Virtusa Corporation and Subsidiaries

			Page

PART I. FINANCIAL INFORMATION			3
Item 1.	Consolidated Financial Statements (Unaudited)		3
	Consolidated Balance Sheets at ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017~~2018		3
	Consolidated Statements of Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and 2017 ~~and 2016~~		4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and 2017 ~~and 2016~~		5
	Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and 2017 ~~and 2016~~		6
	Notes to Consolidated Financial Statements	7	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47	41
Item 4.	Controls and Procedures	48	42
PART II. OTHER INFORMATION		48	43
Item 1.	Legal Proceedings	48	43
Item 1A.	Risk Factors	48	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
~~Item 5.~~	~~Other Information~~	4943
Item 6.	Exhibits	50	44
SIGNATURES		51
~~EXHIBIT INDEX~~		46

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

Virtusa Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	December 31, 2017			March 31, 2017			September 30, 2018			March 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	226,718		$	144,908		$	176,981		$	194,897
Short-term investments	66,539			72,028			54,108			45,900
Accounts receivable, net of allowance of $3,063 and $1,805 at December 31, 2017 and March 31, 2017, respectively	138,294			135,453
Accounts receivable, net of allowance of $2,914 and $3,328 at September 30, 2018 and March 31, 2018, respectively							162,497			151,455
Unbilled accounts receivable	67,196			66,122			96,605			103,829
Prepaid expenses	32,420			32,751			33,865			31,724
Restricted cash	265			174			1,298			301
Other current assets	23,641			28,806			19,221			21,229
Total current assets	555,073			480,242			544,575			549,335
Property and equipment, net	120,395			118,890			120,264			121,565
Investments accounted for using equity method	1,645			1,708			1,398			1,588
Long-term investments	10,676			20,057			1,410			4,140
Deferred income taxes	26,774			23,093			38,310			31,528
Goodwill	214,265			211,089			275,002			297,251
Intangible assets, net	52,215			58,361			94,212			96,001
Other long-term assets	12,514			9,980			15,728			11,772
Total assets	$	993,557		$	923,420		$	1,090,899		$	1,113,180
Liabilities and stockholders’ equity
Liabilities, Series A convertible preferred stock, redeemable noncontrolling interest and stockholders’ equity
Current liabilities:
Accounts payable	$	22,069		$	20,514		$	27,717		$	29,541
Accrued employee compensation and benefits	55,684			52,582			62,925			71,500
Deferred revenue	9,914			7,479			6,175			7,908
Accrued expenses and other	39,261			33,251			109,677			91,306
Current portion of long-term debt	—			8,870			11,407			11,407
Income taxes payable	4,008			3,066			5,034			5,038
Total current liabilities	130,936			125,762			222,935			216,700
Deferred income taxes	23,155			26,682			17,462			21,341
Long-term debt, less current portion	130,439			176,722			314,524			288,227
Long-term liabilities	23,244			9,238			44,854			43,833
Total liabilities	307,774			338,404			599,775			570,101
Commitments and contingencies	—			—			—			—
Series A Convertible Preferred Stock: par value $0.01 per share, 108,000 shares authorized, 108,000 shares issued and outstanding at December 31, 2017; no shares authorized or issued at March 31, 2017; redemption amount and liquidation preference of $108,000 and $0 at December 31, 2017 and March 31, 2017, respectively	106,955			—
Series A convertible preferred stock: par value $0.01 per share, 108,000 shares authorized, 108,000 shares issued and outstanding at September 30, 2018 and March 31, 2018; redemption amount and liquidation preference of $108,000 at September 30, 2018 and March 31, 2018, respectively							107,079			106,996
Redeemable noncontrolling interest							24,614			—
Stockholders’ equity:
Undesignated preferred stock, $0.01 par value: Authorized 5,000,000 shares at December 31, 2017 and March 31, 2017; zero shares issued and outstanding at December 31, 2017 and March 31, 2017	—			—
Common stock, $0.01 par value: Authorized 120,000,000 shares at December 31, 2017 and March 31, 2017; issued 32,223,386 and 31,762,214 shares at December 31, 2017 and March 31, 2017, respectively; outstanding 29,343,387 and 29,905,511 shares at December 31, 2017 and March 31, 2017, respectively	322			318
Treasury stock, 2,879,999 and 1,856,703 common shares, at cost, at December 31, 2017 and March 31, 2017, respectively	(39,652		)	(9,652		)
Undesignated preferred stock, $0.01 par value: Authorized 5,000,000 shares at September 30, 2018 and March 31, 2018; zero shares issued and outstanding at September 30, 2018 and March 31, 2018							—			—
Common stock, $0.01 par value: Authorized 120,000,000 shares at September 30, 2018 and March 31, 2018; issued 32,769,705 and 32,469,092 shares at September 30, 2018 and March 31, 2018, respectively; outstanding 29,889,706 and 29,589,093 shares at September 30, 2018 and March 31, 2018, respectively							328			325
Treasury stock, 2,879,999 and 2,879,999 common shares, at cost, at September 30, 2018 and March 31, 2018, respectively							(39,652		)	(39,652		)
Additional paid-in capital	326,663			305,387			231,196			260,612
Retained earnings	236,224			240,728			231,517			238,019
Accumulated other comprehensive loss	(39,951		)	(39,749		)	(64,233		)	(40,681		)
Total Virtusa stockholders’ equity	483,606			497,032			359,156			418,623
Noncontrolling interest in subsidiaries	95,222			87,984			275			17,460
Total equity	578,828			585,016			359,431			436,083
Total liabilities and stockholders’ equity	$	993,557		$	923,420
Total liabilities, Series A convertible preferred stock, redeemable noncontrolling interest and stockholders’ equity							$	1,090,899		$	1,113,180

See accompanying notes to unaudited consolidated financial statements

Virtusa Corporation and Subsidiaries

Consolidated Statements of Income (Loss)

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended September 30,						Six Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Revenue	$	263,809		$	217,209		739,328			$	632,769		$	305,520		$	248,174		605,551			$	475,519
Costs of revenue	183,420			154,847			528,103			460,776			216,346			178,404			432,827			344,683
Gross profit	80,389			62,362			211,225			171,993			89,174			69,770			172,724			130,836
Operating expenses:
Selling, general and administrative expenses	66,726			55,904			181,213			163,846			75,155			59,491			144,781			114,487
Income from operations	13,663			6,458			30,012			8,147			14,019			10,279			27,943			16,349
Other income (expense):
Interest income	1,080			1,021			3,012			3,050			589			928			1,353			1,932
Interest expense	(1,305		)	(1,920		)	(4,376		)	(5,657		)	(4,514		)	(1,413		)	(8,768		)	(3,071		)
Foreign currency transaction gains (losses)	2,576			(1,252		)	1,019			(2,802		)
Foreign currency transaction losses, net													(9,355		)	(1,480		)	(20,113		)	(1,557		)
Other, net	492			(180		)	1,376			371			819			778			1,443			884
Total other income (expense)	2,843			(2,331		)	1,031			(5,038		)
Income before income tax expense	16,506			4,127			31,043			3,109
Income tax expense (benefit)	24,427			(1,414		)	26,725			(1,378		)
Total other expense													(12,461		)	(1,187		)	(26,085		)	(1,812		)
Income before income tax (benefit) expense													1,558			9,092			1,858			14,537
Income tax (benefit) expense													(402		)	1,500			5,463			2,298
Net income (loss)	$	(7,921	)	$	5,541		$	4,318		$	4,487		$	1,960		$	7,592		$	(3,605	)	$	12,239
Less: net income attributable to noncontrolling interests, net of tax	2,134			1,106			5,947			3,094			455			2,824			1,186			3,813
Net income (loss) available to Virtusa stockholders	$	(10,055	)	$	4,435		$	(1,629	)	$	1,393		$	1,505		$	4,768		$	(4,791	)	$	8,426
Less: Series A Convertible Preferred Stock dividends and accretion	1,087			—			2,875			—			1,088			1,087			2,175			1,788
Net income (loss) available to Virtusa common stockholders	(11,142		)	4,435			(4,504		)	1,393			417			3,681			(6,966		)	6,638

Basic earnings (loss) per share available to Virtusa common stockholders	$	(0.38	)	$	0.15		$	(0.15	)	$	0.05		$	0.01		$	0.13		$	(0.23	)	$	0.23
Diluted earnings (loss) per share available to Virtusa common stockholders	$	(0.38	)	$	0.15		$	(0.15	)	$	0.05		$	0.01		$	0.12		$	(0.23	)	$	0.22

See accompanying notes to unaudited consolidated financial statements

Virtusa Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(In thousands)

	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended September 30,						Six Months Ended September 30,
	2017			2016			2017			2016			2018			2017			2018			2017

Net income (loss)	$	(7,921	)	$	5,541		$	4,318		$	4,487		$	1,960		$	7,592		$	(3,605	)	$	12,239
Other comprehensive income (loss):
Foreign currency translation adjustments	$	4,641		$	(8,876	)	$	9,068		$	(12,079	)	$	(7,071	)	$	821		$	(17,724	)	$	4,426
Pension plan adjustment	31			42			123			358			113			47			(96		)	92
Unrealized gain (loss) on available-for-sale securities, net of tax	8			49			212			(115		)	(452		)	(95		)	(315		)	204
Unrealized gain (loss) on effective cash flow hedges, net of tax	(106		)	145			(8,314		)	4,734
Other comprehensive income (loss)	$	4,574		$	(8,640	)	$	1,089		$	(7,102	)
Unrealized loss on effective cash flow hedges, net of tax													(3,337		)	(4,153		)	(7,138		)	(8,208		)
Other comprehensive loss													$	(10,747	)	$	(3,380	)	$	(25,273	)	$	(3,486	)
Comprehensive income (loss)	$	(3,347	)	$	(3,099	)	$	5,407		$	(2,615	)	$	(8,787	)	$	4,212		$	(28,878	)	$	8,753
Less: comprehensive income (loss) attributable to noncontrolling interest, net of tax	3,930			(856		)	7,238			684			200			2,045			(535		)	3,307
Comprehensive loss available to Virtusa stockholders	$	(7,277	)	$	(2,243	)	$	(1,831	)	$	(3,299	)
Comprehensive income (loss) available to Virtusa stockholders													$	(8,987	)	$	2,167		$	(28,343	)	$	5,446

See accompanying notes to unaudited consolidated financial statements

Virtusa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended December 31,						Six Months Ended September 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	4,318		$	4,487
Adjustments to reconcile net income to net cash provided by operating activities:
Net income (loss)							$	(3,605	)	$	12,239
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	20,711			19,185			14,593			13,646
Share-based compensation expense	20,048			17,023			17,062			10,930
Provision for doubtful accounts	1,025			702
Provision (recovery) for doubtful accounts							(236		)	723
Gain on disposal of property and equipment	(40		)	(388		)	(159		)	(49		)
Foreign currency transaction (gains) losses, net	(1,019		)	2,802
Foreign currency transaction losses, net							20,113			1,557
Amortization of discounts and premiums on investments	258			807			76			185
Amortization of debt issuance cost	847			847			546			565
Deferred income taxes, net	5,219			454			(6,522		)	—
Net change in operating assets and liabilities:
Accounts receivable and unbilled receivable	(6,754		)	(3,669		)	(1,975		)	(4,492		)
Prepaid expenses and other current assets	(3,860		)	(4,422		)	(11,238		)	(4,450		)
Other long-term assets	(2,760		)	10,753			(4,009		)	(815		)
Accounts payable	(352		)	7,356			232			740
Accrued employee compensation and benefits	2,167			(12,104		)	(5,834		)	(579		)
Accrued expenses and other current liabilities	6,855			1,033			11,179			4,712
Income taxes payable	(4,300		)	(14,593		)	3,133			(3,586		)
Other long-term liabilities	11,818			(5,459		)	(73		)	(1,494		)
Net cash provided by operating activities	54,181			24,814			33,283			29,832
Cash flows from investing activities:
Proceeds from sale of property and equipment	217			2,536			451			180
Purchase of short-term investments	(88,033		)	(100,131		)	(68,803		)	(50,549		)
Proceeds from sale or maturity of short-term investments	118,614			99,888			60,571			62,829
Purchase of long-term investments	(16,772		)	(28,984		)	—			(12,273		)
Proceeds from sale or maturity of long-term investments	1,606			7,116
(Increase) decrease in restricted cash	(119		)	92,651
Business acquisition, net of cash acquired	(600		)	(3,460		)	(34		)	(600		)
Purchase of property and equipment	(11,242		)	(10,947		)	(18,875		)	(8,195		)
Net cash provided by investing activities	3,671			58,669
Net cash used in investing activities							(26,690		)	(8,608		)
Cash flows from financing activities:
Proceeds from exercise of common stock options	3,351			816			428			2,717
Proceeds from exercise of subsidiary stock options	636			357			326			196
Proceeds from revolving credit facility							32,000			—
Payment of debt	(81,000		)	(7,500		)	(6,250		)	(81,000		)
Payments of withholding taxes related to net share settlements of restricted stock	(2,753		)	(3,803		)	(7,602		)	(2,431		)
Series A Convertible Preferred Stock proceeds, net of issuance costs of $1,154	106,846			—			—			106,846
Repurchase of common stock	(30,000		)	—			—			(30,000		)
Payment of contingent consideration related to acquisitions	—			(830		)
Acquisition of noncontrolling interest	—			(89,147		)
Payment of other noncontrolling interest	—			(50		)
Borrowings on revolving credit facility	25,000			—
Proceeds from subsidiary stock sale	—			7,236
Principal payments on capital lease obligation	(161		)	(118		)	(43		)	(124		)
Payment of dividend on Series A Convertible Preferred Stock	(2,081		)	—
Net cash provided by (used in) financing activities	19,838			(93,039		)
Effect of exchange rate changes on cash and cash equivalents	4,120			(5,552		)
Net increase (decrease) in cash and cash equivalents	81,810			(15,108		)
Cash and cash equivalents, beginning of period	144,908			148,986
Cash and cash equivalents, end of period	$	226,718		$	133,878
Payment of contingent consideration related to acquisition							(100		)	—
Payment of redeemable noncontrolling interest							(28,396		)	—
Payment of dividend on Series A convertible preferred stock							(2,092		)	(1,035		)
Net cash used in financing activities							(11,729		)	(4,831		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash							(11,694		)	1,753
Net (decrease) increase in cash, cash equivalents and restricted cash							(16,830		)	18,146
Cash, cash equivalents and restricted cash, beginning of period							195,236			145,086
Cash, cash equivalents and restricted cash, end of period							$	178,406		$	163,232

Virtusa Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets:

	September 30, 2018		March 31, 2018
Balance sheet classification
Cash and cash equivalents	$	176,981	$	194,897

Restricted cash in current assets	1,298		301
Restricted cash in other long-term assets	127		38
Total restricted cash	$	1,425	$	339
Total cash, cash equivalents and restricted cash	$	178,406	$	195,236

See accompanying notes to unaudited consolidated financial statements

Virtusa Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts)

(1) Nature of the Business

Virtusa Corporation (the “Company”, “Virtusa”, “we”, “us” or “our”) is a global provider of digital engineering and information technology (“IT”) ~~consulting and~~ outsourcing services that accelerate business outcomes for our clients. We support Forbes Global 2000 clients across large, consumer facing industries like ~~Banking & Financial Services, Insurance, Healthcare, Communications,~~banking, financial services, insurance, healthcare, communications, and ~~Media & Entertainment,~~media and entertainment, as ~~they look~~these clients seek to improve their business performance through accelerating revenue growth, delivering compelling consumer experiences, improving operational efficiencies, and lowering overall IT costs. We provide services across the entire spectrum of the IT services lifecycle, from strategy &and consulting to technology &and user experience (“UX”) design, development of IT applications, systems integration, testing &and business assurance, and maintenance and support services, including infrastructure and managed services. ~~Our services leverage~~We help our clients solve critical business problems by leveraging a combination of our distinctive consulting approach, ~~and~~ unique platforming methodology, ~~to transform our clients’ businesses through the innovative use of~~and deep domain and technology ~~and domain knowledge to solve critical business problems.~~ expertise.

Our services enable our clients to accelerate business outcomes by consolidating, rationalizing and modernizing their core customer-facing processes into one or more core systems. We deliver cost-effective solutions through a global delivery model, applying advanced methods such as Agile, an industry standard technique designed to accelerate application development. We also use our consulting methodology, which we refer to as Accelerated Solution Design (“ASD”), which is a collaborative decision-making and design process performed with the client to ensure our solutions meet the client’s specifications and requirements. Our industry leading business transformational solutions combine deep domain expertise with our strengths in software engineering and business consulting to support our clients’ ~~business imperative~~business-imperative initiatives across business growth and IT operations.

Headquartered in Massachusetts, we have offices in the United States, Canada, the United Kingdom, the Netherlands, Germany, Switzerland, Sweden, Austria, the United Arab Emirates, Hong Kong, Japan, Australia and New Zealand, with global delivery centers in India, Sri Lanka, Hungary, Singapore and Malaysia, as well as near shore delivery centers in the United States.

(2) Unaudited Interim Financial Information

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended, and should be read in conjunction with the Company’s audited consolidated financial statements (and notes thereto) for the fiscal year ended March 31, ~~2017~~2018 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission, or SEC, on May ~~26, 2017.~~25, 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company’s management, all adjustments considered necessary for a fair presentation of the accompanying unaudited consolidated financial statements have been included, and all material adjustments are of a normal and recurring nature. Operating results for the interim periods are not necessarily indicative of results that may be expected to occur for the entire fiscal year.

Principles of Consolidation

The accompanying financial statements have been prepared on a consolidated basis and reflect the financial statements of Virtusa Corporation and all of its subsidiaries that are directly or indirectly more than 50% owned or controlled. When the Company does not have a controlling interest in an entity, but exerts a significant influence on the entity, the Company applies the equity method of accounting. For those majority-owned subsidiaries that are not 100% owned by the Company, the interests of the minority owners are accounted for as noncontrolling interests.

The consolidated financial statements reflect the accounts of the Company and its direct and indirect subsidiaries: Virtusa Consulting Services Private Limited, Virtusa Software Services Private Limited, Virtusa Technologies (India) Private Limited, Polaris Consulting & Services Limited and Optimus Global Services Limited, each organized and located in India; Virtusa (Private) Limited, organized and located in Sri Lanka; Virtusa UK Limited and Polaris Consulting & Services Limited, each organized and located in the United Kingdom; Virtusa US LLC, Virtusa Securities Corporation, a Massachusetts securities corporation and Apparatus, Inc. organized and located in Indiana, each organized and located in the United States; Virtusa International, B.V., Virtusa C.V., Virtusa

Netherlands Cooperatief U.A. and Polaris Consulting & Services B.V., each organized and located in the Netherlands; Virtusa Hungary Kft. and Polaris Consulting & Services, Kft., each organized and located in Hungary; Virtusa Germany GmbH and Polaris Consulting & Services GmbH, each organized and located in Germany; Virtusa Switzerland GmbH and Polaris Consulting & Services SA, each organized and located in Switzerland; Virtusa Singapore Private Limited and Polaris Consulting & Services Pte Limited, each organized and located in Singapore; Virtusa Malaysia Private Limited Company and Polaris Consulting & Services, SND BHD, each organized and located in Malaysia; Virtusa Austria GmbH, organized and located in Austria; Virtusa Philippines Inc., organized and located in the Philippines; TradeTech Consulting Scandinavia AB, organized and located in Sweden; Virtusa Canada, Inc. and Polaris Consulting & Services Inc, each organized and located in Canada; Polaris Consulting & Services Ireland Limited, organized and located in Ireland; Polaris Consulting & Services Japan K.K., organized and located in Japan; Polaris Consulting & Services Pty Ltd., organized and located in Australia; Polaris Consulting & Services FZ-LLC, organized and located in United Arab Emirates; and Polaris Software Lab (Shanghai) Limited, organized and located in China. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and

expenses during the reported period. Management re-evaluates these estimates on an ongoing basis. The most significant estimates relate to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities, intangible assets, contingent consideration and valuation of financial instruments including derivative contracts and investments. Management bases its estimates on historical experience and on various other factors and assumptions that are believed to be reasonable under the circumstances. The actual amounts may vary from the estimates used in the preparation of the accompanying consolidated financial statements.

Fair Value of Financial Instruments

At ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, unbilled accounts receivable, restricted cash, accounts payable, accrued employee compensation and benefits, other accrued expenses and long-term debt, approximate their fair values due to the nature of the items. See Note 5 of the notes to our consolidated financial statements for a discussion of the fair value of the Company’s other financial instruments.

Recent accounting pronouncements

Recently Adopted Accounting Pronouncements

Unless otherwise discussed below, the adoption of new accounting standards did not have an impact on the consolidated financial statements.

In May 2014, the FASB issued ~~ASU~~an Accounting Standard Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers ~~which~~(“Accounting Standard Codification (“ASC”) Topic 606”) as well as other clarifications and technical guidance related to this new revenue standard, including ASC Topic 340-40, Other Assets and Deferred Costs — Contracts with Customers (“ASC 340-40”). ASC Topic 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on April 1, 2018. Early application is permitted but not before periods beginning on or after January 1, 2017. In March, April and May 2016, the FASB issued updates to the new revenue standard to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net, identifying performance obligations, accounting for licenses of intellectual property, transition, contract modifications, collectability, non-cash consideration and presentation of sales and other similar taxes with the same effective date. The standard permits the use of either the retrospective or ~~cumulative effect transition~~modified retrospective method.

The Company ~~plans to adopt~~adopted the standard effective April 1, 2018 using the modified retrospective method ~~when it becomes effective for~~applied to those contracts which were not completed as of that date. Upon adoption of ASC Topic 606 on April 1, 2018, the Company inrecorded a net increase to opening retained earnings of approximately $464, after a tax impact of $142. The impact of adoption primarily relates to the ~~first quarter~~longer period of ~~fiscal 2019.~~amortization for costs to fulfill a contract compared to the amortization period prior to adoption.

The ~~Company’s project team is finalizing its review~~following table summarizes the cumulative effect of ~~existing customer contracts and current accounting policies to identify and assess~~adopting ASC Topic 606 using the ~~potential differences that would result from applying the requirements~~modified retrospective method of ~~the new standard including costs to obtain and fulfill a contract. The Company is also~~adoption as of April 1, 2018:

	Balance as of March 31, 2018		ASC Topic 606 Adjustments		Balance as of April 1, 2018
Balance Sheet :
Assets
Other current assets	$	21,229	(62	)	$	21,167
Deferred income taxes	31,528		(142	)	31,386
Other long-term assets	11,772		668		12,440
Stockholders’ equity
Retained earnings	238,019		464		238,483

See Note 8 “Revenues” in the process of identifying and implementing changes to the Company’s processes to meet the reporting and disclosure requirements. The Company currently records approximately 86% of its annual revenue on a time-and-material (60%) or retainer-billing basis (26%), with the remaining 14% recorded under either a percentage of completion or proportional performance methods of accounting using an inputs methodologyconsolidated financial statements for fixed price projects. For the Company’s revenue recorded under the time-and-material or retainer billings methods of accounting, the Company does not expect this new standard to change the timing or the amount of revenue that is currently recorded. The Company is currently evaluating the revenue recorded under its fixed price percentage of completion and proportional performance projects to determine if the manner or timing of revenue recognition would change for existing projects. The Company generally expects to continue to recognize revenue over time based on the measured progress of satisfaction of the performance obligations for its fixed price projects, which is consistent with the Company’s current method. Overall, the Company believes that its implementation efforts are progressing as planned to allow a timely implementation.additional information regarding revenues.

December 15, 2017, including interim periods within those fiscal years. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption. ~~Early adoption of certain sections of~~The Company adopted this ~~update is permitted. Based~~guidance on ~~the Company’s current investment portfolio, the~~April 1,

2018. The adoption of this guidance isdid not ~~expected to~~ have a material impact on the consolidated financial statements, therefore, the Company did not record any cumulative adjustments to the opening retained earnings in the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 230), which is intended to reduce diversity in practice on how changes in restricted cash are classified and presented in the statement of cash flows. This ASU requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The amendments in this update should be applied using a retrospective transition method to each period presented. The Company adopted the standard effective April 1, 2018 using the retrospective method. As a result of the adoption, the Company restated its consolidated statement of cash flows for all of the prior periods presented. The following table summarizes the impact of this standard on the Company’s consolidated cash flows for the six months ended September 30, 2017:

	As Reported			Restated			Effect
Cash flows from investing activities:
Increase in restricted cash	$	(799	)	$	—		$	799
Net cash used in investing activities	(9,407		)	(8,608		)	799
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	1,755			1,753			(2		)
Net increase in cash, cash equivalents and restricted cash	17,349			18,146			797
Cash, cash equivalents and restricted cash, beginning of period	144,908			145,086			178
Cash, cash equivalents and restricted cash, end of period	162,257			163,232			975

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715), “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, a guidance on presentation of net periodic pension cost and net periodic postretirement benefit cost. The new standard requires that an employer disaggregate the service costs components of net benefit cost. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component, such as in other income and expense. The guidance is effective for fiscal years beginning after December 15, 2017. The Company adopted this guidance effective April 1, 2018. Upon adoption, the Company presented the service cost component in costs of revenue and selling, general and administrative expenses. The other components of net periodic pension cost are presented within other (income) expense in the Consolidated Statements of Income (Loss). The adoption of this guidance did not have a material impact on the consolidated financial statements, therefore, the Company did not retrospectively change the presentation of the financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation — Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. The new standard is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. The guidance is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods, with early adoption permitted but no earlier than an entity’s adoption date of Topic 606. The Company early adopted this guidance effective April 1, 2018. The adoption of this guidance did not have an impact on the consolidated financial statements.

New Accounting Pronouncements

Unless otherwise discussed below, the Company believes the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued asan update (ASU 2016-02) to the standard on leases to increase transparency and comparability among organizations. The FASB subsequently issued ASU 2018-10 and ASU 2018-11 in July 2018, which provide clarifications and improvements to this new standard. ASU 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented. The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. For public business entities this standard is effective for the annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption of this new standard is permitted. Entities will be required to use a modified retrospective transition which provides for certain practical expedients. ~~The~~While the Company is ~~currently evaluating~~continuing to assess the ~~effect the new standard will have on its consolidated financial statements and related disclosures.~~

In March 2016, the FASB issued an update (ASU 2016-09) to the standard on Compensation- Stock Compensation, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Upon adoption, entities will be required to apply a modified retrospective, prospective or retrospective transition method depending on the specific section of the guidance being adopted. The Company adopted this guidance effective April 1, 2017 and the following describe the results of adoption:

· The Company prospectively recognized tax expenses of $23 and tax benefits of $1,127 in the income tax expense line item of its consolidated statements of income in the three and nine months ended December 31, 2017, respectively, related to excess tax benefits on stock options;

· ~~The Company changed its accounting policy from estimated forfeitures to actual forfeitures effective April 1, 2017. The cumulative~~potential impact of this ASU, the ~~change in the accounting policy did not~~Company anticipates this ASU will have a material impact on the consolidated ~~financial statements, therefore prior period amounts have not been restated;~~

· ~~The Company elected~~balance sheets primarily due to ~~adopt cash flow presentation of excess tax benefits retrospectively where these benefits are classified along with other income tax cash flows as~~recognizing a right-to-use-asset and a lease liability for operating ~~cash flows. Accordingly, prior period amounts in the consolidated statement of cash flows have been restated;~~

· The Company adopted cash flow presentation of taxes paid when an employer withholds shares for tax-withholding purposes retrospectively and classified as a financing activity in the Company’s statement of cash flows. Accordingly, prior period amounts have been restated;

· The remaining amendments to this standard, as noted above, are either not applicable, or do not change the Company’s current accounting practices and thus do not impact its consolidated financial statements.leases.

measured at amortized cost basis to be presented at the net amount expected to be collected. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this new standard will have on its consolidated financial statements and related disclosures.

In ~~August 2016,~~February 2018, the FASB issued ASU ~~2016-15, Statement of Cash Flows~~2018-02, Income Statement—Reporting Comprehensive Income (Topic ~~230)~~220). This update is intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows. This standard update addresses eight specific cash flow issues, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires application using a retrospective transition method. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

permitted in the first interim period. Upon adoption, the entities will be required to use a modified retrospective transition approach. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash (Topic 230), which is intended to reduce diversity in practice on how changes in restricted cash are classified and presented in the statement of cash flows. This ASU requires amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The amendments in this ~~update should be applied using~~Update allow a ~~retrospective transition method~~reclassification from accumulated other comprehensive income to ~~each period presented. The adoption~~retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of ~~this~~information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance ~~will impact~~that requires that the ~~Company’s presentation of cash and cash equivalents. As of December 31, 2017 and March 31, 2017, the Company’s restricted cash was $300 and $178, respectively.~~

~~In January 2017, the FASB issued ASU 2017-01, an update on business combinations, which clarifies the definition~~effect of a business. The update requires a business to include at least an input and a substantive process that together significantly contribute to the ability to create outputs. The update also states that the definition of a businesschange in tax laws or rates be included in income from continuing operations is not met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2018. Upon adoption, entities will be required to apply the update prospectively. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, an update on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, a guidance on presentation of net periodic pension cost and net periodic postretirement benefit cost. The new standard requires that an employer disaggregate the service costs components of net benefit cost. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component, such as in other income and expense. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements. The Company’s current presentation of service cost components is consistent with the requirements of the new standard. Upon adoption of the new standard, the Company expects to present the other components within other (income) expense.

~~In March 2017, FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.~~affected. The amendments in this ~~update shorten the amortization period for~~Update also require certain callable debt securities that are held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which would be amortized to maturity. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018, which for us is the first quarter ending December 31, 2019. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

~~In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, an update that provides guidance~~disclosures about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718, Compensation — Stock Compensation. Under the amendments in ASU 2017-09, an entity should account for the effects of a modification unless all of the following criteria are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified — if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2) the vesting conditions of the modified award are the same as the conditions of the original award immediately before the original award is modified; 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the effect the new standard will have on its consolidated financial statements and related disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. These amendments are intended to better align a company’s risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements.stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including ~~the~~ interim periods within those years. ~~The guidance requires the use of a modified retrospective approach.~~ The Company is currently evaluating the effect ~~the~~of this new standard will have on its consolidated financial statements and related disclosures.

(3) Earnings (Loss) per Share

Basic earnings (loss) per share available to Virtusa common ~~stock holders~~stockholders (“EPS”) is computed by dividing net income (loss), less any dividends and accretion of issuance cost on the Series A Convertible Preferred Stock by the weighted average number of shares of common stock outstanding for the period. In computing diluted EPS, the Company adjusts the numerator used in the basic EPS computation, subject to anti-dilution requirements, to add back the dividends (declared or cumulative undeclared) applicable to the Series A Convertible Preferred Stock. Such add-back would also include any adjustments to equity in the period to accrete the Series A Convertible Preferred Stock to its redemption price. The Company adjusts the denominator used in the basic EPS computation, subject to anti-dilution requirements, to include the dilution from potential shares resulting from the issuance of restricted stock units, unvested restricted stock and stock options along with the conversion of the Series A Convertible Preferred Stock to common stock. The following table sets forth the computation of basic and diluted EPS for the periods set forth below:

The components of basic earnings (loss) per share are as follows:

Three Months Ended
December 31,

Nine Months Ended
December 31,

2017

2016

2017

2016

Numerator:

Net income (loss) available to Virtusa stockholders

$
(10,055
)
$
4,435

$
(1,629
)
$
1,393

Less: Series A Convertible Preferred Stock dividends and accretion

1,087

—

2,875

—

Net income (loss) available to Virtusa common stockholders

(11,142
)
4,435

(4,504
)
1,393

Denominator:

Basic weighted average common shares outstanding

29,295,730

29,704,526

29,387,977

29,602,331

Basic earnings (loss) per share available to Virtusa common stockholders

$
(0.38
)
$
0.15

$
(0.15
)
$
0.05

	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018			2017
Numerator:
Net income (loss) available to Virtusa stockholders	$	1,505	$	4,768	$	(4,791	)	$	8,426
Less: Series A Convertible Preferred Stock dividends and accretion	1,088		1,087		2,175			1,788
Net income (loss) available to Virtusa common stockholders	417		3,681		(6,966		)	6,638
Denominator:
Basic weighted average common shares outstanding	29,767,276		29,216,600		29,700,151			29,434,101

Basic earnings (loss) per share available to Virtusa common stockholders	$	0.01	$	0.13	$	(0.23	)	$	0.23

The components of diluted earnings (loss) per share are as follows:

Three Months Ended
December 31,

Nine Months Ended
December 31,

2017

2016

2017

2016

Numerator:

Net income (loss) available to Virtusa common stockholders

$
(11,142
)
$
4,435

$
(4,504
)
$
1,393

Add: Series A Convertible Preferred Stock dividends and accretion

—

—

—

—

Net income (loss) available to Virtusa common stockholders

(11,142
)
4,435

(4,504
)
1,393

Denominator:

Basic weighted average common shares outstanding

29,295,730

29,704,526

29,387,977

29,602,331

Dilutive effect of Series A Convertible Preferred Stock

—

—

—

—

Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units

—

447,064

—

519,414

Dilutive effect of stock appreciation rights

—

—

—

7,633

Weighted average shares-diluted

29,295,730

30,151,590

29,387,977

30,129,378

Diluted earnings (loss) per share available to Virtusa common stockholders

$
(0.38
)
$
0.15

$
(0.15
)
$
0.05

	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018			2017
Numerator:
Net income (loss) available to Virtusa common stockholders	$	417	$	3,681	$	(6,966	)	$	6,638
Add: Series A Convertible Preferred Stock dividends and accretion	—		—		—			—
Net income (loss) available to Virtusa common stockholders	417		3,681		(6,966		)	6,638
Denominator:
Basic weighted average common shares outstanding	29,767,276		29,216,600		29,700,151			29,434,101
Dilutive effect of Series A Convertible Preferred Stock	—		—		—			—
Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units	859,768		603,981		—			601,764
Weighted average shares-diluted	30,627,044		29,820,581		29,700,151			30,035,865

Diluted earnings (loss) per share available to Virtusa common stockholders	$	0.01	$	0.12	$	(0.23	)	$	0.22

During the three months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase ~~743,949~~20,617 and ~~649,414~~62,576 shares of common stock, respectively, were excluded from the calculations of diluted earnings (loss) per share as their effect would have been anti-dilutive. For the three months ended ~~December 31,~~September 30, 2018 and 2017, the ~~3,000,000~~ weighted average shares of ~~the~~ Series A Convertible Preferred Stock ~~on an as converted basis,~~of 3,000,000 were excluded from the diluted earnings (loss) per share as their effect would have been anti-dilutive using the if-converted method.

During the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ unvested restricted stock awards and unvested restricted stock units issuable for, and options to purchase ~~764,154~~1,710,551 and ~~466,936~~180,367 shares of common stock, respectively, were excluded from the calculations of diluted earnings (loss) per share as their effect would have been anti-dilutive. For the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, the ~~2,637,363~~ weighted average shares of ~~the~~ Series A Convertible Preferred Stock ~~on an as converted basis,~~of 3,000,000 and 2,456,044, respectively, were excluded from the diluted earnings (loss) per share as their effect would have been anti-dilutive using the if-converted method.

(4) Investment Securities

At ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, all of the Company’s investment securities were classified as available-for-sale securities and equity securities. These were carried on its balance sheet at their fair market value. A fair market value hierarchy based on three levels of inputs was used to measure each security (See Note 5 of the notes to our consolidated financial statements for a discussion of the fair value of the Company’s other financial ~~instruments.)~~instruments).

The following is a summary of investment securities at ~~December 31, 2017:~~September 30, 2018:

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Available-for-sale securities:

Corporate bonds:

Current

$
20,129

$
—

$
(58
)
20,071

Non-current

8,816

—

(46
)
8,770

Preference shares: Non-current

1,771

—

(84
)
1,687

Agency and short-term notes:

Current

801

—

(3
)
798

Mutual funds:

Current

24,640

443

—

25,083

Equity Shares/ Options:

Non-current

15

204

—

219

Time deposits:

Current

20,587

—

—

20,587

Total available-for-sale securities

$
76,759

$
647

$
(191
)
$
77,215

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities :
Corporate bonds:
Current	$	13,158	$	—	$	(42	)	$	13,116
Preference shares: Non-current	1,524		—		(242		)	1,282
Time Deposits:
Current	25,461		—		—			25,461
Equity securities:
Mutual funds:
Current	15,423		108		—			15,531
Equity Shares/ Options:
Non-current	7		121		—			128
Total available-for-sale and equity securities	$	55,573	$	229	$	(284	)	$	55,518

The following is a summary of investment securities at March 31, ~~2017:~~2018:

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Available-for-sale securities:

Corporate bonds:

Current

$
36,722

$
7

$
(55
)
$
36,674

Non-current

17,511

3

(48
)
17,466

Preference shares:

Current

1,633

—

(75
)
1,558

Non-current

1,829

—

(101
)
1,728

Agency and short-term notes:

Current

1,816

—

(3
)
1,813

Non-current

803

—

(3
)
800

Mutual funds:

Current

17,934

371

—

18,305

Commercial paper:

Current

2,993

—

—

2,993

Equity Shares/ Options:

Non-current

17

46

63

Time deposits:

Current

10,685

—

—

10,685

Total available-for-sale securities

$
91,943

$
427

$
(285
)
$
92,085

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale securities:
Corporate bonds:
Current	$	25,397	$	—	$	(126	)	$	25,271
Non-current	2,293		—		(22		)	2,271
Preference shares:
Non-current	1,726		—		(70		)	1,656
Agency and short-term notes:
Current	800		—		(1		)	799
Mutual funds:
Current	1,540		11		—			1,551
Equity Shares/ Options:
Non-current	15		198		—			213
Time deposits:
Current	18,279		—		—			18,279
Total available-for-sale securities	$	50,050	$	209	$	(219	)	$	50,040

The Company evaluates investments with unrealized losses to determine if the losses are other than temporary. The Company has determined that the gross unrealized losses at ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017~~2018 are temporary. In making this determination, the Company considered the financial condition, credit ratings and near-term prospects of the issuers, the underlying collateral of the investments, and the magnitude of the losses as compared to the cost and the length of time the investments have been in an unrealized loss position. Additionally, while the Company classifies the securities as available for sale, the Company does not currently intend to sell such investments and it is more likely than not that the Company will not be required to sell such investments prior to the recovery of their carrying value.

Proceeds from sales of available-for-sale investment securities and equity securities and the gross gains and losses that have been included in earnings as a result of those sales were as follows:

Three Months Ended
December 31,

Nine Months Ended
December 31,

2017

2016

2017

2016

Proceeds from sales of available-for-sale investment securities

$
57,391

$
24,249

$
120,220

$
107,004

Gross gains

$
241

$
107

$
916

$
850

Gross losses

(36
)
—

(127
)
—

Net realized gains on sales of available-for-sale investment securities

$
205

$
107

$
789

$
850

	Three Months Ended September 30,						Six Months Ended September 30,
	2018			2017			2018			2017

Proceeds from sales or maturities of available-for-sale investment securities and equity securities	$	31,279		$	33,827		$	60,571		$	62,829
Gross gains	$	261		$	656		$	386		$	675
Gross losses	(14		)	(1		)	(32		)	(91		)
Net realized gains on sales of available-for-sale investment securities and equity securities	$	247		$	655		$	354		$	584

(5) Fair Value of Financial Instruments

The Company uses a framework for measuring fair value under U.S. generally accepted accounting principles and enhanced disclosures about fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The Company’s financial assets and liabilities reflected in the consolidated financial statements at carrying value include marketable securities and other financial instruments which approximate fair value. Fair value for marketable securities is determined using a market approach based on quoted market prices at period end in active markets. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following.

· Level 1—Quoted prices in active markets for identical assets or liabilities.

· Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at ~~December 31, 2017:~~September 30, 2018:

Level 1

Level 2

Level 3

Total

Assets:

Investments:

Available-for-sales securities—current

$
—

$
66,539

$
—

$
66,539

Available-for-sales securities—non-current

—

10,676

—

10,676

Foreign currency derivative contracts

—

5,488

—

5,488

Interest Rate Swap Contracts

—

2,030

—

2,030

Total assets

$
—

$
84,733

$
—

$
84,733

Liabilities:

Foreign currency derivative contracts

$
—

$
110

$
—

110

Contingent consideration

—

—

100

100

Total liabilities

$
—

$
110

$
100

$
210

	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Available-for-sales securities—current	$	—	$	38,577	$	—	$	38,577
Equity securities—current			15,531		—		15,531
Available-for-sales securities—non-current	—		1,282		—		1,282
Equity securities—non-current			128		—		128
Derivative financial instruments:
Foreign currency derivative contracts	—		26		—		26
Interest Rate Swap Contracts	—		2,509		—		2,509
Total assets	$	—	$	58,053	$	—	$	58,053
Liabilities:
Foreign currency derivative contracts	$	—	$	8,851	$	—	8,851

Total liabilities	$	—	$	8,851	$		$	8,851

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, ~~2017:~~2018:

Level 1

Level 2

Level 3

Total

Assets:

Investments:

Available-for-sales securities—current

$
—

$
72,028

$
—

$
72,028

Available-for-sales securities—non-current

—

20,057

—

20,057

Foreign currency derivative contracts

—

16,431

—

16,431

Interest Rate Swap Contracts

—

1,842

—

1,842

Total assets

$
—

$
110,358

$
—

$
110,358

Liabilities:

Foreign currency derivative contracts

$
—

$
—

$
—

—

Interest Rate Swap Contracts

—

—

—

—

Total liabilities

$
—

$
—

$
—

$
—

The Company determines the fair value of the contingent consideration related to the Company’s acquisition of a small consulting company based on the probability of attaining a specific contract renewal target. See Note 7 of the notes to our financial statements included herein for a description of this acquisition. The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities at December 31, 2017.

Level 3
Liabilities

Balance at April 1, 2017

$
—

Contingent consideration arising from acquisition (See Note 7)

100

Payments made during the period

—

Balance at December 31, 2017

$
100

	Level 1		Level 2		Level 3		Total
Assets:
Investments:
Available-for-sales securities—current	$	—	$	45,900	$	—	$	45,900
Available-for-sales securities—non-current	—		4,140		—		4,140
Foreign currency derivative contracts	—		2,122		—		2,122
Interest Rate Swap Contracts	—		2,486		—		2,486
Total assets	$	—	$	54,648	$	—	$	54,648
Liabilities:
Foreign currency derivative contracts	$	—	$	1,023	$	—	1,023
Interest Rate Swap Contracts	—		—		—		—
Contingent consideration	—		—		100		100
Total liabilities	$	—	$	1,023	$	100	$	1,123

(6) Derivative Financial Instruments

The Company evaluates its foreign exchange policy on an ongoing basis to assess its ability to address foreign exchange exposures on its consolidated balance sheets, statements of income and consolidated statement of cash flows from all foreign currencies, including most significantly the U.K. pound sterling ~~Indian rupee~~ and ~~Sri Lankan~~Indian rupee. The Company enters into hedging programs with highly rated financial institutions in accordance with its foreign exchange policy (as approved by the Company’s audit committee and board of directors) which permits hedging of material, known foreign currency exposures. There is no margin required, no cash collateral posted or received by us related to our foreign exchange forward contracts. Currently, the Company maintains four hedging programs, each with varying contract types, duration and purposes. The Company’s “Cash Flow Program” is designed to mitigate the impact of volatility in the U.S. dollar equivalent of the Company’s Indian rupee denominated expenses over a rolling 18-month period. The Cash Flow Program transactions currently meet the criteria for hedge accounting as cash flow hedges. In addition, as part of the Polaris acquisition, the Company has assumed a cash flow program designed to mitigate the impact of the volatility of the translation of Polaris U.S. dollar denominated revenue into Indian rupees over a rolling 18 month period (“Polaris Cash Flow Program”). These cash flow hedges meet the criteria for hedge accounting as cash flow hedges. The Company’s “Balance Sheet Program” involves the use of 30-day derivative instruments designed to mitigate the monthly impact of foreign exchange gains/losses on certain intercompany balances and payments. The Company’s Balance Sheet Program is currently inactive. The Company’s “Economic Hedge Program” involves the purchase of derivative instruments with maturities of up to 92 days, and is designed to mitigate the impact of foreign exchange on U.K. pound sterling, the euro and Swedish krona denominated revenue and costs with respect to the quarter for which such instruments are purchased. The Balance Sheet Program and the Economic Hedge Program are treated as economic hedges as these programs do not meet the criteria for hedge accounting and all gains and losses are recognized in consolidated statement of income under the same line item as the underlying exposure being hedged.

The Company is exposed to credit losses in the event of non-performance by the counterparties on its financial instruments. All counterparties currently have investment grade credit ratings. The Company anticipates that these counterparties will be able to fully satisfy their obligations under the contracts. The Company has derivative contracts with six counterparties as of December 31, 2017.

The Company’s agreements with its counterparties contain provisions pursuant to which the Company could be declared in default of its derivative obligations. As of December 31, 2017, the Company had not posted any collateral related to these agreements. If the Company had breached any of these provisions as of December 31, 2017, it could have been required to settle its obligations under these agreements at amounts which approximate the December 31, 2017 fair values reflected in the table below. During the three months ended December 31, 2017, the Company was not in default of any of its derivative obligations.

Changes in fair value of the designated cash flow hedges for our Cash Flow Program as well as the Polaris Cash Flow Program are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”), net of tax until the forecasted hedged transactions occur and are then recognized in the consolidated statements of income in the same line item as the item being hedged. The Company evaluates hedge effectiveness at the time a contract is entered into, as well as on an ongoing basis. If and when hedge relationships are discontinued, and should the forecasted transaction be deemed probable of not occurring by the end of the originally specified period or within an additional two-month period of time thereafter, any related derivative amounts recorded in equity are reclassified to earnings in other income (expense). There were no amounts reclassified to earnings as a result of hedge ineffectiveness for the nine months ended December 31, 2017 and 2016.

Changes in the fair value of the hedges for the Balance Sheet Program and the Economic Hedge Program, if any, are recognized in the same line item as the underlying exposure being hedged and the ineffective portion of cash flow hedges, if any, is recognized as other income (expense). The Company values its derivatives based on market observable inputs including both forward and spot prices for currencies. Any significant change in the forward or spot prices for hedged currencies would have a significant impact on the value of the Company’s derivatives.

The U.S. dollar notional value of all outstanding foreign currency derivative contracts was ~~$118,195~~$173,461 and ~~$153,435~~$140,347 at ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, respectively. Unrealized net ~~gains~~losses related to these contracts which are expected to be reclassified from AOCI to earnings during the next 12 months ~~were $5,256~~are $8,331 at ~~December 31, 2017.~~September 30, 2018. At ~~December 31, 2017,~~September 30, 2018, the maximum outstanding term of any derivative instrument was 1518 months.

The Company also uses interest rate swaps to mitigate the Company’s interest rate risk on the Company’s variable rate debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the ~~Existing~~ Credit Agreement ~~(see note 12~~(See Note 13 to the ~~Consolidated~~consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. ~~The Company will recognize these transactions in accordance with ASC 815~~ ~~“Derivatives and Hedging,”~~ ~~and have designated the swaps as cash flow hedges.~~

The Interest Rate Swap Agreements have an effective date of July 31, 2017 and a maturity date of July 31, 2020. The swaps have an aggregate notional amount of $91,300 and, with the pre-payment of $81,000 of principal on our existing debt, hedge approximately 85% of the Company’s outstanding debt balance as of December 31, 2017. The notional amount of the swaps amortizes over the remaining swap periods. The Interest Rate Swap agreements require the Company to make monthly fixed interest rate payments based on the amortized notional amount at a blended weighted average rate of 1.025% and the Company will receive 1-month LIBOR on the same notional amounts.

The counterparties to the Interest Rate Swap Agreements could demand an early termination of the 2016 Swap Agreements if the Company is in default under the Existing Credit Agreement, or any agreement that amends or replaces the Existing Credit Agreement in which the counterparty is a member, and the Company is unable to cure the default. An event of default under the Existing Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio commencing on December 31, 2016, of not more than 3.25 to 1.00 for the first year of the Existing Credit Agreement, of not more than 3.00 to 1.00 for the second year of the Existing Credit Agreement, and 2.75 to 1.00 thereafter, each as determined for the four consecutive quarter period ending on each fiscal quarter and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As of December 31, 2017, the Company was in compliance with these covenants. The unrealized gain associated with the 2016 Swap Agreements was $2,030 and $1,842 ~~at December 31, 2017 and March 31, 2017, respectively, which represents the estimated amount that the Company would receive from the counterparties in the event of an early termination.~~

The following table sets forth the fair value of derivative instruments included in the consolidated balance sheets at ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017:~~2018:

Derivatives designated as hedging instruments

December 31, 2017

March 31, 2017

Foreign currency exchange contracts:

Other current assets

$
5,366

$
15,544

Other long-term assets

$
122

$
887

Accrued expenses and other

$
110

$
—

Long-term liabilities

$
—

$
—

	December 31, 2017		March 31, 2017		September 30, 2018		March 31, 2018
Interest rate swap contracts:
Foreign currency exchange contracts:
Other current assets					$	24	$	2,109
Other long-term assets	$	2,030	$	1,842	$	2	$	13

Accrued expenses and other					$	8,354	$	1,023
Long-term liabilities					$	497	$	—

	September 30, 2018		March 31, 2018
Interest rate swap contracts:
Other long-term assets	$	2,509	$	2,486

The following tables set forth the effect of the Company’s foreign currency exchange contracts and interest rate swap contracts on the consolidated financial statements of the Company for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:

	Amount of Gain or (Loss) Recognized in AOCI on Derivative (Effective Portion)								Amount of Gain or (Loss) Recognized in AOCI on Derivative
Derivatives Designated as Cash Flow Hedging Relationships	Three Months Ended December 31,				Nine Months Ended December 31,
Derivatives Designated as Cash Flow Hedging Relationships	2017		2016		2017		2016
Derivatives Designated as Cash Flow									Three Months Ended September 30,					Six Months Ended September 30,
Hedging Relationships									2018			2017		2018			2017
Foreign currency exchange contracts	$	4,211	$	1,947	$	4,811	$	11,807	$	(6,309	)	$	93	$	(11,601	)	$	598
Interest rate swaps	$	518	$	1,826	$	281	$	1,723	$	193		$	37	$	466		$	(237	)

Location of Gain Reclassified
from AOCI into Income (Effective
Portion)

Amount of Gain Reclassified from AOCI into Income
(Effective Portion)

Three Months Ended December 31,

Nine Months Ended December 31,

2017

2016

2017

2016

Revenue

$
2,334

$
932

$
7,846

$
2,409

Costs of revenue

$
1,432

$
1,505

$
5,484

$
2,877

Operating expenses

$
750

$
877

$
3,060

$
1,722

Interest expense

$
59

$
—

$
93

$
—

~~Table of Contents~~

Location of Gain ((Loss) Reclassified	Amount of Gain (Loss) Reclassified from AOCI into Income (loss)
from AOCI into Income (loss) (Effective	Three Months Ended September 30,					Six Months Ended September 30,
Portion)	2018			2017		2018			2017
Revenue	$	(807	)	$	2,919	$	(1,163	)	$	5,511
Costs of revenue	$	(659	)	$	1,987	$	(341	)	$	4,052
Operating expenses	$	(343	)	$	1,150	$	(173	)	$	2,310
Interest expense	$	236		$	34	$	443		$	34

		Amount of Gain or (Loss) Recognized in Income on Derivatives													Amount of Gain or (Loss) Recognized in Income (loss) on Derivatives
Derivatives not Designated as Hedging Instrument	Location of Gain or (Loss) Recognized in Income on Derivatives	Three Months Ended December 31,						Nine Months Ended December 31,
Derivatives not Designated as Hedging Instrument		2017			2016			2017			2016
Derivatives not Designated														Location of Gain or (Loss)	Three Months Ended September 30,						Six Months Ended September 30,
as Hedging Instrument														Recognized in Income (loss) on Derivatives	2018			2017			2018			2017
Foreign currency exchange contracts	Foreign currency transaction gains (losses)	$	—		$	—		$	—		$	(180	)	Revenue	$	287		$	(155	)	$	1,106		$	(336	)
	Revenue	$	216		$	(94	)	$	(120	)	$	(10	)	Costs of revenue	$	(220	)	$	89		$	(753	)	$	231
	Costs of revenue	$	(177	)	$	(11	)	$	55		$	(50	)	Selling, general and administrative expenses	$	(19	)	$	22		$	(19	)	$	53
	Selling, general and administrative expenses	$	(94	)	$	(42	)	$	(41	)	$	(55	)

(7) Acquisitions

On March ~~3, 2016, pursuant to a share~~12, 2018, (i) the Company entered into an equity purchase agreement ~~(the “SPA”), dated as of November 5, 2015,~~ by and among ~~Virtusa Consulting Services Private Limited~~the Company, eTouch Systems Corp. (“~~Virtusa India”~~eTouch US”)~~, a subsidiary~~ and each of the ~~Company, Polaris Consulting & Services Limited (“Polaris”) and the Promoter Sellers named therein, as amended, the Company completed the purchase~~equity holders of 53,133,127 shares, or approximately 51.7% of the fully-diluted capitalization of Polaris from certain Polaris shareholders for approximately $168,257 (Indian rupees 11,391,365) in cash (the “Polaris SPA Transaction”). In addition, on April 6, 2016, Virtusa India completed an unconditional mandatory open offer with successful tendereTouch US to purchase an additional 26% of the fully diluted outstanding shares of Polaris common stock from Polaris’ public shareholders. The mandatory open offer was conducted in accordance with requirements of the Securities and Exchange Board of India (“SEBI”) and the applicable Indian rules on takeovers. Virtusa India purchased 26,719,942 shares of Polaris common stock for an aggregate purchase price of approximately $89,147 (Indian rupees 5,935,260). Pursuant to the mandatory open offer, during the fiscal year ended March 31, 2016, the Company transferred $89,220 into an escrow account in accordance with the India takeover rules, which was recorded as restricted cash at March 31, 2016, and the mandatory open offer closed on April 6, 2016. On April 6, 2016, the restricted cash was released from the escrow account and used for settlement for the mandatory open offer.

Upon the closing of the mandatory offering, Virtusa’s ownership interest in Polaris increased from approximately 51.7% to 77.7% of Polaris’ fully diluted shares of common stock outstanding, and from approximately 52.9% to 78.8% of Polaris’ basic shares of common stock outstanding. Under applicable Indian rules on takeovers, Virtusa India was required to sell within one year of the settlement of the unconditional mandatory offer its shares of common stock in Polaris in excess of 75% of the basic outstanding shares of common stock of Polaris. In order to comply with the applicable Indian rules on takeovers, during the three months ended December 31, 2016, the Company sold 3.7% of its shares of Polaris common stock through a public offering. The sale offer closed on December 14, 2016, and the Company received approximately $7,645 in proceeds, net of $188 in brokerage fees and taxes. In addition to these costs, the Company incurred additional costs of $409 towards professional and legal fees and expense. The Company’s ownership interest in Polaris prior to the sale offer was 78.6%acquire all of the outstanding shares of ~~common stock,~~eTouch US, and ~~upon~~(ii) certain of the Company’s Indian subsidiaries entered into a share purchase agreement by and among those Company subsidiaries, eTouch Systems (India) Pvt. Ltd (“eTouch India,” together with eTouch US, “eTouch”) and the equity holders of eTouch India to acquire all of the outstanding shares of eTouch India (together with the acquisition of eTouch US, the “Acquisition”). The Acquisition strengthens our digital engineering capabilities, and establishes a solid base in Silicon Valley.

Under the terms of the equity purchase agreement and the share purchase agreement, on March 12, 2018, the Company acquired all of the outstanding shares of eTouch US and eTouch India for approximately $140,000 in cash, subject to certain adjustments, with up to an additional $15,000 set aside for retention bonuses to be paid to eTouch management and key employees, in equal installments on the first and second anniversary of the transaction. The purchase price is being paid in three tranches with $80,000 paid at closing, $42,500 on the 12-month anniversary of the close of the transaction, and $17,500 on the 18-month anniversary of the close of the transaction, subject in each case to certain adjustments. The Company utilized the net cash proceeds of a $70,000 delayed draw term loan funded pursuant to the Credit Agreement (as defined in note 13 to the consolidated financial statements) and $10,000 of cash on hand to make the payments due at the closing of the ~~sale offer,~~Acquisition. The Company paid an amount equal to $66,000 to the equity holders of eTouch US, and an amount equal to $14,000 to the equity holders of eTouch India, which together comprise the first of three tranches of the purchase price to be paid in connection with the closing of the Acquisition.

The purchase price is subject to adjustment after the closing in the event the working capital associated with eTouch deviates from a threshold amount and other contractual adjustments.

Under the purchase method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair values. The Company may continue to adjust the preliminary estimated fair values after obtaining more information regarding asset valuations, liabilities assumed, and revision of preliminary estimates. During the three months ended September 30, 2018, the Company recorded $7,100 as a reduction of goodwill related to updating the fair value assessment of customer relationships and trademark and $308 as an

increase in goodwill related to other adjustments. The following are the preliminary fair values of assets and liabilities based on information available as of September 30, 2018 and may be subject to change during the measurement period.

A summary of the fair values for eTouch is as follows:

	Amount			Useful Life
Consideration Transferred:
Cash paid at closing	$	80,000		��
Fair value of the future payments	57,858
Tax related liability	9,313
Fair value of consideration	147,171
Less: Cash acquired	2,241
Total purchase price, net of cash acquired	$	144,930
Assets and Liabilities:
Cash and cash equivalents	2,241
Accounts receivable	15,143
Unbilled receivables	2,986
Prepaid expenses	815
Other current assets	869
Property and equipment	2,798
Other long-term assets	98
Goodwill	78,824
Trademark	900			2 years
Customer relationships	53,000			10 - 15 years
Accounts payable	(3,248		)
Deferred revenue	(852		)
Accrued expenses and other current liabilities	(607		)
Accrued employee compensation and benefits	(4,160		)
Income taxes payable	(250		)
Deferred income taxes	(368		)
Other long-term liabilities	(1,018		)
Total purchase price	$	147,171

Acquisition costs are recorded in selling, general and administrative expenses. The primary items that generated goodwill are the value of the acquired assembled workforces and synergies between eTouch and the Company, neither of which qualify as an amortizable intangible asset.

(8) Revenues

Effective April 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”) as amended. The Company adopted the new guidance using the modified retrospective method by recognizing the cumulative effect of adoption as an adjustment to retained earnings as of April 1, 2018. Results for reporting periods beginning after April 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Revenue Recognition (“Topic 605”). The impact of adoption of the new guidance on the Company’s ~~ownership interest decreased~~consolidated financial statements as of April 1, 2018 is presented in Note 2 to the Company’s consolidated financial statements.

Revenue recognition

The Company accounts for a contract when it has approval and commitment from ~~78.6%~~both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

Revenues are recognized when control of the promised services is transferred to ~~74.9%~~its customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company generally recognizes revenue for services over time as the Company’s performance creates or enhances an asset that the customer controls from fixed price contracts related to complex design, development and customization. For these contracts, the Company measures the progress and recognizes revenue using effort-based input methods, as the Company performs, based on actual efforts spent compared to the total expected efforts for the contract. The use of ~~Polaris’ basic shares~~the effort based input method requires significant judgment relative to estimating total efforts, including assumptions relative to the length of ~~common stock outstanding. As~~time to complete the project and the nature

and complexity of ~~December 31, 2017~~the work to be performed. Estimates of total efforts are continuously monitored during the term of the contract and are subject to revision as the contract progresses. When revisions in estimated contract revenue and efforts are determined, such adjustments are recorded in the period in which they are first identified. An input method is used to recognize revenue as the value of services provided to the customer is best represented by the hours expended to deliver those services.

The Company generally recognizes revenue for services over time as the customer simultaneously receives and consumes the benefits as the Company performs for fixed-price contracts related to consulting or other IT services. For these contracts, the Company measures the progress and recognizes revenue using effort-based input methods as the Company performs based on actual efforts spent compared to the total expected efforts for the contract. The cumulative impact of any change in estimates of the contract revenue is reflected in the period in which the changes become known.

The Company has applied the as-invoiced practical expedient to recognize revenues for services the Company renders to customers on time and material basis contracts.

The Company generally recognizes revenue from fixed-price applications management, maintenance, or support engagements over time as customers receive and consume the benefits of such services and have applied the as-invoiced practical expedient to recognize revenue for services the Company renders to customers based on the amount the Company has ~~74.2%~~a right to invoice, which is representative of ~~ownership interest on Polaris basic shares of common stock.~~the value being delivered.

~~On October 26, 2017,~~Contracts are often modified to account for changes in contract specification and requirements. The Company considers a contract modification when the ~~Company announced its intention~~modification either creates new or changes the existing enforceable rights and obligations. The accounting for modifications involves assessing whether the services added to ~~commence through its Indian subsidiary, Virtusa India,~~an existing contract are distinct and whether the pricing is at the standalone selling price. Services added that are not distinct are accounted for on a ~~process~~cumulative catch up basis, while those that ~~could lead to~~are distinct are accounted for prospectively, either as a separate contract if the ~~delisting~~additional services are priced at the standalone selling price, or as a termination of ~~its Indian subsidiary, Polaris, from all stock exchanges on which Polaris’ common shares are listed. In December 2017,~~ the ~~Company drew down $25,000 from its~~ existing revolving credit facility to prepare to meet the minimum escrow requirements in accordance with the applicable SEBI delisting regulations. In addition, In January 2018, the Company funded the minimum escrow requirements of approximately $96,285 for the delisting offer towards the purchase of up to 26,416,725 shares, comprisedcontract and creation of a ~~combination of cash and bank guarantee.~~new contract if not priced at the standalone selling price.

~~On February 5, 2018, Virtusa India closed its delisting offer to all public shareholders of Polaris in accordance with the provisions~~Certain customers may receive discounts, incentive payments or service level credits. A portion of the SEBI Delisting Regulations, which resulted in a discovered price of INR 480 per share. On February 8, 2018, Virtusa India accepted the discovered price of INR 480 per share (the “Exit Price”) which will be offeredrevenues relating to all Polaris public shareholders. Upon settlement by Virtusa India of an amount of approximately $145,000, exclusive of transaction and closing costs, for the Polaris shares tendered during the delisting process at the Exit Price, the shareholding of Virtusa India shall increase from approximately 74% to at least 93% of the share capital of Polaris. Upon closing of the transaction ~~and receipt of final approvals from the stock exchanges on which Polaris is traded, the common shares of Polaris will be delisted from all public exchanges on which the Polaris shares are traded.~~ The public shareholders of Polaris who have yet to tender their shares to Virtusa India may offer their shares for sale to Virtusa India at the Exit Price for a period of one year following the date of the delisting ~~from all stock exchanges on which Polaris common shares are listed~~.

~~In accordance with ASC 810-10, changes in a parent’s ownership, while retaining its financial controlling interest~~such arrangements are accounted for as ~~equity transactions. Therefore,~~variable consideration when the ~~purchase~~amount of ~~additional shares of Polaris through its Indian subsidiary, would result in a reduction of minority interest and an increase~~revenue to be recognized can be estimated to the extent that it is probable that a significant reversal of any revenue will not occur. The Company estimates these amounts based on the expected amount to be provided to customers and adjusts revenues recognized. The Company’s ~~equity. In connection with~~estimates of variable consideration and determination of whether to include estimated amounts in the ~~Polaris delisting,~~transaction price may involve judgment and are based largely on ~~February 6, 2018~~an assessment of the Company’s anticipated performance and all information that is reasonably available to us.

From time to time, the Company ~~entered~~may enter into contracts with customers that include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. The Company generally determines standalone selling prices based on an ~~amended~~expected cost plus a margin approach.

The Company’s warranties generally provide a customer with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications and ~~restated credit agreement (the “Credit Agreement”) dated~~is therefore not considered as an additional performance obligation in the contract.

When the Company receives consideration from a customer prior to transferring services to the customer under the terms of ~~February 6, 2018 (See Note 12~~a contract, the Company records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as revenue after the Company has transferred control of the ~~notes~~services to the ~~financial statements for further discussion).~~customer and all revenue recognition criteria are met.

~~On June 29, 2017,~~

The Company’s payment terms vary by the type and location of its customers. The term between invoicing and when payment is due is not significant. As a practical expedient, the Company ~~acquired certain assets~~does not assess the existence of a ~~small consulting company located in India. The purchase price was approximately $750 payable in cash subject to a holdback~~significant financing component when the difference between payment and transfer of ~~$50 after~~deliverables is one year or less.

The Company reports gross reimbursable “out-of-pocket” expenses incurred as both revenues and cost of revenues.

Any tax assessed by a ~~payment~~governmental authority that is incurred as a result of ~~$100 in earn-out consideration after two years based on certain achievement. The purchase price allocation was as follows: goodwill~~a revenue transaction (e.g. sales tax) is excluded from the Company’s assessment of ~~$150 and customer relationships of $600.~~transaction prices.

~~(8)~~Costs to obtain and fulfill

The Company’s costs to obtain contracts are generally expensed as incurred, as the liability is not solely a result of obtaining the contract. The costs to obtain contracts are triggered by multiple conditions such as being contingent on future performance, including continued employment and revenue recognized associated with the contract.

The Company’s recurring operating costs for contracts with customers are recognized as expense as incurred. Certain eligible costs incurred in the initial phases of the Company’s application maintenance, business process outsourcing and infrastructure services contracts (i.e. set-up or transition costs) are capitalized when such costs (1) relate directly to the contract, (2) generate or enhance resources of the Company that will be used in satisfying the performance obligation in the future, and (3) are expected to be recovered. These costs are expensed ratably over the estimated life of the customer relationship, including expected renewals. In determining the estimated life of the customer relationship, the Company evaluates the contract term, the expected life of the enhanced assets as well as the rate of technological and industry change. Capitalized amounts are monitored regularly for impairment. Impairment losses are recorded when projected remaining undiscounted operating cash flows are not sufficient to recover the carrying amount of the capitalized costs to fulfill.

The following table presents information related to the capitalized costs to fulfill, such as set-up or transition activities, for the six months ended September 30, 2018:

	Costs to Fulfill
Balance at April 1, 2018	$	4,278
Costs capitalized	1,539
Amortization expense	(1,075		)
Foreign currency translation adjustments	(183		)
Balance at September 30, 2018	$	4,559

Costs to fulfill are recorded in “Other current assets” and “Other long-term assets” in the consolidated balance sheets.

The following table summarizes the impacts of changes in accounting policies after adoption of ASC 606 on the Company’s consolidated financial statements as of and for the three and six months ended September 30, 2018:

	As of September 30, 2018
	As reported		Pro-forma Amounts		Impacts of the New Revenue standard
Balance Sheet :
Assets
Other current assets (1)	$	19,221	$	18,862	$	359
Total current assets					359
Deferred income taxes (3)	38,310		38,486		(176		)
Other long-term assets (1)	15,728		15,671		57
Total Assets					$	240
Liabilities
Deferred revenue (2)	6,175		6,442		(267		)
Total current liabilities					(267		)
Stockholders’ equity:
Retained earnings	231,517		231,010		507
Total liabilities, Series A convertible preferred stock and stockholders’ equity					$	240

	Three Months Ended September 30, 2018									Six Months Ended September 30, 2018
	As reported			Pro-forma Amounts			Impact from New Revenue Standard			As reported			Pro-forma Amounts			Impact from New Revenue Standard
Revenue (2)	$	305,520		$	305,541		$	(21	)	605,551			$	605,284		$	267
Costs of revenue (1)	216,346			216,589			(243		)	432,827			433,243			(416		)
Gross profit	89,174			88,952			222			172,724			172,041			683
Operating expenses:
Selling, general and administrative expenses	75,155			75,155			—			144,781			144,781			—
Income from operations	14,019			13,797			222			27,943			27,260			683
Other expense	(12,461		)	(12,461		)	—			(26,085		)	(26,085		)	—
Income before income tax expense (benefit)	1,558			1,336			222			1,858			1,175			683
Income tax (benefit) expense (3)	(402		)	(463		)	61			5,463			5,287			176
Net income (loss)	$	1,960		$	1,799		$	161		$	(3,605	)	(4,112		)	$	507
Less: net income attributable to noncontrolling interests, net of tax	455			455			—			1,186			1,186			—
Net income (loss) available to Virtusa stockholders	$	1,505		$	1,344		$	161		$	(4,791	)	(5,298		)	$	507
Less: Series A Convertible Preferred Stock dividends and accretion	1,088			1,088			—			2,175			2,175			—
Net income (loss) available to Virtusa common stockholders	417			256			161			(6,966		)	(7,473		)	507

Basic earnings (loss) per share available to Virtusa common stockholders	$	0.01		$	—		$	0.01		$	(0.23	)	(0.25		)	$	0.02
Diluted earnings (loss) per share available to Virtusa common stockholders	$	0.01		$	—		$	0.01		$	(0.23	)	(0.25		)	$	0.02

Notes

(1) Reflects the impact of a longer period of amortization for costs to fulfill a contract.

(2) Reflects the impact of changes in timing of revenue recognition on our software licenses and certain fixed-price application maintenance contracts.

(3) Reflects the income tax impact of the above items.

Receivables and Contract Balances

The Company classifies its right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). The Company presents such receivables in accounts receivable or unbilled accounts receivable, in its consolidated statements of financial position at their net estimated realizable value.

Contract assets included in unbilled accounts receivable are recorded when services have been provided but the Company does not have an unconditional right to receive consideration. Contracts assets are primarily related to unbilled amounts on fixed-price contracts utilizing the input method of revenue recognition. The timing between services rendered and timing of payment is less than one year. The Company recognizes an impairment loss when the contract carrying amount is greater than the remaining consideration receivable, less directly related costs to be incurred.

The table below shows significant movements during the six months ended September 30, 2018 in contract assets:

	Contract Assets
Balance at April 1, 2018	$	15,998
Revenues recognized during the period but not yet billed	63,983
Amounts billed	(64,231		)
Other	(278		)
Balance at September 30, 2018	$	15,472

Contract liabilities comprise amounts billed to customers for revenues not yet earned. Such amounts are anticipated to be recorded as revenues when services are performed in subsequent periods.

The table below shows significant movements in the deferred revenue balances during the six months ended September 30, 2018:

	Contract Liabilities
Balance at April 1, 2018	$	7,908
Amounts billed but not yet recognized as revenues	4,918
Revenues recognized related to the opening balance of deferred revenue	(6,354		)
Other	(297		)
Balance at September 30, 2018	$	6,175

Remaining performance obligation

ASC 606 requires that the Company discloses the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2018. This disclosure is not required for:

(1) contracts with an original duration of one year or less, including contracts that can be terminated for convenience without a substantive penalty,

(2) contracts for which the Company recognizes revenues based on the right to invoice for services performed,

(3) variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606- 10-32-40 have been met, or

(4) variable consideration in the form of a sales-based or usage-based royalty promised in exchange for a license of intellectual property.

Many of the Company’s performance obligations meet one or more of these exemptions. As of September 30, 2018, the aggregate amount of transaction price allocated to remaining performance obligations, other than those meeting the exclusion criteria above, was $46,164 and will be recognized as revenue within 4 years.

Disaggregation of Revenue

The table below presents disaggregated revenues from the Company’s contracts with customers by geography, industry groups, service offerings and contract-type. The Company believes this disaggregation best depicts how the nature, amount, timing and uncertainty of its revenues and cash flows are affected by industry, market and other economic factors.

Revenue by geography:	Three Months Ended September 30, 2018		Six Months Ended September 30, 2018
North America	$	218,303	$	427,932
Europe	60,393		127,129
Rest of World	26,824		50,490
Consolidated revenue	$	305,520	$	605,551

Revenue by Customer’s Industry Groups	Three Months Ended September 30, 2018		Six Months Ended September 30, 2018
Banking financial services insurance	$	192,071	$	380,809
Communications and Technology	85,341		168,368
Media & Information and Other	28,108		56,374
Consolidated revenue	$	305,520	$	605,551

Revenue by service offerings	Three Months Ended September 30, 2018		Six Months Ended September 30, 2018
Application outsourcing	$	161,890	$	322,599
Consulting	143,630		282,952
Consolidated revenue	$	305,520	$	605,551

Revenue by contract type	Three Months Ended September 30, 2018		Six Months Ended September 30, 2018
Time-and-materials	$	184,170	$	363,396
Fixed-price*	121,350		242,155
Consolidated revenue	$	305,520	$	605,551

*Fixed-price includes both retainer-billing basis and fixed-price progress towards completion

(9) Series A Convertible Preferred Stock

On May 3, 2017, the Company ~~and Orogen Viper LLC (the “Purchaser”),~~ entered into an ~~Investment Agreement (the “Investment Agreement”~~investment agreement with The Orogen Group (“Orogen”), pursuant to which ~~the Company issued and sold to the Purchaser, and the Purchaser~~Orogen purchased ~~from the Company, an aggregate of 70,000~~108,000 shares of ~~voting convertible preferred stock of the Company, designated as~~ the Company’s ~~3.875%~~newly issued Series A Convertible Preferred Stock, ~~par value $0.01 per share (the “Series A Voting Preferred Stock”), and 38,000~~initially convertible into 3,000,000 shares of ~~a separate class of non-voting convertible preferred~~common stock, of the Company, designated as the Company’s 3.875% Series A-1 Convertible Preferred Stock, par value $0.01 per share (the “Series A-1 Preferred Stock” and, together with the Series A Voting Preferred Stock, the “Series A Convertible Preferred Stock”), in each case for aan aggregate purchase price of ~~$1,000 per share, representing~~ $108,000 with an initial conversion price of ~~gross proceeds to the Company.~~

~~The Investment Agreement provides the Purchaser the right, pursuant to~~$36.00 (the “Orogen Preferred Stock Financing”). Under the terms of the ~~Series A Convertible Preferred Stock, to appoint a director to serve on our Board. Pursuant to~~investment, the Investment Agreement, in connection with the closing of the transactions contemplated by the Investment Agreement (the “Closing”), our Board of Directors (the “Board”) increased the size of the Board from nine directors to ten directors and elected Vikram S. Pandit, the initial nominee designated by the Purchaser, to the Board, subject to replacement pursuant to the procedures described in the Investment Agreement. Such appointment right will terminate if the Purchaser and its affiliates fail to retain beneficial ownership of at least 50% of the number of shares of our common stock underlying the Series A Convertible Preferred Stock held by the Purchaser immediately following the Closing.

Following the conversion of the Series A Convertible Preferred Stock into shares of our common stock, so long as the Purchaser retains beneficial ownership of at least 50% of the number of shares of our common stock underlying the Series A Convertible Preferred Stock held by the Purchaser immediately following the Closing, we have agreed to include one nominee of the Purchaser for election as a director of the same class (whether Class I, Class II or Class III) as the other directors nominated by us for election at our next meeting of stockholders following such conversion, and to renominate such individual thereafter at each meeting of stockholders electing such class of directors. We are required to use our reasonable efforts to cause the election of such person.

Pursuant to the Investment Agreement, the Purchaser has agreed, subject to certain exceptions, that until the later of (1) the first date on which there is no Purchaser-affiliated director serving on our Board, and (2) May 3, 2019 (the “Standstill Period”), the Purchaser will not, among other things, subject to certain exceptions described in the Investment Agreement: (i) acquire any securities of the Company if, immediately after such acquisition, the Purchaser would collectively own in the aggregate more than 20.0% of the then outstanding common stock of the Company, (ii) propose or seek to effect any tender or exchange offer, merger or other business combination involving the Company or its securities, or make any public statement with respect to such transaction, (iii) make, or in any way participate in any “proxy contest” or other solicitation of proxies, (iv) seek election or appointment to, or representation on, our Board other than as set forth in the Investment Agreement or the Series A Certificate of Designations (as defined below), or seek the removal of any of our directors, or (v) conduct any referendum of stockholders of the Company or make or be the proponent of any stockholder proposal.

The Investment Agreement restricts the Purchaser’s ability to transfer the Series A Convertible Preferred Stock or shares of our common stock issued or issuable upon conversion of the Series A Convertible Preferred Stock, subject to certain exceptions specified in the Investment Agreement. In particular, prior to the earliest of (i) May 3, 2019, (ii) a change of control of the Company or entry into a definitive agreement for a transaction that, if consummated, would result in a change of control of the Company, and (iii) the later of May 3, 2018 and the first date on which there is no Purchaser-affiliated director serving on our Board, the Purchaser will be restricted from selling, offering, transferring, assigning, pledging, mortgaging, hypothecating, gifting or disposing the Series A Convertible Preferred Stock or shares of common stock issued or issuable upon conversion of the Series A Convertible Preferred Stock. Such restrictions also prohibit the Purchaser from entering into or engaging in any hedge, swap, short sale, derivative transaction or other agreement or arrangement that transfers any ownership of, or interests in, the shares of Series A Convertible Preferred Stock or shares of common stock issued or issuable upon conversion of the Series A Convertible Preferred Stock. These restrictions do not apply to, among others, transfers to affiliates or in connection with certain third-party tender offers.

Subject to certain limitations, the Investment Agreement provides the Purchaser with certain registration rights for the shares of common stock underlying the Series A Convertible Preferred Stock (including any shares issued or issuable as dividends on the Series A Convertible Preferred Stock) held by the Purchaser. The Investment Agreement contains other customary terms for private investments in public companies, including representations, warranties and covenants.

On May 3, 2017, we filed with the Secretary of State of the State of Delaware (i) a Certificate of the Powers, Designations, Preferences and Rights of the 3.875% Series A Preferred Stock (the “Series A Certificate of Designations”) and (ii) a Certificate of the Powers, Designations, Preferences and Rights of the 3.875% Series A-1 Preferred Stock (the “Series A-1 Certificate of Designations” and, together with the Series A Certificate of Designations, the “Certificates of Designations”). Generally, except with respect to certain voting rights, and a conversion trigger applicable to the Series A-1 Preferred Stock described below as the “HSR Conversion,” the rights, preferences and privileges of the Series A Preferred Stock and the Series A-1 Preferred Stock are substantially identical.

~~The~~ Series A Convertible Preferred Stock has a ~~liquidation preference of $1,000 per share. In addition, cumulative Series A Convertible Preferred Stock dividends accumulate on the Series A Convertible Preferred Stock at a rate of~~ 3.875% dividend per annum, ~~and are~~ payable quarterly in arrears. The payments on such dividends may be paid in cash or, at our option, in shares of our common stock. We may only pay such dividends in shares of common stock on or after August 1, 2018, subject to an aggregate share cap and so long as we have paid full cumulative dividends on the Series A Convertible Preferred Stock for all past dividend periods, and there is adequate current public information with respect to the Company and no volume limitations would apply to the resale of such shares, in each case under Rule 144 under the Securities Act of 1933.

The Series A Convertible Preferred Stock is convertible at the option of the holders at any time into shares of the Company’s common stock at an initial conversion rate of 27.77778 shares of the Company’s common stock per share of Series A Convertible Preferred Stock (which is equal to an initial conversion price of approximately $36.00 per share of the Company’s common stock), subject to certain customary anti-dilution adjustments. If at any time after May 3, 2020, the closing sale price of our common stock exceeds 150% of the then applicable conversion price of the Series A Convertible Preferred Stock for at least 20 trading days during a period of 30 consecutive trading days, the Company may cause some or all of the Series A Convertible Preferred Stock to be converted into shares of common stock at the then applicable conversion rate. Upon the conversion of the Series A Convertible Preferred Stock into common stock, we are required to pay all accumulated but unpaid dividends in additional shares of common stock ~~valued~~and/or cash at the ~~then applicable conversion price on the date of such conversion.~~

Holders of Series A Convertible Preferred Stock are entitled to vote generally with the holders of common stock on an as-converted basis (including with respect to election of the members of our Board). Holders of Series A Convertible Preferred Stock are also entitled to certain limited special approval rights, including with respect to amendments to the Company’s organizational documents that have an adverse effect on the Series A Convertible Preferred Stock, certain issuances of senior or pari passu securities, certain purchases, redemptions or other acquisitions of junior securities or payments, dividends or distributions thereon. In addition, so long as any shares of Series A Convertible Preferred Stock are outstanding and the Purchaser and its affiliates collectively beneficially own at least a majority of the shares of Series A Convertible Preferred Stock beneficially owned by such holders immediately following the Closing, the holders of Series A Convertible Preferred Stock, voting as a separate class by majority vote, are entitled to elect one director to serve on our Board.

Holders of Series A-1 Preferred Stock generally have no voting rights except as required by law and with respect to amendments to the Company’s organizational documents that have an adverse effect on the Series A-1 Preferred Stock. At such time as any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 applicable to the acquisition of shares of Preferred Stock expires or is terminated, all shares of the Series A-1 Preferred Stock then issued and outstanding shall immediately and automatically convert on a one for one basis to shares of Series A Preferred Stock (the “HSR Conversion”). Upon such HSR Conversion (which occurred in May 2017), all accumulated but unpaid dividends on such shares of Series A-1 Preferred Stock immediately prior to such HSR Conversion converted into an equivalent amount of accumulated but unpaid dividends on shares of Series A Preferred Stock immediately following such HSR Conversion.

With certain exceptions, upon a Fundamental Change (as defined in the Certificates of Designations), the holders of the Series A Convertible Preferred Stock may require that the Company repurchase for cash all or any whole number of shares of Series A Convertible Preferred Stock at a per-share repurchase price equal to 100% of the liquidation preference of such shares, plus accumulated and unpaid dividends. If we fail to effect such repurchase, the dividend rate on the Series A Convertible Preferred Stock will increase by 1% per annum and an additional 1% per annum on each anniversary of the date that the Company is required to effect such repurchase, during the period in which such failure to effect the repurchase is continuing, except that the dividend rate will not increase to more than 6.875% per annum. The definition of Fundamental Change includes a sale of substantially all the Company’s assets, a change of control of the Company by way of a tender offer, merger or similar event, the adoption of a plan relating to the Company’s liquidation or dissolution and certain delistings of our common stock, except in certain cases described in the Certificates of Designations in which the consideration received or to be received by the Company’s common stockholders in a sale or change of control transaction consists primarily of publicly listed and traded securities.

Holders of Series A Convertible Preferred Stock that are converted in connection with a Make-Whole Fundamental Change, as defined in the Certificates of Designations, are, under certain circumstances, entitled to an increase in the conversion rate for such shares of Series A Convertible Preferred Stock based on the effective date of such event and the applicable price attributable to the event as set forth in a table contained in the Certificates of Designations. The definition of Make-Whole Fundamental Change includes a sale of substantially all the Company’s assets, a change of control of the Company by way of a tender offer, merger or similar event, the adoption of a plan relating to the Company’s liquidation or dissolution and certain delistings of our common stock.

option. If any shares of Series A Convertible Preferred Stock have not been converted into common stock prior to May 3, 2024, the Company will be required to repurchase such shares at a repurchase price equal to the liquidation preference of the repurchased shares plus the amount of accumulated and unpaid dividends thereon. If ~~we fail~~the Company fails to effect such repurchase, the dividend rate on the Series A Convertible Preferred Stock will increase by 1% per annum and an additional 1% per annum on each anniversary of May 3, 2024 during the period in which such failure to effect the repurchase is continuing, except that the dividend rate will not increase to more than 6.875% per annum.

In connection with the issuance of the Series A Convertible Preferred Stock, the Company incurred direct and incremental expenses of $1,154, including financial advisory fees, closing costs, legal expenses and other offering-related expenses. These issuance costs are recorded as a reduction to the proceeds received from issuance of Series A Convertible Preferred Stock. These direct and incremental expenses reduced the Series A Convertible Preferred Stock, and will be accreted through retained earnings as a deemed dividend from the date of issuance through the first possible known redemption date, May 3, 2024. During the three and ~~nine months~~six ended ~~December 31,~~September 30, 2018 and 2017, the Company recorded ~~$41 and $109, respectively, as an accretion~~accretions to the Series A Convertible Preferred ~~Stock.~~Stock related to its issuance cost. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 3.875% per annum, payable quarterly in arrears. During the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, the Company has paid ~~$2,081~~$2,092 and $1,035, respectively, as cash dividend on Series A Convertible Preferred Stock. As of ~~December 31, 2017,~~September 30, 2018, the Company had declared and accrued dividends of ~~$685~~$686 associated with the Series A Convertible Preferred Stock.

~~(9)~~(10) Goodwill and Intangible Assets

Goodwill:

The Company has one operating segment. The following are details of the changes in goodwill balance at ~~December 31, 2017:~~September 30, 2018:

Amount

Balance at April 1, 2017

$
211,089

Goodwill arising from acquisitions

150

Foreign currency translation adjustments

3,026

Balance at December 31, 2017

$
214,265

	Amount
Balance at April 1, 2018	$	297,251
Preliminary fair value adjustment	(7,223		)
Foreign currency translation adjustments	(15,026		)
Balance at September 30, 2018	$	275,002

The acquisition costs and goodwill balance deductible for our business acquisitions for tax purposes are ~~$74,124.~~$145,936. The acquisition costs and goodwill balance not deductible for tax purposes are ~~$152,029~~$141,970 and relate to the Company’s TradeTech acquisition (closed on January 2, 2014), the Polaris acquisition and the ~~Polaris~~eTouch India acquisition.

The Company performed the annual assessment of its goodwill during the fourth quarter of the fiscal year ended March 31, 2017 and determined that the estimated fair value of the Company’s reporting unit exceeded its carrying value and therefore goodwill was not impaired. The Company will continue to complete goodwill impairment assessments at least annually during the fourth quarter of each ensuing fiscal year. The Company will continue to evaluate whether events or circumstances have occurred that indicate that the estimated remaining useful life of its long-lived assets, including intangible assets, may warrant revision or that the carrying value of these assets may be impaired. Any write-downs are treated as permanent reductions in the carrying amount of the assets.

Intangible Assets:

The following are details of the Company’s intangible asset carrying amounts acquired and amortization at ~~December 31, 2017.~~September 30, 2018.

	Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Weighted Average Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizable intangible assets:
Customer relationships	10.8	$	84,010	$	32,346	$	51,664	12.2	$	132,207	$	38,866	$	93,341
Trademark	2.1	3,007		2,729		278		2.1	3,597		2,915		682
Technology	5.0	500		227		273		5.0	500		311		189
		$	87,517	$	35,302	$	52,215	12.0	$	136,304	$	42,092	$	94,212

The intangible assets are being amortized based upon the pattern in which the economic benefits of the intangible assets are being utilized.

~~(10)~~(11) Income Taxes

The Company applies an estimated annual effective tax rate to its year-to-date operating results to determine the interim provision (benefit) for income tax expense. The Company’s effective tax (benefit) rate was ~~148.0%~~(25.8%) and ~~86.1%~~294.0% for the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, as compared to an effective tax rate of ~~(34.3)%~~16.5% and ~~(44.3)%~~15.8% for the three and ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017. The Company’s effective tax rate for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 was significantly impacted by electing disregarded entity treatment for certain foreign subsidiaries, Global Intangible Low—taxed Income (“GILTI”) provisions and executive compensation limitations enacted in the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. The Company’s reported effective tax rate is also impacted by jurisdictional mix of profits and losses in which the Company operates, foreign statutory tax rates in effect, unusual or infrequent discrete items requiring a provision during the period and certain exemptions or tax holidays applicable to the Company.

During the three and six months ended September 30, 2018, the Company elected to treat several foreign entities as disregarded entities. The earnings of these subsidiaries will be subject to US taxation as well as local taxation with a corresponding foreign tax credit, at the election of the Company. The election resulted in a deferred tax charge of $6,288 during the six months ended September 30, 2018. The election also makes available to the Company benefits of foreign tax credits. The Company’s income tax provision for the three and six months ended September 30, 2018 includes a reasonable estimate of the expected impact of GILTI and executive compensation limitations of the Tax Act impacting our operating results for the 2019 fiscal year. The Company’s aggregate income tax rate in foreign jurisdictions is comparable to its income tax rate in the United States, as a result of the Tax Act, other than in jurisdictions in which the Company ~~operates and applicable~~has tax holiday ~~benefits of the Company, obtained primarily in India and Sri Lanka.~~benefits.

The Tax Act contains several key tax provisions that ~~will impact~~have impacted the Company, including the reduction of the corporate income tax rate to 21% effective January 1, 2018. The Tax Act also includes a variety of other changes, such as a deemed repatriation tax on accumulated foreign earnings, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. The lower corporate income tax rate ~~will require~~required the Company to remeasure its U.S. deferred tax assets and liabilities as well as reassess the realizability of its deferred tax assets and liabilities. ASC Topic 740, Income Taxes, requires the Company to recognize the effect of the tax law changes in the period of enactment. However, the Securities and Exchange Commission has issued Staff Accounting Bulletin 118, Income Tax Accounting Implications of the Tax Cuts and Job Act (“SAB 118”), which will allow the Company to record provisional amounts during a measurement period of up to one year after the enactment of the Tax Act to finalize the recording of the related tax impacts. During the ~~three months~~fiscal year ended ~~December~~March 31, ~~2017,~~2018, the Company recorded a provisional charge of ~~$14,597~~$17,834 for deemed repatriation of unremitted earnings

and a provisional charge of ~~$5,219~~$4,890 primarily to remeasure ~~our~~the Company’s opening U.S. deferred tax assets to reflect the lower statutory rate at which they will be realized. Both ~~of these~~ provisional charges are based on the Company’s reasonable estimates. During the three and six months ended September 30, 2018, the Company recorded no additional provisional charge for deemed repatriation of unremitted earnings or remeasurement of deferred tax assets to reflect the lower statutory rate at which they will be realized. The ~~$14,597~~$17,834 for deemed repatriation will be paid over the next 8 ~~years,~~years. In July 2018, the Company paid approximately $1,427 related to deemed repatriation. As of ~~which~~September 30, 2018, of the remaining deemed repatriation balance, approximately ~~$1,168~~$1,427 is included in income ~~tax~~taxes payable and ~~$13,429~~$14,980 is included in long-term liabilities in the consolidated balance sheet as of ~~December 31, 2017.~~September 30, 2018.

Due to the complexities involved in determining the previously unremitted earnings of all of our foreign subsidiaries, the Company is still in the process of obtaining, preparing and analyzing the computations of accumulated earnings and profits balances as of ~~December 31, 2017. In addition, the impact~~September 30, 2018. The Company is continuing to analyze certain aspects of the ~~rate change to our~~Tax Act and may refine its estimates, which could potentially affect the measurement of its net deferred tax assets ~~is provisional as the Company is still in process of obtaining, preparing and analyzing~~ ~~the underlying timing differences.~~

~~A valuation allowance is required if, based on available evidence, it is more likely than not, that all~~ or ~~some portion of the asset will not be realized due~~give rise to the inability of the Company to generate sufficient taxable income in a specific jurisdiction. Net loss in the United States has decreased during the nine months ended December 31, 2017 compared with the nine months ended December 31, 2016. The Company has $21,888 ofnew deferred tax ~~assets in the United States at December 31, 2017.~~amounts. The ~~Company has not completed its valuation allowance assessment related~~U.S. Government and state tax authorities are expected to continue to issue guidance regarding the Tax Act, ~~primarily related~~which may result in adjustments to the ~~impact~~Company’s provisional estimates. The final determination of these provisional amounts will be completed as additional information becomes available, but no later than one year from the ~~global intangible low taxed income (“GILTI”), interest expense limitation and executive pay, which might impact the need for a valuation allowance.~~enactment date.

The changes included in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the above estimate, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.

The U.S. Tax Act subjects a U.S. shareholder to GILTI earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740, No. 5, Accounting for Global Intangible Low-Taxed Income, states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. The Company has elected to provide for GILTI in the year incurred. The Company’s results for the six months ended September 30, 2018 include a reasonable estimate for the impact of GILTI. Given the complexity of the GILTI provisions, and future guidance that might be released, the Company continues to evaluate the effects of the GILTI provisions on our results. The Company continues to review the anticipated impacts of the ~~GILTI and~~ base erosion anti-abuse tax (“BEAT”), which ~~are not~~is effective ~~until~~for our fiscal year ended March 31, 2019. The Company has not recorded any impact associated with ~~either GILTI or~~ BEAT in the tax rate for the ~~third quarter~~six months ended September 30, 2018 given the Company’s understanding of ~~fiscal year~~current guidance.

A valuation allowance is required if, based on available evidence, it is more likely than not that all or some portion of the asset will not be realized due to the inability of the Company to generate sufficient taxable income in a specific jurisdiction. Net loss in the United States has decreased during the six months ended September 30, 2018 compared with the months ended September 30, 2017. The Company has $31,343 of net deferred tax assets in the United States at September 30, 2018. The Company ~~will continue~~has not completed its valuation allowance assessment related to ~~assess~~the Tax Act, primarily related to the impact of the ~~recently enacted~~GILTI, interest expense limitation and executive pay, which might impact the need for a valuation allowance. However, as a result of the Company’s election to treat several foreign entities as disregarded entities, U.S. taxable income has significantly increased. The Company also has a deferred tax ~~law on its business and consolidated financial statements.~~asset in the United Kingdom for loss carryovers, which in the determination of management is more likely than not to be utilized before expiration.

The Company created two export oriented units in India, one in Bangalore during the fiscal year ended March 31, 2011 and a second unit in Hyderabad (Special Economic Zone or “SEZ”) during the fiscal year ended March 31, 2010 for which no income tax exemptions were availed. TheCompany’s Indian subsidiaries ~~also~~ operate ~~two~~several development centers in areas designated as a special economic zone, or SEZ, under the SEZ Act of 2005. In particular, the Company was approved as an SEZ Co-developer and has built a campus on a 6.3 acre parcel of land in Hyderabad, India that has been designated as an SEZ. As an SEZ Co-developer, the Company is entitled to certain tax benefits for any consecutive period of 10 years during the 15 year period starting in fiscal year 2008. The Company has elected to claim SEZ Co-developer income tax benefits starting in fiscal year ended March 31, 2013. In addition, the Company has leased facilities in SEZ designated locations in Hyderabad and Chennai, India. The Company’s profits from the Hyderabad and Chennai SEZ operations are eligible for certain income tax exemptions for a periodother units at various stages of up to 15 years beginning in fiscal March 31, 2009. The Company’s India profits ineligible for SEZ benefits are subject to corporate income tax at the current rate of 34.6%. In the fiscal years ended March 31, 2013 and March 31, 2014, the Company leased a facility in an SEZ designated location in Bangalore and Pune, India each of which is eligible for tax holidays for up to 15 years beginning in the fiscal years ended March 31, 2013 and March 31, 2014 respectively. During the fiscal year ended March 31, 2016, the Company established a new unit in Hyderabad, in an SEZ designated area, for which it is eligible for tax holiday for up to 15 years. Based on the latest changes in tax laws, book profits of SEZ units are subject to MAT, commencing April 1, 2011, which will continue to negatively impact the Company’s cash flows.benefit.

In addition, the Company’s Sri Lankan subsidiary, Virtusa (Private) Limited, is operating under a 12-year income tax holiday arrangement that is set to expire on March 31, 2019 and required Virtusa (Private) Limited to retain certain job creation and investment criteria through the expiration of the holiday period. During the fiscal year ended March 31, ~~2017,~~2018, the Company ~~believed~~believes it had fulfilled its hiring and investment commitments and is eligible for tax holiday through March 2019. The current agreement provides income tax exemption for all export business income. On November 23, 2017, the Company received confirmation from the Board of Investments that it had satisfied investment criteria through March 31, 2017 and is eligible for holiday benefits. At ~~December 31, 2017,~~September 30, 2018, the Company believes it is eligible for continued benefits for the entire ~~12 year~~12-year tax holiday.

~~In connection with~~Due to the geographical scope of the Company’s ~~adoption of ASU 2016-09 (Stock Compensation), during the nine months ended December 31, 2017,~~operations, the Company is subject to tax examinations in various jurisdictions. The Company’s ongoing assessments of the more-likely-than-not outcomes of these examinations and related tax positions require judgment and can increase or decrease the Company’s effective tax rate, as well as impact the Company’s operating results. The specific timing of when the resolution of each tax position will be reached is uncertain. The Company does not believe that the outcome of any ongoing examination will have a material effect on its consolidated financial statements within the next twelve months. The Company’s major taxing jurisdictions include the United States, the United Kingdom, India and Sri Lanka. In the United States, the Company remains subject to examination for all tax years ended after March 31, 2015. In the foreign jurisdictions, the Company

generally remains subject to examination for tax years ended after March 31, 2005. The Company has ~~accounted on a prospective basis~~been under income tax examination in India, the ~~Consolidated Statements of Income~~U.K. and the United States. The Company is currently appealing assessments in India for fiscal years ended March 31, 2005 through 2014. In the United Kingdom, the Company is currently under examination for transfer pricing matters for the ~~income tax expense or benefit for~~year ended March 2014. In the ~~tax effects~~United States, the IRS has initiated an examination of ~~differences recognized on or after the effective date of the equity-based payment awards between the deduction for an award for tax purposes~~fiscal years ended March 31, 2015 and ~~the cumulative compensation costs of that award recognized for financial reporting purposes. During the three and nine months ended December~~March 31, 2017, the Company recorded a tax expense of $23 and tax benefit of $1,127, respectively, in the Company’s income tax expense. The Company also presented the excess tax benefits (deficiencies) as operating activities in the Consolidated Statements of Cash Flows on a retrospective basis and the prior period has been restated.2017.

Unrecognized tax benefits represent uncertain tax positions for which the Company has established reserves. At ~~December 31, 2017~~September 30, 2018 and March 31, ~~2017,~~2018, the total liability for unrecognized tax benefits was ~~$7,505~~$6,702 and ~~$7,612,~~$7,544, respectively. Unrecognized tax benefits may be adjusted upon the closing of the statute of limitations for income tax returns filed in various jurisdictions. During the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, the unrecognized tax benefits decreased by ~~$107~~$842 and decreased by ~~$117~~$24 during the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017. The decrease in unrecognized tax benefits in the ~~nine~~six months period ending
~~December 31, 2017~~ September 30, 2018 was predominantly due to foreign currency movements and the ~~release~~settlement of a prior period ~~domestic tax~~ position ~~as the statute has expired,~~ offset by increases for incremental interest accrued on existing uncertain tax positions.

Undistributed Earnings of Foreign Subsidiaries

A substantial amount of the Company’s income before provision for income tax is from operations earned in its Indian and Sri Lankan subsidiaries and is subject to tax holiday. The Company intends to use accumulated and future earnings of foreign subsidiaries to expand operations outside the United States and, accordingly, undistributed income is considered ~~to be~~ indefinitely reinvested. The Company does not provide for U.S. income taxes on foreign currency translation or applicable withholding tax until a distribution is declared. At ~~December 31, 2017,~~September 30, 2018, the Company had approximately ~~$252,543~~$180,348 of cash, cash equivalents, short-term and long-term investments that would otherwise be available for potential distribution, if not indefinitely reinvested. If required, such cash and investments could be repatriated to the United States. ~~However, under current law, any repatriation would be subject to United States federal income tax on currency translation and applicable withholding tax.~~ Due to the various methods by which such earnings could be repatriated in the future, the amount of taxes attributable to the undistributed earnings is not practicably determinable.

~~(11)~~(12) Concentration of Revenue and Assets

Total revenue is attributed to geographic areas based on the location of the client. Long-lived assets represent property, plant and equipment, intangible assets and goodwill, net of accumulated depreciation and amortization, and are attributed to geographic area based on their location. Geographic information is summarized as follows:

	Three Months Ended December 31,				Nine Months Ended December 31,				Three Months Ended September 30,				Six Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Client revenue:
United States of America	$	162,549	$	136,141	$	453,013	$	394,571	$	208,543	$	150,765	$	409,683	$	290,465
United Kingdom	49,598		38,879		139,612		121,184		48,810		47,881		102,566		90,013
Rest of World	51,662		42,189		146,703		117,014		48,167		49,528		93,302		95,041
Consolidated revenue	$	263,809	$	217,209	$	739,328	$	632,769	$	305,520	$	248,174	$	605,551	$	475,519

	December 31, 2017		March 31, 2017		September 30, 2018		March 31, 2018
Long-lived assets, net of accumulated depreciation and amortization:
United States of America	$	88,446	$	91,500	$	211,512	$	213,024
India	272,709		271,346		252,799		276,512
Rest of World	25,720		25,494		25,168		25,281
Consolidated long-lived assets, net	$	386,875	$	388,340	$	489,479	$	514,817

Revenue from significant clients as a percentage of the Company’s consolidated revenue was as follows:

Three Months Ended
December 31,

Nine Months Ended
December 31,

2017

2016

2017

2016

Customer 1

20.0
%
16.6
%
19.2
%
16.3
%

	Three Months Ended September 30,				Six Months Ended September 30,
	2018		2017		2018		2017
Customer 1	18.0	%	19.6	%	17.6	%	18.8	%

~~(12)~~(13) Debt

On February ~~25, 2016, in connection with the Polaris SPA Transaction,~~6, 2018, the Company entered into a credit agreement (the ~~“Existing Credit~~“Credit Agreement”) dated as of February ~~25, 2016,~~6, 2018, by and among the Company, its guarantor subsidiaries party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runners and lead arrangers. The ~~Existing~~ Credit Agreement replaced the prior $300,000 credit agreement with J.P. Morgan Securities and Merrill Lynch, Pierce, Fenner & Smith Incorporated and provides for a ~~$100,000~~$200,000 revolving credit facility and a ~~$200,000~~$250,000 term loan and delayed-draw term ~~loan (together, the “Existing Credit Facility”). To finance the Polaris SPA Transaction, on February 25, 2016,~~loan. On August 14, 2018, the Company drew down $32,000 from the ~~full $200,000 of~~credit facility to finance the term loan. Interest under these facilities accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expensePolaris Consulting & Services Limited (“~~EBITDA”~~Polaris”). delisting open offer. The Company ~~was~~is required under the terms of the ~~Existing~~ Credit Agreement to make quarterly principal payments on the term ~~loan, however,~~loan. For the ~~prepayment of~~fiscal year ending March 31, 2019, the ~~$81,000 from the proceeds from the Orogen Viper LLC investment~~ ~~(See Note 8 of the notes~~Company is required to ~~our financial statements), has satisfied this obligation and no further~~make principal payments ~~are required.~~of $3,125 per quarter. The ~~Existing~~ Credit Agreement includes customary ~~minimum cash,~~ maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the ~~Existing~~ Credit Agreement is five years ending February ~~24, 2021.~~6, 2023. At ~~December 31, 2017,~~September 30, 2018, the interest ~~rate~~rates on the ~~Existing Credit Facility was 3.82%. On December 20, 2017, the Company drew down $25,000 from its existing revolving~~term loan and line of credit ~~facility to prepare to meet the minimum escrow requirements in accordance with the applicable SEBI delisting regulations.~~

The Existing Credit Agreement has financial covenants that require that the Company maintain a Total Leverage Ratio, commencing on December 31, 2016, of not more than 3.25 to 1.00 for the first year of the Existing Credit Facility, of not more than 3.00 to 1.00 for the second year of the Existing Credit Facility,were 4.75% and 2.75 to 1.00 thereafter, each as determined for the four consecutive quarter period ending on each fiscal quarter (the “Reference Period”). In addition, for a period, expected to be at least one year from the completion of the Company’s closing of the Polaris SPA Transaction, until the occurrence of certain events described in the Existing Credit Agreement, at any time when the Total Leverage Ratio exceeds 1.50 to 1.00 as of the last day of a quarter, the Company must maintain at least $30,000 in unrestricted cash, cash equivalents and certain permitted investments under the Existing Credit Facility held in bank deposits in the U.S.4.65%, and $20,000 in unrestricted cash and certain permitted investments under the Existing Credit Facility and long-term securities investments held in accordance with the Company’s current investment policy. The financial covenants also require that the Company maintain a Fixed Charge Coverage Ratio, commencing on December 31, 2017, of not less than 1.25 to 1.00, as of the last day of any Reference Period. For purposes of these covenants, “Total Leverage Ratio” means, as of the last day of any fiscal quarter, the ratio of Funded Debt to

Adjusted EBITDA for the reference period ended on such date. “Funded Debt” refers generally to total indebtedness to third-parties for borrowed money, capital leases, deferred purchase price and earn-out obligations and related guarantees and “Adjusted EBITDA” is defined as consolidated net income plus (a) (i) GAAP depreciation and amortization, (ii) non-cash equity-based compensation expenses, (iii) fees and expenses incurred during such period in connection with the Existing Credit Facility and loans made thereunder, (iv) fees and expenses incurred during such period in connection with any permitted acquisition, (v) one-time regulatory charges, (vi) other extraordinary and non-recurring losses or expenses, and (vii) all other non-cash charges, expenses and losses for such period, minus (b) (i) extraordinary or non-recurring income or gains for such period, and (ii) any cash payments made during such period in respect of non-cash charges, expenses or losses described in clauses (a)(ii), (a)(v) and (a)(vi) above taken in a prior period, subject to other adjustments and certain caps and limits on adjustments. The Fixed Charge Coverage Ratio is calculated under the Existing Credit Agreement generally as the ratio of Adjusted EBITDA, excluding capital expenditures made during such period (to the extent not financed with indebtedness (other than Revolving Loans), an issuance of equity interests or capital contributions, or proceeds of asset sales, the proceeds of casualty insurance used to replace or restore assets), to fixed charges (regularly scheduled consolidated interest expense paid in cash, regularly scheduled amortization payments on indebtedness in cash, income taxes paid in cash and the interest component of capital lease obligation payments), on a consolidated basis.

The Existing Credit Facility is secured by substantially all of the Company’s assets, including all intellectual property and all securities in domestic subsidiaries (other than certain domestic subsidiaries where the material assets of such subsidiaries are equity in foreign subsidiaries), subject to customary exceptions and exclusions from the collateral. All obligations under the Existing Credit Agreement are unconditionally guaranteed by substantially all of the Company’s material direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of the guarantors, with certain exclusions.respectively.

At ~~December 31, 2017,~~September 30, 2018, the Company iswas in compliance with ~~our~~its debt covenants and ~~have~~has provided a quarterly certification to ~~our~~its lenders to that effect. ~~We believe~~The Company believes that weit currently ~~meet~~meets all conditions set forth in the ~~Existing~~ Credit Agreement to borrow thereunder and ~~we are~~it is not aware of any conditions that would prevent usit from borrowing part or all of the remaining available capacity under the existing revolving credit facility at ~~December 31, 2017~~September 30, 2018 and through the date of this filing.

Current portion of long-term debt

The following summarizes our short-term debt balances as of:

	December 31, 2017		March 31, 2017			September 30, 2018			March 31, 2018
Notes outstanding under the revolving credit facility	$	—	$	—		$	—		$	—
Term loan- current maturities	—		10,000			12,500			12,500
Less: deferred financing costs — current	—		(1,130		)	(1,093		)	(1,093		)
Total	$	—	$	8,870		$	11,407		$	11,407

Long-term debt, less current portion

The following summarizes our long-term debt balance as of:

	December 31, 2017			March 31, 2017			September 30, 2018			March 31, 2018
Term loan	$	109,000		$	190,000		$	243,750		$	250,000
Borrowings under revolving credit facility	25,000			—			87,000			55,000
Less:
Current maturities	—			(10,000		)	(12,500		)	(12,500		)
Deferred financing costs, long-term	(3,561		)	(3,278		)	(3,726		)	(4,273		)
Total	$	130,439		$	176,722		$	314,524		$	288,227

~~In accordance with the recently adopted FASB ASU 2015-03, the Company has presented debt issuance costs in the balance sheet as a direct deduction from the carrying value of that debt liability.~~

In July 2016, the Company entered into 12-month forward starting interest rate swap transactions to mitigate Company’s interest rate risk on Company’s variable rate debt ~~(collectively, “The Interest Rate Swap Agreements”). The Company’s objective is~~(See Note 6 to ~~limit~~ the variability of cash flows associated with changes in LIBOR interest rate payments due on the Existing Credit Agreement by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. The Company will recognize these transactions in accordance with ASC 815 ~~“Derivatives and Hedging,”~~ ~~and have designated the swaps as cash flow hedges.~~

The three Interest Rate Swap Agreements have an effective date of July 31, 2017 and a maturity date of July 31, 2020. As of December 31, 2017, the swaps have an aggregate notional amount of $91,300 and, with the pre-payment of $81,000 of principal on our existing debt, hedge approximately 85% of our outstanding debt balance. The notional amount of the swaps amortizes over the remaining swap periods. The Interest Rate Swap Agreements require the Company to make monthly fixed interest rate payments based on the amortized notional amount at a blended weighted average rate of 1.025% and the Company will receive 1-month LIBOR on the same notional amounts. The unrealized gain associated with the 2016 Swap Agreement was $2,030 at December 31, 2017, which represents the estimated amount that the Company would receive from the counterparties in the event of an early termination.

On February 6, 2018, in connection with the Polaris delisting as discussed in Note 7, the Company entered into an amended and restated $450,000 credit agreement (the “Credit Agreement”) dated as of February 6, 2018, among the Company, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and JPMorgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and lead arrangers. The Credit Agreement amends and restates the Company’s existing $300,000 credit agreement (the “Existing Credit Agreement”) dated as of February 25, 2016, among the Company, the lenders party thereto and the Administrative Agent and provides for a $200,000 revolving credit facility, a $180,000 term loan facility and a $70,000 delayed-draw term loan (together, the “Credit Facility”). Proceeds of borrowings under the Credit Facility will be used (i) to refinance loans and other outstanding obligations under the Existing Credit Agreement and pay fees, costs and expenses incurred in connection with such refinancing and related transactions, (ii) acquisition financing, (iii) to finance consummation of the public tender offer for the outstanding equity interests of Polaris Consulting & Services Limited and (iv) for working capital and other general corporate purposes of the Company and its subsidiaries (including acquisitions, investments, capital expenditures and restricted payments). Interest on the loans under the Credit Facility accrues at a rate per annum of LIBOR plus 3.00%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“EBITDA”). The Company intends to enter into an interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes customary maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years from the Closing Date (as defined below), ending February 6, 2023.

~~The Credit Agreement has~~consolidated financial covenants that require that the Company maintain a Total Net Leverage Ratio, during the period commencing on December 31, 2017 and ending prior to December 31, 2019, of not more than 3.50 to 1.00, during the period commencing on December 31, 2019 and ending prior to September 30, 2020, of not more than 3.25 to 1.00, and during the period commencing on September 30, 2020 and ending on the maturity date of the Credit Facility, of not more than 3.00 to 1.00, in each case as determined for the four consecutive fiscal quarter period ending on the last day of each fiscal quarter ending during the applicable period (the “Reference Period”)statements). The financial covenants also require that the Company maintain a Fixed Charge Coverage Ratio during the term of the Credit Agreement of not less than 1.25 to 1.00, determined as of the last day of each Reference Period. For purposes of these covenants, “Total Net Leverage Ratio” means, as of the last day of any fiscal quarter, the ratio of Net Funded Debt to Adjusted EBITDA for the reference period ended on such date. “Net Funded Debt” refers generally to total indebtedness to third-parties for borrowed money, capital leases, deferred purchase price and earn-out obligations and related guarantees, net of up to $50,000 of unrestricted cash and cash equivalents of the Company, and “Adjusted EBITDA” is defined as consolidated net income plus (a) (i) GAAP depreciation and amortization, (ii) non-cash equity-based compensation expenses, (iii) fees and expenses incurred during such period in connection with the Credit Facility and loans made thereunder, (iv) fees and expenses incurred during such period in connection with any permitted acquisition, (v) one-time regulatory charges, (vi) other extraordinary and non-recurring losses or expenses, and (vii) all other non-cash charges, expenses and losses for such period, minus (b) (i) extraordinary or non-recurring income or gains for such period, and (ii) any cash payments made during such period in respect of non-cash charges, expenses or losses described in clauses (a)(ii), (a)(v) and (a)(vi) above taken in a prior period, subject to other adjustments and certain caps and limits on adjustments. The Fixed Charge Coverage Ratio is calculated under the Credit Agreement generally as the ratio of Adjusted EBITDA, excluding capital expenditures made during such period (to the extent not financed with indebtedness (other than Revolving Loans), an issuance of equity interests or capital contributions, or proceeds of asset sales, the proceeds of casualty insurance used to replace or restore assets), to fixed charges (regularly scheduled consolidated interest expense paid in cash, regularly scheduled amortization payments on indebtedness in cash, income taxes paid in cash and the interest component of capital lease obligation payments), on a consolidated basis.

The Credit Facility amortizes at a rate of 5% per annum of the outstanding principal amount for first two years, 7.5% per annum in the third year, 10% in the fourth year and 15% in the fifth year, in each case payable in equal quarterly instalments. To the extent funded, the delayed draw term loan will amortize in equal quarterly instalments on the same amortization schedule described above.

The Credit Agreement contains customary affirmative covenants for transactions of this type and other affirmative covenants agreed to by the parties, including, among others, the provision of annual and quarterly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters. The Credit Agreement contains customary negative covenants, including, among others, restrictions on the incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, repurchases of equity interests in the Company, entering into affiliate transactions and asset sales. The Credit Agreement also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults.

Beginning in fiscal 2009, the Company’s U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse or continuing involvement, certain of its European-based accounts receivable balances from one client to such third party financial institution. During the ~~nine~~six months ended ~~December 31, 2017, $17,293~~September 30, 2018, $15,230 of receivables were sold under the terms of the financing agreement. Fees paid pursuant to this agreement were immaterial during the three and ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. No amounts were due as of ~~December 31, 2017,~~September 30, 2018, but the Company may elect to use this program again in future periods. However, the Company cannot provide any assurances that this or any other financing facilities will be available or utilized in the future.

~~(13) Pensions and post-retirement benefits~~(14) Redeemable noncontrolling interest

~~The Company has noncontributory defined benefit plans covering its employees~~In connection with the Company’s Indian Subsidiary, Virtusa Consulting Services Private Limited (“Virtusa India”) delisting offer of Polaris and subsequent stock exchange approvals, effective August 1, 2018, the Polaris common shares were delisted in accordance with SEBI Delisting Regulations. For a period of one year following the date of delisting, Virtusa India ~~and Sri Lanka as mandated by~~will, in compliance with SEBI Delisting Regulations, permit the ~~Indian and Sri Lankan governments. The following tables provide information regarding pension expense recognized:~~

Three Months Ended
December 31,

Nine Months Ended
December 31,

2017

2016

2017

2016

Components of net periodic pension cost

Service cost

$
365

$
325

$
1,098

$
990

Interest cost

165

133

495

416

Expected return on plan assets

(172
)
(155
)
(519
)
(459
)
Amortization actuarial loss

38

40

115

122

Amortization past service cost

2

2

7

7

Net periodic pension cost

$
398

$
345

1,196

$
1,076

~~During~~public shareholders of Polaris to tender their shares for sale to Virtusa India at the ~~nine months ended December 31, 2017,~~exit price of INR 480 per share.

In connection with the ~~Company made cash contributions of $2,638 towards the plans for the fiscal year 2018~~

~~(14) Restructuring~~

~~During~~Polaris delisting offer, during the three months ended September 30, ~~2017,~~2018, Virtusa India purchased 4,141,816 shares, or approximately 4.0% of Polaris common stock from shareholders for an aggregate purchase price of approximately $28,396.

As of September 30, 2018, the Polaris common stock held by noncontrolling interest shareholders was 3,626,167, or approximately 3.5% of Polaris’ basic shares of common stock outstanding. In accordance with ASC 480, Distinguishing Liabilities from Equity, the Company ~~implemented certain cost saving~~has recorded the fair value of these shares as well as comprehensive income attributable to noncontrolling interest totaling $24,614 and ~~restructuring initiatives~~presented this in the mezzanine section of the consolidated balance sheet as redeemable noncontrolling interest.

As of September 30, 2018, the Company had approximately $1,245 of Polaris stock options at fair value that were reclassified to current liabilities related to a ~~workforce reduction. During~~deemed cash settlement modification resulting from the ~~nine months ended December 31, 2017, the Company incurred $985, primarily related to termination benefits, which have been included in s~~elling, general and administrative expenses in the consolidated statements of income. The Company expects to incur additional restructuring costs of approximately $250 in the remainder of fiscal year 2018. The Company expects to complete these initiatives by March 31, 2018.delisting offer.

~~The following table summarizes the above restructuring charges during the period ending December 31, 2017:~~

December 31, 2017

Balance at April 1, 2017

$
—

Provisions

985

Cash Payments

(700
)
Balance at December 31, 2017

$
285

(15) Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive income (loss) by component were as follows for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:

	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended September 30,						Six Months Ended September 30,
Accumulated Other Comprehensive Income (Loss)	2017			2016			2017			2016			2018			2017			2018			2017
Investment securities
Beginning balance	$	220		$	(122	)	$	57		$	23		$	199		$	280		$	69		$	57
Other comprehensive income (loss) (OCI) before reclassifications net of tax of $38, $83, $138 and $48	29			47			229			(125		)
Reclassifications from OCI to other income, net of tax of $(18), $0, $(33) and $3	(21		)	1			(17		)	10
Less : Noncontrolling interests, net of tax $(5), $(19), $(27) and $(10)	(10		)	(36		)	(51		)	(18		)
Comprehensive income (loss) on investment securities, net of tax of $15, $64, $78 and $41	(2		)	12			161			(133		)
Other comprehensive income (loss) (OCI) before reclassifications net of tax of $(2), $(32), $19 and $84													(271		)	(23		)	(141		)	186
Reclassifications from OCI to other income, net of tax of $(1), $(40), $21 and $0													(181		)	(72		)	(174		)	18
Less : Noncontrolling interests, net of tax $15, $19, $11 and $(22)													28			35			21			(41		)
Comprehensive income (loss) on investment securities, net of tax of $12, $(53), $51 and $62													(424		)	(60		)	(294		)	163
Closing Balance	218			$	(110	)	218			$	(110	)	$	(225	)	$	220		$	(225	)	$	220
Currency Translation Adjustments
Beginning balance	$	(46,135	)	$	(48,220	)	$	(50,415	)	$	(45,211	)	$	(50,477	)	$	(47,296	)	$	(41,207	)	$	(50,415	)
OCI before reclassifications	4,641			(8,876		)	9,068			(12,079		)	(7,071		)	821			(17,724		)	4,426
Less: Noncontrolling interests, net of tax	(1,943		)	1,964			(2,090		)	2,158
Less: Noncontrolling interests													230			340			1,613			(146		)
Comprehensive income (loss) on currency translation adjustment	2,698			(6,912		)	6,978			(9,921		)	(6,841		)	1,161			(16,111		)	4,280
Closing Balance	(43,437		)	$	(55,132	)	(43,437		)	$	(55,132	)	$	(57,318	)	$	(46,135	)	$	(57,318	)	$	(46,135	)
Cash Flow Hedges
Beginning balance	$	4,274		$	8,811		$	11,789		$	3,934		$	(1,831	)	$	8,023		$	1,881		$	11,789
OCI before reclassifications net of tax of $1,263, $1,176, $1,671, and $3,577	3,467			2,598			3,421			9,956
OCI before reclassifications net of tax of $(1,677), $153, $(3,189), and $403													(4,440		)	(22		)	(7,946		)	(42		)
Reclassifications from OCI to
- Revenue, net of tax of $(808), $(322), $(2,714) and $(834)	(1,526		)	(609		)	(5,132		)	(1,575		)
- Costs of revenue, net of tax of $(129), $(340), $(1,289) and $(620)	(1,303		)	(1,165		)	(4,195		)	(2,257		)
- Selling, general and administrative expenses, net of tax of $(53), $(198), $(719) and $(382)	(697		)	(679		)	(2,341		)	(1,390		)
- Interest expenses, net of tax of $(12), $0, $(26) and $0	(47		)	—			(67		)	—
Less: Noncontrolling interests, net of tax $83, $23, $450 and $175	157			43			850			331
Comprehensive income (loss) on cash flow hedges, net of tax of $344 , $339, $(2,627) and $1,916	51			188			(7,464		)	5,065
- Revenue, net of tax of $282, $(1,010), $406 and $(1,907)													525			(1,909		)	757			(3,604		)
- Costs of revenue, net of tax of $163, $(594), $89 and $(1,160)													496			(1,393		)	252			(2,892		)
- Selling, general and administrative expenses, net of tax of $85, $(342), $45 and $(661)													258			(808		)	128			(1,649		)
- Interest expenses, net of tax of $(61), $(14), $(114) and $(14)													(176		)	(21		)	(329		)	(21		)
Less: Noncontrolling interests, net of tax $(6), $214, $42 and $367													(11		)	404			78			693
Comprehensive loss on cash flow hedges, net of tax of $(1,214), $(1,593), $(2,721) and $(2,972)													(3,348		)	(3,749		)	(7,060		)	(7,515		)
Closing Balance	4,325			$	8,999		4,325			$	8,999		$	(5,179	)	$	4,274		$	(5,179	)	$	4,274
Benefit plans
Beginning balance	$	(1,088	)	$	(621	)	$	(1,180	)	$	(885	)	$	(1,632	)	$	(1,135	)	$	(1,424	)	$	(1,180	)
OCI before reclassifications net of tax of $0 for all periods	$	—		$	—		$	—		$	247
OCI before reclassifications net of tax of $29, $0, $348, $0 for all periods													$	(32	)	$	—		$	(352	)	$	—
Reclassifications from OCI for prior service credit (cost) to:
- Costs of revenue, net of tax of $0 for all periods	2			2			6			6			—			2			—			4
- Selling, general and administrative expenses, net of tax of $0 for all periods	—			—			1			1			—			—			—			—
- Other income (expense), net of tax of $0 for all periods													14						28
Reclassifications from OCI for net actuarial gain (loss) amortization to:
- Costs of revenue, net of tax of $0 for all periods	26			25			82			77			—			27			—			53
- Selling, general and administrative expenses, net of tax of $0 for all periods	12			15			36			45			—			12			—			24
- Other income (expense), net of tax of $0 for all periods													38						77
Other adjustments	(9		)	—			(2		)	(18		)	93			6			151			11
Less: Noncontrolling interests, net of tax	—			(9		)	—			(61		)
Less: Noncontrolling interests, net of tax $0 for all periods													8			—			9			—
Comprehensive income (loss) on benefit plans, net of tax of $0 for all periods	31			33			123			297			121			47			(87		)	92
Closing Balance	(1,057		)	$	(588	)	(1,057		)	$	(588	)	$	(1,511	)	$	(1,088	)	$	(1,511	)	$	(1,088	)
Accumulated other comprehensive loss at December 31, 2017	(39,951		)	$	(46,831	)	(39,951		)	$	(46,831	)
Accumulated other comprehensive loss at September 30, 2018													$	(64,233	)	$	(42,729	)	$	(64,233	)	$	(42,729	)

~~(16) Subsequent Events~~

On January 19, 2018, the Company purchased multiple foreign currency forward contracts designed to hedge fluctuation in the U.K. pound sterling (“GBP”) against the U.S. dollar, the Swedish Krona (“SEK”) against the U.S. dollar and the Euro against the U.S. dollar, each of which will expire on various dates during the period ending March 29, 2018. The GBP contracts have an aggregate notional amount of approximately £2,346 (approximately $3,252), the SEK contracts have an aggregate notional amount of approximately SEK 1,658 (approximately $210) and the Euro contracts have an aggregate notional amount of approximately EUR 1,130 (approximately $1,385). The weighted average U.S. dollar settlement rate associated with the GBP contracts is $1.39, the weighted average U.S dollar settlement rate associated with the SEK contracts is approximately $0.13, and the weighted average U.S. dollar settlement rate associated with the Euro contracts is approximately $1.23.

On February 5, 2018, Virtusa India closed its delisting offer to all public shareholders of Polaris in accordance with the provisions of the SEBI Delisting Regulations, which resulted in a discovered price of INR 480 per share. On February 8, 2018, Virtusa India accepted the discovered price of INR 480 per share (the “Exit Price”) which will be offered to all Polaris public shareholders. Upon settlement by Virtusa India of an amount of approximately $145,000, exclusive of transaction and closing costs, for the Polaris shares tendered during the delisting process at the Exit Price, the shareholding of Virtusa India shall increase from approximately 74% to at least 93% of the share capital of Polaris. Upon closing of the transaction and receipt of final approvals from the stock exchanges on which Polaris is traded, the common shares of Polaris will be delisted from all public exchanges on which the Polaris shares are traded. The public shareholders of Polaris who have yet to tender their shares to Virtusa India may offer their shares for sale to Virtusa India at the Exit Price for a period of one year following the date of the delisting from all stock exchanges on which Polaris common shares are listed.

On February 6, 2018, the Company entered into an amended and restated $450,000 credit agreement (the “Credit Agreement”) dated as of February 6, 2018, among the Company, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and JPMorgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and lead arrangers. The Credit Agreement amends and restates the Company’s existing $300,000 credit agreement (the “Existing Credit Agreement”) dated as of February 25, 2016, among the Company, the lenders party thereto and the Administrative Agent and provides for a $200,000 revolving credit facility, a $180,000 term loan facility and a $70,000 delayed-draw term loan (together, the “Credit Facility”). Proceeds of borrowings under the Credit Facility will be used (i) to refinance loans and other outstanding obligations under the Existing Credit Agreement and pay fees, costs and expenses incurred in connection with such refinancing and related transactions, (ii) acquisition financing, (iii) to finance consummation of the public tender offer for the outstanding equity interests of Polaris Consulting & Services Limited and (iv) for working capital and other general corporate purposes of the Company and its subsidiaries (including acquisitions, investments, capital expenditures and restricted payments). Interest on the loans under the Credit Facility accrues at a rate per annum of LIBOR plus 3.00%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“EBITDA”). The Company intends to enter into an interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes customary maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years from the Closing Date (as defined below), ending February 6, 2023.

period commencing on December 31, 2019 and ending prior to September 30, 2020, of not more than 3.25 to 1.00, and during the period commencing on September 30, 2020 and ending on the maturity date of the Credit Facility, of not more than 3.00 to 1.00, in each case as determined for the four consecutive fiscal quarter period ending on the last day of each fiscal quarter ending during the applicable period (the “Reference Period”). The financial covenants also require that the Company maintain a Fixed Charge Coverage Ratio during the term of the Credit Agreement of not less than 1.25 to 1.00, determined as of the last day of each Reference Period. For purposes of these covenants, “Total Net Leverage Ratio” means, as of the last day of any fiscal quarter, the ratio of Net Funded Debt to Adjusted EBITDA for the reference period ended on such date. “Net Funded Debt” refers generally to total indebtedness to third-parties for borrowed money, capital leases, deferred purchase price and earn-out obligations and related guarantees, net of up to $50,000 of unrestricted cash and cash equivalents of the Company, and “Adjusted EBITDA” is defined as consolidated net income plus (a) (i) GAAP depreciation and amortization, (ii) non-cash equity-based compensation expenses, (iii) fees and expenses incurred during such period in connection with the Credit Facility and loans made thereunder, (iv) fees and expenses incurred during such period in connection with any permitted acquisition, (v) one-time regulatory charges, (vi) other extraordinary and non-recurring losses or expenses, and (vii) all other non-cash charges, expenses and losses for such period, minus (b) (i) extraordinary or non-recurring income or gains for such period, and (ii) any cash payments made during such period in respect of non-cash charges, expenses or losses described in clauses (a)(ii), (a)(v) and (a)(vi) above taken in a prior period, subject to other adjustments and certain caps and limits on adjustments. The Fixed Charge Coverage Ratio is calculated under the Credit Agreement generally as the ratio of Adjusted EBITDA, excluding capital expenditures made during such period (to the extent not financed with indebtedness (other than Revolving Loans), an issuance of equity interests or capital contributions, or proceeds of asset sales, the proceeds of casualty insurance used to replace or restore assets), to fixed charges (regularly scheduled consolidated interest expense paid in cash, regularly scheduled amortization payments on indebtedness in cash, income taxes paid in cash and the interest component of capital lease obligation payments), on a consolidated basis.

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

The following discussion of the financial condition and results of operations of Virtusa Corporation should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~2018 (the “Annual Report”), which has been filed with the Securities and Exchange Commission, or SEC.

~~Forward looking~~Forward-looking statements

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seek,” “intends,” “plans,” “estimates,” “projects,” “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These forward-looking statements, such as statements regarding anticipated future revenue, contract percentage completions, capital expenditures, the effect of new accounting pronouncements, management’s plans and objectives and other statements regarding matters that are not historical facts, involve predictions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. There are a number of important factors that could cause our results to differ materially from those indicated by such forward-looking statements, including those factors set forth in Item 1A. “Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017~~2018 and those factors referred to or discussed in or incorporated by reference into the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q. We urge you to consider those risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Business overview

Virtusa Corporation (the “Company”, “Virtusa”, “we”, “us” or “our”) is a global provider of information technology (“IT”) consulting and outsourcing services that accelerate business outcomes for our clients. We support Forbes Global 2000 clients across large, ~~consumer facing~~consumer-facing industries like banking and financial services, insurance, healthcare, communications, and media and entertainment, as they look to improve their business performance through accelerating revenue growth, delivering compelling consumer experiences, improving operational efficiencies, and lowering overall IT costs. We provide services across the entire spectrum of the IT services lifecycle, from strategy and consulting, to technology and user experience (“UX”) design, development of IT applications, systems integration, testing and business assurance, and maintenance and support services, including infrastructure and managed services. Our services leverage our distinctive consulting approach and unique platforming methodology to transform our clients’ businesses through the innovative use of technology and domain knowledge to solve critical business problems. Our services enable our clients to accelerate business outcomes by consolidating, rationalizing and modernizing their core customer-facing processes into one or more core systems. We deliver cost-effective solutions through a global delivery model, applying advanced methods such as Agile, an industry standard technique designed to accelerate application development. We also use our consulting methodology, which we refer to as accelerated solution design (“ASD”), which is a collaborative decision-making and design process performed with the client, to ensure our solutions meet the client’s specifications and requirements. Our industry leading business transformational solutions combine deep domain expertise with our strengths in software engineering and business consulting to support our clients’ business imperative initiatives across business growth and IT operations. Headquartered in Massachusetts, we have offices in the United States, Canada, the United Kingdom, the Netherlands, Germany, Switzerland, Sweden, Austria, the United Arab Emirates, Hong Kong, Japan, Australia and New Zealand, with global delivery centers in India, Sri Lanka, Hungary, Singapore and Malaysia, as well as near shore delivery centers in the United States. At ~~December 31, 2017,~~September 30, 2018, we had ~~19,062~~21,325 employees, or team members, inclusive of our ~~Polaris~~eTouch team members.

To strengthen our digital engineering capabilities and establish a solid base in Silicon Valley, on March 12, 2018, we entered into an equity purchase agreement by and among the Company, eTouch Systems Corp. (“eTouch US”) and each of the equity holders of eTouch US to acquire all of the outstanding shares of eTouch US, and certain of the Company’s Indian subsidiaries entered into a share purchase agreement by and among those Company subsidiaries, eTouch Systems (India) Pvt. Ltd (“eTouch India,” together with eTouch US, “eTouch”) and the equity holders of eTouch India to acquire all of the outstanding shares of eTouch India.

Under the terms of the equity purchase agreement and the share purchase agreement, on March 12, 2018, we acquired all of the outstanding shares of eTouch US and eTouch India for approximately $140.0 million in cash, subject to certain adjustments, with up to an additional $15.0 million set aside for retention bonuses to be paid to eTouch management and key employees, in equal installments on the first and second anniversary of the transaction. The purchase price is being paid in three tranches, with $80.0 million

paid at closing, $42.5 million on the 12-month anniversary of the close of the transaction, and $17.5 million on the 18-month anniversary of the close of the transaction, subject in each case to certain adjustments.

On May 3, 2017, we entered into an investment agreement with The Orogen Group (“Orogen”) pursuant to which Orogen purchased 108,000 shares of the Company’s newly issued Series A Convertible Preferred Stock, initially convertible into 3,000,000 shares of common stock, for an aggregate purchase price of $108 million with an initial conversion price of $36.00 (the “Orogen Preferred Stock Financing”). In connection with the investment, Vikram S. Pandit, the former CEO of Citigroup, was appointed to Virtusa’s Board of Directors. Orogen is a new operating company that was created by Vikram Pandit and Atairos Group, Inc., an independent private company focused on supporting growth-oriented businesses, to leverage the opportunities created by the evolution of the financial services landscape and to identify and invest in financial services companies and related businesses with proven business models.

In connection with the investment, we repaid $81 million of our outstanding senior term loan, and our board of directors approved the repurchase of approximately $30 million of our common stock.

On March 3, 2016, our Indian subsidiary, Virtusa Consulting Services Private Limited (“Virtusa India”), acquired approximately 51.7% of the fully diluted shares of Polaris Consulting & Services Limited (“Polaris”) for approximately $168.3 million in cash (the “Polaris Transaction”) pursuant to a share purchase agreement dated as of November 5, 2015, by and among Virtusa ~~Consulting Services Private Limited (“Virtusa India”), a subsidiary of the Company,~~India, Polaris ~~Consulting & Services Limited (“Polaris”)~~ and the promoter sellers named ~~therein, as amended on February 25, 2016 (the “SPA”), the Company completed the purchase~~therein. Through a series of ~~53,133,127 shares, or approximately 51.7% of the fully-diluted capitalization of Polaris from certain Polaris shareholders for approximately $168.3 million~~transactions and in ~~cash (the “Polaris SPA Transaction”). The primary strategic purpose and goal of Virtusa’s acquisition of Polaris was, and is, as follows:~~

· ~~The combination of Virtusa and Polaris creates a unique, fully integrated provider of comprehensive solutions and services across the banking and financial services industry,~~

· ~~The combination meaningfully expands our addressable market, and~~

· ~~The transaction enhances our ability to pursue larger consulting and outsourcing contracts.~~

~~In addition, on April 6, 2016, as part of the Polaris acquisition, Virtusa India completed an unconditional mandatory open offer (the “Mandatory Tender Offer”)~~compliance with successful tender to purchase an additional 26% of the fully diluted outstanding shares of Polaris from Polaris’ public shareholders. The Mandatory Tender Offer was conducted in accordance with requirements of the Securities and Exchange Board of India (“SEBI”) and the applicable Indian rules on ~~takeovers.~~takeovers and SEBI Delisting Regulations, Virtusa increased its ownership interest in Polaris from 51.7% to 93.0% by February 12, 2018, when Virtusa consummated its Polaris delisting offer with respect to the public shareholders of Polaris. The delisting offer resulted in an accepted exit price of INR 480 per share (“Exit Price”), for an aggregate consideration of approximately $145.0 million, exclusive of transaction and closing costs. On July 11, 2018, the stock exchanges on which Polaris common shares are listed notified Polaris that trading in equity shares of Polaris would be discontinued and delisted effective on August 1, 2018. For a period of one year following the date of delisting, Virtusa India will, in compliance with SEBI Delisting Regulations, permit the public shareholders of Polaris to tender their shares for sale to Virtusa India at the Exit Price. In connection with the Polaris delisting offer, during the three months ended September 30, 2018, Virtusa India purchased ~~26,719,942~~4,141,816 shares, or 4.0%, of Polaris common stock ~~for approximately $3.32 per share~~from Polaris public shareholders for an aggregate purchase price of approximately ~~$89.1 million (Indian rupees 5,935 million). Upon~~$28.4 million. At September 30, 2018, if all the ~~closing of the Mandatory Tender Offer, Virtusa India’s ownership interest in Polaris increased from approximately 51.7% to 77.7% of Polaris’ fully diluted~~remaining shares outstanding, and from approximately 52.9% to 78.8% of Polaris’ basic shares outstanding. Under applicable Indian rules on takeovers, Virtusa India was required to sell within one year of the settlement of the unconditional mandatory offer its shares of common stock in Polaris in excess of 75% of the basic outstanding shares of common stock of Polaris. In order to comply with the applicable Indian rules on takeovers, during the three months ended December 31, 2016, the Company sold 3.7% of its shares(approximately 3.5%) of Polaris ~~common stock through a public offering. The sale offer closed on December 14, 2016, and~~were tendered at the ~~Company received~~Exit Price, we would pay additional consideration of approximately ~~$7.6~~$24.0 million in ~~proceeds, net of $0.2 million in brokerage fees and taxes. In addition to these costs,~~ the Company incurred additional costs of $0.4 million towards professional and legal fees and expense. The Company’s ownership interest in Polaris prior to the sale offer was 78.6% of the outstanding shares of common stock, and upon the closing of the sale offer, the Company’s ownership interest decreased from 78.6% to 74.9% of Polaris’ basic shares of common stock outstanding.

To finance the Polaris acquisition, on February 25, 2016, the Company entered into a credit agreement (the “Existing Credit Agreement”) by and among the Company, its guarantor subsidiaries a party thereto, the lenders a party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runners and lead arrangers. The Existing Credit Agreement replaced the Company’s old $25.0 million credit agreement with JP Morgan Chase Bank, N.A. and provides for a $100.0 million revolving credit facility and a $200.0 million delayed-draw term loan (together, the “Existing Credit Facility”). In connection with the Polaris acquisition, on February 25, 2016, the Company drew down the full $200.0 million of the term loan. Interest under these facilities accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“EBITDA”). We were required under the terms of the Existing Credit Agreement to make quarterly principal payments on the term loan. On May 3, 2017, in connection with the Orogen Preferred Stock Financing, we amended our Existing Credit Agreement primarily to issue the Series A Convertible Preferred Stock and pay certain dividends with respect to the Series A Convertible Preferred Stock and we repaid $81.0 million of our term loan under the Existing Credit Facility. As a result of this pre-payment, the Company has no additional obligated principal payments until the amount due at maturity. Interest payments will continue per the terms of the Existing Credit Agreement. The Existing Credit Agreement includes customary minimum cash, maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Existing Credit Agreement is five years, ending February 24, 2021.aggregate.

In connection with, and as part of the Polaris acquisition, on November 5, 2015, ~~the Company~~we entered into an amendment with Citigroup Technology, Inc. (“Citi”) and Polaris, which became effective upon the closing of the Polaris ~~SPA~~ Transaction, pursuant to which ~~(i)~~Virtusa was added as a party to the master services agreement with Citi and Citi agreed to appoint the Company and Polaris as a preferred vendor for Global Technology Resource Strategy (“GTRS”) for the provision of IT services to Citi on an enterprise wide basis (“GTRS Preferred Vendor”), (ii) the Company agreed to certain productivity savings and associated reduced spend commitments for a period of two years, which, if not achieved, would require the Company to provide certain minimum discounts to Citi, (iii) the parties amended Polaris’ master services agreement with

Citi such that the Company would also be deemed a contracting party and the Company would assume, and agree to perform, or cause Polaris to perform, all applicable obligations under the master services agreement, as amended by the amendment (the “Citi/Virtusa MSA”), and (iv) Virtusa agreed to terminate Virtusa’s existing master services agreement with Citi, and have the Citi/Virtusa MSA be the sole surviving agreement.

On October 26, 2017, the Company announced its intention to commence through its Indian subsidiary, Virtusa India, a process that could lead to the delisting of its Indian subsidiary, Polaris, from all stock exchanges on which Polaris’ common shares are listed. In December 2017, the Company drew down $25.0 million from its existing revolving credit facility to prepare to meet the minimum escrow requirements in accordance with the applicable SEBI delisting regulations. In addition, in January 2018, the Company funded the minimum escrow requirements of approximately $96.3 million for the delisting offer towards the purchase of up to 26,416,725 shares, comprised of a combination of cash and bank guarantee.vendor.

On February 5, 2018, Virtusa India closed its delisting offer to all public shareholders of Polaris in accordance with the provisions of the SEBI Delisting Regulations, which resulted in a discovered price of INR 480 per share. On February 8, 2018, Virtusa India accepted the discovered price of INR 480 per share (the “Exit Price”) which will be offered to all Polaris public shareholders. Upon settlement by Virtusa India of an amount of approximately $145.0 million, exclusive of transaction and closing costs, for the Polaris shares tendered during the delisting process at the Exit Price, the shareholding of Virtusa India shall increase from approximately 74% to at least 93% of the share capital of Polaris. Upon closing of the transaction and receipt of final approvals from the stock exchanges on which Polaris is traded, the common shares of Polaris will be delisted from all public exchanges on which the Polaris shares are traded. The public shareholders of Polaris who have yet to tender their shares to Virtusa India may offer their shares for sale to Virtusa India at the Exit Price for a period of one year following the date of the delisting from all stock exchanges on which Polaris common shares are listed. In accordance with ASC 810-10, changes in a parent’s ownership, while retaining its financial controlling interest are accounted for as equity transactions. Therefore, should the Company decide to purchase additional shares through its Indian subsidiary, it would result in a reduction of minority interest and an increase to the Company’s equity.

~~In support of the transaction, on~~ February 6, 2018, we entered into a $450.0 million credit agreement (“Credit Agreement”) with a syndicated bank group jointly lead by JP Morgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, which amends and restates our ~~existing~~prior $300.0 million credit agreement (which we had originally entered into on February 25, 2016 (“Prior Credit Agreement”) to fund the Polaris acquisition and certain related transactions) and provides for a $200.0 million revolving credit facility, a $180.0 million term loan facility, and a $70.0 million delayed-draw term loan. ~~Virtusa~~We drew down $180.0 million onunder the ~~new~~ term loan of the Credit Agreement and $55.0 million onunder the ~~new~~ revolving credit facility under the Credit Agreement to repay in full the ~~prior credit facility~~amount outstanding under the Prior Credit Agreement and fund the Polaris delisting transaction. On March 12, 2018, we drew down the $70 million delayed draw to fund the eTouch acquisition. On August 14, 2018, we drew down $32 million from our credit facility to fund the Polaris delisting open offer. Interest under this new credit facility accrues at a rate per annum of LIBOR plus 3.0%, subject to step-downs based on the Company’s ratio of debt to EBITDA. We intend to enter into an interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years, ending February 6, ~~2023.~~2023 (See Note 13 to the consolidated financial statements for further information). As of September 30, 2018, the outstanding amount under the Credit Agreement was $330.8 million.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Acts (the “Tax Act”). The Tax Act contains several key tax provisions that will impact the Company, including the reduction of

the corporate income tax rate to 21% effective January 1, 2018. The Tax Act also includes a variety of other changes, such as a one-time repatriation tax on accumulated foreign earnings, a limitation on the tax deductibility of interest expense, acceleration of business asset expensing, and reduction in the amount of executive pay that could qualify as a tax deduction, among others. During the three months ended September 30, 2018, the Company elected to treat several foreign entities as disregarded entities. The earnings of these subsidiaries will be subject to US taxation as well as local taxation with a corresponding foreign tax credit. (See Note 1011 to the ~~Consolidated Financial Statements~~consolidated financial statements for further ~~discussion)~~information).

Financial overview

In the three months ended ~~December 31, 2017,~~September 30, 2018, our revenue increased by ~~21.5%~~23.1% to $~~263.8~~305.5 million, compared to ~~$217.2~~$248.2 million in the three months ended ~~December 31, 2016.~~September 30, 2017. In the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, our revenue increased by ~~16.8%~~27.3% to ~~$739.3~~$605.6 million, compared to ~~$632.8~~$475.5 million in the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017.

In the three months ended ~~December 31, 2017,~~September 30, 2018, net income available to Virtusa common stockholders decreased by ~~351.2%~~88.7% to ~~a net loss of $(11.1)~~$0.4 million, as compared to a net income of ~~$4.4~~$3.7 million in the three months ended ~~December 31, 2016.~~September 30, 2017. Net income ~~available to Virtusa common stockholders~~ decreased by ~~423.3%~~204.9% to a net loss of ~~$(4.5)~~(7.0) million in the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, compared to a net income of ~~$1.4~~$6.6 million in the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017.

The increase in revenue for the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, as compared to the three and ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, primarily resulted from:

· Revenue from the eTouch acquisition

· Broad based growth, particularly in our top ten clients

· Broad revenue growth in our industry groups, particularly banking, insurance, telecommunications and ~~telecommunications~~healthcare industry groups

· Revenue growth in ~~all our geographies, led by Europe~~North America

The key drivers of the decrease in our net income for the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, as compared to the three and ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, were as follows:

· ~~Substantial increase~~Increase in ~~income tax expense from the provisional impact of the Tax Act principally~~foreign currency transaction losses related to the ~~repatriation tax~~revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar

· Increased cost of revenue due to higher onsite effort and ~~re-measurement of deferred tax assets;~~subcontractor costs

· Increase in ~~net income attributable~~interest expense related to ~~noncontrolling interest;~~our term loan

partially offset by:

· Higher revenue growth, particularly ~~in our top ten clients,~~from the eTouch acquisition, including ~~accelerated~~ growth in banking, insurance, telecommunications and ~~telecommunications:~~healthcare industry groups

· ~~Increase~~Substantial depreciation of the Indian rupee, which resulted in higher gross profit ~~due to higher revenue,~~ and ~~higher gross margin driven by significantly higher utilization; partially offset by the impact of lower margins from higher onsite effort and subcontractor costs;~~

· ~~Decrease in~~ operating ~~expense as a percentage of revenue, reflecting a larger revenue base.~~income

High repeat business and client concentration are common in our industry. During the three months ended ~~December 31,~~September 30, 2018 and 2017, 88% (reflecting new clients from the recent eTouch acquisition) and ~~2016, 96% and 80%~~98%, respectively, of our revenue was derived from clients who had been using our services for more than one year. During the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, 89% (reflecting new clients from the recent eTouch acquisition) and ~~2016,~~ 97% ~~and 82%~~, respectively, of our revenue was derived from clients who had been using our services for more than one year. Accordingly, our global account management and service delivery teams focus on expanding client relationships and converting new engagements to long-term relationships to generate repeat revenue and expand revenue streams from existing clients. We also have a dedicated business development team focused on generating engagements with new clients to continue to expand our client base and, over time, reduce client concentration.

We derive our revenue from two types of service offerings: application outsourcing, which is recurring in nature; and consulting, including technology implementation, which is non-recurring in nature. For the three months ended ~~December 31, 2017,~~September 30, 2018, our application outsourcing and consulting revenue represented ~~56%~~53% and ~~44%~~47%, respectively of our total revenue as compared to ~~58%~~56% and ~~42%~~44%, respectively, for the three months ended ~~December 31, 2016.~~September 30, 2017. For the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, our application

outsourcing and consulting revenue represented ~~57%~~53% and ~~43%~~47%, respectively, of our total revenue as compared to ~~58%~~57% and ~~42%~~43%, respectively, for the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017.

In the three months ended ~~December 31, 2017,~~September 30, 2018, our North America revenue increased by ~~22.4%~~34.3%, or ~~$31.5~~$55.8 million, to ~~$172.1~~$218.3 million, or ~~65.2%~~71.5% of total revenue, from $~~140.6~~$162.5 million, or ~~64.7%~~65.5% of total revenue in the three months ended ~~December 31, 2016.~~September 30, 2017. In the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, our North America revenue increased by ~~17.1%~~38.7%, or ~~$70.1~~$119.3 million, to ~~$480.8~~$427.9 million, or ~~65.0%~~70.7% of total revenue, from ~~$410.7~~$308.6 million, or ~~65.0%~~64.9% of total revenue in the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017. The increase in revenue for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 is primarily due to revenue from the eTouch acquisition and revenue growth in our banking, insurance and ~~telecommunications~~healthcare clients.

In the three months ended ~~December 31, 2017,~~September 30, 2018, our European revenue increased by 5~~30.0%~~.5%, or ~~$14.6~~$3.2 million, to ~~$63.3~~$60.4 million, or ~~24.0%~~19.8% of total revenue, from ~~$48.7~~$57.2 million, or ~~22.4%~~23.1% of total revenue in the three months ended ~~December 31, 2016.~~September 30, 2017. In the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, our European revenue increased by ~~22.2%~~14.9%, or ~~$31.6~~$16.5 million, to ~~$173.9~~$127.1 million, or ~~23.5%~~21.0% of total revenue, from ~~$142.2~~$110.6 million, or ~~22.5%~~23.3% of total revenue in the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017. The increase in revenue for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 is primarily due to an increase in revenue from European banking and telecommunication clients.

Our gross profit increased by ~~$18.0~~$19.4 million to ~~$80.4~~$89.2 million for the three months ended ~~December 31, 2017,~~September 30, 2018, as compared to ~~$62.4~~$69.8 million in the three months ended ~~December 31, 2016.~~September 30, 2017. Our gross profit increased by ~~$39.2~~$41.9 million to ~~$211.2~~$172.7 million for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 as compared to ~~$172.0~~$130.8 million in the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017. The increase in gross profit during the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, as compared to the three and ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, was primarily due to higher revenue and ~~higher utilization,~~substantial depreciation of the Indian rupee, partially offset by ~~appreciation of the Indian Rupee.~~higher onsite effort and subcontractor costs. As a percentage of revenue, gross margin was ~~30.5%~~29.2% and ~~28.7%~~28.1% in the three months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively. During the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ gross margin, as a percentage of revenue, was ~~28.6%~~28.5% and ~~27.2%~~27.5%, respectively.

We perform our services under both time-and-materials and fixed-price contracts. Revenue from fixed-price contracts represented ~~42%~~40% and ~~43%~~39% of total revenue, and revenue from time-and-materials contracts represented ~~58%~~60% and ~~57%~~61% of total revenue for the three months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively. Revenue from fixed-price contracts represented ~~39%~~40% and ~~43%~~38% of total revenue and revenue from time-and-materials contracts represented ~~61%~~60% and ~~57%~~62% for the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively. The revenue earned from fixed-price contracts in the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 primarily reflects our client preferences.

As an IT services company, our revenue growth is highly dependent on our ability to attract, develop, motivate and retain skilled IT professionals. We monitor our overall attrition rates and patterns to align our people management strategy with our growth objectives. At ~~December 31, 2017,~~September 30, 2018, our attrition rate for the trailing 12 months, which reflects voluntary and involuntary attrition, was approximately ~~19.4%, of which 1.1% relates to implementation of certain cost saving and restructuring initiatives.~~22.8%. Our attrition rate at ~~December 31, 2017~~September 30, 2018 reflects a ~~lower~~higher rate of attrition as compared to the corresponding prior year period. The majority of our attrition occurs in India and Sri Lanka, and is weighted towards the more junior members of our staff. In response to higher attrition and as part of our retention strategies, we have experienced increases in compensation and benefit costs, which may continue in the future. However, we try to absorb such cost increases through price increases or cost management strategies such as managing discretionary costs, the mix of professional staff and utilization levels and achieving other operating efficiencies. If our attrition rate increases or is sustained at higher levels, our growth may slow and our cost of attracting and retaining IT professionals could increase.

We engage in a foreign currency hedging strategy using foreign currency forward contracts designed to hedge fluctuations in the Indian rupee against the U.S. dollar and U.K. pound sterling, as well as the euro, ~~Swedish krona~~the Canadian dollar, the Australian dollar and the U.K. pound sterling against the U.S. dollar, when consolidated into U.S. dollars and intercompany balances. In addition, as part of the Polaris acquisition, the Company has assumed a cash flow program designed to mitigate the impact of the volatility of the translation of Polaris U.S. dollar denominated revenue into Indian rupees to reduce the effect of change in these foreign currency exchange rates on our foreign operations. There is no assurance that these hedging programs or hedging contracts will be effective. Because these foreign currency forward contracts are designed to reduce volatility in the Indian rupee, U.K. pound sterling ~~euro~~ and ~~Swedish krona~~euro exchange rates, they not only reduce the negative impact of a stronger Indian rupee, weaker U.K. pound sterling, ~~weaker~~ euro, Canadian dollar and ~~weaker Swedish krona,~~Australian dollar but also could reduce the positive impact of a weaker Indian rupee on our Indian rupee expenses or reduce the impact of a stronger U.K. pound sterling, ~~stronger~~ euro, ~~or stronger Swedish krona~~Canadian dollar and Australian dollar on our U.K. pound sterling, euro, Canadian dollar and ~~Swedish krona~~Australian dollar denominated revenues. In addition, to the extent that these hedges do not qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges placed earlier and in larger amounts than expected.

Application of critical accounting estimates and risks

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible assets, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, in particular those related to the recognition of revenue and profits based on the percentage of completion method of accounting for fixed-price contracts, share-based compensation, income taxes, including reserves for uncertain tax positions, deferred taxes and liabilities, ~~contingent consideration both upon and subsequent to acquisitions~~intangible assets and valuation of financial instruments including derivative contracts and investments. Actual amounts could differ significantly from these estimates. Our management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of revenue and expenses that are not readily apparent from other sources. Additional information about these critical accounting policies may be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included in the Annual Report.

Results of operations

Three months ended ~~December 31, 2017~~September 30, 2018 compared to the three months ended ~~December 31, 2016~~September 30, 2017

The following table presents an overview of our results of operations for the three months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:

Three Months Ended
December 31,

$

%

(dollars in thousands)

2017

2016

Change

Change

Revenue

$
263,809

$
217,209

$
46,600

21.5
%
Costs of revenue

183,420

154,847

28,573

18.5
%
Gross profit

80,389

62,362

18,027

28.9
%
Operating expenses

66,726

55,904

10,822

19.4
%
Income from operations

13,663

6,458

7,205

111.6
%
Other income (expense)

2,843

(2,331
)
5,174

222.0
%
Income before income tax expense

16,506

4,127

12,379

300.0
%
Income tax expense (benefit)

24,427

(1,414
)
25,841

1827.5
%
Net income (loss)

(7,921
)
5,541

(13,462
)
(243.0
)%
Less: net income attributable to noncontrolling interests, net of tax

2,134

1,106

1,028

92.9
%
Net income (loss) available to Virtusa stockholders

(10,055
)
4,435

(14,490
)
(326.7
)%
Less: Series A Convertible Preferred Stock dividends and accretion

1,087

—

1,087

—

Net income (loss) available to Virtusa common stockholders

$
(11,142
)
$
4,435

$
(15,577
)
(351.2
)%

	Three Months Ended September 30,						$			%
(dollars in thousands)	2018			2017			Change			Change
Revenue	$	305,520		$	248,174		$	57,346		23.1	%
Costs of revenue	216,346			178,404			37,942			21.3	%
Gross profit	89,174			69,770			19,404			27.8	%
Operating expenses	75,155			59,491			15,664			26.3	%
Income from operations	14,019			10,279			3,740			36.4	%
Other expense	(12,461		)	(1,187		)	(11,274		)	949.8	%
Income before income tax expense (benefit)	1,558			9,092			(7,534		)	-82.9	%
Income tax (benefit) expense	(402		)	1,500			1,902			-126.8	%
Net income	1,960			7,592			(5,632		)	-74.2	%
Less: net income attributable to noncontrolling interests, net of tax	455			2,824			(2,369		)	-83.9	%
Net income available to Virtusa stockholders	1,505			4,768			(3,263		)	68.4	%
Less: Series A Convertible Preferred Stock dividends and accretion	1,088			1,087			1			0.1	%
Net income available to Virtusa common stockholders	$	417		$	3,681		$	(3,264	)	-88.7	%

Revenue

Revenue increased by ~~21.5%~~23.1%, or ~~$46.6~~$57.3 million, from ~~$217.2~~$248.2 million during the three months ended ~~December 31, 2016~~September 30, 2017 to ~~$263.8~~$305.5 million in the three months ended ~~December 31, 2017.~~September 30, 2018. The increase in revenue was primarily driven by revenue from the eTouch acquisition and growth in our banking, insurance, telecommunications and ~~telecommunications clients.~~healthcare industry groups. Revenue from North American clients in the three months ended ~~December 31, 2017~~September 30, 2018 increased by ~~$31.5~~$55.8 million, or ~~22.4%~~34.3%, as compared to the three months ended ~~December 31, 2016,~~September 30, 2017, particularly due to revenue growth from the eTouch acquisition and growth in our banking, insurance and healthcare clients. Revenue from European clients increased by ~~$14.6~~$3.2 million, or ~~30.0%~~5.5%, as compared to the three months ended ~~December 31, 2016,~~September 30, 2017, primarily due to an increase in revenue from European banking and telecommunications clients. We had ~~200~~212 active clients at ~~December 31, 2017,~~September 30, 2018, as compared to ~~189~~198 active clients at ~~December 31, 2016.~~September 30, 2017.

Cost of ~~Revenue~~revenue

Costs of revenue increased from ~~$154.8~~$178.4 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~$183.4~~$216.3 million in the three months ended ~~December 31, 2017,~~September 30, 2018, an increase of ~~$28.6~~$37.9 million, or ~~18.5%, which reflects a higher cost of $1.6 million due to the appreciation of the Indian rupee.~~21.3%. The increase in cost of revenue was primarily due to an increase in the number of IT professionals (inclusive of eTouch) and related compensation and benefit costs of ~~$23.9~~$31.3 million. The increased costs of revenue are also due to an increase in subcontractor costs of ~~$4.1 million and an increase in travel expenses of $0.8~~$7.2 million. At ~~December 31, 2017,~~September 30, 2018, we had ~~17,355~~19,330 IT professionals as compared to ~~15,805~~16,787 at ~~December 31, 2016.~~

September 30, 2017. As a percentage of revenue, cost of revenue decreased from 71~~.3%~~71.9% for the three months ended ~~December 31, 2016~~September 30, 2017 to ~~69.5%~~70.8% for three months ended ~~December 31, 2017.~~September 30, 2018.

Gross ~~Profit~~profit

Our gross profit increased by ~~$18.0~~$19.4 million, or ~~28.9%~~27.8%, to ~~$80.4~~$89.2 million for the three months ended ~~December 31, 2017,~~September 30, 2018, as compared to $~~62.4~~69.8 million for the three months ended ~~December 31, 2016,~~September 30, 2017, primarily due to ~~an increase in~~higher revenue and ~~higher utilization,~~substantial depreciation of the Indian rupee, partially offset by ~~appreciation of the Indian Rupee.~~higher onsite effort and subcontractor costs. As a percentage of revenue, our gross profit was ~~30.5%~~29.2% and ~~28.7%~~28.1% in the three months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively.

Operating expenses

Operating expenses increased from ~~$55~~$59.9.5 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~$66.7~~$75.2 million in the three months ended ~~December 31, 2017,~~September 30, 2018, an increase of ~~$10.8~~$15.7 million, or ~~19.4%, which reflects a higher cost of $0.7 million due to the appreciation of the Indian rupee.~~26.3%. The increase in operating expenses was primarily due to an increase of ~~$12.1~~$11.4 million in compensation related ~~expenses~~to an increase in the number of non-IT professionals (inclusive of eTouch) and stock compensation, an increase in facilities costs of ~~$1.2 million partially offset by decrease in professional services related expense of $1.8~~$1.9 million and travel costs of ~~$0.8~~$0.7 million. As a percentage of revenue, our operating expenses ~~decreased~~increased from ~~25.7%~~24.0% in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~25.3%~~24.6% in the three months ended ~~December 31, 2017.~~September 30, 2018.

Income from operations

Income from operations increased by ~~111.6%~~36.4%, from ~~$6.5~~$10.3 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~$13.7~~$14.0 million income in the three months ended ~~December 31, 2017.~~September 30, 2018. As a percentage of revenue, income from operations increased from ~~3.0%~~4.1% in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~5.2%~~4.6% in the three months ended ~~December 31, 2017.~~September 30, 2018, primarily due to substantial depreciation of the Indian rupee.

Other income (expense)

Other ~~income (expense)~~expense increased by ~~$5.2~~$11.3 million from ~~an expense of $(2.3)~~$1.2 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~an income of $2.8~~$12.5 million in the three months ended ~~December 31, 2017,~~September 30, 2018, primarily due to net foreign currency transaction ~~gains due~~losses related to the ~~appreciation~~revaluation of ~~our~~a $300 million Indian rupee denominated intercompany note, ~~when converted into~~primarily due to a substantial depreciation of the Indian rupee against the U.S. ~~dollars.~~dollar and an increase in interest expense related to our term loan.

Income tax expense (benefit)

Income tax expense ~~increased~~decreased by ~~$25.8~~$1.9 million, from ~~a benefit~~an expense of ~~$(1.4)~~$1.5 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~an expense~~a benefit of ~~$24.4~~$0.4 million in the three months ended ~~December 31, 2017.~~September 30, 2018. Our effective tax rate ~~increased~~decreased from ~~(34.3)~~16.5% for the three months ended September 30, 2017 to (25.8)% for the three months ended ~~December 31, 2016 to 148.0% for the three months ended December 31, 2017.~~September 30, 2018. The ~~increase~~decrease in the tax expense and effective tax rate for the three months ended ~~December 31, 2017~~September 30, 2018, was primarily due to ~~the provisional net charges of $19.8 million recorded due to the recently enacted Tax Act~~, ~~an increase~~decrease in ~~income from operations, geographical mix of profits~~profit before tax and excess tax benefits associated with stock compensation offset by ~~certain foreign currency translation gains with no corresponding~~the impact from the GILTI tax ~~expense.~~during the three months ended September 30, 2018.

Noncontrolling interests

In connection with the Polaris acquisition, for the three months ended ~~December 31, 2017,~~September 30, 2018, we recorded a noncontrolling interest of $~~2.1~~0.5 million, representing a ~~25.64%~~5.96% share of profits of Polaris held by parties other than Virtusa.

Net income ~~(loss)~~ available to Virtusa stockholders

Net income available to Virtusa stockholders decreased by ~~326.7%~~68.4%, from ~~an income of $4.4~~$4.8 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~a net loss of $(10.1)~~$1.5 million in the three months ended ~~December 31, 2017.~~September 30, 2018. The decrease in net income in the three months ended ~~December 31, 2017~~September 30, 2018 was primarily due to net foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar and an increase in ~~income tax~~interest expense ~~from the provisional impact of the Tax Act principally~~ related to ~~the repatriation tax of $14.6 million and re-measurement of deferred tax assets of $5.2 million.~~our term loan.

Series A Convertible Preferred Stock dividends and accretion

In connection with the Orogen Preferred Stock Financing, we accrued dividends and accreted issuance costs of $1.1 million at a rate of 3.875% per annum during the three months ended ~~December 31, 2017.~~September 30, 2018.

Net income ~~(loss)~~ available to Virtusa common stockholders

Net income available to Virtusa common stockholders decreased by ~~351.2%~~88.7%, from ~~an income of $4.4~~$3.7 million in the three months ended ~~December 31, 2016~~September 30, 2017 to ~~a net loss of $(11.1)~~$0.4 million in the three months ended ~~December 31, 2017.~~September 30, 2018. The decrease in net income in the three months ended ~~December 31, 2017~~September 30, 2018, was primarily due to net foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar and an increase in ~~income tax~~interest expense ~~from the provisional impact of the Tax Act principally~~ related to ~~the repatriation tax of $14.6 million and re-measurement of deferred tax assets of $5.2 million.~~our term loan.

~~Nine~~Six months ended ~~December 31, 2017~~September 30, 2018 compared to the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017

The following table presents an overview of our results of operations for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:

Nine Months Ended
December 31,

$

%

(dollars in thousands)

2017

2016

Change

Change

Revenue

$
739,328

$
632,769

$
106,559

16.8
%
Costs of revenue

528,103

460,776

67,327

14.6
%
Gross profit

211,225

171,993

39,232

22.8
%
Operating expenses

181,213

163,846

17,367

10.6
%
Income from operations

30,012

8,147

21,865

268.4
%
Other (income) expense

1,031

(5,038
)
6,069

120.5
%
Income before income tax expense

31,043

3,109

27,934

898.5
%
Income tax expense (benefit)

26,725

(1,378
)
28,103

2039.4
%
Net income

4,318

4,487

(169
)
(3.8
)%
Less: net income attributable to noncontrolling interests, net of tax

5,947

3,094

2,853

92.2
%
Net income (loss) available to Virtusa stockholders

(1,629
)
1,393

(3,022
)
(216.9
)%
Less: Series A Convertible Preferred Stock dividends and accretion

2,875

—

2,875

—

Net income (loss) available to Virtusa common stockholders

$
(4,504
)
$
1,393

$
(5,897
)
(423.3
)%

	Six Months Ended September 30,						$			%
(dollars in thousands)	2018			2017			Change			Change
Revenue	$	605,551		$	475,519		$	130,032		27.3	%
Costs of revenue	432,827			344,683			88,144			25.6	%
Gross profit	172,724			130,836			41,888			32.0	%
Operating expenses	144,781			114,487			30,294			26.5	%
Income from operations	27,943			16,349			11,594			70.9	%
Other expense	(26,085		)	(1,812		)	(24,273		)	1339.6	%
Income before income tax expense	1,858			14,537			(12,679		)	-87.2	%
Income tax expense	5,463			2,298			3,165			137.7	%
Net income (loss)	(3,605		)	12,239			(15,844		)	-129.5	%
Less: net income attributable to noncontrolling interests, net of tax	1,186			3,813			(2,627		)	-68.9	%
Net income (loss) available to Virtusa stockholders	(4,791		)	8,426			(13,217		)	-156.9	%
Less: Series A Convertible Preferred Stock dividends and accretion	2,175			1,788			(387		)	21.6	%
Net income (loss) available to Virtusa common stockholders	$	(6,966	)	$	6,638		$	(13,604	)	-204.9	%

Revenue

Revenue increased by ~~16.8%~~27.3%, or ~~$106.6~~$130.0 million, from ~~$632.8~~$475.5 million during the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~$739.3~~$605.6 million in the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. The increase in revenue was primarily driven by revenue from the eTouch acquisition and growth in our banking, insurance, telecommunications and ~~telecommunication clients.~~healthcare industry groups. Revenue from North American clients in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 increased by ~~$70.1~~$119.3 million, or ~~17.1%~~38.7%, as compared to the ~~nine~~six months ended ~~December 31, 2016, primarily~~September 30, 2017, particularly due to revenue growth from the eTouch acquisition and growth in our banking, insurance and healthcare clients. Revenue from European clients increased by ~~$31.6~~$16.5 million, or ~~22.2%~~14.9%, as compared to the ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, primarily due to an increase in revenue from European ~~banking~~telecommunications and ~~telecommunication~~banking clients. We had ~~200~~212 active clients at ~~December 31, 2017,~~September 30, 2018, as compared to ~~189~~198 active clients at ~~December 31, 2016.~~September 30, 2017.

Cost of ~~Revenue~~revenue

Costs of revenue increased from ~~$460.8~~$344.7 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~$528.1~~$432.8 million in the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, an increase of ~~$67.3~~$88.1 million, or ~~14.6%, which reflects a higher cost of $1.9 million due to the appreciation of the Indian rupee.~~25.6%. The increase in cost of revenue was primarily due to an increase in the number of IT professionals (inclusive of eTouch) and related compensation and benefit costs of ~~$52.0~~$68.7 million. The increased costs of revenue are also due to an increase in subcontractor costs of ~~$13.0~~$17.9 million and an increase in travel expenses of ~~$3.1~~$2.4 million. At ~~December 31, 2017,~~September 30, 2018, we had ~~17,355~~19,330 IT professionals as compared to ~~15,805~~16,787 at ~~December 31, 2016.~~

September 30, 2017. As a percentage of revenue, cost of revenue decreased from 72~~.8%~~72.5% for the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~71.4%~~71.5% for ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018.

Gross ~~Profit~~profit

Our gross profit increased by ~~$39.2~~$41.9 million, or ~~22.8%~~32.0%, to ~~$211.2~~$172.7 million for the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, as compared to $~~172.0~~130.8 million for the ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, primarily due to ~~an increase in~~higher revenue and ~~higher utilization,~~substantial depreciation of the Indian rupee, partially offset by ~~appreciation of the Indian rupee.~~higher onsite effort and subcontractor costs. As a percentage of revenue, our gross profit was ~~28.6%~~28.5% and ~~27.2%~~27.5% in the ~~nine~~six months ended ~~December 31,~~September 30, 2018 and 2017, ~~and 2016,~~ respectively.

Operating expenses

Operating expenses increased from ~~$163~~$114.8.5 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~$181.2~~$144.8 million in the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, an increase of ~~$17.4~~$30.3 million, or ~~10.6%, which reflects a higher cost of $0.9 million due to the appreciation of the Indian rupee.~~26.5%. The increase in operating expenses was primarily due to an increase of ~~$17.8~~$23.2 million in compensation related ~~expenses~~to an increase in the number of non-IT professionals (inclusive of eTouch) and stock

compensation, an increase in facilities ~~expense~~costs of ~~$1.4~~$3.9 million ~~partially offset by a decrease in~~and travel costs of ~~$1.3 million and decrease in professional services related cost by $1.2~~$1.6 million. As a percentage of revenue, our operating expenses decreased from ~~25.9%~~24.1% in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~24.5%~~23.9% in the ~~nine~~six months ended ~~December 31, 2017, primarily due to certain acquisition and integration related expenses incurred during the nine months ended December 31, 2016.~~September 30, 2018.

Income from operations

Income from operations increased by ~~268.4%,~~70.9 %, from ~~a $8.1~~$16.3 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~$30.0~~$27.9 million income in the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. As a percentage of revenue, income from operations increased from ~~1.3%~~3.4% in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~4.1%~~4.6% in the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018, primarily due to a substantial depreciation of the Indian rupee.

Other ~~income (expense)~~expense

Other ~~income (expense)~~expense increased by ~~$6.1~~$24.3 million from ~~an expense of $5.0~~$1.8 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~an income of $1.0~~$26.1 million in the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, primarily due to net foreign currency transaction ~~gains due~~losses related to the ~~appreciation~~revaluation of ~~our~~a $300 million Indian rupee denominated intercompany note, ~~when converted into~~primarily due to a substantial depreciation of the Indian rupee against the U.S. ~~dollars.~~dollar and an increase in interest expense related to our term loan.

Income tax expense ~~(benefit)~~

Income tax expense ~~(benefit)~~ increased by ~~$28.1~~$3.2 million, from ~~a benefit of $(1.4)~~$2.3 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~an expense of $26.7~~$5.5 million in the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. Our effective tax rate increased from ~~a tax benefit of (44.3)%~~15.8% for the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to ~~a tax expense of 86.1%~~294.0% for the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. The increase in the tax expense and effective tax rate for the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018, was primarily due to a deferred tax charge of $6.3 million as a result of the ~~provisional net charges of $19.8 million recorded due~~election to ~~recently enacted Tax Act, an increase in income~~treat certain subsidiaries as disregarded entities for US tax purposes and the impact from ~~operations and a change in geographical mix of profits,~~the GILTI tax. This was partially offset by ~~certain foreign currency translation gains~~increases in excess benefits associated with ~~no corresponding tax expense and~~ stock compensation ~~deductions.~~and settlements of uncertain tax positions during the six months ended September 30, 2018.

Noncontrolling interests

In connection with the Polaris acquisition, for the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, we recorded a noncontrolling interest of $~~5.9~~1.2 million, representing a ~~25.58%~~6.76% share of profits of Polaris held by parties other than Virtusa.

Net income (loss) available to Virtusa stockholders

Net income available to Virtusa stockholders decreased by ~~216.9%~~156.9%, from ~~a net~~an income of ~~$1.4~~$8.4 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to a net loss of ~~$(1.6)~~$(4.8) million in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018. . The decrease in net income in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 was primarily due to net foreign currency transaction losses related to the revaluation of a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar, an increase in ~~income tax~~interest expense ~~from the provisional impact of the Tax Act principally~~ related to ~~the repatriation tax of $14.6 million~~our term loan and ~~re-measurement of~~a deferred tax ~~assets~~charge of ~~$5.2 million.~~$6.3 million related to our election to treat certain subsidiaries as disregarded entities for US tax purposes.

Series A Convertible Preferred Stock dividends and accretion

In connection with the Orogen Preferred Stock Financing, we accrued dividends and accreted issuance costs of ~~$2.9~~$2.2 million at a rate of 3.875% per annum during the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018.

Net income (loss) available to Virtusa common stockholders

Net income available to Virtusa common stockholders decreased by ~~423.3%~~204.9%, from ~~a net~~an income of ~~$1.4~~$6.6 million in the ~~nine~~six months ended ~~December 31, 2016~~September 30, 2017 to a net loss of ~~$(4.5)~~$(7.0) million in the ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. The decrease in net income in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018, was primarily due to ~~substantial increase in income tax expense from the provisional impact of the Tax Act principally~~net foreign currency transaction losses related to the ~~repatriation tax~~revaluation of ~~$14.6~~a $300 million Indian rupee denominated intercompany note, primarily due to a substantial depreciation of the Indian rupee against the U.S. dollar, an increase in interest expense related to our term loan and ~~re-measurement of~~a deferred tax ~~assets~~charge of ~~$5.2 million.~~$6.3 million related to our election to treat certain subsidiaries as disregarded entities for US tax purposes.

Non-GAAP Measures

We include certain non-GAAP financial measures as defined by Regulation G by the Securities and Exchange Commission. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures should be read in conjunction with our financial statements prepared in accordance with GAAP.

We consider the total measure of cash, cash equivalents, short-term and long-term investments to be an important indicator of our overall liquidity. All of our investments are classified as either equity or available-for-sale securities, including our long-term investments which consist of

fixed income securities, including government agency bonds and municipal and corporate bonds, which meet the credit rating and diversification requirements of our investment policy as approved by our audit committee and board of directors.

The following table provides the reconciliation from cash and cash equivalents to total cash and cash equivalents, short-term investments and long-term investments:

	As of September 30,		As of March 31,
	2018		2018
Cash and cash equivalents	$	176,981	$	194,897
Short-term investments	54,108		45,900
Long-term investments	1,410		4,140
Total cash and cash equivalents, short-term and long-term investments	$	232,499	$	244,937

We believe the following financial measures will provide additional insights to measure the operational performance of our business.

· We present the following consolidated statements of income (loss) measures that exclude, when applicable, stock-based compensation expense, acquisition-related charges, restructuring charges, ~~stock-based compensation expense,~~ foreign currency transaction gains and losses, non-recurring third party financing costs, the tax impact of dividends received from foreign subsidiaries, the initial impact of our election to treat certain subsidiaries as disregarded entities for U.S. tax purposes and the impact from the U.S. government enacted comprehensive tax legislation (“Tax Act”) to provide further insights into the comparison of our operating results among the periods:

· Non-GAAP income from operations: income from operations, as reported on our consolidated statements of income (loss), excluding stock-based compensation expense, and acquisition-related charges and restructuring charges

· Non-GAAP operating margin: non-GAAP income from operations as a percentage of reported revenues

· Non-GAAP net income available to Virtusa common stockholders: net income (loss) available to Virtusa common stockholders, as reported on our consolidated statements of income (loss), excluding stock-based compensation, acquisition-related charges, restructuring charges, foreign currency transaction gains and losses, non-recurring third party financing costs, the tax impact of the above items, the initial impact of our election to treat certain subsidiaries as disregarded entities for U.S. tax purposes, the tax impact of dividends received from foreign subsidiaries and the impact from the Tax Act.

· Non-GAAP diluted earnings per share: diluted earnings (loss) per share, as reported on our consolidated statements of income (loss) available to Virtusa common stockholders, excluding stock-based compensation, acquisition-related charges, restructuring charges, foreign currency transaction gains and losses, non-recurring third party financing costs, the tax impact of the above items, the ~~per share~~initial impact of our election to treat certain subsidiaries as disregarded entities for U.S. tax purposes, the tax impact of dividends received from foreign subsidiaries and the impact from the Tax Act. Non-GAAP diluted earnings per share is also subject to dilutive and anti-dilutive requirements of the if-converted method related to our Series A Convertible Preferred Stock that could result in a difference between GAAP to non-GAAP diluted weighted average shares outstanding.

The following table presents a reconciliation of each non-GAAP financial measure to the most comparable GAAP measure for the three and ~~nine~~six months ended ~~December 31, 2017 and 2016:~~September 30:

Three Months Ended

Nine Months Ended

December 31,

December 31,

2017

2016

2017

2016

(in thousands, except

(in thousands, except

per share amounts)

per share amounts)

GAAP income from operations

$
13,663

$
6,458

$
30,012

$
8,147

Add: Stock-based compensation expense

9,118

4,748

20,048

17,023

Add: Acquisition-related charges and restructuring charges (1)

3,227

5,116

9,087

11,787

Non-GAAP income from operations

$
26,008

$
16,322

$
59,147

$
36,957

GAAP operating margin

5.2
%
3.0
%
4.1
%
1.3
%
Effect of above adjustments to income from operations

4.7
%
4.5
%
3.9
%
4.6
%
Non-GAAP operating margin

9.9
%
7.5
%
8.0
%
5.9
%
GAAP net income (loss) available to Virtusa common stockholders

$
(11,142
)
$
4,435

$
(4,504
)
$
1,393

Add: Stock-based compensation expense

9,118

4,748

20,048

17,023

Add: Acquisition-related charges and restructuring charges (1)

3,227

5,116

9,087

11,787

Add: Foreign currency transaction (gains) losses (2)

(2,576
)
1,252

(1,019
)
2,802

Add: Impact from the Tax Act (8)

19,815

—

19,815

—

Tax adjustments (3)

(3,210
)
(4,198
)
(9,798
)
(7,397
)
Less: Noncontrolling interest, net of tax (4)

(647
)
(319
)
(1,326
)
(875
)
Non-GAAP net income available to Virtusa common stockholders

$
14,585

$
11,034

$
32,303

$
24,733

GAAP diluted earnings (loss) per share (6)

$
(0.38
)
$
0.15

$
(0.15
)
$
0.05

Effect of stock-based compensation expense (7)

0.28

0.16

0.63

0.56

Effect of acquisition-related charges and restructuring charges (1) (7)

0.10

0.17

0.28

0.39

Effect of foreign currency transaction (gains) losses (2) (7)

(0.08
)
0.04

(0.03
)
0.09

Effect of impact from the Tax Act (7) (8)

0.60

—

0.62

—

Tax adjustments (3) (7)

(0.10
)
(0.14
)
(0.31
)
(0.24
)
Effect of noncontrolling interest (4) (7)

(0.02
)
(0.01
)
(0.04
)
(0.03
)
Effect of dividend on Series A Convertible Preferred Stock (6) (7)

0.03

—

0.07

—

Effect of change in dilutive shares for non-GAAP (6)

0.04

—

0.01

—

Non-GAAP diluted earnings per share (5) (7)

0.47

0.37

1.08

0.82

	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
	(in thousands, except						(in thousands, except
	per share amounts)						per share amounts)
GAAP income from operation	$	14,019		$	10,279		$	27,943		$	16,349
Add: Stock-based compensation expense	9,124			6,142			17,062			10,930
Add: Acquisition-related charges and restructuring charges (1)	5,829			3,351			11,495			5,860
Non-GAAP income from operations	$	28,972		$	19,772		$	56,500		$	33,139
GAAP operating margin	4.6		%	4.1		%	4.6		%	3.4		%
Effect of above adjustments to income from operations	4.9		%	3.9		%	4.7		%	3.6		%
Non-GAAP operating margin	9.5		%	8.0		%	9.3		%	7.0		%
GAAP net income (loss) available to Virtusa common stockholders	$	417		$	3,681		$	(6,966	)	$	6,638
Add: Stock-based compensation expense	9,124			6,142			17,062			10,930
Add: Acquisition-related charges and restructuring charges (1)	6,300			3,351			12,427			5,860
Add: Foreign currency transaction losses (2)	9,355			1,480			20,113			1,557
Tax adjustments (3)	(8,126		)	(4,066		)	(9,943		)	(6,588		)
Less: Noncontrolling interest, net of tax (4)	50			(313		)	177			(679		)
Non-GAAP net income available to Virtusa common stockholders	$	17,120		$	10,275		$	32,870		$	17,718
GAAP diluted earnings (loss) per share	$	0.01		$	0.12		$	(0.23	)	$	0.22
Effect of stock-based compensation expense (7)	0.27			0.19			0.51			0.35
Effect of acquisition-related charges and restructuring charges (1) (7)	0.19			0.10			0.37			0.18
Effect of foreign currency transaction losses (2) (7)	0.28			0.05			0.60			0.05
Tax adjustments (3) (7)	(0.24		)	(0.13		)	(0.30		)	(0.21		)
Effect of noncontrolling interest (4) (7)	—			(0.01		)	—			(0.02		)
Effect of dividend on Series A Convertible Preferred Stock (6) (7)	0.03			0.03			0.06			0.03
Effect of change in dilutive shares for non-GAAP(6)	—						0.03
Non-GAAP diluted earnings per share (5) (7)	0.54			0.35			1.04			0.60

(1) Acquisition-related charges include, when applicable, amortization of purchased intangibles, external deal costs, transaction-related professional fees, acquisition-related retention bonuses, changes in the fair value of contingent consideration liabilities, accreted interest related to deferred acquisition payments, charges for impairment of acquired intangible assets and other acquisition-related costs including integration expenses consisting of outside professional and consulting services and direct and incremental travel costs. Restructuring charges, when applicable, include termination benefits, as well as certain professional fees related to the restructuring. The following table provides the details of the acquisition-related charges and restructuring charges:

	Three Months Ended December 31,				Nine Months Ended December 31,				Three Months Ended September 30,				Six Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Amortization of intangibles	$	2,568	$	2,403	$	7,671	$	7,146	$	2,994	$	2,594	$	5,770	$	5,103
Acquisition and integration costs	431		827		431		2,755
Acquisition & integration costs									2,835		—		5,725		—
Restructuring charges	228		1,886		985		1,886		—		757		—		757
Total	$	3,227	$	5,116	$	9,087	$	11,787
Acquisition-related charges included in costs of revenue and operating expense									5,829		3,351		11,495		5,860
Accreted interest related to deferred acquisition payments									471		—		932		—
Total acquisition-related charges and restructuring charges									$	6,300	$	3,351	$	12,427	$	5,860

(2) Foreign currency transaction gains and losses are inclusive of gains and losses on related foreign exchange forward contracts not designated as hedging instruments for accounting purposes.

(3) Tax adjustments reflect the estimated tax effect of the non-GAAP adjustments using the tax rates at which these adjustments are expected to be realized for the respective ~~periods.~~periods, excluding the initial impact of our election to treat certain subsidiaries as disregarded entities for U.S. tax purposes. Tax adjustments also assume application of foreign tax credit benefits in the United States.

(4) Noncontrolling interest represents the minority shareholders interest of ~~Polaris~~Polaris.

(5) Non-GAAP diluted earnings per share is subject to ~~rounding~~rounding.

(6) During the three and ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, the weighted average shares outstanding of Series A Convertible Preferred Stock of 3,000,000 were excluded from the calculations of GAAP diluted earnings per share as their effect would have been anti-dilutive using the if-converted method. During the three and ~~2,637,363~~six months ended September 30, 2017, the weighted

average shares outstanding of Series A Convertible Preferred Stock of 3,000,000 and 2,456,044, respectively, were excluded from the calculations of GAAP diluted earnings per share as their effect would have been anti-dilutive using the if-converted method.

The following table provides the non-GAAP net income available to Virtusa common stockholders and non-GAAP dilutive weighted average shares outstanding using if-converted method to calculate the non-GAAP diluted earnings per share for the three and ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 and ~~2016:~~2017:

	Three Months Ended December 31,				Nine Months Ended December 31,				Three Months Ended September 30,				Six Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Non-GAAP net income available to Virtusa common stockholders	$	14,585	$	11,304	$	32,303	$	24,733	$	17,120	$	10,275	$	32,870	$	17,718
Add: Dividends and accretion on Series A Convertible Preferred Stock	1,087		—		2,175		—		1,088		1,087		2,175		1,087
Non-GAAP net income available to Virtusa common stockholders and assumed conversion	$	15,672	$	11,304	$	34,478	$	24,733	$	18,208	$	11,362	$	35,045	$	18,805

GAAP dilutive weighted average shares outstanding	29,295,730		30,151,590		29,387,977		30,129,378		30,627,044		29,820,581		29,700,151		30,035,865
Add: Dilutive effect of employee stock options and unvested restricted stock awards and restricted stock units	709,961		—		637,830		—		—		—		866,156		—
Add: Series A Convertible Preferred Stock as converted	3,000,000		—		2,000,000		—		3,000,000		3,000,000		3,000,000		1,500,000
Non-GAAP dilutive weighted average shares outstanding	33,005,691		30,151,590		32,025,807		30,129,378		33,627,044		32,820,581		33,566,307		31,535,865

(7) To the extent the Series A Convertible Preferred Stock is dilutive using the if-converted method, the Series A Convertible Preferred Stock is included in the weighted average shares outstanding to determine non-GAAP diluted earnings per share.

~~(8)~~ The U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017. This resulted in a tax expense of $19.8 million for the three months ended December 31, 2017, comprised of a provisional repatriation tax expense of $14.6 million and a provisional net deferred tax expense of $5.2 million. The adjustment to GAAP net income (loss) available to Virtusa common stockholders only includes these impacts. It does not include the ongoing impacts of the lower U.S. statutory rate on current year earnings.

Liquidity and capital resources

We have financed our operations primarily from sales of shares of common stock, cash from operations, debt financing and from sales of shares of Series A Convertible Preferred Stock.

We do not believe the deemed repatriation tax on accumulated foreign earnings related to the Tax Act will have a significant impact on our cash flows in any individual fiscal year.

~~During~~To strengthen our digital engineering capabilities and establish a solid base in Silicon Valley, on March 12, 2018, we entered into an equity purchase agreement by and among the ~~nine~~Company, eTouch Systems Corp. (“eTouch US”) and each of the equity holders of eTouch US to acquire all of the outstanding shares of eTouch US, and certain of the Company’s Indian subsidiaries entered into an share purchase agreement by and among those Company subsidiaries, eTouch Systems (India) Pvt. Ltd (“eTouch India,” together with eTouch US, “eTouch”) and the equity holders of eTouch India to acquire all of the outstanding shares of eTouch India.

Under the terms of the equity purchase agreement and the share purchase agreement, on March 12, 2018, we acquired all of the outstanding shares of eTouch US and eTouch India for approximately $140.0 million in cash, subject to certain adjustments, with up to an additional $15.0 million set aside for retention bonuses to be paid to eTouch management and key employees, in equal installments on the first and second anniversary of the transaction. The purchase price will be paid in three tranches with $80.0 million paid at closing, $42.5 million on the 12-month anniversary of the close of the transaction, and $17.5 million on the 18-month anniversary of the close of the transaction, subject in each case to certain adjustments.

On March 3, 2016, our Indian subsidiary, Virtusa Consulting Services Private Limited (“Virtusa India”) acquired approximately 51.7% of the fully diluted shares of Polaris Consulting & Services Limited (“Polaris”) for approximately $168.3 million in cash (the “Polaris Transaction”) pursuant to a share purchase agreement dated as of November 5, 2015, by and among Virtusa India, Polaris and the promoter sellers named therein. Through a series of transactions and in compliance with the applicable Indian rules on takeovers and SEBI Delisting Regulations, Virtusa increased its ownership interest in Polaris from 51.7% to 93.0% by February 12, 2018 when Virtusa consummated its Polaris delisting offer with respect to the public shareholders of Polaris. The delisting offer resulted in an accepted exit price of INR 480 per share (“Exit Price”), for an aggregate consideration of approximately $145.0 million, exclusive of transaction and closing costs. On July 11, 2018, the stock exchanges on which Polaris common shares are listed notified Polaris that trading in equity shares of Polaris would be discontinued and delisted effective on August 1, 2018. For a period of one year following the date of delisting, Virtusa India will, in compliance with SEBI Delisting Regulations, permit the public shareholders of Polaris to tender their shares for sale to Virtusa India at the Exit Price. In connection with the Polaris delisting offer, during the three months ended ~~December 31, 2017,~~September 30, 2018 Virtusa India purchased 4,141,816 shares, or 4.0%, of Polaris common stock from Polaris public shareholders for

an aggregate purchase price of approximately $28.4 million. At September 30, 2018, if all the remaining shares outstanding of Polaris (approximately 3.52%) were tendered at the Exit Price, we ~~implemented certain cost saving~~would pay additional consideration of approximately $24.0 million in the aggregate. In addition, we would pay approximately $1.6 million for Polaris stock options, net of exercise price, if these shares were tendered at the Exit Price.

In connection with, and ~~restructuring initiatives. During~~as part of the ~~nine months ended December 31, 2017,~~Polaris acquisition, on November 5, 2015, we entered into an amendment with Citigroup Technology, Inc. (“Citi”) and Polaris, which became effective upon the closing of the Polaris Transaction, pursuant to which Virtusa was added as a party to the master services agreement with Citi and Citi agreed to appoint the Company ~~incurred costs~~and Polaris as a preferred vendor.

On February 6, 2018, we entered into a $450.0 million credit agreement (“Credit Agreement”) with a syndicated bank group jointly lead by JP Morgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, which amends and restates our prior $300.0 million credit agreement (which we had originally entered into on February 25, 2016 (“Prior Credit Agreement”) to fund the Polaris acquisition and Mandatory Tender Offer) and provides for a $200.0 million revolving credit facility, a $180.0 million term loan facility, and a $70.0 million delayed-draw term loan. We drew down $180.0 million under the term loan of ~~$1.0~~the Credit Agreement and $55.0 million ~~primarily related~~under the revolving credit facility under the Credit Agreement to ~~termination benefits, out~~repay in full the amount outstanding under the Prior Credit Agreement and fund the Polaris delisting transaction. On March 12, 2018, we drew down the $70 million delayed draw to fund the eTouch acquisition. On August 14, 2018, we drew down $32 million from our credit facility to fund the Polaris delisting open offer. Interest under this new credit facility accrues at a rate per annum of ~~which we paid $0.7 million during~~LIBOR plus 3.0%, subject to step-downs based on the ~~nine months ended December 31, 2017. In addition,~~Company’s ratio of debt to EBITDA. We intend to enter into an interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years, ending February 6, 2023 (See Note 13 to the consolidated financial statements for further information).

At September 30, 2018, the outstanding amount under the Credit Agreement was 330.8 million. At September 30, 2018, the interest rates on the term loan and line of credit were 4.75% and 4.65% respectively. For the description of the financial covenants of the Credit agreement and certain other the terms please See Note 13 to our consolidated financial statements.

The credit facility is secured by substantially all of the Company’s assets, including all intellectual property and all securities in domestic subsidiaries (other than certain domestic subsidiaries where the material assets of such subsidiaries are equity in foreign subsidiaries), subject to customary exceptions and exclusions from the collateral. All obligations under the Credit Agreement are unconditionally guaranteed by substantially all of the Company’s material direct and indirect domestic subsidiaries, with certain exceptions. These guarantees are secured by substantially all of the present and future property and assets of the guarantors, with certain exclusions.

At September 30, 2018, the Company ~~expects~~was in compliance with its debt covenants and has provided a quarterly certification to ~~incur additional restructuring costs~~our lenders to that effect. We believe that we currently meet all conditions set forth in the Credit Agreement to borrow thereunder and we are not aware of ~~approximately $0.3 million in remainder~~any conditions that would prevent us from borrowing part or all of ~~fiscal year 2018.~~the remaining available capacity under the existing revolving credit facility at September 30, 2018 and through the date of this filing.

Under the terms of the investment, the Series A Convertible Preferred Stock has a 3.875% dividend per annum, payable quarterly in additional shares of common stock and/or cash at our option. If any shares of Series A Convertible Preferred Stock have not been converted into common stock prior to May 3, 2024, ~~the Company~~we will be required to repurchase such shares at a repurchase price equal to the liquidation preference of the repurchased shares plus the amount of accumulated and unpaid dividends thereon. If we fail to effect such repurchase, the dividend rate on the Series A Convertible Preferred Stock will increase by 1% per annum and an additional 1% per annum on each anniversary of May 3, 2024 during the period in which such failure to effect the repurchase is continuing, except that the dividend rate will not increase to more than 6.875% per annum. The shares purchased consist of voting Series A Preferred Stock and a separate class of non-voting Series A-1 Preferred Stock, the latter of which automatically converted into shares of voting Series A Preferred Stock on a one-to-one basis upon the expiration or termination of the applicable waiting period (which occurred in May 2017) under the Hart-Scott-Rodino Antitrust Improvements Act. In connection with the investment, we repaid $81 million of our outstanding senior term loan, and our board of directors approved the repurchase of approximately $30 million of our common stock. During the ~~nine~~six months ended ~~December 31, 2017, we repurchased $30 million of our common stock.~~

On March 3, 2016, Virtusa Consulting Services Private Limited (“Virtusa India”), a subsidiary of Virtusa Corporation (“Virtusa” or the “Company”), purchased 53,133,127 shares, or approximately 51.7%, of the fully-diluted capitalization of Polaris Consulting & Services Limited (“Polaris”) from certain Polaris shareholders for approximately $168.3 million in cash (the “Polaris SPA Transaction”) pursuant to a definitive share purchase agreement (“SPA”) by and among Virtusa India, the Polaris founding shareholders, promoters, and certain other Polaris minority stockholders, which was entered into on November 5, 2015. On April 6, 2016, Virtusa India completed its purchase of an additional 26% of the fully diluted outstanding shares of Polaris from public shareholders for approximately $89.1 million in cash under a mandatory tender open offer as required under applicable India takeover rules. Pursuant to the mandatory offer, during the fiscal year ended March 31, 2016,September 30, 2018, the Company ~~transferred $89.2~~has paid $2.1 million ~~into an escrow account in accordance with the India takeover rules, which is recorded~~ as ~~restricted~~a cash ~~at March 31, 2016. On April 6, 2016, the restricted cash was released from the escrow account and used for settlement for the mandatory open offer.~~

~~In order to comply with the applicable Indian rules~~dividend on ~~takeovers, during the three months ended December 31, 2016, the Company sold 3.7% of~~ its shares of Polaris common stock through a public sale offer. The sale offer closed on December 14, 2016 and the Company received approximately $7.6 million in proceeds, net of $0.2 million in brokerage fees and taxes. In addition to these costs, the Company incurred additional professional and legal costs of $0.4 million. The Company’s ownership interest in Polaris prior to the sale offer was 78.6% and upon the closing of the sale offer, the Company’s ownership interest decreased from 78.6% to 74.9% of Polaris’ basic shares of common stock outstanding.

To finance the Polaris acquisition, on February 25, 2016, the Company entered into a credit agreement (the “Existing Credit Agreement”) by and among the Company, its guarantor subsidiaries party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runners and lead arrangers. The Existing Credit Agreement provides for a $100.0 million revolving credit facility and a $200.0 million delayed-draw term loan (together, the “Existing Credit Facility”). In connection with the Polaris acquisition, on February 25, 2016, the Company drew down the full $200.0 million of the term loan. Interest under these facilities accrues at a rate per annum of LIBOR plus 2.75%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“EBITDA”). We are required under the terms of the Existing Credit Agreement to make quarterly principal payments on the term loan. The Existing Credit Agreement includes customary minimum cash, maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Existing Credit Agreement is five years, ending February 24, 2021. On May 3, 2017, in connection with the Orogen Preferred Stock Financing, we amended our Existing Credit Agreement primarily to issue the Series A Convertible Preferred Stock and pay certain dividends with respect to the Series A Convertible Preferred Stock and we repaid principal payment of $81.0 million of our term loan. As a result of this pre-payment, the Company has no additional obligated principal payments until the amount due at maturity. Interest payments will continue per the terms of the Existing Credit Agreement.Stock.

The ~~Existing Credit Agreement has financial covenants that require that the~~ Company maintain a Total Leverage Ratio, commencing on December 31, 2016, of not more than 3.25 to 1.00 for the first year of the Existing Credit Facility, of not more than 3.00 to 1.00 for the second year of the Existing Credit Facility, and 2.75 to 1.00 thereafter, each as determined for the four consecutive quarter period ending on each fiscal quarter (the “Reference Period”). In addition, for a period, expected to be at least one year from the completion of the Company’s closing of the Polaris SPA Transaction, until the occurrence of certain events described in the Existing Credit Agreement, at any time when the Total Leverage Ratio exceeds 1.50 to 1.00 as of the last day of a quarter, the Company must maintain at least $30.0 million in unrestricted cash, cash equivalents and certain permitted investments under the Existing Credit Facility held in bank deposits in the U.S., and $20.0 million in unrestricted cash and certain permitted investments under the Existing Credit Facility and long-term securities investments held in accordance with the Company’s current investment policy. The financial covenants also require that the Company maintain a Fixed Charge Coverage Ratio, commencing on December 31, 2017, of not less than 1.25 to 1.00, as of the last day of any Reference Period. For purposes of these covenants, “Total Leverage Ratio” means, as of the last day of any fiscal quarter, the ratio of Funded Debt to Adjusted EBITDA for the reference period ended on such date. “Funded Debt” refers generally to total indebtedness to third-parties for borrowed money, capital leases, deferred purchase price and earn-out obligations and related guarantees and

“Adjusted EBITDA” is defined as consolidated net income plus (a) (i) GAAP depreciation and amortization, (ii) non-cash equity-based compensation expenses, (iii) fees and expenses incurred during such period in connection with the Existing Credit Facility and loans made thereunder, (iv) fees and expenses incurred during such period in connection with any permitted acquisition, (v) one-time regulatory charges, (vi) other extraordinary and non-recurring losses or expenses, and (vii) all other non-cash charges, expenses and losses for such period, minus (b) (i) extraordinary or non-recurring income or gains for such period, and (ii) any cash payments made during such period in respect of non-cash charges, expenses or losses described in clauses (a)(ii), (a)(v) and (a)(vi) above taken in a prior period, subject to other adjustments and certain caps and limits on adjustments. The Fixed Charge Coverage Ratio is calculated under the Existing Credit Agreement generally as the ratio of Adjusted EBITDA, excluding capital expenditures made during such period (to the extent not financed with indebtedness (other than Revolving Loans), an issuance of equity interests or capital contributions, or proceeds of asset sales, the proceeds of casualty insurance used to replace or restore assets), to fixed charges (regularly scheduled consolidated interest expense paid in cash, regularly scheduled amortization payments on indebtedness in cash, income taxes paid in cash and the interest component of capital lease obligation payments), on a consolidated basis.

As of December 31, 2017, we are in compliance with our debt covenants and have provided a quarterly certification to our lenders to that effect. We believe that we currently meet all conditions set forth in the existing credit agreement to borrow thereunder and we are not aware of any conditions that would prevent us from borrowing part or all of the remaining available capacity under the existing revolving credit facility as of December 31, 2017 and through the date of this filing.

On February 5, 2018, Virtusa India closed its delisting offer to all public shareholders of Polaris in accordance with the provisions of the SEBI Delisting Regulations, which resulted in a discovered price of INR 480 per share. On February 8, 2018, Virtusa India accepted the discovered price of INR 480 per share (the “Exit Price”) which will be offered to all Polaris public shareholders. Upon settlement by Virtusa India of an amount of approximately $145.0 million, exclusive of transaction and closing costs, for the Polaris shares tendered during the delisting process at the Exit Price, the shareholding of Virtusa India shall increase from approximately 74% to at least 93% of the share capital of Polaris. Upon closing of the transaction and receipt of final approvals from the stock exchanges on which Polaris is traded, the common shares of Polaris will be delisted from all public exchanges on which the Polaris shares are traded. The public shareholders of Polaris who have yet to tender their shares to Virtusa India may offer their shares for sale to Virtusa India at the Exit Price for a period of one year following the date of the delisting from all stock exchanges on which Polaris common shares are listed. In accordance with ASC 810-10, changes in a parent’s ownership, while retaining its financial controlling interest are accounted for as equity transactions. Therefore, should the Company decide to purchase additional shares through its Indian subsidiary, it would result in a reduction of minority interest and an increase to the Company’s equity.

In support of the transaction, on February 6, 2018, we entered into a $450.0 million credit agreement with a syndicated bank group jointly lead by JP Morgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, which amends and restates our existing $300.0 million credit agreement and provides for a $200.0 million revolving credit facility, a $180.0 million term loan facility, and a $70.0 million delayed-draw term loan. Virtusa drew down $180.0 million on the new term loan and $55.0 million on the new revolving credit facility to repay in full the prior credit facility and fund the Polaris delisting transaction. Interest under this new credit facility accrues at a rate per annum of LIBOR plus 3.0%, subject to step-downs based on the Company’s ratio of debt to EBITDA. We intend to enter into anuses interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years, ending February 6, 2023. The Credit Facility amortizes at a rate of 5% per annum of the outstanding principal amount for first two years, 7.5% per annum in the third year, 10% in the fourth year and 15% in the fifth year, in each case payable in equal quarterly instalments. To the extent funded, the delayed draw term loan will amortize in equal quarterly instalments on the same amortization schedule described above.

~~In July 2016, we entered into 12-month forward starting interest rate swap transactions~~swaps to mitigate ~~our~~the Company’s interest rate risk on ~~our~~the Company’s variable rate ~~debt (collectively, “The Interest Rate Swap Agreements”). Our~~debt. The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on the ~~Existing~~ Credit Agreement (See Note 13 to the consolidated financial statements), by using pay-fixed, receive-variable interest rate swaps to offset the future variable rate interest payments. ~~We will recognize these transactions in accordance with ASC 815~~ ~~“Derivatives and Hedging,”~~ ~~and have designated the swaps as cash flow hedges.~~

The Interest Rate Swap ~~Agreements have an effective date of July 31, 2017 and a maturity date of July 31, 2020. The notional amount of~~agreements require the swaps amortizes over the three swap periods. The swaps have an aggregate notional amount of $91.3 million and with the pre-payment of $81 million of principal on our existing debt, hedge approximately 85% of our outstanding debt balance as of December 31, 2017. The notional amount of the swaps amortizes over the remaining swap periods. The Interest Rate Swap Agreements require usCompany to make monthly fixed interest

rate payments based on the amortized notional amount at a blended weighted average rate of 1.025% and wethe Company will receive 1-month LIBOR on the same notional amounts.

The counterparties to the Interest Rate Swap Agreements could demand an early termination of the 2016 Swap Agreements if we are in default under the ~~Existing~~ Credit Agreement, or any agreement that amends or replaces the ~~Existing~~ Credit Agreement in which the counterparty is a member, and we are unable to cure the default. An event of default under the ~~Existing~~ Credit Agreement includes customary events of default and failure to comply with financial covenants, including a maximum consolidated leverage ratio commencing on December 31, ~~2016,~~2017, of not more than 3.50 to 1.00 for periods ending prior to December 31, 2019, of not more than 3.25 to 1.00 commencing December 31, 2019 and for ~~the first year of the Existing Credit Agreement, of not more than~~periods ending prior to September 30, 2020, and 3.00 to 1.00 ~~for the second year of the Existing Credit Agreement, and 2.75 to 1.00~~ thereafter ~~each as determined for the four consecutive quarter period ending on each fiscal quarter~~ and a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00. As of ~~December 31, 2017,~~September 30, 2018, we were in compliance with these covenants. The unrealized gain associated with the 2016 Swap Agreement was ~~$2.0~~$2.5 million as of ~~December 31, 2017,~~September 30, 2018, which represents the estimated amount that we would receive from the counterparties in the event of an early termination.

At ~~December 31, 2017,~~September 30, 2018, a significant portion of our cash, cash equivalents, short-term and long-term investments was held by our foreign subsidiaries. We continually monitor our cash needs and employ tax planning and financing strategies to ensure cash is available in the appropriate jurisdictions to meet operating needs. The cash held by our foreign subsidiaries is considered indefinitely reinvested in local operations. If required, it could be repatriated to the United States. ~~However, under current law, any repatriation would~~Due to the various methods by which such earnings could be ~~subject~~repatriated in the future, the amount of taxes attributable to ~~United States federal income tax on currency translation and~~these earnings is not practicably determinable. If such earnings were to be repatriated in the future or are no longer deemed to be indefinitely reinvested, we will accrue the applicable ~~withholding tax.~~amount of taxes.

Beginning in fiscal 2009, our U.K. subsidiary entered into an agreement with an unrelated financial institution to sell, without recourse, certain of its Europe-based accounts receivable balances from one client to the financial institution. During the ~~nine~~six months ended ~~December 31, 2017,~~September 30, 2018, we sold $~~17.3~~$15.2 million of receivables under the terms of the financing agreement. Fees paid pursuant to this agreement were not material during the three and ~~nine~~six months ended ~~December 31, 2017.~~September 30, 2018. No amounts were due under the financing agreement at ~~December 31,~~September 30, 2017, but we may elect to use this program again in future periods. However, we cannot provide any assurances that this or any other financing facilities will be available or utilized in the ~~future~~future.

Cash flows

The following table summarizes our cash flows for the periods presented:

Nine Months Ended
December 31,

(in thousands)

2017

2016

Net cash provided by operating activities

$
54,181

$
24,814

Net cash provided by investing activities

3,671

58,669

Net cash provided by (used in) financing activities

19,838

(93,039
)
Effect of exchange rate changes on cash

4,120

(5,552
)
Net increase (decrease) in cash and cash equivalents

81,810

(15,108
)
Cash and cash equivalents, beginning of period

144,908

148,986

Cash and cash equivalents, end of period

$
226,718

$
133,878

	Six Months Ended September 30,
(in thousands)	2018			2017
Net cash provided by operating activities	$	33,283		$	29,832
Net cash used in investing activities	(26,690		)	(8,608		)
Net cash used in financing activities	(11,729		)	(4,831		)
Effect of exchange rate changes on cash	(11,694		)	1,753
Net (decrease) increase in cash, cash equivalents and restricted cash	(16,830		)	18,146
Cash, cash equivalents and restricted cash beginning of period	195,236			145,086
Cash, cash equivalents and restricted cash, end of period	$	178,406		$	163,232

Operating activities

Net cash provided by operating activities increased in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 compared to the ~~nine~~six months ended ~~December 31, 2016,~~September 30, 2017, primarily ~~driven by~~due to an increase ~~working capital~~in the non-cash expenses during ~~the nine~~six months ended ~~December 31, 2017 compared to the nine months ended December 31, 2016.~~September 30, 2018.

Investing activities

Net cash ~~provided by~~used in investing activities ~~decreased~~increased in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 compared to ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2017. The ~~decrease~~increase in net cash ~~provided by~~used in investing activities is primarily due to the ~~decrease~~increase in ~~restricted cash related to~~ the ~~Polaris mandatory offering~~purchase of property and equipment and a net increase in the purchase of investments during the ~~nine~~six months ended ~~December 31, 2016.~~September 30, 2018.

Financing activities

Net cash ~~provided by (used in)~~used in financing activities increased in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 compared to ~~nine~~six months ended ~~December 31, 2016.~~
September 30, 2017. The increase in net cash ~~provided by~~used in financing activities during the six months ended September 30, 2018 is primarily due to the ~~borrowings from our existing revolving credit facility. During the nine months ended December 31, 2017, the proceeds from issuance~~payment of redeemable noncontrolling interest, an increase in payment of withholding taxes related to net share settlements

of restricted stock and an increase in payment of dividend on Series A Convertible Preferred Stock, ispartially offset by proceeds from the ~~principal payment of our debt and repurchase of our common stock.~~revolving credit facility

Off-balance sheet arrangements

We do not have investments in special purpose entities or undisclosed borrowings or debt.

We have entered into foreign currency derivative contracts with the objective of limiting our exposure to changes in the Indian rupee, the U.K. pound sterling, the euro, ~~and~~ the ~~Swedish Krona~~Canadian dollar, the Australian dollar as described below and in “Quantitative and Qualitative Disclosures about Market Risk.”

We maintain a foreign currency cash flow hedging program designed to further mitigate the risks of volatility in the Indian rupee against the U.S. dollar and U.K. pound sterling as described below in “Quantitative and Qualitative Disclosures about Market Risk.” From time to time, we may also purchase multiple foreign currency forward contracts designed to hedge fluctuation in foreign currencies, such as the U.K. pound sterling, euro, Canadian dollar and ~~Swedish Krona~~Australian dollar against the U.S. dollar to minimize the impact of foreign currency fluctuations on foreign currency denominated revenue and expenses. Other than these foreign currency derivative contracts, we have not entered into off-balance sheet transactions, arrangements or other relationships with unconsolidated entities or other persons that are likely to affect liquidity or the availability of or requirements for capital resources.

Recent accounting pronouncements

~~In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity~~See Note 2 to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on April 1, 2018. Early application is permitted but not before periods beginning on or after January 1, 2017. In March, April and May 2016, the FASB issued updates to the new revenue standard to clarify the implementation guidance on principal versus agent considerations for reporting revenue gross versus net, identifying performance obligations, accounting for licenses of intellectual property, transition, contract modifications, collectability, non-cash consideration and presentation of sales and other similar taxes with the same effective date. The standard permits the use of either the retrospective or cumulative effect transition method. We plan to adopt the standard using the modified retrospective method when it becomes effective in our first quarter of fiscal 2019.

Our project team is finalizing its review of existing customer contracts and current accounting policies to identify and assess the potential differences that would result from applying the requirements of the new standard including costs to obtain and fulfill a contract. We are also in the process of identifying and implementing changes to our processes to meet the reporting and disclosure requirements. We currently record approximately 86% of its annual revenue on a time-and-material (60%) or retainer-billing basis (26%), with the remaining 14% recorded under either a percentage of completion or proportional performance methods of accounting using an inputs methodology for fixed price projects. For our revenue recorded under the time-and-material or retainer billings methods of accounting, we do not expect this new standard to change the timing or the amount of revenue that is currently recorded. We are currently evaluating the revenue recorded under its fixed price percentage of completion and proportional performance projects to determine if the manner or timing of revenue recognition would change for existing projects. We generally expect to continue to recognize revenue over time based on the measured progress of satisfaction of the performance obligations for its fixed price projects, which is consistent with our current method. Overall, we believe that its implementation efforts are progressing as planned to allow a timely implementation.

In January 2016, the FASB issued an update (ASU 2016-01) to the standard on financial instruments. The update significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The update also amends certain disclosure requirements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Upon adoption, entities will be required to make a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. However, the specific guidance on equity securities without readily determinable fair value will apply prospectively to all equity investments that exist as of the date of adoption. Early adoption of certain sections of this update is permitted. Based on our current investment portfolio, the adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued as update (ASU 2016-02) to the standard on leases to increase transparency and comparability among organizations. The new standard replaces the existing guidance on leases and requires the lessee to recognize a right-of-use asset and a lease liability for all leases with lease terms equal to or greater than twelve months. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize total lease expense on a straight-line basis. For public business entities this standard is effective for the annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption of this new standard is permitted. Entities will be required to use a modified retrospective transition which provides for certain practical expedients. We are currently evaluating the effect the new standard will have on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued an update (ASU 2016-09) to the standard on Compensation—Stock Compensation, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Upon adoption, entities will be required to apply a modified retrospective, prospective or retrospective transition method depending on the specific section of the guidance being adopted. We adopted this guidance effective April 1, 2017 and the following describe the results of adoption:

· We prospectively recognized tax expenses of $0.0 million and tax benefits of $1.1 million in the income tax expense line item of our consolidated statements of income in the three and nine months ended December 31, 2017, respectively, related to excess tax benefits on stock options;

· We changed our accounting policy from estimated forfeitures to actual forfeitures effective April 1, 2017. The cumulative impact of the change in the accounting policy did not have a material impact on our consolidated financial statements ~~therefore the prior period amounts have not been restated;~~for additional information.

· We elected to adopt cash flow presentation of excess tax benefits retrospectively where these benefits are classified along with other income tax cash flows as operating cash flows. Accordingly, prior period amounts in our consolidated statement of cash flows have been restated;

· We adopted cash flow presentation of taxes paid when an employer withholds shares for tax-withholding purposes retrospectively and classified as a financing activity in the our statement of cash flows. Accordingly, prior period amounts have been restated;

· ~~The remaining amendments to this standard, as noted above, are either not applicable, or do not change our current accounting practices and thus do not impact its consolidated financial statements.~~

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Measurement of Credit Losses on Financial Instruments, which modifies the measurement of expected credit losses of certain financial instruments. This standard update requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the effect of this new standard will have on its consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update is intended to reduce diversity in practice in how certain cash receipts and payments are classified in the statement of cash flows. This standard update addresses eight specific cash flow issues, including debt prepayment or extinguishment costs, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, and distributions from certain equity method investees. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires application using a retrospective transition method. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, an update to the standard on income taxes. This new standard requires the recognition of current and deferred income taxes when an intra-entity transfer of assets other than inventory occurs. The update is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2017. Early adoption is permitted in the first interim period. Upon adoption, the entities will be required to use a modified retrospective transition approach. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, an update on business combinations, which clarifies the definition of a business. The update requires a business to include at least an input and a substantive process that together significantly contribute to the ability to create outputs. The update also states that the definition of a business is not met if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2018. Upon adoption, entities will be required to apply the update prospectively. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, an update on goodwill, which eliminates the need to calculate the implied fair value of goodwill when an impairment is indicated. The update states that goodwill impairment is measured as the excess of a reporting unit’s carrying value over its fair value, not to exceed the carrying amount of goodwill. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after January 1, 2020. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, a guidance on presentation of net periodic pension cost and net periodic postretirement benefit cost. The new standard requires that an employer disaggregate the service costs components of net benefit cost. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component, such as in other income and expense. The guidance is effective for fiscal years beginning after December 15, 2017. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. The Company’s current presentation of service cost components is consistent with the requirements of the new standard. Upon adoption of the new standard, we expect to present the other components within other (income) expense.

In March 2017, FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in this update shorten the amortization period for certain callable debt securities that are held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which would be amortized to maturity. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018, which for us is the first quarter ending December 31, 2019. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, an update that provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718, Compensation — Stock Compensation. Under the amendments in ASU 2017-09, an entity should account for the effects of a modification unless all of the following criteria are met: 1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified — if the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; 2) the vesting conditions of the modified award are the same as the conditions of the original award immediately before the original award is modified; 3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We are currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. These amendments are intended to better align a company’s risk management strategies and financial reporting for hedging relationships. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. In addition, the new guidance amends presentation and disclosure requirements. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including the interim periods within those years. The guidance requires the use of a modified retrospective approach. The Company is currently evaluating the effect the new standard will have on our consolidated financial statements and related disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our market risks, and the ways we manage them, are summarized in Item 7A of the Annual Report. There have been no material changes in the ~~nine~~six months ended ~~December 31, 2017~~September 30, 2018 to such risks or to our management of such risks except for the additional factors noted below.

Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk in the ordinary course of business. We have historically entered into, and in the future we may enter into, foreign currency derivative contracts to minimize the impact of foreign currency fluctuations on both foreign currency denominated assets and forecasted expenses. The purpose of this foreign exchange policy is to protect us from the risk that the recognition of and eventual cash flows related to Indian rupee denominated expenses might be affected by changes in exchange rates. Some of these contracts meet the criteria for hedge accounting as cash flow hedges (See Note 6 of the notes to our consolidated financial statements included herein for a description of recent hedging activities).

We evaluate our foreign exchange policy on an ongoing basis to assess our ability to address foreign exchange exposures on our balance sheet, statement of income and operating cash flows from all foreign currencies, including most significantly the U.K. pound sterling ~~the Indian rupee,~~ and the ~~Sri Lankan~~Indian rupee.

We have two 18 month rolling programs comprised of a series of foreign exchange forward contracts that are designated as cash flow hedges. One program is designed to mitigate the impact of volatility in the U.S. dollar equivalent of our Indian rupee denominated expenses. The second program was assumed as part of the Polaris acquisition and is intended to mitigate the volatility of the U.S. dollar denominated revenue that is translated into Indian rupees. While these hedges are achieving the designed objective, upon consolidation they may cause volatility in revenue. The U.S. dollar equivalent notional value of all outstanding foreign currency derivative contracts at ~~December 31, 2017~~September 30, 2018 was ~~$118.2~~$173.5 million. There is no assurance that these hedging programs or hedging contracts will be effective. As these foreign currency hedging programs are designed to reduce volatility in the Indian rupee, they not only reduce the negative impact of a stronger Indian rupee but also reduce the positive impact of a weaker Indian rupee on our Indian rupee expenses. In addition, to the extent that these hedges do not qualify for hedge accounting, we may have to recognize gains or losses on the aggregate amount of hedges placed earlier than expected.

The U.K. pound sterling, ~~Swedish krona~~the euro, the Canadian dollar and the ~~euro~~Australian dollar exchange fluctuations can have an unpredictable impact on our U.K. pound sterling ~~Swedish krona~~ and the euro revenues generated and costs incurred. In response to this volatility, we have entered into hedging transactions designed to hedge our forecasted revenue and expenses denominated in the U.K. pound sterling, the ~~Swedish krona as well as~~euro, the ~~euro.~~Canadian dollar and the Australian dollar. These derivative contracts have maximum duration of 92 days and do not meet the criteria for hedge accounting. Such hedges may not be effective in mitigating this currency volatility. These hedges are designed to

reduce the negative impact of a weaker U.K. pound sterling, ~~Swedish krona or the~~ euro, Canadian dollar and Australian dollar, however they also reduce the positive impact of a stronger U.K. pound sterling ~~Swedish krona~~ or the euro on the respective revenues.

Interest Rate Risk

~~In connection~~On February 6, 2018, we entered into a $450.0 million credit agreement (“Credit Agreement”) with ~~the Polaris acquisition,~~a syndicated bank group jointly lead by JP Morgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, which amends and restates our prior $300.0 million credit agreement (which we had originally entered into on February 25, 2016 (“Prior Credit Agreement”) to fund the Polaris acquisition and Mandatory Tender Offer) and provides for a $200.0 million revolving credit facility, a $180.0 million term loan facility, and a $70.0 million delayed-draw term loan. Virtusa drew down $180.0 million under the term loan of the Credit Agreement and $55.0 million under the revolving credit facility under the Credit Agreement to repay in full the amount outstanding under the Prior Credit Agreement and fund the Polaris delisting transaction. On March 12, 2018, we drew down the ~~full $200.0~~$70 million ofdelayed draw to fund the ~~term loan under~~eTouch acquisition. On August 14, 2018, we drew down $32 million from our credit facility to fund the ~~Existing Credit Facility.~~Polaris delisting open offer. Interest under this new credit facility accrues at a rate per annum of LIBOR plus ~~2.75%~~3.0%, subject to step-downs based on the Company’s ratio of debt to EBITDA. We intend to enter into an interest rate swap agreement to minimize interest rate exposure. The ~~Existing~~ Credit Agreement includes ~~customary minimum cash,~~ maximum debt to EBITDA and minimum fixed charge coverage ~~covenants—see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.~~covenants. The term of the ~~Existing~~ Credit Agreement ~~ends on~~is five years, ending February ~~24, 2021. We do not believe we are exposed to material direct risks associated with changes in~~6, 2023. At September 30, 2018, the interest rates ~~other than with respect to our Existing~~on the term loan and line of credit were 4.75% and 4.65% respectively. At September 30, 2018, the outstanding amount under the Credit ~~Facility, our cash and cash equivalents, short-term investments and long-term investments.~~ To mitigate the Company’s exposure to movements in the one-month London Inter-Bank Offer Rate (LIBOR) rate on future outstanding debt, the Company entered into the Interest Rate Swap Agreements to convert a portion of the Company’s outstanding debt from a floating to a fixed rate of interest (See Note 12 of the notes to our financial statements included herein for a detail description of our existing credit facility and our amended and restated credit facility dated as of February 8, 2018.).Agreement was $330.8 million.

At ~~December 31, 2017,~~September 30, 2018 we had ~~$303.9~~$232.5 million in cash and cash equivalents, short-term investments and long-term investments, the interest income from which is affected by changes in interest rates. Our invested securities primarily consist of government sponsored entity bonds, money market mutual funds, commercial paper, corporate debts, preference shares and municipal bonds. Our investments in debt securities are classified as “available-for-sale” and are recorded at fair value. Our “available-for-sale” investments are sensitive to changes in interest rates. Interest rate changes would result in a change in the net fair value of these financial instruments due to the difference between the market interest rate at the period end and the market interest rate at the date of purchase of the financial instrument.

~~Information provided by the sensitivity analysis does not necessarily represent the actual changes that would occur under normal market conditions.~~

Concentration of Credit Risk

Financial instruments which potentially expose us to concentrations of credit risk primarily consist of cash and cash equivalents, short-term investments and long-term investments, accounts receivable, derivative contracts, other financial assets and unbilled accounts receivable. We place our operating cash, investments and derivatives in highly-rated financial institutions. We adhere to a formal investment policy with the primary objective of preservation of principal, which contains minimum credit rating and diversification requirements. We believe that our credit policies reflect normal industry terms and business risk. We do not anticipate non-performance by the counterparties and, accordingly, do not require collateral. Credit losses and write-offs of accounts receivable balances have historically not been material to our financial statements and have not exceeded our expectations.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

At ~~December 31, 2017,~~September 30, 2018, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective at a reasonable assurance level in (i) enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period and (ii) ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition or cash flows.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2017,~~2018, as filed with the Securities and Exchange Commission, on May ~~26, 2017~~25, 2018 (the “Annual Report”), which could materially affect our business, financial condition or future ~~results.~~

The following risk factors are added to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended March 31, 2017, our Form 10-Q for the quarter ended June 30, 2017 and our Form 10-Q for the quarter ended September 30, 2017.

~~Changes in applicable tax regulations and resolutions of tax disputes could negatively affect our financial results.~~

We are subject to taxation in the U.S. and numerous foreign jurisdictions. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The changes included in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the estimates provided elsewhere in this report, possibly materially, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have utilized to calculate the impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries. It is very difficult to assess the overall effect of potential tax changes, and how they might impact our future financial results.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds; Purchases of Equity Securities By the Issuer and Affiliated Purchasers

Under the terms of our 2007 Stock Option and Incentive Plan (“2007 Plan”) and 2015 Stock Option and Incentive Plan (“2015 Plan”), we have issued shares of restricted stock to our employees. On the date that these restricted shares vest, we automatically withhold, via a net exercise provision pursuant to our applicable restricted stock agreements and the 2007 Plan and 2015 Plan, as the case may be, the number of vested shares (based on the closing price of our common stock on such vesting date) equal to tax liability owed by such grantee. The shares withheld from the grantees under the 2007 Plan or the 2015 Plan, as the case may be, to settle their tax liability are reallocated to the number of shares available for issuance under the 2015 Plan. For the three months period ended ~~December 31, 2017,~~September 30, 2018, we withheld an aggregate of ~~7,073~~88,738 shares of restricted stock at a price of ~~$45.58~~$58.06 per share.

~~Item 5. Other information~~

On February 6, 2018, the Company entered into an amended and restated $450 million credit agreement (the “Credit Agreement”) dated as of February 6, 2018, among the Company, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “Administrative Agent”), and JPMorgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and lead arrangers. The Credit Agreement amends and restates the Company’s existing $300 million credit agreement (the “Existing Credit Agreement”) dated as of February 25, 2016, among the Company, the lenders party thereto and the Administrative Agent and provides for a $200 million revolving credit facility, a $180 million term loan facility and a $70 million delayed-draw term loan (together, the “Credit Facility”). Proceeds of borrowings under the Credit Facility will be used (i) to refinance loans and other outstanding obligations under the Existing Credit Agreement and pay fees, costs and expenses incurred in connection with such refinancing and related transactions, (ii) acquisition financing, (iii) to finance consummation of the public tender offer for the outstanding equity interests of Polaris Consulting & Services Limited and (iv) for working capital and other general corporate purposes of the Company and its subsidiaries (including acquisitions, investments, capital expenditures and restricted payments). Interest on the loans under the Credit Facility accrues at a rate per annum of LIBOR plus 3.00%, subject to step-downs based on the Company’s ratio of debt to adjusted earnings before interest, taxes, depreciation, amortization, and stock compensation expense (“EBITDA”). The Company intends to enter into an interest rate swap agreement to minimize interest rate exposure. The Credit Agreement includes customary maximum debt to EBITDA and minimum fixed charge coverage covenants. The term of the Credit Agreement is five years from the Closing Date (as defined below), ending February 6, 2023.

The Credit Agreement has financial covenants that require that the Company maintain a Total Net Leverage Ratio, during the period commencing on December 31, 2017 and ending prior to December 31, 2019, of not more than 3.50 to 1.00, during the period commencing on December 31, 2019 and ending prior to September 30, 2020, of not more than 3.25 to 1.00, and during the period commencing on September 30, 2020 and ending on the maturity date of the Credit Facility, of not more than 3.00 to 1.00, in each case as determined for the four consecutive fiscal quarter period ending on the last day of each fiscal quarter ending during the applicable period (the “Reference Period”). The financial covenants also require that the Company maintain a Fixed Charge Coverage Ratio during the term of the Credit Agreement of not less than 1.25 to 1.00, determined as of the last day of each Reference Period. For purposes of these covenants, “Total Net Leverage Ratio” means, as of the last day of any fiscal quarter, the ratio of Net Funded Debt to Adjusted EBITDA for the reference period ended on such date. “Net Funded Debt” refers generally to total indebtedness to third-parties for borrowed money, capital leases, deferred purchase price and earn-out obligations and related guarantees, net of up to $50 million of unrestricted cash and cash equivalents of the Company, and “Adjusted EBITDA” is defined as consolidated net income plus (a) (i) GAAP depreciation and amortization, (ii) non-cash equity-based compensation expenses, (iii) fees and expenses incurred during such period in connection with the Credit Facility and loans made thereunder, (iv) fees and expenses incurred during such period in connection with any permitted acquisition, (v) one-time regulatory charges, (vi) other extraordinary and non-recurring losses or expenses, and (vii) all other non-cash charges, expenses and losses for such period, minus (b) (i) extraordinary or non-recurring income or gains for such period, and (ii) any cash payments made during such period in respect of non-cash charges, expenses or losses described in clauses (a)(ii), (a)(v) and (a)(vi) above taken in a prior period, subject to other adjustments and certain caps and limits on adjustments. The Fixed Charge Coverage Ratio is calculated under the Credit Agreement generally as the ratio of Adjusted EBITDA, excluding capital expenditures made during such period (to the extent not financed with indebtedness (other than Revolving Loans), an issuance of equity interests or capital contributions, or proceeds of asset sales, the proceeds of casualty insurance used to replace or restore assets), to fixed charges (regularly scheduled consolidated interest expense paid in cash, regularly scheduled amortization payments on indebtedness in cash, income taxes paid in cash and the interest component of capital lease obligation payments), on a consolidated basis.

The Credit Facility is secured by substantially all of the Company’s assets, including all intellectual property and all securities in domestic subsidiaries (other than certain domestic subsidiaries where the material assets of such subsidiaries are equity in foreign subsidiaries), subject to customary exceptions and exclusions from the collateral. The Credit Facility amortizes at a rate of 5% per annum of the outstanding principal amount for first two years, 7.5% per annum in the third year, 10% in the fourth year and 15% in the fifth year, in each case payable in equal quarterly instalments. To the extent funded, the delayed draw term loan will amortize in equal quarterly instalments on the same amortization schedule described above.

The foregoing summary is qualified in its entirety by reference to the Credit Agreement, which will be filed as an exhibit to our Annual Report on Form 10-K for the fiscal year ending March 31, 2018.

Item 6. Exhibits.

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q:

Exhibit No.				Description

~~10.1~~	10.1+			~~Lease~~Amended and Restated Executive Agreement, dated July 25, 2018, by and between the ~~Registrant~~Company and ~~132 Turnpike Road LLC dated as of October 23, 2017~~Kris Canekeratne (previously filed as Exhibit 10.1 to the Registrant’s ~~quarterly~~Current Report on Form ~~10-Q~~8-K (File No. 001-33625) filed ~~November 8, 2017~~on July 27, 2018 and incorporated ~~here in reference)~~by reference herein).

10.2*	10.2+			~~Lease~~Amended and Restated Executive Agreement, dated July 25, 2018, by and between ~~Orion Development (Private) Limited~~the Company and ~~Virtusa (Private) Limited. Dated~~Samir Dhir (previously filed as ~~of November 17, 2017.~~Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-33625) filed on July 27, 2018 and incorporated by reference herein).

10.3+				~~Fourth~~ Amended and Restated ~~Director Compensation Policy~~Executive Agreement, dated July 25, 2018, by and between the Company and Ranjan Kalia (previously filed as Exhibit ~~10.1~~10.3 to the Registrant’s Current Report on Form 8-K (File No. 001-33625) filed ~~December 7, 2017~~on July 27, 2018 and incorporated by reference herein).

10.4*	10.4+			~~Amendment No. 2 to Credit~~Amended and Restated Executive Agreement, dated July 25, 2018, by and between the Company and Thomas R. Holler (previously filed as ~~of January 11,~~Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 001-33625) filed on July 27, 2018 ~~with JPMorgan Chase Bank, N.A.~~ and ~~the lenders party thereto.~~incorporated by reference herein).

10.5+			Amended and Restated Executive Agreement, dated July 25, 2018, by and between the Company and Keith Modder (previously filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K (File No. 001-33625) filed on July 27, 2018 and incorporated by reference herein).

10.6+			Amended and Restated Executive Agreement, dated July 25, 2018, by and between the Company and Sundar Narayanan (previously filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K (File No. 001-33625) filed on July 27, 2018 and incorporated by reference herein).

31.1*				Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*				Certification of principal financial and accounting officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**				Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.

32.2**				Certification of principal financial and accounting officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.

101*				The following financial statements from Virtusa Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~December 31, 2017,~~September 30, 2018, as filed with the SEC on ~~February~~November 8, 2018, formatted in XBRL (eXtensible Business Reporting Language), as follows:

		(i)		Consolidated Balance Sheets at ~~December 31, 2017~~September 30, 2018 (Unaudited) and March 31, ~~2017~~2018
		(ii)		Consolidated Statements of Income (Loss) for the Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and September 30, 2017 ~~and December 31, 2016~~ (Unaudited)
		(iii)		Consolidated Statements of Comprehensive Income ~~(loss)~~(Loss) for the Three and ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and September 30, 2017 ~~and December 31, 2016~~ (Unaudited)
		(iv)		Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2018 and September 30, 2017 ~~and December 31, 2016~~ (Unaudited)
		(v)		Notes to Condensed Consolidated Financial Statements (Unaudited)

+ Indicates a management contract or compensation plan, contract or arrangement.

* Filed herewith.

** Furnished herewith. This certification shall not be deemed filed for any purpose, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act of 1934.

SIGNATURES

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

	Virtusa Corporation

Date: ~~February~~November 8, 2018	By:	/s/ Kris Canekeratne

		Kris Canekeratne,
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: ~~February~~November 8, 2018	By:	/s/ Ranjan Kalia

		Ranjan Kalia,
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

5146

Delaware	7371	04-3512883
(State or Other Jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer
Incorporation or Organization)	Classification Code Number)	Identification Number)

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
~~(Do not check if a smaller reporting company)~~		Emerging growth company o

Class		Number of Shares
Common Stock, par value $.01 per share		~~29,429,643~~29,911,607

	Level 3 Liabilities
Balance at April 1, 2017	$	—
Contingent consideration arising from acquisition (See Note 7)	100
Payments made during the period	—
Balance at December 31, 2017	$	100

Location of Gain Reclassified from AOCI into Income (Effective Portion)	Amount of Gain Reclassified from AOCI into Income (Effective Portion)
	Three Months Ended December 31,				Nine Months Ended December 31,
	2017		2016		2017		2016
Revenue	$	2,334	$	932	$	7,846	$	2,409
Costs of revenue	$	1,432	$	1,505	$	5,484	$	2,877
Operating expenses	$	750	$	877	$	3,060	$	1,722
Interest expense	$	59	$	—	$	93	$	—

	December 31, 2017
Balance at April 1, 2017	$	—
Provisions	985
Cash Payments	(700		)
Balance at December 31, 2017	$	285

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2017			2016			2017			2016
	(in thousands, except						(in thousands, except
	per share amounts)						per share amounts)
GAAP income from operations	$	13,663		$	6,458		$	30,012		$	8,147
Add: Stock-based compensation expense	9,118			4,748			20,048			17,023
Add: Acquisition-related charges and restructuring charges (1)	3,227			5,116			9,087			11,787
Non-GAAP income from operations	$	26,008		$	16,322		$	59,147		$	36,957
GAAP operating margin	5.2		%	3.0		%	4.1		%	1.3		%
Effect of above adjustments to income from operations	4.7		%	4.5		%	3.9		%	4.6		%
Non-GAAP operating margin	9.9		%	7.5		%	8.0		%	5.9		%
GAAP net income (loss) available to Virtusa common stockholders	$	(11,142	)	$	4,435		$	(4,504	)	$	1,393
Add: Stock-based compensation expense	9,118			4,748			20,048			17,023
Add: Acquisition-related charges and restructuring charges (1)	3,227			5,116			9,087			11,787
Add: Foreign currency transaction (gains) losses (2)	(2,576		)	1,252			(1,019		)	2,802
Add: Impact from the Tax Act (8)	19,815			—			19,815			—
Tax adjustments (3)	(3,210		)	(4,198		)	(9,798		)	(7,397		)
Less: Noncontrolling interest, net of tax (4)	(647		)	(319		)	(1,326		)	(875		)
Non-GAAP net income available to Virtusa common stockholders	$	14,585		$	11,034		$	32,303		$	24,733
GAAP diluted earnings (loss) per share (6)	$	(0.38	)	$	0.15		$	(0.15	)	$	0.05
Effect of stock-based compensation expense (7)	0.28			0.16			0.63			0.56
Effect of acquisition-related charges and restructuring charges (1) (7)	0.10			0.17			0.28			0.39
Effect of foreign currency transaction (gains) losses (2) (7)	(0.08		)	0.04			(0.03		)	0.09
Effect of impact from the Tax Act (7) (8)	0.60			—			0.62			—
Tax adjustments (3) (7)	(0.10		)	(0.14		)	(0.31		)	(0.24		)
Effect of noncontrolling interest (4) (7)	(0.02		)	(0.01		)	(0.04		)	(0.03		)
Effect of dividend on Series A Convertible Preferred Stock (6) (7)	0.03			—			0.07			—
Effect of change in dilutive shares for non-GAAP (6)	0.04			—			0.01			—
Non-GAAP diluted earnings per share (5) (7)	0.47			0.37			1.08			0.82