| Summary of Significant Accounting Policies | Note 2: Summary of Significant Accounting Policies Principles of Consolidation and Use of Estimates The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ( “GAAP” ). These consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated. Certain items in these consolidated financial statements have been reclassified to conform to current period presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingencies. Actual amounts may differ from estimates. Cash and Cash Equivalents We generally invest our excess cash in money market funds that are made up of securities issued by agencies of the U.S. government. From time-to-time, we may invest in other vehicles, such as debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities, and publicly held corporations, as well as commercial paper and insured time deposits with commercial banks. Specific holdings can vary from period to period depending upon our cash requirements. Such investments are reported at fair value on the consolidated balance sheets. Accounts Receivable, Net Accounts receivable are stated at amounts due from clients, net of an allowance for credit losses. Our estimates of credit losses are based on our historical experience, the aging of our trade receivables, and management judgment. The allowance for credit losses was not material as of December 31, 2022 and 2021. Property, Equipment, and Software, Net Property, equipment, and software, net, are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the following estimated useful lives: Estimated Useful Life Computer equipment 3 years Purchased software 3 years Data center servers 3 years Internally developed software 3 years Office equipment 7 years Office furniture 7 years Airplane 25 years Leasehold improvements Shorter of lease term or economic life Internally Developed Software Costs incurred to develop software intended for our internal use, primarily contractor costs and employee salaries and benefits, are capitalized during the application development stage. Capitalization of such costs ceases once the project is substantially complete and ready for its intended use. We also capitalize costs related to specific upgrades and enhancements when it is probable that the expenditure will result in additional functionality. Costs related to preliminary project activities and post-implementation operating activities are expensed as incurred. We capitalized $13.0 million, $16.4 million, and $4.0 million of internally developed software costs for the years ended December 31, 2022, 2021, and 2020, respectively. Business Combinations We allocate the fair value of the purchase consideration for our business combinations to the assets acquired and liabilities assumed, generally based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Purchase consideration includes assets transferred, liabilities assumed, and/or equity interests issued by us, all of which are measured at their fair value as of the date of acquisition. Our business combinations may be structured to include a combination of up-front, deferred, and contingent payments to be made at specified dates subsequent to the date of acquisition. Deferred and contingent payments determined to be purchase consideration are recorded at fair value as of the acquisition date. Our contingent consideration arrangements are generally obligations to make future payments to sellers contingent upon the achievement of future financial targets and are remeasured to fair value at the end of each reporting period until the obligations are settled. The valuation of the net assets acquired as well as certain elements of purchase consideration requires management to make significant estimates and assumptions, especially with respect to future expected cash flows, discount rates, growth and attrition rates, and estimated useful lives. Management’s assumptions and estimates of fair value are based on comparable market data and information obtained from the management of acquired entities. These assumptions and estimates are believed to be reasonable, but are inherently uncertain and, as a result, actual results may differ from estimates. During the measurement period, we may record adjustments to the assets acquired and liabilities assumed with a corresponding offset to goodwill. Subsequent changes to the fair value of contingent consideration are reflected in “Acquisition and integration” expense on the consolidated statements of comprehensive income (loss). Acquisition costs are expensed as incurred and are included in “Acquisition and integration” expense on the consolidated statements of comprehensive income (loss). We include the results of operations from acquired businesses in our consolidated financial statements from the effective date of the acquisition. Asset Acquisitions Acquisitions that do not meet the criteria to be accounted for as a business combination are accounted for as an asset acquisition. Using a cost accumulation model, the purchase price, including certain acquisition-related costs, is allocated to the acquired assets and assumed liabilities based upon their relative fair values as of the acquisition date. No goodwill is contemplated in the allocation process. Our asset acquisitions typically include contingent consideration arrangements that encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. Contingent consideration is not recognized until all contingencies are resolved and the consideration is payable, at which point the consideration is allocated to the assets acquired on a relative fair value basis. Discontinued Operations We review the presentation of planned business dispositions in the consolidated financial statements based on the available information and events that have occurred. The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether the disposition represents a strategic shift that has a major effect on operations and financial results. In addition, we evaluate whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year. Planned dispositions are presented as discontinued operations when all the criteria described above are met. For those divestitures that qualify as discontinued operations, all comparative periods presented are reclassified in the consolidated balance sheets. Additionally, the results of operations of a discontinued operation are reclassified to income from discontinued operations, net of tax, for all periods presented in the consolidated statements of comprehensive income (loss). Results of discontinued operations include all revenue and expenses directly derived from such businesses; general corporate overhead is not allocated to discontinued operations. Goodwill and Acquired Intangible Assets, Net We test goodwill and indefinite-lived intangible assets for impairment annually, as of November 30, or more frequently when events or circumstances indicate that impairment may have occurred. For purposes of goodwill impairment testing, our reporting units are consistent with our reporting segments. As a result of the TaxAct Sale, which occurred after our annual impairment assessment, our continuing operations are presented as one reportable segment. We test goodwill for impairment either by assessing qualitative factors to determine whether it is more likely than not that the fair values of our reporting unit(s) are less than their carrying amounts, or by performing a quantitative test. Qualitative factors include industry and market conditions, overall financial performance, and other relevant events and circumstances affecting each reporting unit. If we choose to perform a qualitative assessment and, after considering the totality of events or circumstances, we determine it is more likely than not the fair value(s) of our reporting unit(s) are less than their carrying amounts, then we perform a quantitative fair value test. Our quantitative test utilizes a weighted combination of a discounted cash flow model (known as the income approach) and a market approach which estimates a reporting unit’s fair value by applying income-based valuation multiples for a set of comparable companies to the reporting unit’s income. These approaches involve judgmental assumptions, including forecasted future cash flows expected to be generated by each reporting unit over an extended period of time, long-term growth rates, the identification of comparable companies, and each reporting unit’s weighted average cost of capital. The weighted average cost of capital factors in the relevant risk associated with business-specific characteristics and the uncertainty of achieving projected cash flows. These assumptions are unobservable inputs and are considered Level 3 measurements. Impairment is recognized as the excess of a reporting unit’s carrying amount, including goodwill, over its fair value. We test indefinite-lived intangible assets for impairment either through a qualitative assessment similar to our evaluation for goodwill, or by performing a quantitative test. Our quantitative test estimates the fair values of the assets based on estimated future earnings derived from the assets using an income approach. This discounted cash flow model involves judgmental assumptions, including forecasted future cash flows from estimated royalty rates and the asset’s weighted average cost of capital. The weighted average cost of capital factors in the relevant risk associated with business-specific characteristics and the uncertainty of achieving projected cash flows. These assumptions are unobservable inputs and are considered Level 3 measurements. Impairment is recognized as the excess of the indefinite-lived intangible asset’s carrying amount over its fair value. Impairment of Long-Lived Assets Long-lived assets, including definite-lived intangibles, are reviewed for impairment when events or circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. Factors we consider important that may trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, and significant changes in the manner of our use of the asset. If circumstances require that an asset or group of assets be tested for impairment, determination of recoverability is based on an estimate of the undiscounted cash flows expected to be generated by the asset or group of assets. If the carrying amount of the asset or group of assets is not recoverable on an undiscounted cash flow basis, impairment is recognized equal to the excess of the carrying value over its fair value. Financial Professional Loans We periodically extend credit to our financial professionals in the form of recruiting or retention loans, commission advances and other loans. The decision to extend credit to a financial professional is generally based on affiliation with Avantax Wealth Management and their ability to generate future revenues. Loans made in connection with recruiting or retention can either be repayable or forgivable over terms generally up to fifteen years provided that the financial professional remains a service provider to the Company. Forgivable loans are not repaid in cash and are amortized over the term of the loan. If a financial professional terminates their arrangement with the Company prior to the loan maturity date, the remaining balance becomes repayable immediately. We estimate an allowance for credit loss related to both repayable and forgivable loans at inception using estimates and assumptions based on historical loss experience and expectations of future loss rates. Management monitors the adequacy of these estimates on a periodic basis against actual trends experienced. The allowance for credit loss associated with these loans was not material as of December 31, 2022 and 2021. During the years ended December 31, 2022 and 2021, we issued loans to financial professionals for $12.7 million and $22.0 million, respectively. As of December 31, 2022 and 2021, $23.3 million and $17.7 million, respectively, were included within “other long-term assets” on the consolidated balance sheets, and $6.0 million and $4.3 million, respectively, were included in “prepaid expenses and other current assets” on the consolidated balance sheets. During the years ended December 31, 2022, 2021, and 2020, we recognized $5.2 million, $2.3 million, and $0.9 million, respectively, of forgivable loan amortization within “cost of revenue” in the consolidated statements of comprehensive income (loss). Substantially all of our outstanding financial professional loans are considered forgivable. Leases We determine if an arrangement contains a lease at inception. Right-of-use ( “ROU” ) assets represent our right to use an underlying asset for the lease term and the corresponding lease liabilities represent our obligation to make lease payments arising from the lease. On the commencement date, leases are evaluated for classification, and ROU assets and lease liabilities are recognized based on the present value of lease payments over the lease term. The ROU asset is reduced for tenant incentives and excludes any initial direct costs incurred. We have elected to combine the lease and non-lease components of a contract, if applicable, into a single lease component. The implicit rates within our leases are generally not readily determinable, and instead we use our incremental borrowing rate at the lease commencement date to determine the present value of lease payments. Fixed lease cost is recognized on a straight-line basis over the lease term. Variable lease payments are not included in the calculation of the ROU assets and lease liabilities and are recognized as lease costs as incurred. Our variable lease payments generally relate to amounts paid to lessors for common area maintenance. Our lease terms are contractually fixed but may include extension or termination options. These options are included in lease values when it is reasonably certain we will exercise such options. We have elected not to recognize a ROU asset or lease liability for short-term leases, defined as those which have an initial lease term of twelve months or less. Our leases do not contain residual value guarantees or material variable lease payments. We do not have any material restrictions or covenants imposed by leases that would impact our ability to pay dividends or cause us to incur additional financial obligations. Fair Value of Financial Instruments We measure our financial instruments and contingent consideration from our business combinations at fair value at each reporting period using a fair value hierarchy. The classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Fair value inputs are classified in one of the following three categories: • Level 1: Quoted market prices in active markets for identical assets or liabilities. • Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data. • Level 3: Unobservable inputs that are not corroborated by market data and reflect our own assumptions. Revenue Recognition We recognize revenue when all five of the following revenue recognition criteria have been satisfied: • contract(s) with clients have been identified; • performance obligations have been identified; • transaction prices have been determined; • transaction prices have been allocated to the performance obligations; and • the performance obligations have been fulfilled by transferring control over the promised services to the client. The determination of when these criteria are satisfied varies by product or service and is explained in more detail below. Revenue recognition. Revenue primarily consists of advisory revenue, commission revenue, asset-based revenue, and transaction and fee revenue. Revenue is recognized upon the transfer of services to clients in an amount that reflects the consideration to which we expect to be entitled in exchange for those services. Payments received by us in advance of the performance of service are deferred and recognized as revenue when we have satisfied our performance obligation. Advisory revenue includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenues generated by Avantax Planning Partners, advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized over the period in which our performance obligations were completed. Commissions represent amounts generated by clients’ purchases and sales of securities and investment products. We serve as the registered broker-dealer or insurance agent for those trades. We generate two types of commissions: (1) transaction-based commissions and (2) trailing commissions. Transaction-based commissions are generated on a per-transaction basis and are recognized as revenue on the trade date, which is when our performance obligations have been substantially completed. Trailing commissions are earned by us based on our ongoing account support to clients. Trailing commissions are based on a percentage of the current market value of clients’ investment holdings in trail-eligible assets and recognized over the period during which our services are performed. Since trailing commission revenue is generally paid in arrears, we estimate it based on a number of factors, including stock market index levels and the amount of trailing commission revenues received in prior periods. These estimates are primarily based on historical information, and there is not significant judgment involved. A substantial portion of advisory revenue and commission revenue is ultimately paid to our financial professionals. In Avantax Wealth Management, advisory fee payments to financial professionals typically occur at the beginning of the quarter, in advance, and therefore do not result in an advisory fee payable amount at quarter end. In Avantax Planning Partners, advisory fee payments (which are primarily composed of payments to CPA firms under fee sharing arrangements) are typically made quarterly, in arrears, and we record an estimate for the advisory fee payable based on the historical payout ratios and financial market movement for the period. For transaction-based commissions, we record an estimate for commissions payable based upon the payout rate of the financial professional generating the accrued commission revenue. For trailing commissions, we record an estimate for trailing commissions payable based upon historical payout ratios. Such amounts are recorded as “Commissions and advisory fees payable” on the consolidated balance sheets and “Cost of revenue” on the consolidated statements of comprehensive income (loss). Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs, and other asset-based revenues, primarily margin revenues and asset-based retirement plan service fees. Asset-based revenue is recognized ratably over the period in which services are provided. Transaction and fee revenue primarily includes (1) support fees charged to financial professionals, which are recognized over time as support services are provided, (2) fees charged for executing certain transactions in client accounts, which are recognized on a trade-date basis, and (3) other fees related to services provided and other account charges as generally outlined in agreements with financial professionals, clients, and financial institutions, which are recognized as services are performed or as earned, as applicable. Costs to obtain a contract. We capitalize the incremental costs of obtaining a contract with a client, primarily one-time commissions paid to affiliates who refer clients, if we expect to recover those costs. These costs are amortized on a straight-line basis over a period of 15 years, which is the period over which we expect to transfer services to the client. The amortization of these costs are included in “Sales and marketing” on the consolidated statements of comprehensive income (loss). Capitalized costs to obtain a contract were not material for the years ended December 31, 2022 and 2021. Advertising Expenses Costs for advertising are recorded within “Sales and marketing” on the consolidated statements of comprehensive income (loss) when the advertisement appears. Advertising expense totaled $0.9 million, $2.0 million, and $1.6 million for the years ended December 31, 2022, 2021, and 2020, respectively. Stock-Based Compensation We measure stock-based compensation for awards of stock options, restricted stock units ( “RSUs” ), and other similar awards based on the estimated fair value of the awards on the date of grant. RSUs typically include service-based vesting requirements ( “time-based RSUs” ) or performance-based vesting requirements ( “performance-based RSUs” ). Compensation expense for awards that vest ratably is recognized net of estimated forfeitures (if applicable) over the requisite service period of the award for each vesting tranche using the straight-line method. Compensation expense for awards that cliff vest is recognized over the requisite service period of the award using the straight-line method. We estimate forfeitures for employee awards at the time of grant, based upon historical data, and revise those estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We recognize forfeitures as they occur for awards to non-employee financial professionals. The fair value of stock options is estimated using a Black-Scholes-Merton valuation method on the date of grant. The fair value of time-based RSUs is equal to the closing price of the Company’s stock on the date of grant. The fair value of performance-based RSUs that contain a market component is estimated using a Monte-Carlo simulation model on the date of grant. For performance-based RSUs, compensation expense is originally based on the number of shares that would vest if we achieve the level of performance that we estimate is the most probable outcome at the grant date. Throughout the requisite service period, we monitor the probability of achieving the performance condition, and adjust compensation expense based on future expected performance. Compensation expense for performance-based RSUs that contain a market component is not reversed if the market criteria are not satisfied. Income Taxes We account for income taxes under the asset and liability method, under which deferred tax assets, including net operating loss carryforwards, and deferred tax liabilities are determined based on temporary differences between the book and tax basis of assets and liabilities. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of the deferred tax assets by a valuation allowance to the extent we believe it is more likely than not a portion will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including expectations of future taxable income, recent cumulative earnings experience by taxing jurisdiction, and other relevant factors. There is a wide range of possible judgments relating to the valuation of our deferred tax assets. We record liabilities to address uncertain tax positions that have been taken in previously filed tax returns or that are expected to be taken in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that the tax position, based on technical merits, will be sustained upon examination. The tax benefit to be recognized in the financial statements from such a position is measured as the largest amount of benefit that has a greater than 50% cumulative likelihood of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded. We recognize interest and penalties related to uncertain tax positions in interest expense and general and administrative expense, respectively. Concentration of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured. For cash equivalents, short-term investments, and commissions receivable, we attempt to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the applicable agreement. Accounts receivable are typically unsecured and are derived from revenues earned from clients primarily located in the United States operating in a variety of geographic areas. We perform ongoing credit evaluations of our clients and maintain allowances for potential credit losses. Geographic Revenue Information Substantially all of our revenue for 2022, 2021, and 2020 was generated from clients located in the United States. All of our tangible fixed assets are located in the United States. Recently Issued Accounting Pronouncements There have been no recent accounting pronouncements, changes in accounting pronouncements, or recently issued accounting guidance during fiscal year 2022 that are material, significant, or potentially significant to us. |
