| Basis of Presentation and Principles of Consolidation | NOTE 2 — Basis of Presentation and Principles of Consolidation Interim Financial Statements The accompanying condensed consolidated financial statements and notes thereto are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed on February 22, 2018 with the SEC (the 2017 Annual Report). The Condensed Consolidated Balance Sheet as of December 31, 2017, included herein, was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s Balance Sheets as of March 31, 2018 and December 31, 2017, the Company’s Statements of Income for the three months ended March 31, 2018 and 2017 and the Company’s Statements of Cash Flows for the three months ended March 31, 2018 and 2017. The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018. The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is the same as net income for all periods presented. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Significant items subject to such estimates include stock-based compensation, the fair value of acquired assets and assumed liabilities, internal use software, income taxes and goodwill, intangible assets and property, plant and equipment. Actual results could differ from those estimates under different assumptions or conditions. Segment Information The Company’s chief operating decision-maker, its chief executive officer, reviews the Company’s operating results on an aggregate, consolidated basis and manages its operations as a single operating segment. In addition, all of the Company’s operations and assets are based in the United States. Goodwill and Intangible Assets Goodwill consists of the excess of the aggregate purchase price over the fair value of net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill is tested for impairment each year in the fourth quarter, or more frequently if facts and circumstances warrant a review, by using a two-step process. The Company has concluded that it has a single reporting unit for the purpose of goodwill impairment testing, and accordingly, all goodwill resides within a single reporting unit. The Company compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, the Company would perform a measurement of the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied fair value of the goodwill. If the carrying amount of the goodwill is greater than the implied value, an impairment loss is recognized for the difference. There have been no goodwill impairment losses to date. The Company does not have any indefinite lived intangible assets besides goodwill. Intangible assets with definite useful lives are recorded at their acquired value less accumulated amortization. Intangible assets are reviewed for impairment whenever events or changes in circumstances raise doubt about recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. There were no impairments or changes in useful lives of acquired intangible assets during the periods presented. Intangible assets consist primarily of customer relationships, trademarks, trade names, internal use software and reacquired franchisee rights. These intangible assets are acquired through business combinations or, in the case of capitalized software costs, are internally developed. Intangible assets are amortized on a straight-line basis over their estimated useful lives which range from 1 year to 20 years. Long-Lived Assets Long-lived assets, such as property, equipment, and intangible assets, including capitalized internal use software, subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or an asset group may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets or asset group will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows of the assets or asset group are less than their carrying amount, the Company would recognize an impairment loss based on any excess of the carrying amount of the asset or asset group over their fair value. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Impairments to long-lived assets were immaterial during the periods presented. Revenue Recognition The Company elected to adopt Accounting Standards Update (ASU) No. 2014-09 which along with amendments is codified as See Recently Adopted Accounting Standards In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration that the Company expects to be entitled to receive in exchange for these services. To achieve the core principle of this standard, the Company applies the following five steps: 1) Identify the contract with a customer – The Company considers the terms and conditions of contracts and customary business practices in identifying contracts under ASC 606. The Company determines that a contract with a customer exists when the contract is approved, each party’s rights regarding the services to be transferred are identified, the payment terms for the services are identified, the customer has the ability and intent to pay and the contract has commercial substance. The Company applies judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. 2) Identify the performance obligations in the contract - Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. The Company’s performance obligations consist of (i) professional management services and (ii) platform services. Both performance obligations consist of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to customers. 3) Determine the transaction price - The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if it is probable that a significant future reversal of cumulative revenue under the contract will not occur. This requires the Company to estimate any variable consideration and to factor that estimation into the determination of the transaction price. None of the Company’s contracts contain a significant financing component. 4) Allocate the transaction price to performance obligations in the contract - If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price (“SSP”) generally based upon the prices charged to customers, or in the absence of such transactions, management’s estimates of such prices. 5) Recognize revenue when or as performance obligations are satisfied - Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised service to a customer. Revenue is recognized when control of the services is transferred to customers, in an amount that reflects the consideration that the Company expects to receive in exchange for those services. The Company generates all of its revenue from contracts with customers. Revenue is generally recognized over time and the Company satisfies its performance obligation on a daily basis as services are provided to customers. The Company generally can have up to two separate performance obligations in its contracts with customers:
•
Professional Management. The Company derives professional management revenue from client fees paid by or on behalf of both DC and individual investor clients who are enrolled in one of its discretionary portfolio management services (either the Professional Management service or the Personal Advisor service) for the management of their account assets. The Company continues to use the term professional management revenue to include revenue from both the Professional Management and Personal Advisor services. The Company’s Professional Management service is a discretionary personalized portfolio management service for DC participants who want to work with or delegate the management of their retirement accounts to a professional with the help of an advisor team. Personal Advisor is a personalized service that can provide discretionary portfolio management on a client’s 401(k), IRA and/or taxable assets, as well as comprehensive financial planning and a dedicated advisor representative that participants can meet with in person, online or by phone. The Company’s retirement income solutions, including Income+ and Retirement Paycheck, which are features of its Professional Management and Personal Advisor services, respectively, provide clients approaching or in retirement with discretionary portfolio management with an income objective and steady monthly payments from their accounts during retirement, including Social Security claiming guidance and planning. The services are generally made available to prospective clients by written agreements with the plan provider, the plan sponsor and the plan participant in a DC plan (and may be provided on a subadvisory basis) and by written agreements with retail investors. The Company’s arrangements with clients using discretionary portfolio management services generally provide for fees based on the value of assets managed and are generally payable quarterly in arrears. The majority of client fees for DC accounts, for both advisory and subadvisory relationships, are calculated on a monthly basis, as the product of client fee rates and the value of assets under management (AUM) at or near the end of each month. For IRA and taxable accounts, client fees are calculated on a quarterly basis at the end of each quarter.
•
Platform. The Company derives platform revenue from recurring, subscription-based fees for access to its services, including Online Advice, education, and guidance. Online Advice is a non-discretionary, Internet-based investment advisory service, which includes personalized online savings and investment advice and retirement income projections for clients who want to manage their retirement themselves. The arrangements generally provide for fees to be paid by the plan sponsor, plan provider or the DC plan itself, depending on the plan structure. Platform revenue is generally paid annually or quarterly in advance and recognized ratably over the term of the subscription period beginning after the completion of customer setup and data connectivity. Contract Balances - The timing of performance may differ from the timing of the customer’s payment, which may result in the recognition of a contract liability. The Company recognizes a contract liability when it has received consideration from the customer and has a future obligation to perform services. Costs to Obtain and Fulfill a Contract - The Company recognizes an asset from the costs incurred to fulfill or obtain a contract only if the costs incurred are specifically identifiable to a contract, they would result in enhancing resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. For the quarters ended March 31, 2018 and 2017 the Company elected the following practical expedients:
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Remaining performance obligations – In accordance with ASC 606-10-50-13, the Company elected not to disclose the aggregate amount of the transaction price allocated to remaining performance obligations for contracts that are one year or less, as all material revenue is expected to be recognized within the next year.
•
The time value of money – In accordance with ASC 606-10-32-18, the Company elected not to adjust the promised amount of consideration for the effects of the time value of money for contracts in which the anticipated period between when it performs services to the customer and when the customer pays is equal to one year or less. Deferred Sales Commissions Deferred sales commissions consist of incremental costs paid to the Company’s sales force associated with the execution of customer contracts. The deferred sales commission amounts are recoverable through future revenue streams under the customer contracts. The commission charges are recorded as an asset and charged to expense over a beneficial period of the original contract term in addition to expected renewals, which is currently estimated to be six years. Amortization of deferred sales commissions is included in sales and marketing expense in the accompanying Unaudited Condensed Consolidated Statements of Income. Deferred Income Taxes Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are also recognized for tax net operating loss carryforwards. These deferred tax assets and liabilities are measured using the enacted tax rates and laws that are expected to be in effect when such amounts are expected to reverse or be utilized. The realization of total deferred tax assets is contingent upon the generation of future taxable income. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. See Note 8 for additional information. Cost of Revenue Cost of revenue includes fees paid to plan providers for connectivity to plan and plan participant data, printed materials fulfillment costs for certain subadvisory relationships for which a portion are reimbursed, printed client materials, and employee-related costs for in-person dedicated advisor centers and call center advisors, operations, implementations, technical operations, portfolio management and client service administration. Costs in this area are related primarily to payments to third parties, employee compensation and related expenses, facilities expenses, purchased materials and depreciation. The expenses included in cost of revenue are shared across the different revenue categories, and the Company is not able to meaningfully allocate such costs between separate categories of revenue. Consequently, all costs and expenses applicable to the Company’s revenue are included in the category cost of revenue in the Unaudited Condensed Consolidated Statements of Income. A portion of the amortization of intangible assets, including internal use software, relates to the Company’s cost of revenue but is reflected together with all amortization of intangible assets as a separate line item in the Company’s Unaudited Condensed Consolidated Statements of Income. Recently Adopted Accounting Standards Revenue from Contracts with Customers On May 28, 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which 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 and capitalize costs that are incremental costs of obtaining a contract which required it to recast each prior reporting period presented. The Company implemented internal controls and key system functionality to enable the preparation of financial information upon adoption. The impact of adopting of the new revenue recognition standard on the Company's previously reported consolidated balance sheet, condensed consolidated statement of income, and condensed consolidated statement of cash flows are stated below. The impact is primarily from certain costs the Company incurs to obtain sales contracts from customers. For example, prior to adoption, there were direct response advertising costs capitalized and amortized for certain printed materials associated with new customer solicitations. Under the new ASUs, these costs are being expensed as incurred. In addition, these ASUs impact both the amount of commissions capitalized, as well as the length of time over which commissions are amortized by increasing the amortization period beyond the initial contract term to a beneficial period of 6 years.
December 31, 2017
As Reported
Adoption of ASU 2014-09
As adjusted
(In thousands)
Accounts receivable, net
$
116,116
$
(513
)
$
115,603
Other current assets
4,501
1,668
6,169
Long-term deferred tax assets
28,801
(202
)
28,599
Direct response advertising, net
4,653
(4,653
)
—
Other assets
2,184
4,207
6,391
Accounts payable
29,993
(138
)
29,855
Accrued compensation
28,519
56
28,575
Retained earnings
65,109
589
65,698
Three Months Ended
March 31,
2017
As Reported
Adoption of ASU 2014-09
As adjusted
(In thousands, except per share data)
Professional management revenue
$
106,760
$
148
$
106,908
Cost of revenue
51,525
36
51,561
Sales and marketing
19,315
(643
)
18,672
Income tax expense
4,095
290
4,385
Net Income
12,174
465
12,639
Diluted net income per share
0.19
0.01
0.20
Three Months Ended
March 31,
2017
As Reported
Adoption of ASU 2014-09
As adjusted
(In thousands)
Cash flows from operating activities:
Net income
$
12,174
$
465
$
12,639
Adjustments to reconcile net income to net cash provided by operating activities:
Stock -based compensation
8,443
(17
)
8,426
Amortization of deferred sales commissions
288
29
317
Amortization of deferred bonus
—
75
75
Amortization and impairment of direct response advertising
919
(919
)
—
Amortization of deferred setup costs
—
259
259
Deferred taxes
5,301
290
5,591
Changes in operating asset and liabilities:
Accounts receivable
(7,815
)
(148
)
(7,963
)
Direct response advertising
(288
)
288
—
Other assets
(1,226
)
(379
)
(1,605
)
Accounts payable
(3,616
)
76
(3,540
)
Accrued compensation
(17,127
)
(19
)
(17,146
) The Company disaggregated revenue from contracts with customers into types of services and revenue streams. determined that disaggregating revenue into these categories achieves the disclosure objective to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Revenue generated in the US relates to professional management, platform, and other revenue. Professional management revenue accounts for approximately $120.8 million or 94% of total revenue for the three months ended March 31, 2018 and $106.9 million or 94% for the three months ended March 31, 2017. Platform revenue accounts for approximately $6.3 million or 5% of total revenue for the three months ended March 31, 2018 and $6.9 million or 6% of total revenue for the three months ended March 31, 2017. Other revenue accounts for approximately $0.7 million or 1% of total revenue for the three months ended March 31, 2018 and $0.4 million or 0% of total revenue for the three months ended March 31, 2017. We have two main types of customers that are part of our professional management services Reconciliation of Contract Balances - As of March 31, 2018 and December 31, 2017, accounts receivables related to contracts with customers were $116.3 million and $115.5 million, respectively. For the three months ended March 31, 2018 and December 31, 2017, the Company had no material bad-debt expense. As of March 31, 2018 and December 31, 2017 contract liabilities, which are recorded as deferred revenue, were $3.6 million and $4.4 million, respectively. During the three months ended March 31, 2018, the amount of revenue recognized during the period that was included in the opening current contract liability balance was $2.1 million. Comparatively, the amount of revenue recognized during the three months ended March 31, 2017 that was included in the opening contract liability current balances was $2.4 million. Cost to obtain or fulfill a contract - In accordance with ASC 340-40, the Company is required to capitalize amounts paid to obtain contracts with customers. Costs incurred to obtain contracts with customers is generally comprised of commissions and bonuses paid to the internal sales staff and setup costs. Setup costs are based on management’s judgment and estimate of hours incurred for setup activities applied against an historical hourly rate. As of March 31, 2018 and March 31, 2017, the balances remaining from the costs incurred to obtain contracts with customers were as follows:
March 31,
December 31,
2018
2017
(In thousands)
Sales commission
$
3,926
$
4,280
Sales bonus
674
706
Setup costs
2,890
2,777
In accordance with ASC 340-40, the Company amortizes the assets recognized from the costs to obtain contracts with customers on a systematic basis consistent with the pattern of transfer to which the services relate. In other words, amortization starts from the roll out date (e.g. the customer 'go live date') and continues over the historical average life of the plan sponsor which ranges from 5 to 6 years, which costs and life are evaluated on a regular basis. The amount of amortization that we recognized for the three months ended March 31, 2018 and March 31, 2017 was $0.6 million and $0.7 million, respectively. Statement of Cash Flows On August 26, 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU clarifies and provides guidance on eight specific cash flow classification issues that are not currently addressed by current GAAP thereby reducing current diversity in practice. Although early adoption is permitted, the Company has adopted the ASU on January 1, 2018 and it did not have a material impact on the Company’s condensed consolidated financial statements. Financial Instruments In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU clarifies and provides guidance on accounting for equity investments, presentation and disclosure of financial instruments, and the measurement of the valuation allowance on deferred tax assets related to available-for-sale debt securities. Although early adoption is permitted, the Company has adopted the ASU on January 1, 2018 and it did not have a material impact on the Company’s condensed consolidated financial statements. |
