NOTE 4—REVENUE

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (“ASC Topic 606”), “Revenue from Contracts with Customers”. ASC Topic 606 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” (“ASC Topic 605”), and requires the recognition of revenue upon transfer of control of promised services and products to clients in an amount that reflects the consideration we expect to receive in exchange for those services and products. We adopted ASC Topic 606 as of January 1, 2018 using the cumulative catch-up transition method. The most significant changes resulting from the adoption of ASC Topic 606, as previously disclosed in our 2017 Form 10-K, are as follows:

For software and implementation contracts, revenue recognition on the software component will be accelerated to the point at which the software is installed, while revenue on the implementation component will be recognized over the software implementation period as a percentage of hours incurred to date as compared to the total expected hours.

For network contingency contracts with termination for convenience clauses, revenue will be recognized over time due to the existence of provisions for payment for progress incurred to date plus a reasonable profit margin.

For managed service implementation contracts, revenue will be recognized over time as a percentage of hours incurred to date as compared to the total expected hours of the implementation.

We recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018. The comparative information has not been adjusted for the effect of ASC Topic 606 and continues to be reported under the accounting standards in effect for the periods presented. Upon the adoption of ASC Topic 606 on January 1, 2018, we recorded a net increase to opening retained earnings of $2.0 million. The cumulative effect of the changes made to our Condensed Consolidated Balance Sheet as of January 1, 2018 for the adoption of ASC Topic 606 was as follows:


	As of January 1, 2018
	As Previously
	Reported				As Adjusted
	Under ASC 605		Adjustments		for ASC 606
Assets
Accounts receivables and contract assets, net of allowance of $503	$	70,824	$	1,468	$	72,292
Prepaid expense and other current assets	$	4,467	$	(1,071)	$	3,396
Deferred tax asset	$	2,521	$	(549)	$	1,972
Liabilities
Contract liabilities	$	8,898	$	(2,418)	$	6,480
Accrued expenses	$	21,486	$	133	$	21,619
Deferred tax liability	$	1,569	$	95	$	1,664
Stockholders' equity
Accumulated deficit	$	(157,814)	$	2,038	$	(155,776)

The majority of our revenue is derived from contracts that can span from a few months to several years. We enter into contracts that can include various combinations of services and products, which, depending on contract type, are sometimes capable of being distinct. If services are determined to be distinct, they are accounted for as separate performance obligations. A performance obligation is a promise in a contract to transfer a distinct good or service to the client and is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, including our managed service implementation and software and implementation contract types, the Company allocates the transaction price to each performance obligation using our best estimate of the standalone selling price, or SSP, of each distinct good or service in the contract. As of June 30, 2018, the Company had $97.9 million of remaining performance obligations, the majority of which are expected to be satisfied within the next year.

As part of our adoption of ASC Topic 606, we used practical expedients permitted by the standard when applicable. These practical expedients included:

applying the new guidance only to contracts that are not completed as of January 1, 2018;

expensing the incremental costs to obtain a contract as incurred when the expected amortization period is one year or less; and

presenting all revenue net of any related sales tax.

Our contracts may include promises to transfer multiple services and products to a client. Determining whether services and products are considered distinct performance obligations that should be accounted for separately versus together may require judgment.

Estimates were required to determine the SSP for each distinct performance obligation identified within our managed service implementation contracts and software and implementation contracts. Further details of our approach to determining the SSP for each contract type is described below.

For our software and implementation contracts, we had to determine the SSP for both the software license and implementation service performance obligations. For the software license performance obligation, we utilized the adjusted market assessment approach and determined that our listed price of the software licenses generally approximated the SSP. For the implementation service performance obligation, we utilized the residual approach, which resulted in the difference between the total contract value and the software license price in the arrangement being allocated to the implementation service.

For our managed service implementation contracts, we had to determine the SSP for both the managed services and implementation performance obligations. For each performance obligation, we estimated the SSP using the expected cost plus a reasonable profit margin approach, under which we forecasted our expected costs of satisfying a performance obligation and then added an appropriate margin for the distinct service.

Adjustments to Financial Statements from the Adoption of Accounting Pronouncements

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated balance sheet as of June 30, 2018.


	June 30, 2018
	As Reported
	Under ASC 606		Adjustments		ASC 605
Assets
Accounts receivables and contract assets, net of allowance of $661	$	73,522	$	(1,731)	$	71,791
Prepaid expense and other current assets	$	4,038	$	2,074	$	6,112
Deferred tax asset	$	2,502	$	549	$	3,051
Liabilities
Contract liabilities	$	4,800	$	6,120	$	10,920
Accrued expenses	$	17,738	$	(150)	$	17,588
Deferred tax liability	$	1,866	$	(802)	$	1,064
Stockholders' equity
Accumulated deficit	$	(153,248)	$	(4,276)	$	(157,524)

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated statement of comprehensive income for the three months ended June 30, 2018.


	Three Months Ended June 30, 2018
	As Reported
	Under ASC 606		Adjustments		ASC 605
Revenues	$	71,026	$	(419)	$	70,607
Operating expenses						—
Direct costs and expenses for advisors		40,153		469		40,622
Selling, general and administrative		24,680		-		24,680
Depreciation and amortization		1,993		-		1,993
Operating income		4,200		(888)		3,312
Interest income		3		-		3
Interest expense		(1,728)		-		(1,728)
Foreign currency transaction gain		49		-		49
Income before taxes		2,524		(888)		1,636
Income tax provision (benefit)		162		(213)		(51)
Net income	$	2,362	$	(675)	$	1,687

The following table presents the effect of the adoption of ASC Topic 606 on our condensed consolidated statement of comprehensive income for the six months ended June 30, 2018.


	Six Months Ended June 30, 2018
	As Reported
	Under ASC 606		Adjustments		ASC 605
Revenues	$	139,903	$	(3,966)	$	135,937
Operating expenses						—
Direct costs and expenses for advisors		83,137		(1,019)		82,118
Selling, general and administrative		46,908		-		46,908
Depreciation and amortization		3,895		-		3,895
Operating income		5,963		(2,947)		3,016
Interest income		110		-		110
Interest expense		(3,465)		-		(3,465)
Foreign currency transaction gain		25		-		25
Income (loss) before taxes		2,633		(2,947)		(314)
Income tax provision (benefit)		107		(707)		(600)
Net income	$	2,526	$	(2,240)	$	286

Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed accounts receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities). Our clients are billed based on the type of arrangement. A portion of our services is billed monthly based on hourly or daily rates. There are also client engagements in which we bill a fixed amount for our services. This may be one single amount covering the whole engagement or several amounts for various phases, functions, or milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, we sometimes receive advances or deposits, particularly on our software and implementation contracts, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet at the end of each reporting period. See the table below for a breakdown of contract assets and contract liabilities.


			January 1, 2018
	June 30, 2018		(as adjusted)
Contract assets (i.e., unbilled receivables)	$	27,273	$	18,838
Contract liabilities (i.e., deferred revenue)	$	4,800	$	6,480

Revenue recognized for the three months ended June 30, 2018 that was included in the contract liability balance at April 1, 2018 was $4.7 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

Revenue recognized for the six months ended June 30, 2018 that was included in the contract liability balance at January 1, 2018 was $6.0 million and represented primarily revenue from our software and implementation contracts and managed services contracts.

Disaggregation of Revenue

The following table presents our revenue disaggregated by geographic area for the three and six months ended June 30, 2018.


	Three Months Ended		Six Months Ended
Geographic area	June 30, 2018		June 30, 2018
Americas	$	40,831	$	82,507
Europe		24,047		45,801
Asia Pacific		6,148		11,595
	$	71,026	$	139,903