2. Summary of Significant Accounting Policies

Cash

The Company places its cash with institutions with high credit quality. However, at certain times, such cash may be in excess of Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insurance limits.

Accounts Receivable

Accounts receivable are carried at sales value less an allowance for doubtful accounts. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company periodically evaluates accounts receivable and establishes an allowance for doubtful accounts based on a combination of specific customer circumstances, credit conditions and the history of write‑ offs and collections. The Company evaluates items on an individual basis when determining accounts receivable write‑offs. In general, the Company’s policy is to not charge interest on trade receivables after the invoice becomes past due. A receivable is considered past due if payment has not been received within agreed upon invoice terms. Account balances are charged off against the allowance after all normal means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off‑balance‑sheet credit exposure related to its customers, and collateral is generally not required.

Property and Equipment

Property and equipment consists of leasehold improvements, furniture, fixtures, equipment and capitalized internal software development costs. Property and equipment is stated at cost, less accumulated depreciation and amortization. Plant and equipment under capital leases are stated at the present value of their minimum lease payments.

Computer software development costs that are incurred in the preliminary project stage are expensed as incurred. During the development stage, direct consulting costs and payroll and payroll related costs for employees that are directly associated with each project are capitalized and amortized over the estimated useful life of the software once placed into operation. Replacements and major improvements are capitalized, while maintenance and repairs are charged to expense as incurred.

Depreciation is computed on a straight‑line basis over the estimated useful lives of the respective assets. Amortization of leasehold improvements is computed on a straight‑line basis over the shorter of the lease term or estimated useful life of the asset and is included in depreciation expense. The estimated useful lives of property and equipment are as follows:


Computer equipment and software			3	years
Furniture and fixtures	5	-	7	years
Leasehold improvements	Shorter of lease term or useful life
Office equipment	3	-	5	years

Operating Leases

The Company leases its office space and various office equipment under operating lease agreements. In general, the leases contain renewal options and require the Company to pay executory costs (real estate taxes, insurance, and repairs). Some of the leases contain future rent increases, free rent periods, or periods in which rent payments are reduced. The total amount of rental payments due over the lease term is charged to rent expense on a straight‑line basis over the term of the lease. The difference between rent expense recorded and the amount paid is credited or charged to accrued expenses and other liabilities in the consolidated balance sheet.

Fair Value of Financial Instruments

The Company measures and reports its financial assets and liabilities on the basis of fair value. 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.

Deferred Financing Fees

Costs incurred related to obtaining financing arrangements are capitalized and amortized over the term of the financing arrangement as a component of interest expense using the effective interest method. Deferred financing fees related to term loan borrowings are presented in the consolidated balance sheet as a direct deduction from the carrying amount of the debt liability and deferred financing fees related to the Company’s revolving credit facility are presented as an asset. Write‑offs of unamortized deferred financing fees associated with debt amendments and refinancings are included as extinguishment of debt in the consolidated statements of operations. The Company recognized interest expense for the amortization of financing costs of $635,000, $728,000, and $1.1 million for the years ended December 31, 2015, 2014, and 2013, respectively.

Business Combinations

The Company accounts for acquisitions of businesses under the purchase method of accounting and allocates the purchase price to the tangible assets, specifically identifiable intangible assets and liabilities assumed based upon their respective fair values. The excess of the purchase price over these estimated fair values is allocated to goodwill. The operating results of the businesses acquired are included in the consolidated statements of operations from the date of acquisition.

Goodwill and Intangible Assets

Goodwill represents the excess of costs over fair value of net assets of businesses acquired. Goodwill and intangible assets acquired in connection with business combinations and determined to have indefinite lives are not amortized, but are instead tested for impairment at least annually.

The Company evaluates goodwill first using a qualitative assessment to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount. If the qualitative assessment indicates that the fair value of the reporting unit may be less than its carrying amount, the Company evaluates goodwill using a two‑step impairment test; otherwise, the Company concludes that there is no impairment and does not perform the two‑step impairment test. If the qualitative assessment concludes that the two‑step impairment test is necessary, the Company first compares the book value of the reporting unit, including goodwill, with its fair value. The fair value is estimated based on a market approach and a discounted cash flow analysis, also known as the income approach, and is reconciled back to the estimated equity value for the Company to ensure that the implied control premium is reasonable. If the book value of a reporting unit exceeds its fair value, the Company performs the second step to estimate an implied fair value of the reporting unit’s goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). The difference between the total fair value of the reporting unit and the fair value of all the assets and liabilities other than goodwill is the implied fair value of that goodwill. The amount of impairment loss is equal to the excess of the book value of the goodwill over the implied fair value of that goodwill.

The Company evaluates indefinite‑lived intangible assets using a qualitative assessment to determine whether it is more likely than not that the fair value of the indefinite‑lived intangible asset is less than its carrying amount. If the qualitative assessment indicates that the fair value may be less than its carrying amount, the fair value of the intangible asset is estimated and compared to its carrying value to determine if impairment exists. Otherwise, the Company concludes that there is no impairment and does not perform the quantitative test. When the qualitative assessment is not utilized and a quantitative test is performed, the Company estimates the fair value of these intangible assets using the relief‑from‑royalty method, which requires assumptions related to royalty rates that the owner would otherwise be willing to pay to use the asset, as well as projected revenues from the Company’s long-range plan. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives and reviewed for impairment when impairment indicators are present.

Long‑Lived Assets

Long‑lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Revenue Recognition

Revenue relates to services provided typically under annually renewable contracts, primarily summarizing and benchmarking hospital patient experience surveys and quality improvement services. For annual service contracts, revenue is recognized on a ratable basis over the life of the contract. The contracts are generally cancelable on short or no notice by the customer without penalty. The Company offers a variety of billing arrangements to its customers. Any amounts billed in excess of the revenue recognized result in deferred revenue. The Company recognizes revenue for services that have been earned but not billed. These unbilled amounts are recorded in other receivables on the consolidated balance sheets.

Sales and Marketing

Sales and marketing expenses consist primarily of employee‑related expenses including salaries, benefits, commissions, employment taxes, severance and equity‑based compensation costs for employees engaged in sales, sales support, business development and marketing. Sales and marketing expenses also include operating expenses for marketing programs, trade shows and public relations costs. Sales and marketing expenses are expensed as incurred and are included in general and administrative expenses.

Equity‑Based Compensation

Prior to the IPO, the Parent adopted an equity‑based compensation plan, or the Plan, which authorized the granting of various equity awards of preferred units, Class A common units, Class A‑1 common units, Class B common units, and Class C common units of the Parent to the Company’s employees and directors. The fair value of the awards of the Parent was reflected as expense on the accounts of the Company because the recipients were employees of the Company. On an annual basis, the Company determined the fair value of each class of its Parent’s equity units using an enterprise value allocation methodology. In order to determine the enterprise value, the Company used a variety of widely accepted valuation techniques which considered a number of factors such as its financial performance, the values of comparable companies and the lack of marketability of the Parent’s equity instruments. Significant assumptions included the expected term in which the units would be realized; a risk‑free interest rate equal to the U.S. federal treasury bond rate consistent with the term assumption; expected dividend yield, for which there was none; and expected volatility based on the historical data of equity instruments of comparable companies. The Company classified immature awards as liabilities due to the Parent’s right to repurchase the awards from the employee and the Parent’s history of exercising such rights. The Company funded the Parent’s repurchase obligations as the Parent was dependent upon the Company to meet its obligations. The Parent’s repurchase right permitted an employee to avoid the risks and rewards normally associated with equity ownership. The Company recorded compensation expense as units vested based upon the fair value of the respective award and adjusted the accumulated immature awards to fair value in cost of revenue and general and administrative expenses in the consolidated statement of operations.

The Company accounts for equity-based compensation, primarily consisting of restricted stock, based on the fair value of the award at grant date, which is typically the closing stock price, and recognizes compensation expense over the requisite service period.

Income Taxes

The Company accounts for income taxes using the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company expenses any penalties or interest associated with tax obligations as general and administrative expense.

Reclassifications

Certain amounts in the prior periods have been reclassified to conform to the current period financial statement presentation. These reclassifications have no effect on previously reported net income, assets or earnings per share.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606)”. This ASU 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. In August 2015, the FASB deferred the effective date by one year to annual and interim reporting periods beginning after December 15, 2017. The FASB is permitting early adoption of the standard, but not until annual and interim reporting periods beginning after December 15, 2016, the original effective date. An entity may choose to adopt this ASU either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the standard. The Company is currently in the process of evaluating the impact that this new guidance will have on its consolidated financial statements and its method of adoption.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. In addition, this update changes the accounting for software licenses to be consistent with other licenses of intangible assets. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. An entity may choose to adopt this ASU either retrospectively or prospectively to all arrangements entered into or materially modified after the effective date. The Company will adopt this standard in the first quarter of 2016 on a prospective basis. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015‑03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU 2015-03 during the year ended December 31, 2015 and prior period amounts have been reclassified to conform to the current period presentation. As of December 31, 2014, debt issuance costs of $977,000 were reclassified from deferred financing fees, net to long-term debt, less current portion in the consolidated balance sheet. The adoption of ASU 2015-03 did not impact the Company’s consolidated financial position, results of operations or cash flows.

In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”. This ASU added an SEC paragraph addressing the presentation of debt issuance costs related to line-of-credit arrangements since ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff does not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted ASU 2015-15 during the year ended December 31, 2015. There were no adjustments to the presentation of debt issuance costs relating to the line-of-credit arrangement and no impact on the Company’s financial position, results of operations or cash flows upon adoption of the new standard.

In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. This standard is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company will adopt this standard in the first quarter of 2016 on a prospective basis. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This standard is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company adopted ASU 2015-17 during the year ended December 31, 2015 and prior period amounts were reclassified to conform to the current period presentation. As of December 31, 2014 and 2013, deferred income tax liabilities of $712,000 and $1.6 million, respectively, were reclassified from current to noncurrent on the consolidated balance sheet. The adoption of ASU 2015-17 did not impact the Company’s consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued ASU 2016-02, “Leases”. This ASU requires that a lessee record an operating lease in the balance sheet with a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. This standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Adoption of this standard will be on a modified retrospective approach, which includes a number of optional practical expedients that the Company may elect to apply. The Company is currently in the process of evaluating the impact that this new guidance will have on its consolidated financial statements and its method of adoption.