Full Press Release Details
WageWorks, Inc. and Subsidiaries
Index to Consolidated Financial Statements
| Page | ||
| Reports of Independent Registered Public Accounting Firms | 1 | |
| Consolidated Balance Sheets | 6 | |
| Consolidated Statements of Income | 7 | |
| Consolidated Statements of Comprehensive Income | 8 | |
| Consolidated Statements of Stockholders Equity | 9 | |
| Consolidated Statements of Cash Flows | 10 | |
| Notes to Consolidated Financial Statements | 12 |
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
San Mateo, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of WageWorks, Inc. (the Company ) and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the consolidated financial statements ). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ( PCAOB ), the Company s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) and our report dated May 29, 2019 expressed an adverse opinion thereon.
Change in Accounting Principles
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company has changed its accounting method for recognizing revenue from contracts with customers in fiscal year 2018 due to the adoption of Topic 606, Revenue from Contracts with Customers.
As discussed in Notes 1 and 14 to the consolidated financial statements, the Company has changed its accounting method for recording excess tax benefits from employee share-based payments in fiscal year 2017 due to the adoption of ASU 2016-09, Improvement to Employee Share-Based Payment Accounting.
These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on the Company s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company s auditor since 2018.
San Jose, California
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
San Mateo, California
Opinion on Internal Control over Financial Reporting
We have audited WageWorks, Inc. s (the Company s ) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria ). In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We do not express an opinion or any other form of assurance on management s statements referring to any corrective actions taken by the Company after the date of management s assessment.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ( PCAOB ), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the financial statements ) and our report dated May 29, 2019 expressed an unqualified opinion thereon.
The Company s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management s Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company s annual or interim financial statements will not be prevented or detected on a timely basis. Several material weaknesses regarding management s failure to design and maintain controls have been identified and described in management s assessment. The material weaknesses related to 1) the control environment, due to material weaknesses related to a) an inadequate or ineffective senior accounting leadership, b) an insufficient complement of qualified resources with an appropriate level of knowledge, experience and training important to the Company s financial reporting requirements, c) inadequate mechanisms and oversight to ensure accountability for the performance of controls; 2) risk assessment, as the Company did not have an adequate assessment of changes in risks by management that could significantly impact internal control over financial reporting and did not effectively design controls in response to the risks of material misstatement; 3) control activities and information and communication, specifically between the accounting department and other operating departments necessary to support the proper functioning of internal controls; and 4) monitoring controls, as the Company did not maintain an internal audit function sufficient to monitor control activities. The control environment material weaknesses contributed to additional material weaknesses in the control activities of the Company as the Company did not design and maintain effective controls over a) accounting close and financial reporting; b) contract to cash process, c) risk assessment and management of change, as well as the review, approval, and documentation related to the application of generally accepted accounting principles, d) review of new, unusual or significant transactions and contracts, e) manual reconciliations of high-volume standard transactions, and f) information technology general controls (ITGCs) in the areas of logical access and change management. The risk assessment material weakness contributed to an additional material weakness as the
Company did not design effective controls over certain business processes, including controls over the preparation, analysis, and review of closing adjustments required to assess the appropriateness of certain account balances at period end.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect our report dated May 29, 2019 on those consolidated financial statements.
Definition and Limitations of Internal Control over Financial Reporting
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. A company s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
San Jose, California
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Stockholders
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, stockholders equity, and cash flows of WageWorks, Inc. (the Company ) and subsidiaries for the year ended December 31, 2016, and the related notes (collectively referred to as the consolidated financial statements ). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of operations of the Company and subsidiaries and their cash flows for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on the Company s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ( PCAOB ) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. We were not engaged to perform an audit of the Company s internal control over financial reporting. As part of our audit, we were required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Macias, Gini & O Connell, LLP
We have served as the Company s auditor since 2018.
Newport Beach, California
Consolidated Balance Sheets
(In thousands, except per share amount)
| December 31, 2018 | December 31, 2017 | ||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 898,426 | $ | 779,345 | |||
| Restricted cash | 333 | 332 | |||||
| Short-term investments | 222,205 | 195,534 | |||||
| Receivables, net | 101,297 | 107,547 | |||||
| Prepaid expenses and other current assets | 23,662 | 29,271 | |||||
| Total current assets | 1,245,923 | 1,112,029 | |||||
| Property and equipment, net | 76,920 | 68,742 | |||||
| Goodwill | 297,409 | 297,409 | |||||
| Acquired intangible assets, net | 130,095 | 155,369 | |||||
| Deferred tax assets, net | 1,482 | 10,143 | |||||
| Other assets | 33,324 | 8,291 | |||||
| Total assets | $ | 1,785,153 | $ | 1,651,983 | |||
| Liabilities and Stockholders Equity | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses | $ | 99,854 | $ | 89,977 | |||
| Customer obligations | 762,100 | 695,368 | |||||
| Other current liabilities | 1,757 | 628 | |||||
| Total current liabilities | 863,711 | 785,973 | |||||
| Long-term debt, net of financing costs | 244,693 | 244,915 | |||||
| Other non-current liabilities | 11,608 | 8,845 | |||||
| Total liabilities | 1,120,012 | 1,039,733 | |||||
| Commitments and contingencies (Note 15) | |||||||
| Stockholders Equity: | |||||||
| Common stock, $0.001 par value (authorized 1,000,000 shares; 40,333 shares issued and 39,853 shares outstanding at December 31, 2018; 40,251 shares issued and 39,771 shares outstanding at December 31, 2017) | 41 | 41 | |||||
| Additional paid-in capital | 582,521 | 562,131 | |||||
| Treasury stock at cost (480 shares at December 31, 2018 and 2017) | (22,309 | ) | (22,309 | ) | |||
| Accumulated other comprehensive loss | (754 | ) | (354 | ) | |||
| Retained earnings | 105,642 | 72,741 | |||||
| Total stockholders equity | 665,141 | 612,250 | |||||
| Total liabilities and stockholders equity | $ | 1,785,153 | $ | 1,651,983 |
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Statements of Income
(In thousands, except per share amounts)
| Year Ended December 31, 2018 | ||||||||||
| 2018 | 2017 | 2016 | ||||||||
| Revenues: | ||||||||||
| Healthcare | $ | 274,861 | $ | 274,815 | $ | 195,108 | ||||
| COBRA | 106,161 | 111,607 | 73,765 | |||||||
| Commuter | 75,936 | 72,874 | 70,215 | |||||||
| Other | 15,226 | 16,799 | 16,473 | |||||||
| Total revenues | 472,184 | 476,095 | 355,561 | |||||||
| Operating expenses: | ||||||||||
| Cost of revenues (excluding amortization of internal use software) | 154,804 | 173,661 | 129,046 | |||||||
| Technology and development | 53,079 | 56,362 | 44,719 | |||||||
| Sales and marketing | 73,092 | 64,111 | 57,083 | |||||||
| General and administrative | 101,577 | 72,150 | 60,324 | |||||||
| Amortization and impairment | 41,456 | 37,890 | 37,175 | |||||||
| Employee termination and other charges | 3,792 | 1,489 | 1,147 | |||||||
| Total operating expenses | 427,800 | 405,663 | 329,494 | |||||||
| Income from operations | 44,384 | 70,432 | 26,067 | |||||||
| Other income (expense): | ||||||||||
| Interest income | 5,849 | 1,147 | 406 | |||||||
| Interest expense | (10,087 | ) | (7,293 | ) | (2,717 | ) | ||||
| Other income (expense), net | (31 | ) | (316 | ) | 1,075 | |||||
| Income before income taxes | 40,115 | 63,970 | 24,831 | |||||||
| Income tax provision | (14,145 | ) | (9,583 | ) | (8,929 | ) | ||||
| Net income | $ | 25,970 | $ | 54,387 | $ | 15,902 | ||||
| Net income per share: | ||||||||||
| Basic | $ | 0.65 | $ | 1.41 | $ | 0.44 | ||||
| Diluted | $ | 0.64 | $ | 1.38 | $ | 0.43 | ||||
| Shares used in computing net income per share: | ||||||||||
| Basic | 39,846 | 38,447 | 36,404 | |||||||
| Diluted | 40,434 | 39,415 | 37,210 |
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Statements of Comprehensive Income
| Year Ended December 31, | ||||||||||
| 2018 | 2017 | 2016 | ||||||||
| Net income | $ | 25,970 | $ | 54,387 | $ | 15,902 | ||||
| Other comprehensive loss, net of tax | ||||||||||
| Net unrealized loss on investments, net of tax | (400 | ) | (354 | ) | ||||||
| Other comprehensive loss, net of tax | (400 | ) | (354 | ) | ||||||
| Total comprehensive income | $ | 25,570 | $ | 54,033 | $ | 15,902 |
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Statements of Stockholders Equity
| Common stock | Additional paid-in | Treasury | Accumulated other comprehensive | Retained earnings (accumulated | Total stockholders | ||||||||||||||||
| Shares | Amount | capital | stock at cost | loss | deficit) | equity | |||||||||||||||
| Balance at Balance at December 31, 2015 | 35,936 | $ | 36 | $ | 343,166 | $ | (5,003 | ) | $ | $ | (1,230 | ) | $ | 336,969 | |||||||
| Exercise of stock options | 926 | 1 | 16,069 | 16,070 | |||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan | 53 | 2,194 | 2,194 | ||||||||||||||||||
| Issuance of restricted stock units, net of shares withheld for employee taxes | 213 | (6,108 | ) | (6,108 | ) | ||||||||||||||||
| Tax benefit from the exercise of stock options | 14,806 | 14,806 | |||||||||||||||||||
| Treasury stock acquired | (226 | ) | (9,371 | ) | (9,371 | ) | |||||||||||||||
| Stock-based compensation | 27,180 | 27,180 | |||||||||||||||||||
| Net income | 15,902 | 15,902 | |||||||||||||||||||
| Balance at December 31, 2016 | 36,902 | $ | 37 | $ | 397,307 | $ | (14,374 | ) | $ | $ | 14,672 | $ | 397,642 | ||||||||
| Exercise of stock options | 810 | 2 | 14,267 | 14,269 | |||||||||||||||||
| Public stock offering, net of issuance costs | 1,955 | 2 | 130,787 | 130,789 | |||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan | 48 | 2,681 | 2,681 | ||||||||||||||||||
| Issuance of restricted stock units, net of shares withheld for employee taxes | 191 | (9,019 | ) | (9,019 | ) | ||||||||||||||||
| Treasury stock acquired | (135 | ) | (7,935 | ) | (7,935 | ) | |||||||||||||||
| Stock-based compensation | 25,649 | 25,649 | |||||||||||||||||||
| Capitalized stock-based compensation | 459 | 459 | |||||||||||||||||||
| Other comprehensive loss, net of tax | (354 | ) | (354 | ) | |||||||||||||||||
| Excess tax benefit cumulative-effect adjustment - adoption ASU 2016-09 | 3,682 | 3,682 | |||||||||||||||||||
| Net income | 54,387 | 54,387 | |||||||||||||||||||
| Balance at December 31, 2017 | 39,771 | $ | 41 | $ | 562,131 | $ | (22,309 | ) | $ | (354 | ) | $ | 72,741 | $ | 612,250 | ||||||
| Exercise of stock options | 54 | 1,395 | 1,395 | ||||||||||||||||||
| Issuance of common stock under Employee Stock Purchase Plan | 18 | 869 | 869 | ||||||||||||||||||
| Issuance of restricted stock units, net of shares withheld for employee taxes | 10 | (281 | ) | (281 | ) | ||||||||||||||||
| Stock-based compensation | 18,088 | 18,088 | |||||||||||||||||||
| Capitalized stock-based compensation | 319 | 319 | |||||||||||||||||||
| Other comprehensive loss, net of tax | (400 | ) | (400 | ) | |||||||||||||||||
| ASC 606 cumulative-effect adjustment (Note 2) | 6,931 | 6,931 | |||||||||||||||||||
| Net income | 25,970 | 25,970 | |||||||||||||||||||
| Balance at December 31, 2018 | 39,853 | $ | 41 | $ | 582,521 | $ | (22,309 | ) | $ | (754 | ) | $ | 105,642 | $ | 665,141 |
See accompanying Notes to the Consolidated Financial Statements.
Consolidated Statements of Cash Flows
| Year Ended December 31, | ||||||||||
| 2018 | 2017 | 2016 | ||||||||
| Cash flows from operating activities: | ||||||||||
| Net income | $ | 25,970 | $ | 54,387 | $ | 15,902 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation | 14,011 | 11,384 | 8,696 | |||||||
| Amortization and impairment | 41,456 | 37,889 | 37,175 | |||||||
| Amortization of debt issuance costs | 578 | 418 | 159 | |||||||
| Amortization of contract costs | 2,844 | |||||||||
| Provision for doubtful accounts | 1,034 | 558 | 947 | |||||||
| Stock-based compensation expense | 18,088 | 25,649 | 27,180 | |||||||
| Loss on disposal of fixed assets | 306 | 123 | 273 | |||||||
| Accrued interest on debt securities | (493 | ) | (237 | ) | ||||||
| Deferred taxes | 6,408 | 9,336 | (5,853 | ) | ||||||
| Excess tax benefit related to stock-based compensation arrangements | (14,806 | ) | ||||||||
| Changes in operating assets and liabilities: | ||||||||||
| Accounts receivable | 5,216 | (14,692 | ) | (22,088 | ) | |||||
| Prepaid expenses and other current assets | 5,609 | (9,514 | ) | 7,901 | ||||||
| Other assets | (18,558 | ) | (3,145 | ) | (699 | ) | ||||
| Accounts payable and accrued expenses | 8,276 | 17,387 | 9,488 | |||||||
| Customer obligations | 66,732 | 86,988 | 207,559 | |||||||
| Other liabilities | 1,178 | 1,278 | (2,892 | ) | ||||||
| Net cash provided by operating activities | 178,655 | 217,809 | 268,942 | |||||||
| Cash flows from investing activities: | ||||||||||
| Purchases of property and equipment | (33,535 | ) | (36,787 | ) | (28,319 | ) | ||||
| Purchases of short-term investments | (157,672 | ) | (208,656 | ) | ||||||
| Proceeds from sales of short-term investments | 16,049 | 5,398 | ||||||||
| Proceeds from maturities of short-term investments | 114,910 | 7,500 | ||||||||
| Cash consideration for business acquisitions, net of cash acquired | (233,965 | ) | ||||||||
| Purchases of intangible assets | (209 | ) | (4,658 | ) | (21,120 | ) | ||||
| Net cash used in investing activities | (60,457 | ) | (237,203 | ) | (283,404 | ) | ||||
| Cash flows from financing activities: | ||||||||||
| Proceeds from long-term debt | 169,900 | |||||||||
| Proceeds from public stock offering | 135,387 | |||||||||
| Payment of underwriting discounts, commissions and other costs associate with the public offering | (4,598 | ) | ||||||||
| Proceeds from exercise of common stock options | 1,395 | 14,267 | 16,070 | |||||||
| Proceeds from issuance of common stock under Employee Stock Purchase Plan | 869 | 2,681 | 2,194 | |||||||
| Payment of debt issuance / amendment costs | (800 | ) | (1,851 | ) | (207 | ) | ||||
| Payments of debt principal | (2,500 | ) | ||||||||
| Payment of contingent consideration | (750 | ) | ||||||||
| Payment for treasury stock acquired | (7,935 | ) | (9,371 | ) | ||||||
| Payment of capital lease obligations | (299 | ) | (302 | ) | (381 | ) | ||||
| Taxes paid related to net share settlement of stock-based compensation arrangements | (281 | ) | (9,019 | ) | (6,108 | ) | ||||
| Excess tax benefit related to stock-based compensation arrangements | 14,806 | |||||||||
| Net cash provided by financing activities | 884 | 126,130 | 186,153 | |||||||
| Net increase in cash and cash equivalents, unrestricted and restricted | 119,082 | 106,736 | 171,691 | |||||||
| Cash and cash equivalents, unrestricted and restricted, at beginning of the year | 779,677 | 672,941 | 501,250 | |||||||
| Cash and cash equivalents, unrestricted and restricted, at end of the year | $ | 898,759 | $ | 779,677 | $ | 672,941 | ||||
| Supplemental cash flow disclosure: | ||||||||||
| Cash paid during the year for: | ||||||||||
| Interest | $ | 8,859 | $ | 6,462 | $ | 1,825 | ||||
| Taxes | $ | 2,412 | $ | 2,958 | $ | 5,534 | ||||
| Noncash financing and investing activities: | ||||||||||
| Property and equipment, accrued but not paid | $ | 4,472 | $ | 2,325 | $ | 2,412 | ||||
| Property and equipment purchased under capital lease obligations | $ | 142 | $ | 263 | $ | 835 | ||||
| Capitalized stock-based compensation | $ | 319 | $ | 459 | $ |
See accompanying Notes to the Consolidated Financial Statements.
Notes to Consolidated Financial Statements.
Note 1. Summary of Business and Significant Accounting Policies
WageWorks, Inc., (together with its subsidiaries, WageWorks or the Company ) was incorporated in the state of Delaware in 2000. The Company is a leader in administering Consumer-Directed Benefits ( CDBs ), which empower employees to save money on taxes while also providing corporate tax advantages for employers.
The Company operates as a single reportable segment on an entity level basis, and considers itself to operate under one operating and reporting segment with healthcare, transit and other employer sponsored programs representing a group of similar products lines. The Company believes that it engages in a single business activity and operates in a single economic environment.
Principles of Consolidation
The consolidated financial statements include the accounts of WageWorks, Inc., and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
In preparing the consolidated financial statements and related disclosure in conformity with United States ( U.S. ) generally accepted accounting principles ( GAAP ), including all adjustments as a result of the Company s restatement, and pursuant to the rules and regulations of the Securities and Exchange Commission ( SEC ), the Company must make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to allocation of purchase consideration to acquired assets and liabilities from business combinations, revenue recognition, allowances for doubtful accounts, useful lives for depreciation and amortization, loss contingencies, income taxes, the assumptions used for stock-based compensation including attainment of performance-based awards, the assumptions used for software and web site development cost classification, and recoverability and impairments of goodwill and long-lived assets. Actual results may be materially different from those estimates. In making its estimates, the Company considers the current economic and legislative environment.
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds, stated at cost, as well as commercial paper with an original maturity of less than 90 days as further described under Marketable Securities below. To the extent the Company s contracts do not provide for any restrictions on the Company s use of cash that it receives from clients, the cash is recorded as cash and cash equivalents.
The majority of the Company s cash and cash equivalents represent funding and pre-funding balances received from customers for which the Company has a corresponding current obligation. In all cases where we have collected cash from a customer but not fulfilled services (primarily the payment of participant healthcare claims and commuter benefits), the Company recognizes a related liability to its customers, classified as customer obligations in the accompanying consolidated balance sheets.
Restricted cash represents cash used to collateralize standby letters of credit which were issued to the benefit of a third party to secure a contract with the Company.
Notes to Consolidated Financial Statements.
The following table summarizes the Company s cash and cash equivalents at December 31, 2018 and 2017 (in thousands):
| December 31, 2018 | December 31, 2017 | ||||||
| Cash and cash equivalents, unrestricted | $ | 898,426 | $ | 779,345 | |||
| Cash and cash equivalents, restricted | 333 | 332 | |||||
| Total unrestricted and restricted cash and cash equivalents | $ | 898,759 | $ | 779,677 |
Marketable Securities
The Company determines the classification of its investments in marketable securities at the time of purchase and accounts for them as available-for-sale. Marketable securities of highly liquid investments with stated maturities of three months or less when purchased are classified as cash equivalents and those with stated maturities of between three months and one year as short-term investments. Marketable securities with maturities beyond twelve months are also included in short-term investments within current assets as the Company intends for its investments to support current operations and other strategic initiatives. These securities are reported at fair value, which includes the accrued interest of interest-bearing securities. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive loss as a component of stockholders equity, except for unrealized losses determined to be other-than-temporary which will be recorded within other income (expense). Realized gains and losses on the sale of marketable securities are recorded in other income (expense).
Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and we consider counterparty credit risk in our assessment of fair value. Carrying amounts of financial instruments, including cash equivalents, accounts receivable, accounts payable, and accrued liabilities, approximate their fair values as of the balance sheet dates because of their short maturities. The carrying value of the Company s debt under the credit facility is estimated to approximate fair value as the variable interest rate approximates the market rate for debt securities with similar terms and risk characteristics. The determination of the fair value of the Company s marketable securities is further explained in Note 5 Investments and Fair Value Measurements.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Notes to Consolidated Financial Statements.
Receivables represent both trade receivables from customers in relation to fees for the Company s services and unpaid amounts for benefit services provided by third-party vendors, such as transit agencies and healthcare providers for which the Company records a receivable for funding until the payment is received from the customer and a corresponding customer obligations liability until the Company disburses the balances to the vendors. The Company provides for an allowance for doubtful accounts by specifically identifying accounts with a risk of collectability and providing an estimate of the loss exposure. The Company reviews its allowance for doubtful accounts on a quarterly basis. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Write-offs for 2018, 2017 and 2016 were not significant.
The Company offsets on a customer by customer basis unpaid amounts for benefit services and customer obligation balances for financial reporting presentation. Additionally, the Company offsets outstanding trade and non-trade receivables, including any debit or credit memos, against any prefund balances after plan year close or upon termination of services both based on the completion of a full reconciliation with the customer.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation on computer and equipment and furniture and fixtures is calculated on a straight-line basis over the estimated useful lives of those assets, ranging from three to five years. Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful life or the lease term. When events or circumstances suggest an asset s life is different than initially estimated, management reassesses the useful life of the asset and recognizes future depreciation prospectively over the revised life.
When assets are retired or otherwise disposed of, the cost and related accumulated depreciation / amortization are removed from their respective accounts, and any gain or loss on such sale or disposal is reflected in operating expenses.
Maintenance and repairs are expensed as incurred. Expenditures that substantially increase an asset s useful life are capitalized.
Software and Website Development Costs
Costs incurred to develop software for internal use are capitalized and amortized over the technology s estimated useful life, generally four years. When events or circumstances suggest an asset s life is different than initially estimated, management reassesses the useful life of the asset and recognizes future amortization prospectively over the revised life. Costs incurred related to the planning and post implementation phases of development are expensed as incurred. Costs associated with the platform content or the repair or maintenance, including transfer of data between existing platforms are expensed as incurred.
Impairment of Long-lived Assets
The Company reviews long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying amounts of such assets may not be recoverable. An impairment of long-lived assets exists when the carrying amount of a long-lived asset group, exceeds its fair value. Such impairment arises in circumstances when such assets are assessed and determined to have no continuing or future benefit. Impairment losses are recorded when the carrying amount of the impaired asset group is not recoverable. Recoverability is determined by comparing the carrying amount of the asset or asset group to the undiscounted cash flows which are expected to be generated from its use. If the carrying amount of the asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record impairment losses related to long-lived assets in the years ended December 31,2018 and 2017. The company recorded impairment of $3.7 million during the year ended December 31, 2016. See Note 7 Property and Equipment for more details.
Acquisitions, Goodwill and Intangible Assets
The cost of an acquisition is allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values at the date of acquisition. Goodwill represents the excess cost over the fair value of net assets acquired in the acquisition and is not amortized, but rather is tested for impairment.
Notes to Consolidated Financial Statements.
Definite lived intangible assets, consisting of client/broker contracts and relationships, trade names, technology, noncompete agreements and favorable lease arrangements, are stated at cost less accumulated amortization. All definite lived intangible assets are amortized on a straight-line basis over their estimated remaining economic lives, ranging generally from one to ten years. Amortization expense related to these intangible assets is included in amortization and impairment expense on the consolidated statements of income.
The Company performs a goodwill impairment test annually, and more frequently if events and circumstances indicate that the asset might be impaired. In 2018, we changed the date of our annual impairment test from December 31 to October 1. The change was made to more closely align the impairment testing date with our long-range planning and forecasting process, and does not represent a material change to a method of applying an accounting principle. The change in accounting principle related to changing our annual impairment testing date did not delay, accelerate, or avoid an impairment charge.
The following are examples of triggering events that could indicate that the fair value of a reporting unit has fallen below the unit s carrying amount:
A significant adverse change in legal factors or in the business climate