The Company prepares its interim unaudited condensed consolidated financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial condition and results of operations. Operating results for the three months and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission. A complete listing of the Company’s significant accounting policies is included in the 2017 Annual Report on Form 10-K.

All dollar amounts, except per share data in the text and tables herein, are stated in thousands unless otherwise indicated.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly‑owned subsidiaries. All intercompany transactions and balances have been eliminated.

The Company evaluates entities in which it invests and investment funds that it sponsors to determine whether the Company has a controlling financial interest in these entities and is required to consolidate them. A controlling financial interest generally exists if 1) the Company holds greater than 50% voting interest in entities controlled through voting interests or if 2) the Company has the ability to direct significant activities of a fund not controlled through voting interests (a variable interest entity or VIE) and the obligation to absorb losses of and/or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company’s involvement with non‑consolidated sponsored investment funds that are considered VIEs include providing investment advisory services, fund administration, distribution and compliance services and/or holding a minority interest. At June 30, 2018 and December 31, 2017, the Company’s investments in and maximum risk of loss related to unconsolidated sponsored VIE investment funds totaled $13.0 million and $10.9 million respectively which are included in investments on the unaudited condensed consolidated balance sheets. The Company has not provided financial support to these entities outside the ordinary course of business, which includes assuming operating expenses of funds for competitive or contractual reasons through fee waivers and fund expense reimbursements. The Company does not consolidate the sponsored investment funds in which it had an equity investment as it holds a minority interest, does not direct significant activities of these funds and does not have the right to receive benefits nor the obligation to absorb losses that could potentially be significant to these funds.

During the period ended June 30, 2018, the Company’s involvement with other non‑consolidated VIEs included an equity method investment and put and call option arrangements with Cerebellum Capital, LLC (“Cerebellum Capital”). The Company’s maximum risk of loss associated with Cerebellum Capital totaled $7.0 million and $6.0 million at June 30, 2018 and December 31, 2017, respectively, which includes the $7.0 million investment at June 30, 2018 and as of December 31, 2017, $5.0 million investment and $1.0 million exposure under the put option for the purchase of additional equity. See Note 11.

The Company applies the equity method of accounting to investments where it does not hold a controlling equity interest but has the ability to exercise significant influence over operating and financial matters. In the event that management identifies an other than temporary decline in the estimated fair value of an equity method investment to an amount below its carrying value, the investment is written down to its estimated fair value.

Restructuring and Integration Costs

In connection with business combinations, asset purchases and changes in business strategy, the Company incurs costs integrating investment platforms, products and personnel into existing systems, processes and service provider arrangements and restructuring the business to capture operating expense synergies. These costs include severance‑related expenses related to one‑time benefit arrangements and contract termination costs.

Contract termination liabilities are recorded for contract termination costs when the Company terminates a contract or stops using the product or service covered by the contract. Contract termination liabilities are recognized and measured at fair value. Contract termination costs are recorded in restructuring and integration costs on the unaudited condensed consolidated statements of operations. A rollforward of restructuring and integration liabilities for the three months and six months ended June 30, 2018 and 2017 appears below.

 

Debt Modification

Gains and losses on debt modifications that are considered extinguishments are recognized in current earnings. Debt modifications that are not considered extinguishments are accounted for prospectively through yield adjustments, based on the revised terms. Legal fees and other costs incurred with third parties that are directly related to debt modifications are expensed as incurred and included in general and administrative expense on the unaudited condensed consolidated statements of operations. The analysis as to whether a modification of debt is an extinguishment or modification is performed on a creditor‑by‑creditor basis.

Adoption of New Accounting Standards

ASU 2016-09 was issued by the FASB in March 2016 to reduce the cost and complexity of reporting on employee share based payments and to address the tax reporting, forfeitures, and expected term related to equity awards. ASU 2016-09 eliminates the requirement that excess tax benefits be realized through a reduction in income taxes payable before the benefits can be recognized.

The Company adopted ASU 2016-09 on January 1, 2018 using a modified retrospective transition method. A one-time credit to retained earnings of $1.3 million was recorded as the cumulative-effect adjustment for excess tax benefits not previously recognized and to adjust compensation cost on equity awards outstanding at January 1, 2018 as if the Company had previously accounted for forfeitures as they occurred.

With the adoption of ASU 2016-09, the Company now recognizes the income tax effects of stock-based compensation in income tax expense, which may cause significant fluctuations in the reported amount of income tax expense in the unaudited condensed consolidated statements of operations and the effective tax rate as restricted shares vest and stock options are exercised. In addition, upon adoption of ASU 2016-09, the Company made the election to account for forfeitures of equity awards as they occur. The Company elected to adopt the amendment related to the cash flow presentation of excess tax benefits prospectively and prior periods have not been adjusted.

ASU 2017-09 was issued by the FASB in May 2017 to clarify when changes in the terms or conditions of a share-based payment award qualify for accounting treatment as a modification. The Company adopted ASU 2017-09 on January 1, 2018 and will apply the new guidance prospectively to awards modified after January 1, 2018. The adoption had no significant impact on the Company’s unaudited condensed consolidated financial statements for the six months ended June 30, 2018.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers, to clarify the principles of recognizing revenue from contracts with customers and to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards. This ASU will supersede existing revenue recognition guidance and require the following steps when recognizing revenue under ASU 2014‑09: 1) identify the contract with the customer 2) identify performance obligations in the contract 3) determine the transaction price 4) allocate the transaction price to the performance obligations in the contract and 5) recognize revenue when or as the entity satisfies the performance obligation. This ASU also requires additional disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. An entity may apply the new guidance by using one of two methods 1) retrospective application to each prior reporting period presented or 2) a modified retrospective approach, requiring the standard be applied only to the most current period presented, with the cumulative effect of initially applying the standard recognized at the date of initial application. ASU 2014‑09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, for non‑emerging growth companies, and for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, for the Company.

The Company’s introducing broker-dealer VCA adopted ASU 2014-09 effective January 1, 2018. VCA receives compensation for sales and sales-related services promised under distribution contracts with the Victory Funds. There are no direct costs incurred to obtain these contracts. Direct costs incurred to fulfill services under the distribution contracts include sales commissions paid to third party dealers for the sale of Class C Shares. There was no change to how VCA records revenue from contracts with customers and accounts for costs incurred to fulfill services under distribution contracts from adoption of ASU 2014-09.

VCA’s distribution fee revenue totaled $9.6 million and $11.0 million for the three months ended June 30, 2018 and 2017, respectively, and $19.7 million and $22.2 million for the six months ended June 30, 2018 and 2017, respectively, and is recorded in fund administration and distribution fees on the unaudited condensed consolidated statements of operations.

The Company is currently evaluating the rest of its revenue contracts, the presentation of certain revenue-related costs on a net versus gross basis, the transition method that will be used to adopt ASU 2014-09 and the related disclosures of revenue.

In early 2016, the FASB issued ASU 2016‑01. This update requires equity securities to be measured at fair value and changes in the fair value of equity securities to be recognized in net income. The update is effective for fiscal years beginning after December 15, 2017 for non‑emerging growth companies and for fiscal years beginning after December 31, 2018 for the Company. Management does not expect the adoption of the standard to have a significant impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016‑02 on leases. The new guidance requires lessees to record most leases on their balance sheets. Expense will be recognized in the income statement in a manner that is similar to today’s accounting. The update is effective for fiscal years beginning after December 15, 2018 for non‑emerging growth companies and for fiscal years beginning after December 15, 2019 for the Company. The Company is in the process of analyzing how the new rules will impact financial reporting.

In August 2016, the FASB issued ASU 2016‑15. The update provides guidance on certain cash flow statement classifications that were previously unclear or lacked specific guidance. The classifications addressed in the update include debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investees. The update is effective for fiscal years beginning after December 15, 2017 for non‑emerging growth companies and for fiscal years beginning after December 15, 2018 for the Company. The Company is in the process of analyzing how the new rules will impact financial reporting.

In January 2017, the FASB issued ASU 2017-04 simplifying the test for goodwill impairment. The standard eliminates Step 2 from the goodwill impairment test. Under the amended guidance, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss cannot exceed the total amount of goodwill allocated to the reporting unit. The new guidance is effective for the Company’s fiscal year that begins after December 15, 2020 and requires a prospective approach to adoption. Early adoption is permitted for interim or annual goodwill impairment tests. Upon adoption, the new guidance will impact the Company’s consolidated financial statements and related disclosures only in the event there is goodwill impairment.

In February 2018, the FASB issued ASU 2018-02 permitting companies to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. The guidance is effective for the Company’s fiscal year beginning January 1, 2019. Early adoption is permitted. Management does not expect the adoption to have a significant impact on the Company’s consolidated financial statements.

In March 2018, the FASB issued ASU 2018-05 incorporating guidance from SEC Staff Accounting Bulletin (SAB) 118 into Accounting Standards Codification 740 on income taxes. SAB 118 addresses situations where companies are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) in the period of enactment. See Note 6 for more information on the Company’s accounting for the income tax effects of the Tax Act.