Note 2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

Subsequent to the Restructuring, the financial statements and notes to financial statements presented herein include the consolidated accounts of WOW and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company operates as one operating segment. Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on the Company’s previously reported results of operations, financial position, or cash flows.

Certain employees of WOW participated in equity plans administered by the Company’s former Parent. Because the management units from the equity plan were issued from the former Parent’s ownership structure, the management units’ value directly correlated to the results of WOW, as the primary asset of the former Parent’s investment in WOW. The management units for the equity plan have been “pushed down” to the Company, as the management units had been utilized as equity-based compensation for WOW management. Immediately prior to the Company’s IPO, these management units were cancelled.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”); however, in our opinion, the disclosures made are adequate to make the information presented not misleading. The year-end consolidated balance sheet was derived from audited financial statements. In the opinion of management, all normally recurring adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results expected for the full year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the 2017 Annual Report filed with the SEC on March 14, 2018.

Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP. These accounting principles require management to make assumptions and estimates that affect the reported amounts and disclosures of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts and disclosures of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that it believes are reasonable under the circumstances. To the extent there are differences between those estimates and actual results, the unaudited condensed consolidated financial statements may be materially affected.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. There have been further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018. The amended guidance is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective adoption, with early adoption permitted. The Company will adopt this guidance beginning with its first quarter ending March 31, 2019. The Company is in the process of evaluating the impact of the new standard on its statement of financial position, results of operations and cash flows.

Recently Adopted Accounting Pronouncements

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). ASC 606 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity is required to follow five steps which are comprised of (a) identifying the contract(s) with a customer; (b) identifying the performance obligations in the contract; (c) determining the transaction price; (d) allocating the transaction price to the performance obligations in the contract and (e) recognizing revenue when (or as) the entity satisfies a performance obligation.

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective transition method and recorded the cumulative effect to the Company’s opening accumulated deficit of $9.1 million, net of tax, representing:

(i)

the recognition of a contract liability associated with “open” or “non-completed” month-to-month and fixed term service contracts containing fees for installation related activities,

(ii)

the recognition of an asset for costs of obtaining contracts with customers, associated with “open” or “non-completed” month-to-month and fixed term service contracts, and

(iii)

the income tax impacts of items (i) and (ii) above.

A completed contract is defined in ASC 606 as a contract for which the Company has recognized all or substantially all of the revenue under the previous revenue recognition rules. In addition to applying the new revenue recognition rules under ASC 606 only to open or non-completed contracts, the Company has elected to apply the practical expedient related to contract modifications and have not separately evaluated the effects of contract modifications prior to January 1, 2018 in determining the adjustment to the Company’s opening accumulated deficit.

Prior to the adoption of ASC 606, the Company recognized revenue related to installation activities upfront to the extent of direct selling costs, which generally resulted in recognition of revenue when the installation related activities had been provided to the customer. Under ASC 606, the majority of the Company’s installation related activities are not considered to be separate performance obligations and non-refundable upfront fees related to installations are assessed to determine whether they provide the customer with a material right. Following the adoption of ASC 606, the Company began recognizing upfront fees for installation related activities as revenue (i) over the period which the customer is expected to benefit from the ability to avoid paying an additional fee upon renewal for month-to-month residential subscription service contracts and (ii) over the term of the contract for business subscription service contracts. In addition, the Company began recognizing an asset for costs associated with obtaining contracts with customers, including sales commissions, and amortizing these costs over the expected period of benefit.

The following tables summarize the impacts of adopting ASC 606 on the Company’s condensed consolidated balance sheet and statements of operations as of and for the three and six months ended June 30, 2018.

Condensed Consolidated Balance Sheet


	As of June 30, 2018
					Without
					adoption of
	As reported		Adjustments		Topic 606
	(in millions)
Assets
Current assets:
Prepaid expenses and other	$	17.7	$	(3.8)	$	13.9
Total current assets		113.5		(3.8)		109.7
Other noncurrent assets		28.1		(15.0)		13.1
Total assets	$	2,196.8	$	(18.8)	$	2,178.0
Liabilities and Stockholders’ Deficit
Current liabilities:
Current portion of unearned service revenue	$	46.2	$	(3.6)	$	42.6
Total current liabilities		209.2		(3.6)		205.6
Deferred income taxes, net		168.8		(0.2)		168.6
Other noncurrent liabilities		8.4		(0.5)		7.9
Total liabilities		2,619.2		(4.3)		2,614.9
Accumulated deficit		(668.8)		(14.5)		(683.3)
Total stockholders’ deficit		(422.4)		(14.5)		(436.9)
Total liabilities and stockholders’ deficit	$	2,196.8	$	(18.8)	$	2,178.0

Condensed Consolidated Statements of Operations


	Three months ended June 30, 2018						Six months ended June 30, 2018
					Without						Without
					adoption of						adoption of
	As reported		Adjustments		Topic 606		As reported		Adjustments		Topic 606
	(in millions)
Revenue	$	291.3	$	0.1	$	291.4	$	576.8	$	2.0	$	578.8
Costs and expenses:
Selling, general and administrative		39.7		4.0		43.7		79.4		7.4		86.8
		243.4		4.0		247.4		743.7		7.4		751.1
Income (loss) from operations		47.9		(3.9)		44.0		(166.9)		(5.4)		(172.3)
Income (loss) before provision for income taxes		16.4		(3.9)		12.5		(227.5)		(5.4)		(232.9)
Net income (loss)	$	25.2	$	(3.9)	$	21.3	$	(177.5)	$	(5.4)	$	(182.9)

ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”), which changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 eliminates the concept of separately recognizing periodic hedge ineffectiveness for cash flow and net investment hedges. ASU 2017-12 is effective for public companies for fiscal years beginning after December 15, 2018; however, the Company elected to early adopt this ASU in the second quarter of 2018 in conjunction with entering into an interest rate derivative instrument. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.

ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company early adopted this standard in the fourth quarter of 2017 in conjunction with its annual goodwill impairment assessment.

ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory

In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 eliminates the current prohibition on the recognition of the income tax effects on the transfer of assets among subsidiaries. After adoption of this ASU, the income tax effects associated with these transfers, except for the transfer of inventory, will be recognized in the period the asset is transferred versus the current deferral and recognition upon either the sale of the asset to a third party or the remaining useful life of the asset. The standard became effective for the Company beginning January 1, 2018, and requires any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings under a modified retrospective approach. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.

ASU 2016-15, Statement of Cash Flows (Topic 230)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”), making changes to the classification of certain cash receipts and cash payments in order to reduce diversity in presentation. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The update addresses eight specific cash flow issues, of which only one is applicable to the Company's financial statements. The adoption of this pronouncement did not have a material impact on the Company’s financial position, results of operations or cash flows.