bnft-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-36061

 

Benefitfocus, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

46-2346314

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

100 Benefitfocus Way

Charleston, South Carolina 29492

(Address of principal executive offices and zip code)

(843) 849-7476

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:  

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

 

 

 

 

 

 

Smaller reporting company

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 29, 2018, there were approximately 31,960,547 shares of the registrant’s common stock outstanding.

 

 

 

 

 


Benefitfocus, Inc.

Form 10-Q

For the Quarterly Period Ended September 30, 2018

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

3

 

 

Unaudited Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2018 and 2017

4

 

 

Unaudited Consolidated Statement of Changes in Stockholders' Deficit for the Nine Months Ended September 30, 2018  

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

6

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

17

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

 

 

ITEM 4. CONTROLS AND PROCEDURES

30

 

 

PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

31

 

 

ITEM 6. EXHIBITS

48

 

 

SIGNATURES

49

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Benefitfocus, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

As of

September 30,

2018

 

 

As of

December 31,

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,065

 

 

$

55,335

 

Accounts receivable, net

 

 

27,624

 

 

 

30,091

 

Contract, prepaid and other current assets

 

 

10,780

 

 

 

15,859

 

Total current assets

 

 

89,469

 

 

 

101,285

 

Property and equipment, net

 

 

70,208

 

 

 

72,681

 

Intangible assets, net

 

 

 

 

 

150

 

Goodwill

 

 

1,634

 

 

 

1,634

 

Deferred contract costs and other non-current assets

 

 

13,838

 

 

 

16,253

 

Total assets

 

$

175,149

 

 

$

192,003

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,868

 

 

$

4,260

 

Accrued expenses

 

 

10,582

 

 

 

9,110

 

Accrued compensation and benefits

 

 

13,182

 

 

 

14,250

 

Deferred revenue, current portion

 

 

37,711

 

 

 

43,804

 

Revolving line of credit, current portion

 

 

30,000

 

 

 

24,000

 

Financing and capital lease obligations, current portion

 

 

4,115

 

 

 

3,423

 

Total current liabilities

 

 

102,458

 

 

 

98,847

 

Deferred revenue, net of current portion

 

 

9,873

 

 

 

11,223

 

Revolving line of credit, net of current portion

 

 

39,246

 

 

 

32,246

 

Financing and capital lease obligations, net of current portion

 

 

56,664

 

 

 

55,597

 

Other non-current liabilities

 

 

2,480

 

 

 

2,809

 

Total liabilities

 

 

210,721

 

 

 

200,722

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Preferred stock, par value $0.001, 5,000,000 shares authorized,

   no shares issued and outstanding at September 30, 2018

   and December 31, 2017

 

 

 

 

 

 

Common stock, par value $0.001, 50,000,000 shares authorized,

   31,899,960 and 31,307,989 shares issued and outstanding

   at September 30, 2018 and December 31, 2017, respectively

 

 

32

 

 

 

31

 

Additional paid-in capital

 

 

365,303

 

 

 

352,496

 

Accumulated deficit

 

 

(400,907

)

 

 

(361,246

)

Total stockholders' deficit

 

 

(35,572

)

 

 

(8,719

)

Total liabilities and stockholders' deficit

 

$

175,149

 

 

$

192,003

 

 

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

 

 

3


Benefitfocus, Inc.

Unaudited Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share data)

 

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

 

$

61,006

 

 

$

56,251

 

 

$

183,950

 

 

$

168,963

 

Cost of revenue

 

 

31,740

 

 

 

31,310

 

 

 

93,864

 

 

 

93,208

 

Gross profit

 

 

29,266

 

 

 

24,941

 

 

 

90,086

 

 

 

75,755

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

17,661

 

 

 

16,467

 

 

 

55,978

 

 

 

52,353

 

Research and development

 

 

10,676

 

 

 

12,568

 

 

 

34,827

 

 

 

37,222

 

General and administrative

 

 

9,263

 

 

 

6,853

 

 

 

29,343

 

 

 

20,487

 

Total operating expenses

 

 

37,600

 

 

 

35,888

 

 

 

120,148

 

 

 

110,062

 

Loss from operations

 

 

(8,334

)

 

 

(10,947

)

 

 

(30,062

)

 

 

(34,307

)

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

73

 

 

 

55

 

 

 

199

 

 

 

129

 

Interest expense on building lease financing obligations

 

 

(1,868

)

 

 

(1,864

)

 

 

(5,601

)

 

 

(5,585

)

Interest expense on other borrowings

 

 

(1,458

)

 

 

(1,254

)

 

 

(4,190

)

 

 

(3,526

)

Other income (expense)

 

 

2

 

 

 

9

 

 

 

15

 

 

 

(140

)

Total other expense, net

 

 

(3,251

)

 

 

(3,054

)

 

 

(9,577

)

 

 

(9,122

)

Loss before income taxes

 

 

(11,585

)

 

 

(14,001

)

 

 

(39,639

)

 

 

(43,429

)

Income tax expense

 

 

13

 

 

 

5

 

 

 

22

 

 

 

10

 

Net loss

 

$

(11,598

)

 

$

(14,006

)

 

$

(39,661

)

 

$

(43,439

)

Comprehensive loss

 

$

(11,598

)

 

$

(14,006

)

 

$

(39,661

)

 

$

(43,439

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.36

)

 

$

(0.45

)

 

$

(1.25

)

 

$

(1.40

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

31,883,029

 

 

 

31,181,141

 

 

 

31,678,360

 

 

 

30,974,116

 

 

 

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

 

 

4


Benefitfocus, Inc.

Unaudited Consolidated Statement of Changes in Stockholders’ Deficit

(in thousands, except share and per share data)

 

 

 

Common Stock,

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

$0.001 Par Value

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance, December 31, 2017 (as previously reported)

 

 

31,307,989

 

 

$

31

 

 

$

355,301

 

 

$

(394,663

)

 

$

(39,331

)

Adoption of revenue recognition standard

 

 

 

 

 

 

 

 

(2,805

)

 

 

33,417

 

 

 

30,612

 

Balance, December 31, 2017

 

 

31,307,989

 

 

$

31

 

 

$

352,496

 

 

$

(361,246

)

 

$

(8,719

)

Exercise of stock options

 

 

9,250

 

 

 

 

 

 

42

 

 

 

 

 

 

42

 

Issuance of common stock upon vesting of restricted stock units

 

 

15,208

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under Employee Stock Purchase Plan, or ESPP

 

 

7,022

 

 

 

 

 

 

180

 

 

 

 

 

 

180

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,325

 

 

 

 

 

 

4,325

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,802

)

 

 

(13,802

)

Balance, March 31, 2018

 

 

31,339,469

 

 

$

31

 

 

$

357,043

 

 

$

(375,048

)

 

$

(17,974

)

Exercise of stock options

 

 

4,578

 

 

 

 

 

 

48

 

 

 

 

 

 

48

 

Issuance of common stock upon vesting of restricted stock units

 

 

481,950

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,674

 

 

 

 

 

 

4,674

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(14,261

)

 

 

(14,261

)

Balance, June 30, 2018

 

 

31,825,997

 

 

$

32

 

 

$

361,764

 

 

$

(389,309

)

 

$

(27,513

)

Exercise of stock options

 

 

1,230

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Issuance of common stock upon vesting of restricted stock units

 

 

67,142

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under Employee Stock Purchase Plan, or ESPP

 

 

5,591

 

 

 

 

 

 

179

 

 

 

 

 

 

179

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,347

 

 

 

 

 

 

3,347

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,598

)

 

 

(11,598

)

Balance, September 30, 2018

 

 

31,899,960

 

 

$

32

 

 

$

365,303

 

 

$

(400,907

)

 

$

(35,572

)

 

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

 

 

5


Benefitfocus, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(39,661

)

 

$

(43,439

)

Adjustments to reconcile net loss to net cash and cash

   equivalents used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,912

 

 

 

11,848

 

Stock-based compensation expense

 

 

12,346

 

 

 

11,646

 

Interest accrual on financing obligation

 

 

5,639

 

 

 

5,623

 

Loss on disposal or impairment of property and equipment

 

 

 

 

 

157

 

Provision for doubtful accounts

 

 

364

 

 

 

142

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

2,103

 

 

 

(443

)

Accrued interest on short-term investments

 

 

 

 

 

7

 

Contract, prepaid and other current assets

 

 

5,179

 

 

 

9,561

 

Deferred contract costs and other non-current assets

 

 

2,590

 

 

 

4,372

 

Accounts payable and accrued expenses

 

 

4,385

 

 

 

(6,560

)

Accrued compensation and benefits

 

 

(1,068

)

 

 

(5,422

)

Deferred revenue

 

 

(7,443

)

 

 

(1,809

)

Other non-current liabilities

 

 

(328

)

 

 

(751

)

Net cash and cash equivalents used in operating activities

 

 

(3,982

)

 

 

(15,068

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from maturity of short-term investments held to maturity

 

 

 

 

 

2,000

 

Purchases of property and equipment

 

 

(5,855

)

 

 

(6,151

)

Net cash and cash equivalents used in investing activities

 

 

(5,855

)

 

 

(4,151

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Draws on revolving line of credit

 

 

97,000

 

 

 

81,000

 

Payments on revolving line of credit

 

 

(84,000

)

 

 

(61,000

)

Proceeds from exercises of stock options and ESPP

 

 

462

 

 

 

3,572

 

Payments on financing and capital lease obligations

 

 

(7,895

)

 

 

(6,633

)

Net cash and cash equivalents provided by financing activities

 

 

5,567

 

 

 

16,939

 

Net decrease in cash and cash equivalents

 

 

(4,270

)

 

 

(2,280

)

Cash and cash equivalents, beginning of period

 

 

55,335

 

 

 

56,853

 

Cash and cash equivalents, end of period

 

$

51,065

 

 

$

54,573

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued expenses

 

$

83

 

 

$

878

 

Property and equipment purchased with financing and capital lease obligations

 

$

3,739

 

 

$

 

Post contract support purchased with financing obligations

 

$

275

 

 

$

 

 

 

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

 

 

6


BENEFITFOCUS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

1. Organization and Description of Business

Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, insurance carriers and brokers under a software-as-a-service (“SaaS”) model. The financial statements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. and BenefitStore, Inc.

 

2. Summary of Significant Accounting Policies

Principles of Consolidation

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We are not the primary beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly, we have not consolidated any variable interest entity.

Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity and cash flows. The results of operations for the three- and nine-month periods ended September 30, 2018 are not necessarily indicative of the results for the full year or for any other future period. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K, as amended.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and the related amortization, stock-based compensation, the determination of the useful lives of assets and the impairment assessment of goodwill as well as the estimates disclosed in association with revenue recognition. Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.

Revenue

The Company derives its revenues primarily from fees for software services and professional services sold to employers and insurance carriers. Revenues are recognized when control of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.  Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenues.

The Company determines revenue recognition through the following steps:

 

Identification of each contract with a customer;

 

Identification of the performance obligations in the contract;

 

Determination of the transaction price;

 

Allocation of the transaction price to the performance obligations in the contract; and

 

Recognition of revenue when, or as, performance obligations are satisfied.

Software Services Revenues

Software services revenues primarily consist of monthly subscription fees paid to the Company by its employer and insurance carrier customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution. Software services revenue also includes insurance broker commissions from the sale of voluntary and ancillary benefits policies to employees of the Company’s customers.  

Software services revenues are generally recognized on a ratable basis over the contract term beginning on the date the software services are made available to the customer. The Company’s software service contracts are generally three years for both

7


carrier and employer customers. Revenue from insurance broker commissions is recognized when the orders for the policies are received and transferred to the insurance carrier, and is reduced by estimates for risks from collectability, policy cancellation and termination.

Professional Services Revenues

Professional services revenues primarily consist of fees related to the implementation of software products purchased by customers.  Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services, support services and training are also included in professional services revenue.

Revenue from implementation services with customers in the Carrier segment are generally recognized over the contract term of the associated software services contract, including any extension periods representing a material right. The Company utilizes estimates of hours as a measure of progress to determine revenue in certain arrangements.

Revenues from implementation services with customers in the Employer segment are generally recognized as those services are performed.

Revenues from support and training fees are recognized over the service contract period.

Contracts with Multiple Performance Obligations

Certain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The Company allocates the transaction price to the separate performance obligations based on their relative standalone selling prices. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the software services sold, customer size and complexity, and the number and types of users under the contracts.

Practical Expedients Elected

In addition to practical expedients disclosed elsewhere in the notes to unaudited consolidated financial statements, the Company has elected to use the practical expedient not to adjust the promised amount of consideration for the effects of a significant financing component for contracts in which the period between transferring a service to a customer and when the customer pays for that service is one year or less.

Contract Costs

The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions.  Payments of sales commissions generally include multiple payments. The Company capitalizes only those payments made within an insignificant time from the contract inception, typically three months or less.  Subsequent payments are expensed as incurred. The capitalized costs are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is generally four to five years. The Company has elected to use the practical expedient to expense the costs to obtain a contract when the amortization period is less than one year. The balance of deferred costs related to obtaining contracts included in deferred contract costs and other non-current assets was $7,429 and $7,376 as of September 30, 2018 and December 31, 2017, respectively.  Sales and marketing expense includes $1,019 and $1,089 of amortization for the three months ended September 30, 2018 and 2017, respectively, and $3,180 and $3,393 for the nine months ended September 30, 2018 and 2017, respectively.

The Company capitalizes contract fulfillment costs directly associated with customer contracts that are not related to satisfying performance obligations. The costs are amortized to cost of revenue expense over the estimated period of benefit, which is generally five years. The balance of deferred fulfillment costs included in deferred contract costs and other non-current assets was $5,746 and $8,060 as of September 30, 2018 and December 31, 2017, respectively. Cost of revenue expense includes $861 and $887 of amortization for the three months ended September 30, 2018 and 2017, respectively, and $2,640 and $2,609 for the nine months ended September 30, 2018 and 2017, respectively.

Concentrations of Credit Risk

 The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The bank deposits of the Company might, at times, exceed federally insured limits and are generally uninsured and uncollateralized. The Company has not experienced any losses on cash and cash equivalents to date.

To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts. Accounts receivable are unsecured and derived from revenue earned from customers located in the United States.  No customer represented more than 10% of total accounts receivable as of September 30, 2018. Accounts receivable from one customer represented approximately 12% of the total accounts receivable as of December 31, 2017. Revenue from one customer was approximately 13% of the total revenue in each of the three-month periods ended September 30, 2018 and 2017, respectively, and 14% and 12% of the total revenue in the nine-month period ended September 30, 2018 and 2017, respectively.

8


Accounts Receivable and Allowance for Doubtful Accounts and Returns

Accounts receivable are stated at realizable value, net of allowances for doubtful accounts and returns. The Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability of amounts due, and other relevant factors. Bad debt expense is recorded in general and administrative expense in the consolidated statements of operations and comprehensive loss. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable. The Company removes recorded receivables and the associated allowances when they are deemed permanently uncollectible. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates. However, if bad debts are higher than expected, future write-offs will be greater than the Company’s estimates. The allowance for doubtful accounts was $458 and $654 as of September 30, 2018 and December 31, 2017, respectively.

The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodic assessment of historical experience and trends. The Company considers factors such as historical reasons for adjustments, changes in customer volume, complexity of billing arrangements, software availability, and past due customer billings. The allowance for returns was $2,438 and $2,877 as of September 30, 2018 and December 31, 2017, respectively.

Capitalized Software Development Costs

The Company capitalizes certain costs related to its software developed or obtained for internal use. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred during the application development stage, including upgrades and enhancements representing modifications that will result in significant additional functionality, are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment and are amortized on a straight-line basis to cost of revenue over the software’s estimated useful life, which is three years. The Company evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

In the three months ended September 30, 2018 and 2017, the Company capitalized software development costs of $1,688 and $1,050, respectively, and amortized capitalized software development costs of $1,045 and $784, respectively. In the nine months ended September 30, 2018 and 2017, the Company capitalized software development costs of $4,287 and $3,379, respectively, and amortized capitalized software development costs of $2,898 and $2,408, respectively. The net book value of capitalized software development costs was $9,050 and $7,660 at September 30, 2018 and December 31, 2017, respectively.

Comprehensive Loss

The Company’s net loss equals comprehensive loss for all periods presented.

Recently Adopted Accounting Standards

Cloud Computing Arrangements

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The ASU allows companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract over the term of the arrangement, including periods covered by renewal options that are reasonably certain to be exercised. The Company early adopted this standard in the quarter ended September 30, 2018. There was no impact on the Company’s consolidated financial statements upon adoption.

Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” applying the full retrospective transition method to all contracts that were not completed as of January 1, 2016, the initial date of application.

The adoption of Topic 606 significantly affected the accounting for revenue from certain professional services in the Carrier segment and insurance broker commission revenue included in software services revenue in the Employer segment.  

Prior to the adoption of Topic 606, the Company recognized revenue from certain professional services in the Carrier segment over the customer relationship period.  Under Topic 606, revenue from certain of these services are recognized over the contract term of the associated software services contract, including any extension periods representing a material right, which can be shorter than the customer relationship period. The financial statement impact of this change is a reduction to the deferred revenue balance as of the date of adoption.

Also prior to the adoption of Topic 606, the Company recognized insurance broker commission revenue over the policy period. Under Topic 606, the revenue related to broker commissions is recognized when the performance obligation has been satisfied, which is when the orders for the policies are received and transferred to the insurance carrier. As a result, software services revenue from these arrangements in the Employer segment is recognized in the aggregate and earlier under Topic 606 in comparison to the previous treatment. The financial statement impact of this change is reductions to balances of deferred revenue and increases in contract asset balances reported in other non-current assets.

9


Additionally, prior to the adoption of Topic 606, the Company recognized revenue from implementation services fees that are paid in advance in the Employer segment either when the associated software services are made available to the customer or over the customer relationship period. Under the new standard, revenue from these fees are recognized as the services are provided on a percentage of completion basis. The financial statement impact of this change is revenue from these fees being recognized sooner under the new standard.

In connection with the adoption of Topic 606, the Company is required to capitalize costs associated with obtaining and fulfilling a contract. Contract assets recognized for costs to obtain a contract consist primarily of sales commissions associated with obtaining contracts in the Carrier segment.  These assets are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is generally four to five years.  Contract assets recognized for costs to fulfill a contract consist primarily of internal costs related to implementing products in the Carrier segment.  These assets are amortized to cost of revenue expense over the estimated period of benefit, which is generally five years.

The Company used the practical expedient for contracts that were completed by January 1, 2018, the initial date of application of Topic 606, that allows for the use of the transaction price at the date the contract was completed for contracts restated in comparative reporting periods, rather than estimating the variable consideration amount in each comparative reporting period.

The following tables show the amounts by which financial statement lines were affected by the adoption of Topic 606.

 

 

 

As of December 31, 2017

 

Financial Statement Line Item

 

As previously reported

 

 

Adjustments

 

 

As adjusted

 

Consolidated Balance Sheet:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

30,156

 

 

$

(65

)

 

$

30,091

 

Contract, prepaid and other current assets

 

 

4,337

 

 

 

11,522

 

 

 

15,859

 

Deferred contract costs and other non-current assets

 

 

816

 

 

 

15,437

 

 

 

16,253

 

Accrued expenses

 

 

9,136

 

 

 

(26

)

 

 

9,110

 

Deferred revenue, current portion

 

 

38,821

 

 

 

4,983

 

 

 

43,804

 

Deferred revenue, net of current portion

 

 

19,898

 

 

 

(8,675

)

 

 

11,223

 

Additional paid-in capital

 

 

355,301

 

 

 

(2,805

)

 

 

352,496

 

Accumulated deficit

 

 

(394,663

)

 

 

33,417

 

 

 

(361,246

)

 

 

 

 

Three Months Ended September 30, 2017

 

Financial Statement Line Item

 

As previously reported

 

 

Adjustments

 

 

As adjusted

 

Consolidated Statement of Operations and Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

62,453

 

 

$

(6,202

)

 

$

56,251

 

Cost of revenue

 

 

30,467

 

 

 

843

 

 

 

31,310

 

Sales and marketing

 

 

16,180

 

 

 

287

 

 

 

16,467

 

Loss from operations

 

 

(3,615

)

 

 

(7,332

)

 

 

(10,947

)

Net loss and comprehensive loss

 

 

(6,674

)

 

 

(7,332

)

 

 

(14,006

)

Net loss per common share:  Basic and diluted

 

$

(0.21

)

 

$

(0.24

)

 

$

(0.45

)

 

 

 

Nine Months Ended September 30, 2017

 

Financial Statement Line Item

 

As previously reported

 

 

Adjustments

 

 

As adjusted

 

Consolidated Statement of Operations and Comprehensive Loss:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

189,972

 

 

$

(21,009

)

 

$

168,963

 

Cost of revenue

 

 

90,896

 

 

 

2,312

 

 

 

93,208

 

Sales and marketing

 

 

51,103

 

 

 

1,250

 

 

 

52,353

 

Loss from operations

 

 

(9,736

)

 

 

(24,571

)

 

 

(34,307

)

Net loss and comprehensive loss

 

 

(18,868

)

 

 

(24,571

)

 

 

(43,439

)

Net loss per common share:  Basic and diluted

 

$

(0.61

)

 

$

(0.79

)

 

$

(1.40

)

 

Cash provided by, or used in, operating, investing and financing activities were not affected by the adoption of Topic 606.

10


Accounting Standards Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU modifies the disclosure requirements required for fair value measurements. This ASU is effective for the Company for the interim and annual reporting periods starting January 1, 2020. Early adoption is permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective for interim and annual reporting periods starting January 1, 2020. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” and subsequent related updates. The guidance requires lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company is continuing to evaluate the impact of this guidance on its consolidated financial statements.

3. Net Loss Per Common Share

Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following common share equivalent securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the periods presented:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Anti-Dilutive Common Share Equivalents

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Restricted stock units

 

 

2,158,468

 

 

 

1,981,488

 

 

 

2,158,468

 

 

 

1,981,488

 

Stock options

 

 

248,097

 

 

 

281,840

 

 

 

248,097

 

 

 

281,840

 

Employee Stock Purchase Plan

 

 

2,480

 

 

 

3,566

 

 

 

2,480

 

 

 

3,566

 

Total anti-dilutive common share equivalents

 

 

2,409,045

 

 

 

2,266,894

 

 

 

2,409,045

 

 

 

2,266,894

 

 

Basic and diluted net loss per common share is calculated as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,598

)

 

$

(14,006

)

 

$

(39,661

)

 

$

(43,439

)

Net loss attributable to common stockholders

 

$

(11,598

)

 

$

(14,006

)

 

$

(39,661

)

 

$

(43,439

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic and diluted

 

 

31,883,029

 

 

 

31,181,141

 

 

 

31,678,360

 

 

 

30,974,116

 

Net loss per common share, basic and diluted

 

$

(0.36

)

 

$

(0.45

)

 

$

(1.25

)

 

$

(1.40

)

 

4. Fair Value Measurement

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to their short-term nature. The carrying value of the Company’s financing obligations and revolving line of credit approximates fair value, considering the borrowing rates currently available to the Company with similar terms and credit risks.

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:

 

Level 1.

Quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2.

Other inputs that are directly or indirectly observable in the marketplace.

 

Level 3.

Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.

11


Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above categories, as of the periods presented.

 

 

 

September 30, 2018

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (1)

 

$

43,853

 

 

$

 

 

$

 

 

$

43,853

 

Total assets

 

$

43,853

 

 

$

 

 

$

 

 

$

43,853

 

 

 

 

December 31, 2017

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (1)

 

$

46,730

 

 

$

 

 

$

 

 

$

46,730

 

Total assets

 

$

46,730

 

 

$

 

 

$

 

 

$

46,730

 

________________

(1)

Money market funds are classified as cash equivalents in the Company’s unaudited consolidated balance sheets. As short-term, highly liquid investments readily convertible to known amounts of cash with remaining maturities of three months or less at the time of purchase, the Company’s cash equivalent money market funds have carrying values that approximate fair value.

 

5. Revolving Line of Credit

On March 29, 2018, the Company amended its revolving line of credit agreement. The amendment altered definitions in the revolving line of credit agreement, including Consolidated EBITDA and Recurring Revenue, and changes the Minimum Consolidated EBITDA requirements. The amendment was entered into to modify the above terms and requirements to account for the Company’s adoption of Topic 606.

As of September 30, 2018 and December 31, 2017, the amount outstanding under the Company’s revolving line of credit was $69,246 and $56,246, respectively. As of September 30, 2018, the additional amount available to borrow, adjusted by the borrowing base limit, was $4,701 and the interest rate was 6.50%.

During the nine months ended September 30, 2018, the Company repaid $84,000 of amounts outstanding under its line of credit and borrowed $97,000 under its revolving line of credit for general operating purposes.

6. Stock-based Compensation

Restricted Stock Units

During the nine months ended September 30, 2018, the Company granted 660,642 restricted stock units, or RSUs, to employees and officers with an aggregate grant date fair value of $18,380. These RSUs generally vest in equal annual installments over various periods ranging from less than 1 to 4 years from the grant date, subject to continued service to the Company. The Company amortizes the grant date fair value of the stock subject to the RSUs on a straight-line basis over the period of vesting.    

During the nine months ended September 30, 2018, in connection with the Company’s incentive bonus programs, the Company granted 856,236 performance RSUs to officers with an aggregate grant date fair value of $20,661. The aggregate grant date fair value of the performance RSUs assuming target achievement was $14,470. Vesting of the performance RSUs is contingent upon meeting specific financial, revenue and sales related growth targets through December 31, 2018. The actual number of shares issued upon vesting of the performance RSUs could range from 0% to 100% of the number granted.  If any targets are met, the awards will vest in equal annual installments over 4 years starting April 1, 2019, except for 86,487 performance RSUs, which will vest in the first quarter of 2019, in each case subject to continued service to the Company. The Company amortizes the grant date fair value of the awards on an accelerated basis over the vesting period.

 

7. Stockholders’ Deficit

Common Stock

The holders of common stock are entitled to one vote for each share.  The voting, dividend and liquidation rights of the holders of common stock are subject to and qualified by the rights, powers and preferences of the holders of preferred stock.

At September 30, 2018, the Company had reserved a total of 4,380,003 of its authorized 50,000,000 shares of common stock for future issuance as follows:

12


 

Outstanding stock options

 

 

248,097

 

Restricted stock units

 

 

2,158,468

 

Available for future issuance under stock award plans

 

 

1,846,700

 

Available for future issuance under ESPP

 

 

126,738

 

Total common shares reserved for future issuance

 

 

4,380,003

 

 

8. Revenue

Disaggregation of Revenue

The following tables provide information about disaggregation of revenue by service line and includes a reconciliation of disaggregated revenue with reportable segments:

 

 

 

Three Months Ended September 30, 2018

 

 

Three Months Ended September 30, 2017

 

 

 

Employer

 

 

Carrier

 

 

Total

 

 

Employer

 

 

Carrier

 

 

Total

 

Service line:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software services

 

$

28,729

 

 

$

18,129

 

 

$

46,858

 

 

$

26,016

 

 

$

16,301

 

 

$

42,317

 

Professional services

 

 

9,279

 

 

 

4,869

 

 

 

14,148

 

 

 

10,935

 

 

 

2,999

 

 

 

13,934

 

Total

 

$

38,008

 

 

$

22,998

 

 

$

61,006

 

 

$

36,951

 

 

$

19,300

 

 

$

56,251

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

Nine Months Ended September 30, 2017

 

 

 

Employer

 

 

Carrier

 

 

Total

 

 

Employer

 

 

Carrier

 

 

Total

 

Service line: