Benefitfocus, Inc.
Benefitfocus,Inc. (Form: 10-Q, Received: 08/04/2016 14:36:28)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended June 30, 2016

or

o

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   x     No   o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   o

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

 

Large accelerated filer

o

Accelerated filer

x

 

 

 

 

Non-accelerated filer

o   (Do not check if a smaller reporting company)

Smaller reporting company

o

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

As of July 29, 2016, there were approximately 29,652,487 shares of the registrant’s common stock outstanding.

 

 

 

 

 

 


 

Benefitfocus, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2016

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

3

 

 

Unaudited Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015

4

 

 

Unaudited Consolidated Statement of Changes in Stockholders’ Deficit for the Six Months Ended   June 30, 2016

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

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

31

 

 

ITEM 4. CONTROLS AND PROCEDURES

32

 

 

PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

33

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

51

 

 

ITEM 6. EXHIBITS

53

 

 

SIGNATURES

55

 

 

2


 

PART I. FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Benefitfocus, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

As of

June 30,

2016

 

 

As of

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,929

 

 

$

48,074

 

Marketable securities

 

 

11,069

 

 

 

40,448

 

Accounts receivable, net

 

 

28,440

 

 

 

27,616

 

Accounts receivable, related party

 

 

2,862

 

 

 

2,082

 

Prepaid expenses and other current assets

 

 

6,147

 

 

 

5,725

 

Total current assets

 

 

105,447

 

 

 

123,945

 

Property and equipment, net

 

 

55,763

 

 

 

55,037

 

Intangible assets, net

 

 

536

 

 

 

665

 

Goodwill

 

 

1,634

 

 

 

1,634

 

Other non-current assets

 

 

1,377

 

 

 

838

 

Total assets

 

$

164,757

 

 

$

182,119

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,445

 

 

$

7,953

 

Accrued expenses

 

 

10,269

 

 

 

10,449

 

Accrued compensation and benefits

 

 

17,488

 

 

 

20,684

 

Deferred revenue, current portion

 

 

33,530

 

 

 

37,858

 

Revolving line of credit, current portion

 

 

34,000

 

 

 

25,000

 

Financing and capital lease obligations, current portion

 

 

2,885

 

 

 

3,648

 

Total current liabilities

 

 

105,617

 

 

 

105,592

 

Deferred revenue, net of current portion

 

 

50,067

 

 

 

55,671

 

Revolving line of credit, net of current portion

 

 

5,246

 

 

 

5,246

 

Financing and capital lease obligations, net of current portion

 

 

33,095

 

 

 

31,183

 

Other non-current liabilities

 

 

2,523

 

 

 

2,436

 

Total liabilities

 

 

196,548

 

 

 

200,128

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

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

   no shares issued and outstanding at June 30, 2016

   and December 31, 2015

 

 

 

 

 

 

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

   29,588,841 and 29,194,332 shares issued and outstanding

   at June 30, 2016 and December 31, 2015, respectively

 

 

30

 

 

 

29

 

Additional paid-in capital

 

 

320,877

 

 

 

310,304

 

Accumulated deficit

 

 

(352,698

)

 

 

(328,342

)

Total stockholders' deficit

 

 

(31,791

)

 

 

(18,009

)

Total liabilities and stockholders' deficit

 

$

164,757

 

 

$

182,119

 

 

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

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue

 

$

57,874

 

 

$

42,708

 

 

$

112,666

 

 

$

85,377

 

Cost of revenue

 

 

29,750

 

 

 

23,640

 

 

 

59,047

 

 

 

46,103

 

Gross profit

 

 

28,124

 

 

 

19,068

 

 

 

53,619

 

 

 

39,274

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

14,761

 

 

 

15,804

 

 

 

28,335

 

 

 

31,279

 

Research and development

 

 

14,180

 

 

 

13,271

 

 

 

29,195

 

 

 

25,048

 

General and administrative

 

 

8,274

 

 

 

6,393

 

 

 

16,669

 

 

 

11,804

 

Total operating expenses

 

 

37,215

 

 

 

35,468

 

 

 

74,199

 

 

 

68,131

 

Loss from operations

 

 

(9,091

)

 

 

(16,400

)

 

 

(20,580

)

 

 

(28,857

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

36

 

 

 

56

 

 

 

92

 

 

 

74

 

Interest expense on building lease financing obligations

 

 

(1,710

)

 

 

(1,730

)

 

 

(3,426

)

 

 

(3,644

)

Interest expense on other borrowings

 

 

(231

)

 

 

(210

)

 

 

(429

)

 

 

(490

)

Other (expense) income

 

 

(3

)

 

 

5

 

 

 

(3

)

 

 

4

 

Total other expense, net

 

 

(1,908

)

 

 

(1,879

)

 

 

(3,766

)

 

 

(4,056

)

Loss before income taxes

 

 

(10,999

)

 

 

(18,279

)

 

 

(24,346

)

 

 

(32,913

)

Income tax expense

 

 

5

 

 

 

5

 

 

 

10

 

 

 

20

 

Net loss

 

$

(11,004

)

 

$

(18,284

)

 

$

(24,356

)

 

$

(32,933

)

Comprehensive loss

 

$

(11,004

)

 

$

(18,284

)

 

$

(24,356

)

 

$

(32,933

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.37

)

 

$

(0.64

)

 

$

(0.83

)

 

$

(1.19

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

29,459,341

 

 

 

28,633,992

 

 

 

29,336,270

 

 

 

27,694,935

 

 

 

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, 2015

 

 

29,194,332

 

 

$

29

 

 

$

310,304

 

 

$

(328,342

)

 

$

(18,009

)

Exercise of stock options

 

 

214,219

 

 

 

1

 

 

 

1,592

 

 

 

 

 

 

1,593

 

Issuance of common stock upon vesting

   of restricted stock units, net of shares

   surrendered for taxes

 

 

180,290

 

 

 

 

 

 

(202

)

 

 

 

 

 

(202

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

9,183

 

 

 

 

 

 

9,183

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(24,356

)

 

 

(24,356

)

Balance, June 30, 2016

 

 

29,588,841

 

 

$

30

 

 

$

320,877

 

 

$

(352,698

)

 

$

(31,791

)

 

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

 

 

5


 

Benefitfocus, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(24,356

)

 

$

(32,933

)

Adjustments to reconcile net loss to net cash and cash

   equivalents used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

6,310

 

 

 

5,726

 

Stock-based compensation expense

 

 

9,183

 

 

 

4,617

 

Interest accrual on financing obligation

 

 

3,426

 

 

 

3,644

 

Loss on disposal or impairment of property and equipment

 

 

7

 

 

 

8

 

Provision for doubtful accounts

 

 

(22

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,582

)

 

 

(614

)

Accrued interest on short-term investments

 

 

158

 

 

 

88

 

Prepaid expenses and other current assets

 

 

(72

)

 

 

(1,523

)

Other non-current assets

 

 

291

 

 

 

711

 

Accounts payable

 

 

(1,279

)

 

 

1,427

 

Accrued expenses

 

 

741

 

 

 

648

 

Accrued compensation and benefits

 

 

(3,196

)

 

 

1,868

 

Deferred revenue

 

 

(9,932

)

 

 

(495

)

Other non-current liabilities

 

 

87

 

 

 

189

 

Net cash and cash equivalents used in operating activities

 

 

(20,236

)

 

 

(16,639

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of short-term investments held to maturity

 

 

(2,004

)

 

 

(51,111

)

Proceeds from maturity of short-term investments held to maturity

 

 

31,225

 

 

 

8,067

 

Purchases of property and equipment

 

 

(4,964

)

 

 

(8,054

)

Net cash and cash equivalents provided by (used in) investing activities

 

 

24,257

 

 

 

(51,098

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Draws on revolving line of credit

 

 

34,000

 

 

 

22,492

 

Payments on revolving line of credit

 

 

(25,000

)

 

 

(34,903

)

Proceeds from exercises of stock options

 

 

1,593

 

 

 

1,318

 

Proceeds from issuance of common stock and warrant, net of issuance costs

 

 

 

 

 

74,538

 

Payment of deferred financing costs and debt issuance costs

 

 

 

 

 

(566

)

Remittance of taxes upon vesting of restricted stock units

 

 

(202

)

 

 

(874

)

Payments on financing and capital lease obligations

 

 

(5,557

)

 

 

(4,918

)

Net cash and cash equivalents provided by financing activities

 

 

4,834

 

 

 

57,087

 

Net increase (decrease) in cash and cash equivalents

 

 

8,855

 

 

 

(10,650

)

Cash and cash equivalents, beginning of period

 

 

48,074

 

 

 

51,074

 

Cash and cash equivalents, end of period

 

$

56,929

 

 

$

40,424

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued expenses

 

$

1,397

 

 

$

1,558

 

Property and equipment purchased with financing and capital lease obligations

 

$

2,099

 

 

$

236

 

Post contract support purchased with financing obligations

 

$

1,182

 

 

$

 

Allocation of proceeds to deferred revenue from issuance of

   common stock based on relative selling price

 

$

 

 

$

207

 

 

 

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., Benefit Informatics, Inc. and BenefitStore, Inc. Benefit Informatics, Inc. was dissolved on December 31, 2015.

 

 

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 six-month periods ended June 30, 2016 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, 2015 included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 25, 2016.

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 revenue recognition and the customer relationship period, allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, warrants, capitalizable software development costs and the related amortization, stock-based compensation, the determination of the useful lives of assets and the recognition and impairment assessment of acquired intangibles and goodwill. Determination of these transactions and account balances are based on 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 and Deferred Revenue

The Company derives the majority of its revenue from software services, which consist primarily of monthly subscription fees paid by customers for access to and usage of the Company’s cloud-based benefits software solutions for a specified contract term. The Company also derives revenue from professional services, which primarily includes fees related to the integration of customers’ systems with the Company’s platform, typically including discovery, configuration, deployment, testing, and training.

The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided, the fees to be paid by the customer are fixed and determinable and collectability is reasonably assured. The Company considers delivery of its cloud-based software services has commenced once it has granted the customer access to its platform.

The Company’s arrangements generally contain multiple elements comprised of software services and professional services. The Company evaluates each element in an arrangement to determine whether it represents a

7


 

separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within the C ompany’s control.

When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE is not available, third-party evidence (“TPE”) is used to establish the selling price if it exists. VSOE and TPE do not currently exist for any of the Company’s deliverables. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, the arrangement consideration is allocated to the separate units of accounting based on the Company’s best estimate of selling price. The amount of arrangement consideration allocated is limited by contingent revenues, if any.

Effective July 1, 2015, the Company determined it had established standalone value for Benefitfocus Marketplace implementation services in the Employer segment because beginning then they could be sold separately from the software services. This was primarily due to the system integrators that have been trained and certified to perform these implementation services, the successful completion of an implementation by a trained system integrator, and the sale of several software subscription arrangements to customers in the Employer segment without the Company’s implementation services. Accordingly, revenues related to implementation services for the Benefitfocus Marketplace solution in the Employer segment delivered after July 1, 2015 are recognized separately from the revenues earned from the Employer software subscription services. Revenues related to such implementation services are recognized at the time that the professional services have been completed and the related software services have commenced. Prior to July 1, 2015, the Company did not have standalone value for implementation services related to the Benefitfocus Marketplace solution as the Company had historically performed these services to support the customers’ implementation of this solution. Revenue from implementation services with standalone value was $368 and $642 for the three and six month periods ended June 30, 2016, respectively.

Certain of the Company’s other professional services, including implementation services related to the Carrier segment, are not sold separately from the software services and there is no alternative use for them. As such, the Company has determined that those professional services do not have standalone value. Accordingly, software services and professional services are combined and recognized as a single unit of accounting. The Company generally recognizes software services fees monthly based on the number of employees covered by the relevant benefits plans at contracted rates for a specified period of time, once the criteria for revenue recognition described above have been satisfied. The Company defers recognition of revenue for fees from professional services that do not have standalone value and begins recognizing such revenue once the services are delivered and the related software services have commenced, ratably over the longer of the contract term or the estimated expected life of the customer relationship. Costs incurred by the Company in connection with providing such professional services are charged to expense as incurred and are included in “Cost of revenue.”

Concentrations of Credit Risk

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, marketable securities 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 credit risk related to marketable securities, the Company invests in various types of highly rated corporate bonds, commercial paper, and various United States backed securities with maturities of less than two years. The weighted average maturity of the portfolio of investments must not exceed nine months, per the Company’s investment policy.

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. One customer, North Carolina State Health Plan, represented 22.2% of the total accounts receivable at December 31, 2015 and represented 10.4% of the total revenue for the three-month period ended June 30, 2016. Another customer, Aetna, represented 10.0% of total revenue for the three- and six-month periods ended June 30, 2015. Mercer, a related party, represented 11.6% and 10.9% of total revenue for the three- and six-month periods ended June 30, 2016, respectively. For more information regarding Mercer revenue, please see Note 11.

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 on 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. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates. The Company removes recorded receivables and the associated allowances when they are deemed permanently uncollectible. 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 $10 and $32 as of June 30, 2016 and December 31, 2015, 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 the time lag since the initiation of revenue recognition, historical reasons for adjustments, new customer volume, complexity of billing arrangements, timing of software availability, and past due customer billings. The allowance for returns was $2,782 and $2,553 as of June 30, 2016 and December 31, 2015, 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 June 30, 2016 and 2015, the Company capitalized software development costs of $1,501 and $506, respectively, and amortized capitalized software development costs of $693 and $671, respectively. In the six months ended June 30, 2016 and 2015, respectively, the Company capitalized software development costs of $2,985 and $1,051, and amortized capitalized software development costs of $1,319 and $1,347, respectively. The net book value of capitalized software development costs was $5,715 and $4,049 at June 30, 2016 and December 31, 2015, respectively.

Comprehensive Loss

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

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update ("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 beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09: Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting. The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for the Company beginning January 1, 2017, but early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02: Leases (Topic 842). The amendments in this update require 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, but early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

9


 

In April 2015, the FASB issued ASU No. 2015-05: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 35 0-40) - Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. The amendments in this update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a s oftware license, the update specifies that the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. The update further specifies that the customer should account for a cloud computing arrangement as a service contract if the arrangement does not include a software license. The Company adopted ASU 2015-05 as of January 1, 2016 on a prospective basis. The adoption of this standard did not materially impact the Company’s consoli dated financial statements.

In April 2015, the FASB issued ASU No. 2015-03: Interest - Imputation of Interest (Subtopic 835-30) - Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this standard as of January 1, 2016. The adoption of this standard did not materially impact the Company’s consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). ASU 2015-11 provides guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. This guidance is effective for the Company beginning January 1, 2017. The Company does not believe the adoption of this standard will have a material effect on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09: Revenue from Contracts with Customers (Topic 606), which amends the revenue recognition requirements in the FASB Accounting Standards Codification, and various clarifying updates. This statement requires 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. The statement shall be applied using one of two methods: retrospectively to each prior reporting period presented, or retrospectively with the cumulative effect of initially applying this statement recognized at the date of initial application. The Company has not yet determined which method it will apply. This guidance will be effective for the Company beginning January 1, 2018, with an option to early adopt. The Company is currently evaluating the impact of this guidance on its consolidated financial position and results of operations.

 

 

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

June 30,

 

 

Six Months Ended

June 30,

 

Anti-Dilutive Common Share Equivalents

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Restricted stock units

 

 

1,474,403

 

 

 

998,889

 

 

 

1,474,403

 

 

 

998,889

 

Stock options

 

 

1,458,140

 

 

 

2,134,685

 

 

 

1,458,140

 

 

 

2,134,685

 

Warrant to purchase common stock

 

 

580,813

 

 

 

580,813

 

 

 

580,813

 

 

 

580,813

 

Total anti-dilutive common share equivalents

 

 

3,513,356

 

 

 

3,714,387

 

 

 

3,513,356

 

 

 

3,714,387

 

10


 

 

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

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,004

)

 

$

(18,284

)

 

$

(24,356

)

 

$

(32,933

)

Net loss attributable to common stockholders

 

$

(11,004

)

 

$

(18,284

)

 

$

(24,356

)

 

$

(32,933

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic and

   diluted

 

 

29,459,341

 

 

 

28,633,992

 

 

 

29,336,270

 

 

 

27,694,935

 

Net loss per common share, basic and diluted

 

$

(0.37

)

 

$

(0.64

)

 

$

(0.83

)

 

$

(1.19

)

 

 

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.

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 June 30, 2016 and December 31, 2015.

 

 

 

June 30, 2016

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (1)

 

$

53,626

 

 

$

 

 

$

 

 

$

53,626

 

Total assets

 

$

53,626

 

 

$

 

 

$

 

 

$

53,626

 

 

 

 

December 31, 2015

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (1)

 

$

46,905

 

 

$

 

 

$

 

 

$

46,905

 

Total assets

 

$

46,905

 

 

$

 

 

$

 

 

$

46,905

 

11


 

 

(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. Marketable Securities

Marketable securities consist of corporate bonds, commercial paper, U.S. Treasury and agency bonds and are classified as held-to-maturity. Investments held in marketable securities had contractual maturities of between 1 and 7 months as of June 30, 2016. The following presents information about the Company’s marketable securities as of:

 

 

 

June 30, 2016

 

 

December 31, 2015

 

Aggregate cost basis and net carrying amount

 

$

11,069

 

 

$

40,448

 

Gross unrealized holding gains

 

 

6

 

 

 

1

 

Gross unrealized holding losses

 

 

-

 

 

 

(26

)

Aggregate fair value determined by Level 2 inputs

 

$

11,075

 

 

$

40,423

 

 

The following table presents information about the Company’s investments that were in an unrealized loss position and for which an other-than-temporary impairment has not been recognized in earnings as of:

 

 

 

June 30, 2016

 

 

December 31, 2015

 

Aggregate fair value of investments with

   unrealized losses (1)

 

$

2,025

 

 

$

27,070

 

Aggregate amount of unrealized losses

 

 

-

 

 

 

(26

)

 

(1)

Investments have been in a continuous loss position for less than 12 months.

 

 

6. Revolving Line of Credit

As of June 30, 2016 and December 31, 2015, the amount outstanding under the Company’s revolving line of credit was $39,246 and $30,246, respectively.  The amount available to borrow, adjusted by the borrowing base limit, was $20,754 and the interest rate was 4.5% as of June 30, 2016.

In January 2016, the Company repaid $25,000 of the amount outstanding under this line of credit.  In June 2016, the Company borrowed $34,000 for general operating purposes.

 

 

 

7. Stock-based Compensation

Restricted Stock Units

During January 2016, the Company granted 31,233 restricted stock units to employees with an aggregate grant date fair value of $1,091. During April 2016, the Company granted 425,183 restricted stock units to employees with an aggregate grant date fair value of $13,776. These restricted stock units vest in equal annual installments generally over 4 years from the grant date. The Company amortizes the fair value of the stock subject to the restricted stock units at the time of grant on a straight-line basis over the period of vesting. The Company recognizes the income tax benefits resulting from vesting of restricted stock units in the period they vest, to the extent the compensation expense has been recognized.

During the six months ended June 30, 2016, the Company granted 242,331 performance restricted stock units to management with an aggregate grant date fair value of $7,490. Vesting is contingent upon meeting various financial targets to support growth initiatives through December 31, 2017. The actual number of shares issued upon vesting could range from 0% to 100% of the number granted.

During March 2016, the Company granted 26,376 performance restricted stock units to management with an aggregate grant date fair value of $875. The awards were granted in lieu of a portion of the target cash bonus that would otherwise be payable under the Company’s Management Incentive Bonus Program for the calendar year

12


 

ended 2016.  The awards vest upon achievement of annual financial targets for 2016. The actual number of shares issued upon vesting could range from 0% to 100% of the number granted.

 

 

8. 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 the Company’s annual stockholder meeting held in June 2016, the Company’s stockholders approved the Benefitfocus, Inc. 2016 Employee Stock Purchase Plan (“ESPP”) pursuant to which 150,000 shares of the Company’s common stock is available for purchase by its employees (and employees of its subsidiaries) who meet certain criteria. The Company’s board of directors approved the ESPP in March 2016. Under the ESPP, eligible employees may purchase the Company’s common stock through accumulated payroll deductions. Options to purchase shares are granted twice yearly on or about January 1 and July 1 and exercisable on or about the succeeding June 30 and December 31, respectively, of each year. Shares are purchased at purchase prices equal to 95% of the fair market value of the Company’s common stock at the purchase date. No participant may purchase more than $12,500 worth of the Company’s common stock in a six-month offering period. The ESPP's initial purchase period began in July 2016. Accordingly, no shares of the Company common stock had been purchased or distributed pursuant to the ESPP as of June 30, 2016.

At June 30, 2016, the Company had reserved a total of 4,574,415 of its authorized 50,000,000 shares of common stock for future issuance as follows:

 

Outstanding stock options

 

 

1,458,140

 

Restricted stock units

 

 

1,474,403

 

Available for future issuance under stock option plans

 

 

911,059

 

Available for future issuance under employee stock purchase plan

 

 

150,000

 

Warrant to purchase common stock

 

 

580,813

 

Total common shares reserved for future issuance

 

 

4,574,415

 

 

 

9. Income Taxes

The Company’s effective federal tax rate for the three and six months ended June 30, 2016 was less than one percent, primarily as a result of estimated tax losses for the fiscal year offset by the increase in the valuation allowance in the net operating loss carryforwards. Current tax expense relates to estimated state income taxes.

 

 

10. Segments and Geographic Information

Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about operating segments, for purposes of allocating resources and evaluating financial performance.

The Company’s reportable segments are based on the type of customer. The Company determined its operating segments to be: Employer, which derives substantially all of its revenue from customers that use the Company’s services for the provision of benefits to their employees, and administrators acting on behalf of employers; and Carrier, which derives substantially all of its revenue from insurance companies that provide coverage at their own risk.

13


 

Segments are evaluated based on gross profit. The Company does not allocate interest income, interest expense or income tax expense by segment. Accordingly, the Company does not report such information. Additionally, Employer and Carrier segments share the majority of the Company’s assets. Therefore, no s egment asset information is reported.

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue from external customers by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employer

 

$

36,261

 

 

$

20,779

 

 

$

68,454

 

 

$

41,677

 

Carrier

 

 

21,613

 

 

 

21,929

 

 

 

44,212

 

 

 

43,700

 

Total net revenue from external customers

 

$

57,874

 

 

$

42,708

 

 

$

112,666

 

 

$

85,377

 

Depreciation and amortization by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employer

 

$

1,975

 

 

$

1,450

 

 

$

3,767

 

 

$

2,792

 

Carrier

 

 

1,292

 

 

 

1,453

 

 

 

2,543

 

 

 

2,934

 

Total depreciation and amortization

 

$

3,267

 

 

$

2,903

 

 

$

6,310

 

 

$

5,726

 

Gross profit by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employer

 

$

15,269

 

 

$

7,571

 

 

$

27,551

 

 

$

16,125

 

Carrier

 

 

12,855

 

 

 

11,497

 

 

 

26,068

 

 

 

23,149

 

Total gross profit

 

$

28,124

 

 

$

19,068

 

 

$

53,619

 

 

$

39,274

 

 

 

11. Related Parties

Related Party Leasing Arrangements

The Company leases the buildings and office space on its Charleston, South Carolina campus from entities with which two of the Company’s directors, significant stockholders, and executives are affiliated. The leasing arrangements have 15-year terms which started in 2006, 2009 and 2015. The Company has an option to renew the 2006 and 2009 arrangements for one five-year period and an option to renew the 2015 arrangement for up to five one-year periods. The arrangements provide for 3.0% fixed annual rent increases. Payments under these agreements were $2,286 and $2,220 for the three months ended June 30, 2016 and 2015, respectively and $5,666 and $7,172 for the six months ended June 30, 2016 and 2015, respectively. Amounts due to the related parties were $1,262 and $1,116 as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016 and December 31, 2015 amounts due to the related parties were recorded in “Accrued expenses.”

Other Related Party Expenses

The Company utilizes the services of three companies that are owned and controlled by a Company director, significant stockholder, and executive. The companies provide private air transportation and construction project management services. Expenses related to these companies were $11 and $28 for the three months ended June 30, 2016 and 2015 and $37 and $82 for the six months ended June 30, 2016 and 2015, respectively. No amounts were due to these companies as of June 30, 2016 and December 31, 2015.

Related Party Revenues

Mercer became a related party when the Company sold it over 10% beneficial ownership of the Company’s outstanding common stock in February 2015. Revenue from Mercer was $6,712 and $3,501 for the three months ended June 30, 2016 and 2015, respectively and $12,258 and $4,615 for the six months ended June 30, 2016 and 2015, respectively, from the time they became a related party and was reflected in “Revenues,” within the accompanying statements of operations. The amounts due from Mercer were $2,862 and $2,082 as of June 30, 2016 and December 31, 2015, respectively. The amount of deferred revenue associated with Mercer was $7,863 and $9,128 as of June 30, 2016 and December 31, 2015, respectively, and was reflected in the balances of deferred revenue in the consolidated balance sheets.

 

 

14


 

1 2. Subsequent Events

Restricted Stock Units

During July 2016, the Company granted 31,391 restricted stock units to employees with an aggregate grant date fair value of $1,181. Generally, these restricted stock units vest in equal annual installments over 4 years from the grant date. The Company amortizes the fair value of the stock subject to the restricted stock units at the time of grant on a straight-line basis over the period of vesting. The Company recognizes the income tax benefits resulting from vesting of restricted stock units in the period they vest, to the extent the compensation expense has been recognized.

Common Stock

During July 2016, employees exercised stock options and restricted stock units vested resulting in the issuance of 63,646 shares.

Revolving Line of Credit

In July 2016, the Company repaid $34,000 under its revolving line of credit.

 

 

 

 

 

15


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Such forward-looking statements include any expectation of earnings, revenue or other financial items; statements about our ability to retain and hire necessary associates and appropriately staff our operations; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements about our ability to establish and maintain intellectual property rights; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

As used in this report, the terms “Benefitfocus, Inc.,” “Benefitfocus,” “Company,” “company,” “we,” “us,” and “our” mean Benefitfocus, Inc. and its subsidiaries unless the context indicates otherwise.

 

 

16


 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings.

Overview

Benefitfocus provides a leading cloud-based benefits management platform for consumers, employers, insurance carriers, and brokers. The Benefitfocus Platform simplifies how organizations and individuals shop for, enroll in, manage, and exchange benefits. Our employer and insurance carrier customers rely on our platform to manage, scale and exchange benefits. Our web-based platform has a user-friendly interface designed to enable the insured consumers to access all of their benefits in one place. Our comprehensive solutions support core benefits plans, including healthcare, dental, life, and disability insurance, and voluntary benefits plans, such as critical illness, supplemental income, and wellness programs. As the number of employer benefits plans has increased, with each plan subject to many different business rules and requirements, demand for the Benefitfocus Platform has grown.

We serve two separate but related market segments. Our fastest growing market segment, the employer market, consists of employers offering benefits to their employees. Within this segment, we mainly target large employers with more than 1,000 employees, of which we believe there are over 18,000 in the United States. In our other market segment, we sell our solutions to insurance carriers, enabling us to expand our overall footprint in the benefits marketplace by aggregating many key constituents, including consumers, employers, and brokers. Our business model capitalizes on the close relationship between carriers and their members, and the carriers’ ability to serve as lead generators for potential employer customers. Carriers pay for services at a rate reflective of the aggregated nature of their customer base on a per application basis. Carriers can then deploy their applications to employer groups and members. As employers become direct customers through our employer segment, we provide them our platform offering that bundles many software applications into a comprehensive benefits solution through Benefitfocus Marketplace. We believe our presence in both the employer and insurance carrier markets gives us a strong position at the center of the benefits ecosystem.

We sell the Benefitfocus Platform on a subscription basis, typically through annual contracts with employer customers and multi-year contracts with our insurance carrier customers, with subscription fees paid monthly. The multi-year contracts with our carrier customers are generally only cancellable by the carrier in an instance of our uncured breach, although some of our carrier customers are able to terminate their respective contracts without cause or for convenience. Software services revenue accounted for approximately 88% and 89% of our total revenue during the three months ended June 30, 2016 and 2015, respectively and 89% and 89% of our total revenue during the six months ended June 30, 2016 and 2015, respectively.

Another component of our revenue is professional services. We derive the majority of our professional services revenue from the implementation of our customers onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and training. In general, it takes from four to five months to implement a new employer customer’s benefits systems and eight to 10 months to implement a new carrier customer’s benefits systems. We also provide customer support services and customized media content that supports our customers’ effort to educate and communicate with consumers. Professional services revenue accounted for approximately 12% and 11% of our total revenue during the three months ended June 30, 2016 and 2015, respectively and 11% and 11% of our total revenue during the six months ended June 30, 2016 and 2015, respectively.

Increasing our base of large employer customers is an important source of revenue growth for us. We actively pursue new employer customers in the U.S. market, and we have increased the number of large employer customers utilizing our solutions from 141 as of December 31, 2010 to 803 as of June 30, 2016. We believe that our continued innovation and new solutions, such as online benefits marketplaces, also known as private exchanges, enhanced mobile offerings, and more robust data analytics capabilities will help us attract additional large employer customers and increase our revenue from existing customers.

We believe that there is a substantial market for our services, and we have been investing in growth over the past five years. In particular, we have continued to invest in technology and services to better serve our larger employer customers, which we believe are an important source of growth for our business. We have also

17


 

substantially increased our marketing and sales efforts and expect those increased efforts to continue. As we have invested in growth, we have had operating lo sses in each of the last six years, and expect our operating losses to continue for at least the next year. Due to the nature of our customer relationships, which have been very stable with relatively few customer losses over the past years, and the subscr iption nature of our financial model, we believe that our current investment in growth should lead to substantially increased revenue, which will allow us to achieve profitability in the relatively near future. Of course, our ability to achieve profitabili ty will continue to be subject to many factors beyond our control.

Key Financial and Operating Performance Metrics

We regularly monitor a number of financial and operating metrics in order to measure our current performance and project our future performance. These metrics help us develop and refine our growth strategies and make strategic decisions. We discuss revenue, gross margin, and the components of operating loss, as well as segment revenue and segment gross profit, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Operating Results”. In addition, we utilize other key metrics as described below.

Number of Large Employer and Carrier Customers

We believe the number of large employer and carrier customers is a key indicator of our market penetration, growth, and future revenue. We have aggressively invested in and intend to continue to invest in our direct sales force to grow our customer base. We generally define a customer as an entity with an active software services contract as of the measurement date. The following table sets forth the number of large employer and carrier customers for the periods indicated:

 

 

 

As of June 30,

 

 

 

2016

 

 

2015

 

Number of customers:

 

 

 

 

 

 

 

 

Large employer

 

 

803

 

 

 

662

 

Carrier

 

 

53

 

 

 

52

 

 

Software Services Revenue Retention Rate

We believe that our ability to retain our customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as our software services revenue retention rate. We calculate this metric for a particular period by establishing the group of our customers that had active contracts for a given period. We then calculate our software services revenue retention rate by taking the amount of software services revenue we recognized for this group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the software services revenue we recognized for the group in the prior period.

For the three- and six-month periods ending June 30, 2016 and 2015, our software services revenue retention rate exceeded 95%.

Adjusted EBITDA

Adjusted EBITDA represents our earnings before net interest, taxes, and depreciation and amortization expense, adjusted to eliminate stock-based compensation and impairment of goodwill and intangible assets. We believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results. However, adjusted EBITDA is not a measure calculated in accordance with United States generally accepted accounting principles, or GAAP, and should not be considered as alternatives to any measures of financial performance calculated and presented in accordance with GAAP.

Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:

 

·

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized might have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

·

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;  

 

·

adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;

18


 

 

·

adjusted EBITDA does not reflect interest or tax payments that would reduce the cash available to us; and  

 

·

other companies, including companies in our industry, might calculate adjusted EBITDA or a similarly titled measure differently, which reduces their usefulness as comparative measures.

Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss and our other GAAP financial results. The following table presents for each of the periods indicated a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure, which for adjusted EBITDA is net loss (in thousands):

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Reconciliation from Net Loss to Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,004

)

 

$

(18,284

)

 

$

(24,356

)

 

$

(32,933

)

Depreciation

 

 

2,509

 

 

 

2,156

 

 

 

4,862

 

 

 

4,226

 

Amortization of software development costs

 

 

693

 

 

 

671

 

 

 

1,319

 

 

 

1,347

 

Amortization of acquired intangible assets

 

 

65

 

 

 

76

 

 

 

129

 

 

 

153

 

Interest income

 

 

(36

)

 

 

(56

)

 

 

(92

)

 

 

(74

)

Interest expense on building lease financing

   obligations

 

 

1,710

 

 

 

1,730

 

 

 

3,426

 

 

 

3,644

 

Interest expense on other borrowings

 

 

231

 

 

 

210

 

 

 

429

 

 

 

490

 

Income tax expense

 

 

5

 

 

 

5

 

 

 

10

 

 

 

20

 

Stock-based compensation expense

 

 

4,450

 

 

 

2,781

 

 

 

9,183

 

 

 

4,617

 

Total net adjustments

 

 

9,627

 

 

 

7,573

 

 

 

19,266

 

 

 

14,423

 

Adjusted EBITDA

 

$

(1,377

)

 

$

(10,711

)

 

$

(5,090

)

 

$

(18,510

)

Components of Operating Results

Revenue

We derive the majority of our revenue from software services fees, which consist primarily of monthly subscription fees paid to us by our employer and carrier customers for access to, and usage of, our cloud-based benefits software solutions for a specified contract term. We also derive revenue from professional services fees, which primarily include fees related to the implementation of our customers onto our platform. Our professional services typically include discovery, configuration and deployment, integration, testing, and training.

The following table sets forth a breakdown of our revenue between software services and professional services for the periods indicated (in thousands):

 

 

 

Three Months Ended

June 30,