bnft-10q_20190930.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, 2019

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)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 Par Value

BNFT

Nasdaq Global Market

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, a 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 November 4, 2019, there were approximately 32,739,796 shares of the registrant’s common stock outstanding.

 

 

 


 

Benefitfocus, Inc.

Form 10-Q

For the Quarterly Period Ended September 30, 2019

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

3

 

 

Unaudited Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2019 and 2018

4

 

 

Unaudited Consolidated Statements of Changes in Stockholders' Deficit for the Three and Nine Months Ended September 30, 2019 and 2018  

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018

6

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

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

21

 

 

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 6. EXHIBITS

50

 

 

SIGNATURES

51

 

 

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,

2019

 

 

As of

December 31,

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,699

 

 

$

190,928

 

Accounts receivable, net

 

 

34,672

 

 

 

21,077

 

Contract, prepaid and other current assets

 

 

15,312

 

 

 

16,667

 

Total current assets

 

 

180,683

 

 

 

228,672

 

Property and equipment, net

 

 

28,689

 

 

 

69,965

 

Financing lease right-of-use assets

 

 

80,665

 

 

 

 

Operating lease right-of-use assets

 

 

1,868

 

 

 

 

Intangible assets, net

 

 

13,236

 

 

 

 

Goodwill

 

 

12,857

 

 

 

1,634

 

Deferred contract costs and other non-current assets

 

 

10,150

 

 

 

13,668

 

Total assets

 

$

328,148

 

 

$

313,939

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,552

 

 

$

8,687

 

Accrued expenses

 

 

10,333

 

 

 

11,461

 

Accrued compensation and benefits

 

 

13,561

 

 

 

17,269

 

Deferred revenue, current portion

 

 

33,911

 

 

 

36,540

 

Lease liabilities and financing obligations, current portion

 

 

7,022

 

 

 

4,486

 

Total current liabilities

 

 

73,379

 

 

 

78,443

 

Deferred revenue, net of current portion

 

 

7,216

 

 

 

9,323

 

Convertible senior notes

 

 

185,069

 

 

 

176,692

 

Lease liabilities and financing obligations, net current portion

 

 

89,438

 

 

 

57,116

 

Other non-current liabilities

 

 

115

 

 

 

2,575

 

Total liabilities

 

 

355,217

 

 

 

324,149

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

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

   no shares issued and outstanding at September 30, 2019

   and December 31, 2018

 

 

 

 

 

 

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

   32,710,032 and 32,017,773 shares issued and outstanding

   at September 30, 2019 and December 31, 2018, respectively

 

 

33

 

 

 

32

 

Additional paid-in capital

 

 

420,808

 

 

 

403,631

 

Accumulated deficit

 

 

(447,910

)

 

 

(413,873

)

Total stockholders' deficit

 

 

(27,069

)

 

 

(10,210

)

Total liabilities and stockholders' deficit

 

$

328,148

 

 

$

313,939

 

 

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,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue

 

$

71,665

 

 

$

61,006

 

 

$

208,543

 

 

$

183,950

 

Cost of revenue

 

 

35,588

 

 

 

31,740

 

 

 

101,242

 

 

 

93,864

 

Gross profit

 

 

36,077

 

 

 

29,266

 

 

 

107,301

 

 

 

90,086

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

18,527

 

 

 

17,661

 

 

 

57,464

 

 

 

55,978

 

Research and development

 

 

14,088

 

 

 

10,676

 

 

 

41,639

 

 

 

34,827

 

General and administrative

 

 

10,772

 

 

 

9,263

 

 

 

34,353

 

 

 

29,343

 

Total operating expenses

 

 

43,387

 

 

 

37,600

 

 

 

133,456

 

 

 

120,148

 

Loss from operations

 

 

(7,310

)

 

 

(8,334

)

 

 

(26,155

)

 

 

(30,062

)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

673

 

 

 

73

 

 

 

2,095

 

 

 

199

 

Interest expense

 

 

(5,926

)

 

 

(1,458

)

 

 

(17,577

)

 

 

(4,190

)

Interest expense on building lease financing obligations (prior to adoption of ASC 842)

 

 

 

 

 

(1,868

)

 

 

 

 

 

(5,601

)

Other income (expense)

 

 

3

 

 

 

2

 

 

 

(61

)

 

 

15

 

Total other expense, net

 

 

(5,250

)

 

 

(3,251

)

 

 

(15,543

)

 

 

(9,577

)

Loss before income taxes

 

 

(12,560

)

 

 

(11,585

)

 

 

(41,698

)

 

 

(39,639

)

Income tax expense

 

 

17

 

 

 

13

 

 

 

26

 

 

 

22

 

Net loss

 

$

(12,577

)

 

$

(11,598

)

 

$

(41,724

)

 

$

(39,661

)

Comprehensive loss

 

$

(12,577

)

 

$

(11,598

)

 

$

(41,724

)

 

$

(39,661

)

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.38

)

 

$

(0.36

)

 

$

(1.29

)

 

$

(1.25

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

 

32,703,723

 

 

 

31,883,029

 

 

 

32,460,494

 

 

 

31,678,360

 

 

 

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

 

 

4


 

Benefitfocus, Inc.

Unaudited Consolidated Statements 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, 2018

 

 

32,017,773

 

 

$

32

 

 

$

403,631

 

 

$

(413,873

)

 

$

(10,210

)

Cumulative effect adjustment from adoption of lease standard

 

 

 

 

 

 

 

 

 

 

 

7,687

 

 

 

7,687

 

Exercise of stock options

 

 

18,600

 

 

 

 

 

 

89

 

 

 

 

 

 

89

 

Issuance of common stock upon vesting of restricted stock units

 

 

34,255

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

6,253

 

 

 

 

 

 

6,253

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(14,209

)

 

 

(14,209

)

Balance, March 31, 2019

 

 

32,070,628

 

 

$

32

 

 

$

409,973

 

 

$

(420,395

)

 

$

(10,390

)

Exercise of stock options

 

 

6,200

 

 

 

 

 

 

45

 

 

 

 

 

 

45

 

Issuance of common stock upon vesting of restricted stock units

 

 

565,878

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

6,203

 

 

 

 

 

 

6,203

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(14,938

)

 

 

(14,938

)

Balance, June 30, 2019

 

 

32,642,706

 

 

$

33

 

 

$

416,221

 

 

$

(435,333

)

 

$

(19,079

)

Issuance of common stock upon vesting of restricted stock units

 

 

60,676

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6,650

 

 

 

 

 

 

172

 

 

 

 

 

 

172

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,415

 

 

 

 

 

 

4,415

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,577

)

 

 

(12,577

)

Balance, September 30, 2019

 

 

32,710,032

 

 

$

33

 

 

$

420,808

 

 

$

(447,910

)

 

$

(27,069

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock,

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

$0.001 Par Value

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Deficit

 

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

 

 

$

361,765

 

 

$

(389,309

)

 

$

(27,512

)

Exercise of stock options

 

 

1,230

 

 

 

 

 

 

13

 

 

 

 

 

 

13

 

Issuance of common stock upon vesting of restricted stock units

 

 

67,142

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

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,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(41,724

)

 

$

(39,661

)

Adjustments to reconcile net loss to net cash and cash

   equivalents used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16,629

 

 

 

11,912

 

Stock-based compensation expense

 

 

14,501

 

 

 

12,346

 

Accretion of interest on convertible senior notes

 

 

8,377

 

 

 

 

Interest accrual on finance lease liabilities

 

 

25

 

 

 

 

Interest accrual on financing obligations (prior to adoption of ASC 842)

 

 

 

 

 

5,639

 

Rent payments in excess of expense

 

 

(6

)

 

 

 

Provision for doubtful accounts

 

 

108

 

 

 

364

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(12,791

)

 

 

2,103

 

Contract, prepaid and other current assets

 

 

1,282

 

 

 

5,179

 

Deferred costs and other non-current assets

 

 

3,746

 

 

 

2,590

 

Accounts payable and accrued expenses

 

 

(642

)

 

 

4,385

 

Accrued compensation and benefits

 

 

(1,524

)

 

 

(1,068

)

Deferred revenue

 

 

(11,427

)

 

 

(7,443

)

Other non-current liabilities

 

 

(69

)

 

 

(328

)

Net cash and cash equivalents used in operating activities

 

 

(23,515

)

 

 

(3,982

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Business combination, net of cash acquired

 

 

(20,914

)

 

 

 

Purchases of property and equipment

 

 

(10,604

)

 

 

(5,855

)

Net cash and cash equivalents used in investing activities

 

 

(31,518

)

 

 

(5,855

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Draws on revolving line of credit

 

 

 

 

 

97,000

 

Payments on revolving line of credit

 

 

 

 

 

(84,000

)

Payments of debt issuance costs

 

 

(357

)

 

 

 

Proceeds from exercises of stock options and ESPP

 

 

305

 

 

 

462

 

Payments on capital lease and financing obligations

 

 

(1,032

)

 

 

(7,895

)

Payments of principal on finance lease liabilities

 

 

(4,112

)

 

 

 

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

 

 

(5,196

)

 

 

5,567

 

Net decrease in cash and cash equivalents

 

 

(60,229

)

 

 

(4,270

)

Cash and cash equivalents, beginning of period

 

 

190,928

 

 

 

55,335

 

Cash and cash equivalents, end of period

 

$

130,699

 

 

$

51,065

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued expenses

 

$

 

 

$

83

 

Property and equipment purchased with financing and capital lease obligations (prior to adoption of ASC 842)

 

$

 

 

$

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. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has 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’ deficit and cash flows. The results of operations for the three- and nine-month periods ended September 30, 2019 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, 2018 included in the Company’s Annual Report on Form 10-K.

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, incremental borrowing rate used in lease accounting, 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.

On January 1, 2019, the Company implemented a self-insured health benefits plan, which provides medical benefits to employees electing coverage under the plan. The Company maintains a reserve for incurred but not reported medical claims and claim development. The reserve is an estimate based on historical experience, current claims and actuarial data. The Company will adjust its self-insured medical benefits reserve as its loss experience changes due to medical inflation, changes in the number of plan participants and demographic composition of its employee base.

Revenue and Deferred 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

7


 

charged based on the number of employees or subscribers with access to the solution. Software services revenue also includes certain other revenue which is generated from the value of policies or products enrolled in through the Company’s marketplace.  

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. Revenue from insurance broker commissions and supplier transactions is recognized at a point in time when the orders for the policies are received and transferred to the insurance carrier or supplier, 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.

The Company determined that implementation services for certain of its insurance carrier customers significantly modify or customize the software solution and, as such, does not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these insurance carrier customers are generally recognized over the contract term of the associated software services contract, including any extension periods representing a material right. In certain arrangements, the Company utilizes estimates of hours as a measure of progress to determine revenue.

Revenues from implementation services with employer customers are generally recognized as those services are performed.

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

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 expenses the costs to obtain a contract when the amortization period is less than one year. Deferred costs related to obtaining contracts is included in deferred contract costs and other non-current assets.

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. Deferred fulfillment costs is included in deferred contract costs and other non-current assets.

The following tables present information about deferred contract costs:

Balance of deferred contract costs

 

As of

September 30,

2019

 

 

As of

December 31,

2018

 

Costs to obtain contracts

 

$

6,184

 

 

$

7,506

 

Costs to fulfill contracts

 

$

3,436

 

 

$

5,235

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Amortization of deferred contract costs

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Costs to obtain contracts included in sales and marketing expense

 

$

871

 

 

$

1,019

 

 

$

2,788

 

 

$

3,180

 

Costs to fulfill contracts included in cost of revenue

 

$

743

 

 

$

861

 

 

$

2,347

 

 

$

2,640

 

 

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.

8


 

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. Revenue from one customer was approximately 13% and 14% of the total revenue in the three- and nine-month periods ended September 30, 2018, respectively. No customer exceeded 10% of total revenue in the three- and nine-month periods ended September 30, 2019.

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. 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, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.

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, delivery issues or delays, and past due customer billings.

The following table presents the balances of the allowances:

Balance of allowances

 

As of

September 30,

2019

 

 

As of

December 31,

2018

 

Allowance for doubtful accounts

 

$

151

 

 

$

392

 

Allowance for returns

 

$

2,839

 

 

$

3,191

 

 

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.

The following tables present information about capitalized software development costs:

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

Capitalized software development costs

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Capitalized

 

$

2,563

 

 

$

1,688

 

 

$

7,246

 

 

$

4,287

 

Amortized

 

$

1,263

 

 

$

1,045

 

 

$

3,760

 

 

$

2,898

 

 

Capitalized software development costs

 

As of

September 30,

2019

 

 

As of

December 31,

2018

 

Net book value

 

$

13,292

 

 

$

9,806

 

 

Leases (after adoption of ASC 842)

The Company regularly enters into finance leases for property and equipment. The leasing arrangements for the Company’s office space at its headquarters campus are classified as finance leases.  The Company also leases office space under operating leases.

The Company determines if an arrangement is a lease at inception. Right of use, or ROU, assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent an obligation to make lease payments arising from the lease. Leases with a term of 12 months or less are not included in the recognized ROU assets and lease liabilities for all classes of assets.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As the Company’s operating leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on information available at commencement date to determine the present value of lease payments. The ROU asset also consists of any prepaid lease payments, lease incentives, or initial direct costs. The lease terms used to calculate the ROU

9


 

asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense. The Company has lease agreements which require payments for lease and non-lease components (e.g. common area maintenance and equipment maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as maintenance costs based on future obligations, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.

Comprehensive Loss

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

Recently Adopted Accounting Standards

Leases

On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” codified as ASC 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. ASC 842 introduces new disclosure requirements for leasing arrangements. The Company adopted this update using the modified transition method at the beginning of the period of adoption. Accordingly, the Company did not adjust prior period financial statements, and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit in 2019 in the amount of $7,687. The Company utilized the following additional significant policy elections:

 

Elected the package of three transition practical expedients to not reassess:

 

o

whether any expired or existing contracts are or contain a lease;

 

o

the classification of any expired or existing leases; and

 

o

the treatment of initial direct costs.

 

Adopted a policy to not separate lease and associated nonlease components for all classes of assets. The Company applied this policy to all existing leases on transition as well as new leases going forward.

 

Adopted a policy to not include leases with a term of 12 months or less in the recognized ROU assets and lease liabilities for all classes of assets.

The adoption of this standard had a significant impact on the Company’s consolidated financial statements as follows:

 

Net assets of $21,019 and related financing obligations and other noncurrent liabilities of $34,909 for existing build-to-suit lease arrangements were derecognized. These leases were transitioned to the new standard based on an analysis of the lease balances as of the transition date as if they had been leases under ASC 840. Based on this analysis, the land component of these leases was combined with the remainder of the lease obligations. Historically, these obligations were accounted for separately and recognized as part of facilities expense and allocated to cost of revenue and operating expenses. Amounts recognized included $56,422 of net ROU assets, $2,848 of net leasehold improvements, and $63,952 of total finance lease liabilities. The net cumulative adjustment to accumulated deficit to derecognize and transition these leases was $7,687.

 

Finance lease liabilities and ROU assets of $3,589 were recorded related to payment obligations for nonlease components (e.g. common area maintenance and equipment maintenance) associated with existing capital leases.

 

Operating lease liabilities and ROU assets of $1,169 were recorded related to existing operating lease obligations.

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.

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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

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Restricted stock units

 

 

2,065,629

 

 

 

2,158,468

 

 

 

2,065,629

 

 

 

2,158,468

 

Stock options

 

 

206,447

 

 

 

248,097

 

 

 

206,447

 

 

 

248,097

 

Convertible senior notes

 

 

4,513,824

 

 

 

-

 

 

 

4,513,824

 

 

 

-

 

Employee Stock Purchase Plan

 

 

3,831

 

 

 

2,480

 

 

 

3,831

 

 

 

2,480

 

Total anti-dilutive common share equivalents

 

 

6,789,731

 

 

 

2,409,045

 

 

 

6,789,731

 

 

 

2,409,045

 

 

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

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(12,577

)

 

$

(11,598

)

 

$

(41,724

)

 

$

(39,661

)

Net loss attributable to common stockholders

 

$

(12,577

)

 

$

(11,598

)

 

$

(41,724

)

 

$

(39,661

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic and diluted

 

 

32,703,723

 

 

 

31,883,029

 

 

 

32,460,494

 

 

 

31,678,360

 

Net loss per common share, basic and diluted

 

$

(0.38

)

 

$

(0.36

)

 

$

(1.29

)

 

$

(1.25

)

 

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 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 the periods presented.

 

 

September 30, 2019

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (1)

 

$

125,053

 

 

$

 

 

$

 

 

$

125,053

 

Total assets