bnft-10q_20200331.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 March 31, 2020

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 May 1, 2020, there were approximately 32,063,446 shares of the registrant’s common stock outstanding.

 


 

Benefitfocus, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2020

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

3

 

 

Unaudited Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019

4

 

 

Unaudited Consolidated Statements of Changes in Stockholders' Deficit for the Three Months Ended March 31, 2020 and 2019  

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019

6

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

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

18

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

28

 

 

ITEM 4. CONTROLS AND PROCEDURES

29

 

 

PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

30

 

 

ITEM 6. EXHIBITS

31

 

 

SIGNATURES

33

 

 

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

March 31,

2020

 

 

As of

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

114,714

 

 

$

130,976

 

Accounts receivable, net

 

 

33,450

 

 

 

33,754

 

Contract, prepaid and other current assets

 

 

21,271

 

 

 

21,523

 

Total current assets

 

 

169,435

 

 

 

186,253

 

Property and equipment, net

 

 

31,507

 

 

 

28,669

 

Financing lease right-of-use assets

 

 

75,687

 

 

 

78,520

 

Operating lease right-of-use assets

 

 

1,591

 

 

 

1,715

 

Intangible assets, net

 

 

12,099

 

 

 

12,667

 

Goodwill

 

 

12,857

 

 

 

12,857

 

Deferred contract costs and other non-current assets

 

 

10,445

 

 

 

11,002

 

Total assets

 

$

313,621

 

 

$

331,683

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,300

 

 

$

9,563

 

Accrued expenses

 

 

11,937

 

 

 

10,526

 

Accrued compensation and benefits

 

 

11,245

 

 

 

15,246

 

Deferred revenue, current portion

 

 

29,736

 

 

 

33,429

 

Lease liabilities and financing obligations, current portion

 

 

8,240

 

 

 

6,871

 

Total current liabilities

 

 

67,458

 

 

 

75,635

 

Deferred revenue, net of current portion

 

 

4,803

 

 

 

5,079

 

Convertible senior notes

 

 

190,873

 

 

 

187,949

 

Revolving line of credit

 

 

10,000

 

 

 

 

Lease liabilities and financing obligations, net current portion

 

 

82,891

 

 

 

88,572

 

Other non-current liabilities

 

 

68

 

 

 

92

 

Total liabilities

 

 

356,093

 

 

 

357,327

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

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

   no shares issued and outstanding at March 31, 2020

   and December 31, 2019

 

 

 

 

 

 

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

   31,778,075 and 32,788,980 shares issued and 31,775,214 and 32,788,980

   shares outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

32

 

 

 

33

 

Additional paid-in capital

 

 

420,393

 

 

 

426,025

 

Accumulated deficit

 

 

(462,897

)

 

 

(451,702

)

Total stockholders' deficit

 

 

(42,472

)

 

 

(25,644

)

Total liabilities and stockholders' deficit

 

$

313,621

 

 

$

331,683

 

 

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

March 31,

 

 

 

2020

 

 

2019

 

Revenue

 

$

66,154

 

 

$

68,299

 

Cost of revenue

 

 

33,912

 

 

 

32,852

 

Gross profit

 

 

32,242

 

 

 

35,447

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

15,630

 

 

 

19,619

 

Research and development

 

 

11,768

 

 

 

13,090

 

General and administrative

 

 

10,515

 

 

 

11,796

 

Total operating expenses

 

 

37,913

 

 

 

44,505

 

Loss from operations

 

 

(5,671

)

 

 

(9,058

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

426

 

 

 

660

 

Interest expense

 

 

(5,891

)

 

 

(5,814

)

Other income

 

 

5

 

 

 

9

 

Total other expense, net

 

 

(5,460

)

 

 

(5,145

)

Loss before income taxes

 

 

(11,131

)

 

 

(14,203

)

Income tax expense

 

 

5

 

 

 

6

 

Net loss

 

$

(11,136

)

 

$

(14,209

)

Comprehensive loss

 

$

(11,136

)

 

$

(14,209

)

Net loss per common share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.34

)

 

$

(0.44

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

32,638,805

 

 

 

32,056,934

 

 

 

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, 2019

 

 

32,788,980

 

 

$

33

 

 

$

426,025

 

 

$

(451,702

)

 

$

(25,644

)

Cumulative effect adjustment from adoption of credit standard

 

 

 

 

 

 

 

 

 

 

 

(59

)

 

 

(59

)

Exercise of stock options

 

 

13,584

 

 

 

 

 

 

73

 

 

 

 

 

 

73

 

Issuance of common stock upon vesting of restricted stock units

 

 

43,315

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

3,677

 

 

 

 

 

 

3,677

 

Common stock repurchased

 

 

(1,070,665

)

 

 

(1

)

 

 

(9,382

)

 

 

 

 

 

(9,383

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,136

)

 

 

(11,136

)

Balance, March 31, 2020

 

 

31,775,214

 

 

$

32

 

 

$

420,393

 

 

$

(462,897

)

 

$

(42,472

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)

 

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

 

 

5


 

Benefitfocus, Inc.

Unaudited Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(11,136

)

 

$

(14,209

)

Adjustments to reconcile net loss to net cash and cash

   equivalents used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,884

 

 

 

5,335

 

Stock-based compensation expense

 

 

3,677

 

 

 

6,367

 

Accretion of interest on convertible senior notes

 

 

2,924

 

 

 

2,749

 

Interest accrual on finance lease liabilities

 

 

23

 

 

 

 

Rent expense (less than) in excess of payments

 

 

(9

)

 

 

9

 

Provision for doubtful accounts

 

 

55

 

 

 

265

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

189

 

 

 

(6,514

)

Contract, prepaid and other current assets

 

 

252

 

 

 

(2,495

)

Deferred costs and other non-current assets

 

 

557

 

 

 

1,568

 

Accounts payable and accrued expenses

 

 

(1,593

)

 

 

(4,867

)

Accrued compensation and benefits

 

 

(4,000

)

 

 

(3,580

)

Deferred revenue

 

 

(3,969

)

 

 

(5,089

)

Other non-current liabilities

 

 

(24

)

 

 

(23

)

Net cash and cash equivalents used in operating activities

 

 

(7,170

)

 

 

(20,484

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Business combination, net of cash acquired

 

 

 

 

 

(21,033

)

Purchases of property and equipment

 

 

(3,821

)

 

 

(2,955

)

Net cash and cash equivalents used in investing activities

 

 

(3,821

)

 

 

(23,988

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Draws on revolving line of credit

 

 

10,000

 

 

 

 

Payments of debt issuance costs

 

 

(154

)

 

 

(357

)

Repurchase of common stock

 

 

(9,383

)

 

 

 

Proceeds from exercises of stock options and ESPP

 

 

73

 

 

 

89

 

Payments on financing obligations

 

 

(207

)

 

 

(655

)

Payments of principal on finance lease liabilities

 

 

(5,600

)

 

 

(1,375

)

Net cash and cash equivalents used in financing activities

 

 

(5,271

)

 

 

(2,298

)

Net decrease in cash and cash equivalents

 

 

(16,262

)

 

 

(46,770

)

Cash and cash equivalents, beginning of period

 

 

130,976

 

 

 

190,928

 

Cash and cash equivalents, end of period

 

$

114,714

 

 

$

144,158

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued expenses

 

$

31

 

 

$

382

 

 

 

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 that is designed to simplify how organizations and individuals transact benefits. 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-month period ended March 31, 2020 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, 2019 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 acquired intangibles and goodwill as well as the estimates disclosed in association with revenue recognition. Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.

Revenue and Deferred Revenue

The Company derives its revenue primarily from fees for subscription services and professional services sold to employers and insurance carriers as well as platform revenue derived from the value of products sold on our platform. Revenue is 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 revenue.

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 Revenue

Software services revenue consists of subscription revenue and platform revenue.

Subscription Revenue

Subscription revenue primarily consists of monthly subscription fees paid to the Company by its employer and insurance carrier customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.

7


 

Subscription services revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. The Company’s subscription service contracts are generally three years.

Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.

Platform Revenue

Platform revenue is generated from the value of policies or products enrolled in through the Company’s marketplace.  Platform revenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where the Company sells policies to employees of its customers as the broker, it earns broker commissions. 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 Revenue

Professional services revenue primarily consists 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 and support services 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, do 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 subscription 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.

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

Revenue from support and training fees is 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 subscription 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 are 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 are 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

March 31,

2020

 

 

As of

December 31,

2019

 

Costs to obtain contracts

 

$

6,205

 

 

$

6,676

 

Costs to fulfill contracts

 

$

3,055

 

 

$

3,112

 

 

 

 

Three Months Ended March 31,

 

 

Amortization of deferred contract costs

 

2020

 

 

2019

 

 

Costs to obtain contracts included in sales and marketing expense

 

$

881

 

 

$

1,047

 

 

Costs to fulfill contracts included in cost of revenue

 

$

375

 

 

$

802

 

 

 

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.  Accounts receivable from one customer represented approximately 13% and 11% of the total accounts receivable as of March 31, 2020 and December 31, 2019, respectively. Accounts receivable from another customer represented approximately 10% of the total accounts receivable as of March 31, 2020. No other customer exceeded 10% of accounts receivable as of December 31, 2019. No customer exceeded 10% of total revenue in the three-month period ended March 31, 2020. Revenue from one customer was approximately 11% of the total revenue in the three-month period ended March 31, 2019.

Allowance for Doubtful Accounts

Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments” on January 1, 2020, the Company shifted to a current expected credit loss model. Accounts receivable and allowance for doubtful accounts are discussed in Note 5.

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 March 31,

 

 

Capitalized software development costs

 

2020

 

 

2019

 

 

Capitalized

 

$

3,472

 

 

$

2,063

 

 

Amortized

 

$

1,519

 

 

$

1,178

 

 

 

Capitalized software development costs

 

As of

March 31,

2020

 

 

As of

December 31,

2019

 

Net book value

 

$

16,412

 

 

$

14,459

 

 

Leases

The Company periodically 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. Because 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 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.

9


 

Recently Adopted Accounting Standards

Financial Instruments

On January 1, 2020, the Company adopted ASU No. 2016-13. 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. On adoption, the Company recorded an immaterial cumulative-effect adjustment to retained earnings in connection with expected credit losses on its trade receivables.

Fair Value Measurement

On January 1, 2020 the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU modifies the disclosure requirements required for fair value measurements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU No. 2019-12 is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This ASU is effective for the Company for the interim and annual reporting periods starting January 1, 2021. Early adoption is permitted. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

3. Net Loss Per Common Share

Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.

The following common share equivalent securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the periods presented:

 

 

Three Months Ended

March 31,

 

Anti-Dilutive Common Share Equivalents

 

2020

 

 

2019

 

Restricted stock units

 

 

1,508,263

 

 

 

2,013,082

 

Stock options

 

 

179,363

 

 

 

214,647

 

Convertible senior notes

 

 

4,513,824

 

 

 

4,513,824

 

Employee Stock Purchase Plan

 

 

5,982

 

 

 

1,959

 

Total anti-dilutive common share equivalents

 

 

6,207,432

 

 

 

6,743,512

 

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,136

)

 

$

(14,209

)

Net loss attributable to common stockholders

 

$

(11,136

)

 

$

(14,209

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic and diluted

 

 

32,638,805

 

 

 

32,056,934

 

Net loss per common share, basic and diluted

 

$

(0.34

)

 

$

(0.44

)

 

4. Fair Value Measurement

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, 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.

10


 

 

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.

 

 

March 31, 2020

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds(1)

 

$

112,199

 

 

$

 

 

$

 

 

$

112,199

 

Total assets

 

$

112,199

 

 

$

 

 

$

 

 

$

112,199

 

 

 

 

December 31, 2019

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds(1)

 

$

124,503

 

 

$

 

 

$

 

 

$

124,503

 

Total assets

 

$

124,503

 

 

$

 

 

$

 

 

$

124,503

 

 

________________

(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. Accounts Receivable, net

Accounts receivable, net include:

 

 

 

As of

March 31,

2020

 

 

As of

December 31,

2019

 

Accounts receivable

 

$

37,022

 

 

$

36,669

 

Less:  Allowance for doubtful accounts

 

 

(242

)

 

 

(155

)

Less:  Allowance for returns

 

 

(3,330

)

 

 

(2,760

)

Total accounts receivable, net

 

$

33,450

 

 

$

33,754

 

 

Accounts receivable are stated at their amortized cost adjusted for any write-offs and net allowances for returns. The Company estimates expected credit losses related to accounts receivable balances based on a review of available and relevant information including current economic conditions, projected economic conditions, historical loss experience, account aging, and other factors that could affect collectability. Expected credit losses are determined individually or collectively depending on whether the accounts receivable balances share similar risk characteristics. The allowance for doubtful accounts is the best estimate of the amount of expected credit losses related to existing accounts receivable. The Company does not have any off-balance sheet credit exposure related to its customers.

Allowance for doubtful accounts

 

Three Months Ended March 31, 2020

 

Beginning of period

 

$

155

 

Provision for credit losses (including effect of adoption)

 

 

131

 

Write-offs and recoveries

 

 

(44

)

End of period

 

$

242

 

 

The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodic assessment of historical experience and trends. The Company considers factors such as historical reasons for adjustments, service and delivery issues or delays, and past due customer billings.

6. Convertible Senior Notes

In December 2018, the Company issued $240,000 aggregate principal amount of 1.25% convertible senior notes (“Notes”) due December 15, 2023, unless earlier repurchased by the Company or converted by the holder pursuant to their terms. Interest is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2019.

The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes are unsecured and rank: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s unsecured indebtedness that is not subordinated; effectively junior

11


 

in right of payment to any of the Company’s senior, secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election.

The Notes have an initial conversion rate of 18.8076 shares of common stock per $1 principal amount of Notes. This represents an initial effective conversion price of approximately $53.17 per share of common stock and 4,513,824 shares issuable upon conversion. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock paid or delivered, as the case may be, to the holder upon conversion of Notes.

Prior to the close of business on September 14, 2023, the Notes will be convertible at the option of holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after September 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion price at any time regardless of whether the conditions set forth below have been met.

Holders may convert all or a portion of their Notes prior to the close of business on September 14, 2023, in multiples of $1 principal amount, only under the following circumstances:

 

during any calendar quarter commencing after the calendar quarter ending on March 31, 2019 (and only during such calendar quarter), if the last reported sales price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

 

during the five business day period after any five consecutive trading day period, or the Notes measurement period, in which the “trading price” (as defined in the Indenture) per $1 principal amount of notes for each trading day of the Notes measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

 

if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on September 14, 2023; or

 

upon the occurrence of specified corporate events.

As of March 31, 2020, the Notes were not convertible.

Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied market interest rate of its Notes to be approximately 7.30%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component of the Notes, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $181,500 upon issuance, calculated as the present value of future contractual payments based on the $240,000 aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes. The $58,500 difference between the gross proceeds received from issuance of the Notes of $240,000 and the estimated fair value of the liability component represents the equity component of the Notes and was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components in proportion to the allocation of proceeds. Transaction costs attributable to the liability component, totaling $4,808, are being amortized to expense over the term of the Notes, and transaction costs attributable to the equity component, totaling $1,550, and were included with the equity component in shareholders’ equity.

The Notes consist of the following as of:

 

 

As of

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Liability component:

 

 

 

 

 

 

 

 

Principal

 

$

240,000

 

 

$

240,000

 

Less:  Debt discount, net of amortization

 

 

(49,127

)

 

 

(52,051

)

Net carrying amount

 

$

190,873

 

 

$

187,949

 

Equity component (a)

 

 

56,950

 

 

 

56,950

 

 

(a)

Recorded in the consolidated balance sheet within additional paid-in capital, net of $1,550 transaction costs in equity.

 

12


 

The following table sets forth total interest expense recognized related to the Notes:

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

1.25% coupon

 

$

750

 

 

$

750

 

Amortization of debt discount and transaction costs

 

 

2,924

 

 

 

2,749

 

 

 

$

3,674

 

 

$

3,499

 

 

As of March 31, 2020, the fair value of the Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Notes classified in equity) were as follows:

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

Convertible senior notes

 

$

180,000

 

 

$

190,873

 

 

$

207,600

 

 

$

187,949

 

 

In connection with the issuance of the Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the Notes. Under the capped call transactions, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock underlying the Notes, with an initial strike price of approximately $53.17 per share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $89.98. The cost of the purchased capped calls of $33,024 was recorded to stockholders’ deficit and will not be re-measured provided it continues to meet the conditions for equity classification.

Based on the closing price of our common stock of $8.91 on March 31, 2020, the last trading day of the quarter, the if-converted value of the Notes was less than their respective principal amounts.

7. Revolving Line of Credit

On February 20, 2020, the Company’s Senior Revolver expired. Other than unused line fees, which have all been paid, there was no outstanding indebtedness under the Senior Revolver when it expired.  

On March 3, 2020, the Company entered into a new credit facility with Silicon Valley Bank providing for a revolving line of credit agreement. The three-year agreement has a borrowing limit of $50,000, with the ability for the Company to increase it to up to $100,000. Interest is payable monthly. Advances under the  agreement bear interest at (a) the higher of (i) the prime rate as published in the Wall Street Journal or (ii) the federal funds effective rate plus 0.50%, plus (b) an applicable margin ranging from (0.50%) to 0.50% based on the Company’s Average Daily Usage (“ADU”) of the credit facility in the preceding month. The Company also is charged for amounts unused under this arrangement at a rate ranging from 0.00% to 0.40% based on the Company’s ADU in the preceding month. Any outstanding principal is due at the end of the term.

The obligations of the Company under the new credit facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of the personal property assets of the Company and its subsidiaries pursuant to the terms of a Guarantee and Collateral Agreement, dated March 3, 2020 and the other security documents.

The new credit facility contains customary representations and warranties and restrictive covenants. In addition, the Company is required to maintain a Consolidated Adjusted Quick Ratio (“AQR”) of (i) Consolidated Quick Assets to (ii) Consolidated Current Liabilities minus the current portion of Deferred Revenue of at least 1.25 to 1.00 as of the last day of any fiscal quarter, and, if the AQR is less than 2.00 to 1.00, a Minimum Consolidated EBITDA of at least $1.00 for any such fiscal quarter calculated on a trailing 12 month basis. The Company has also agreed to fiscal year dollar limits on its capital expenditures.

The new credit facility contains customary events of default, including payment and covenant defaults (subject to grace and cure periods), breaches of representations and warranties, defaults under certain other indebtedness, change of control, insolvency events, and the occurrence of a material adverse effect. If an event of default occurs, the lender would be entitled to take various actions, including the acceleration of amounts due under the credit facility and all actions permitted to be taken by a secured creditor.

As of March 31, 2020, the amount outstanding under the Company’s revolving line of credit was $10,000. The amount available to borrow was $40,000 and the interest rate was 2.75% as of March 31, 2020. In March 2020, the Company borrowed $10,000 under its line of credit for general operating purposes.

8. Commitments

Supplemental cash flow information related to the Company’s operating and finance leases was as follows:

13


 

Cash Paid for Amounts Included in the Measurement of Lease Liabilities

 

Three Months Ended March 31, 2020

 

Financing cash flows from finance leases

 

$

5,600

 

Operating cash flows from finance leases

 

$

2,067

 

Operating cash flows from operating leases

 

$

195

 

ROU Assets Obtained in Exchange for New Lease Obligations

 

 

 

 

Finance lease liabilities

 

$

3,593

 

Operating lease liabilities

 

$

-

 

As of March 31, 2020, the Company had no additional significant operating or finance leases that had not yet commenced.

Finance Leases

On March 13, 2020, the Company executed an amendment to its three leases for office space on its headquarters campus. Pursuant to this amendment, the Company paid the lessor, a related party, $3,993 for future rent due in the first half of 2021, representing an approximately 17% discount on rent due for those periods. The ROU assets and financing lease liabilities were adjusted to reflect the effect of the amendment and associated payments.

In February 2020, the Company entered into a financing lease arrangement for servers and networking equipment used in operations. Total payments under the agreement are $3,723, including the first annual payment of $784 and two annual payments of $1,470, each. In connection with this lease, the Company recorded financing ROU assets and financing lease liabilities of $3,593.

9. Stock-based Compensation

Restricted Stock Units

During the three months ended March 31, 2020, the Company granted 49,800 restricted stock units, or RSUs, to employees and officers with an aggregate grant date fair value of $890. These RSUs generally vest in equal annual installments over various periods ranging from less than one year to up to four years from the grant date, subject to continued service to the Company. The Company amortizes the grant date fair value of the stock subject to the RSUs on a straight-line basis over the period of vesting. The weighted-average vesting period for these RSUs is approximately 3.88 years from the date of grant.

10. 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 March 31, 2020, the Company had reserved a total of 5,415,582 of its authorized 50,000,000 shares of common stock for future issuance as follows:

 

Outstanding stock options

 

 

179,363

 

Restricted stock units

 

 

1,508,263

 

Available for future issuance under stock award plans

 

 

3,622,233

 

Available for future issuance under ESPP

 

 

105,723

 

Total common shares reserved for future issuance

 

 

5,415,582

 

 

Under its stock repurchase program, the Company purchased 1,070,665 shares of its outstanding common stock, for an aggregate of $9,383 during the three months ended March 31, 2020. Of these shares, 1,067,804 have been canceled and returned to its pool of authorized shares to be used for general purposes. The balance of shares repurchased, if any, will be canceled in future periods. As of March 31, 2020, approximately $10,617 remains available for potential repurchases.

11. Revenue

Disaggregation of Revenue

The following tables provide information about disaggregation of revenue by service line:

 

 

Three Months Ended March 31,

 

 

 

 

2020

 

 

2019

 

 

Service line:

 

 

 

 

 

 

 

 

 

Subscription

 

$

45,990

 

 

$

47,869

 

 

Platform

 

 

6,005

 

 

 

5,143

 

 

Total software services

 

$

51,995

 

 

$

53,012

 

 

Professional services

 

 

14,159

 

 

 

15,287

 

 

Total

 

$

66,154

 

 

$

68,299

 

 

 

14


 

Contract Balances

The following table provides information about contract assets and contract liabilities from contracts with customers:

 

 

Balance at Beginning of Period

 

 

Balance at End of Period

 

Three Months Ended March 31, 2020

 

 

 

 

 

 

 

 

Contract assets

 

$

16,685

 

 

$

13,870

 

Contract liabilities:

 

 

 

 

 

 

 

 

Deferred revenue

 

$

38,508

 

 

$

34,539

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

Contract assets

 

$

12,798

 

 

$

12,383

 

Contract liabilities:

 

 

 

 

 

 

 

 

Deferred revenue

 

$

45,863

 

 

$

46,895

 

The Company recognizes payments from customers based on contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional.  Contract assets include amounts related to the Company’s contractual right to consideration for completed performance objectives not yet invoiced. Contract liabilities include payments received in advance of performance under the contract and are recognized as revenue when earned under the contract. The Company had no asset impairment charges related to contract assets during the three months ended March 31, 2020 and 2019.

There were no significant changes in the contract assets outside of standard revenue and billing activity.

Revenue recognized during the three months ended March 31, 2020 that was included in the deferred revenue balance at the beginning of the period was $19,766.

The Company recorded favorable adjustments to revenue arising from performance obligations satisfied or partially satisfied in previous periods $660 during the three months ended March 31, 2020.

Performance Obligations

As of March 31, 2020, the aggregate amount of the Company’s performance obligations that are unsatisfied or partially unsatisfied were approximately $190,000, of which a majority are expected to be satisfied within the next three years. The Company excludes from its population of performance obligations contracts with original durations of one year or less, contract renewal periods that renew automatically, and amounts of variable consideration that are allocated to wholly unsatisfied distinct service that forms part of a single performance obligation and meets certain variable allocation criteria.

12. Income Taxes

The Company’s effective federal tax rate for the three months ended March 31, 2020 was less than one percent, primarily as a result of estimated tax losses for the fiscal year to date offset by the increase in the valuation allowance in the net operating loss carryforwards. Current tax expense relates to estimated state income taxes.

13. Segments and Geographic Information

The Company views its operations and manages its business as one operating segment. Segment information matches the consolidated financial information for the current period and prior periods reported.

14. Related Parties

Related Party Leasing Arrangements

The Company leases its office space at its Charleston, South Carolina headquarters campus under the terms of three non-cancellable leases from entities affiliated with an executive who is also a Company director and significant stockholder. The Company’s headquarter campus building leases are accounted for as financing lease right-of-use assets and lease liabilities on the Consolidated Balance Sheet as of March 31, 2020. The three lease agreements have 15-year terms ending on December 31, 2031, with Company options to renew for five additional years. The arrangements provide for 3.0% fixed annual rent increases. Payments under these agreements were $7,358 and $3,331 for the three months ended March 31, 2020 and 2019, respectively. Other amounts due to these related parties were $209 and $791 as of March 31, 2020 and December 31, 2019, respectively, and were recorded in “Accrued expenses.” Payments made for the three months ended March 31, 2020 include amounts paid in connection with the amendment of these leases discussed in Note 8.  

Other Related Party Expenses

The Company utilizes the services of various companies that are owned and controlled by an executive who is also a Company director and significant stockholder. The companies provide construction project management services, private air transportation and other services. Expenses related to these companies were $120 and $119 for the three months ended March 31, 2020 and 2019, respectively. There were no amounts due to these companies as of March 31, 2020 and December 31, 2019.

15


 

During 2018, the Company entered into an agreement to purchase software and services from a company affiliated with a Company director.  The aggregate amount of payments due under this contract is $115.  Payments related to this agreement were $26 and $35 for the three months ended March 31, 2020 and 2019, respectively. Amounts due to this company were $26 as of March 31, 2020. There were no amounts due to this company as of December 31, 2019.

15. Subsequent Events

Restricted Stock Units

During May 2020, the Company granted 1,225,460 RSUs and 785,596 performance RSUs with an aggregate grant date fair value of $12,524 and $8,029, respectively. The aggregate grant date fair value of the performance RSUs assuming target achievement was $6,206. The RSUs generally vest in equal annual installments over four years from the grant date.  The number of performance RSUs that will vest will be determined upon the achievement of certain financial targets for 2020, and vesting will then occur in equal annual installments over various periods ranging from less than one to three years. The actual number of shares issued upon vesting could range between 0% and 100% of the number of awards granted. The weighted-average vesting period for these RSUs and performance RSUs is approximately 3.09 and 2.36 years from the date of grant, respectively.

Common Stock

During April and May 2020, employees exercised stock options and RSUs vested resulting in the issuance of 288,232 shares.

The Company purchased 35,508 shares of its outstanding common stock for an aggregate of $285 during April 2020.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. The pandemic did not have a material impact on the Company’s financial statements for the three months ended March 31, 2020. The Company has implemented actions to maintain its financial health and liquidity. The Company is also monitoring the impacts of COVID-19 on the fair value of assets. Future changes in sales, earnings and cash flows related to long-lived assets to be held and used and goodwill could cause these assets to become impaired. In addition, the Company continues to monitor the impacts of the pandemic on its estimates for allowance for doubtful accounts and expected credit losses associated with its accounts receivable and certain contract assets. COVID-19 is discussed in more detail throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Restructuring Plan

On April 28, 2020, the Company announced a restructuring plan to as part of the Company’s actions to ensure the safety and well-being of its employees and customers, contain costs and further preserve its liquidity profile in response to the impact of the COVID-19 pandemic.  This plan entailed a reduction in U.S. workforce of approximately 17% in the second quarter of 2020. The Company estimates that the restructuring plan will result in pre-tax charges of approximately $5,000 to $7,000 and will be recorded as restructuring expenses in the second quarter of 2020. The charges will consist of one-time severance charges, acceleration of unvested equity grants, continuation of health benefits and outplacement services. The estimated cash expenditure for these charges is approximately $5,000.

 

16


 

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; 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 retain and hire necessary associates and appropriately staff our operations; 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.

 

 

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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, 2019. 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 buyers (consumers, employees and employers) and sellers (insurance brokers, carriers and suppliers). The Benefitfocus Platform simplifies how organizations and individuals transact benefits. Our employer, carrier, broker and supplier customers rely on our platform to manage, scale and exchange benefits data seamlessly. Our solutions drive value for all participants in our benefits ecosystem.

The Benefitfocus platform has a multi-tenant architecture and a user-friendly interface designed for consumers to access all of their benefits in one place. Our comprehensive solutions support medical benefit plans and non-medical benefits, such as, dental, life, disability insurance, income protection, digital health and financial wellness. Our platform includes artificial intelligence functionality designed to help consumers identify and evaluate benefit options offered by their employer. 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 is growing.

In 2018, we expanded our economic model to include a transaction-oriented, buyer solution, known as Benefit Catalog (formerly BenefitsPlace), designed to align brokers, carriers and suppliers around the needs of employers, employees and consumers. In this model, our seller partners offer their voluntary and specialty benefit products through a holistic, multidimensional marketplace.  This marketplace is designed to increase the economic value of the consumer lives on our platform by aligning the product catalog to consumer needs. In exchange for Benefitfocus delivering consumer access, data-driven analysis and operational efficiencies, seller partners pay us a percentage of the purchases completed on our platform. Carrier agreements have terms of two to four years and are typically cancellable upon breach of contract or insolvency.  Supplier contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to cure, bankruptcy and termination for convenience.

We classify our revenue into three streams – subscription, platform, and professional services revenue.  Subscription and platform revenue are combined and reported as software services revenue.  As a result of adding Benefit Catalog to our economic model in 2018, we now manage platform revenue as a separate stream. Accordingly, platform revenue is reported separately for the current and historical periods.

Subscription revenue primarily consists of monthly subscription fees paid to us by our employer and insurance carrier customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Subscription fees are generally charged based on the number of employees or subscribers with access to the solution. Subscription revenue accounted for approximately 70% of our total revenue during both of the three-month periods ended March 31, 2020 and 2019.

Platform revenue includes Benefit Catalog transactional revenue, which is generated from the value of the policies or products enrolled in through our marketplace. Benefit Catalog revenue from insured produces is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog supplier transactions is generally recognized at the time when open enrollment is complete and the orders for policies are transferred to the supplier. Platform revenue accounted for approximately 9% and 8% of our total revenue during the three-month period ended March 31, 2020 and 2019, respectively.

Our professional services revenue stream is largely derived from the implementation of our customers onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and training. 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 21% and 22% of our total revenue during the three-month period ended March 31, 2020 and 2019, respectively.

Expanding our customer base is a key element of our growth strategy. We believe that our continued innovation and new solutions, such as Benefit Catalog, which extend the functionality of our mobile offerings, provide more robust data analytics capabilities, and enhance our ability to quickly respond to evolving market needs with innovative capabilities, will help us attract additional net benefit eligible lives to our platform through new employer customers, partners, and brokers, and increase our revenue from existing customers and relationships.

We believe that there is a substantial market for our services, and we have been investing in growth over the past several 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 substantially increased our marketing and sales efforts. As we have invested in growth, we have had operating losses in each of the last nine years, and expect our operating losses to continue for at least the next year.

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On March 11, 2020 the World Health Organization classified the COVID-19 outbreak as a pandemic. In response to changes in the business environment as a result of the pandemic, we implemented actions to maintain our financial health and liquidity. These actions to control cost by reducing our workforce by approximately 17%, renegotiating vendor service contracts, restricting travel, and reducing discretionary expenditures such as consultants. These actions also target improving efficiencies by investing in automation.

While the ultimate impact of the pandemic on our business and financial results remains uncertain, we believe our business will be impacted by the following in the near term:

 

New sales. We expect to experience a slowdown in new sales activity which we expect to negatively impact professional services revenue and platform revenue from new business.

 

Unemployment. We expect the increase in unemployment caused by the pandemic will negatively impact platform revenue by decreasing the rate at which our Benefits Catalog voluntary benefits offerings are purchased. We expect our subscription revenue will be impacted to a lesser extent depending on the level of contractual minimums in our contracts and a delay in when unemployed workers leave our platform. In addition, we expect unemployment to potentially cause a decrease in net benefit eligible lives on our platform in the near term.

 

Participation in Voluntary Benefits. We expect a decrease in the participation of lives on our platform in purchasing voluntary benefits as a result of the economic impacts of the pandemic on income levels across the country.

As a result of the nature of our customer relationships, the stability of our subscription revenue, the cost restructuring actions taken in the second quarter of 2020 and our ongoing investments in automation, we believe we will be able to achieve profitability in the relatively near future. Of course, our ability to achieve profitability 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 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.

Adjusted EBITDA

Adjusted EBITDA represents our earnings before net interest and other expenses, taxes, and depreciation and amortization expense, adjusted to eliminate stock-based compensation and impairment of goodwill and intangible assets, transaction and acquisition-related costs expensed, restructuring costs and costs not core to our business. 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 an alternative to any measure of financial performance calculated and presented in accordance with GAAP.

Beginning in the first quarter of 2020, we revised our definition of adjusted EBITDA to also exclude restructuring charges.  This revision to the definition had no material impact on our reported adjusted EBITDA for the three months ended March 31, 2020 or prior periods.

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;

 

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.

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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, net loss (in thousands):

 

 

Three Months Ended

March 31,

 

 

 

2020

 

 

2019

 

Reconciliation from Net Loss to Adjusted EBITDA:

 

 

 

 

 

 

 

 

Net loss

 

$

(11,136

)

 

$

(14,209

)

Depreciation

 

 

3,796

 

 

 

3,967

 

Amortization of software development costs

 

 

1,519

 

 

 

1,178

 

Amortization of acquired intangible assets

 

 

569

 

 

 

190

 

Interest income

 

 

(426

)

 

 

(660

)

Interest expense

 

 

5,891

 

 

 

5,814

 

Income tax expense

 

 

5

 

 

 

6

 

Stock-based compensation expense

 

 

3,677

 

 

 

6,367

 

Transaction and acquisition-related costs expensed

 

 

192

 

 

 

642

 

Costs not core to our business

 

 

-

 

 

 

320

 

Total net adjustments

 

 

15,223