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 June 30, 2017
or
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-36061
Benefitfocus, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
46-2346314 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
100 Benefitfocus Way
Charleston, South Carolina 29492
(Address of principal executive offices and zip code)
(843) 849-7476
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
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Large accelerated filer |
☐ |
Accelerated filer |
☒ |
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Non-accelerated filer |
☐ (Do not check if a smaller reporting company) |
Smaller reporting company |
☐ |
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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 July 28, 2017, there were approximately 31,179,802 shares of the registrant’s common stock outstanding.
Form 10-Q
For the Quarterly Period Ended June 30, 2017
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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3 |
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Unaudited Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 |
3 |
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4 |
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5 |
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Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 |
6 |
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7 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
17 |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
31 |
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32 |
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PART II. OTHER INFORMATION |
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33 |
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50 |
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51 |
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2
Benefitfocus, Inc.
Unaudited Consolidated Balance Sheets
(in thousands, except share and per share data)
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As of June 30, 2017 |
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As of December 31, 2016 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
59,395 |
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$ |
56,853 |
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Marketable securities |
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– |
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2,007 |
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Accounts receivable, net |
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26,952 |
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28,340 |
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Accounts receivable, related party, net |
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907 |
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4,626 |
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Prepaid expenses and other current assets |
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6,247 |
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4,449 |
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Total current assets |
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93,501 |
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96,275 |
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Property and equipment, net |
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76,410 |
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80,518 |
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Intangible assets, net |
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279 |
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408 |
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Goodwill |
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1,634 |
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1,634 |
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Other non-current assets |
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1,216 |
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1,575 |
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Total assets |
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$ |
173,040 |
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$ |
180,410 |
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Liabilities and stockholders' deficit |
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Current liabilities: |
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Accounts payable |
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$ |
5,146 |
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$ |
5,829 |
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Accrued expenses |
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8,490 |
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10,867 |
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Accrued compensation and benefits |
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14,678 |
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17,347 |
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Deferred revenue, current portion |
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32,307 |
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35,426 |
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Revolving line of credit, current portion |
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20,000 |
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20,000 |
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Financing and capital lease obligations, current portion |
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3,232 |
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2,604 |
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Total current liabilities |
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83,853 |
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92,073 |
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Deferred revenue, net of current portion |
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32,791 |
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40,412 |
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Revolving line of credit, net of current portion |
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32,246 |
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20,246 |
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Financing and capital lease obligations, net of current portion |
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56,654 |
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57,934 |
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Other non-current liabilities |
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2,590 |
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3,056 |
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Total liabilities |
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208,134 |
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213,721 |
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Commitments and contingencies |
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Stockholders' deficit: |
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Preferred stock, par value $0.001, 5,000,000 shares authorized, no shares issued and outstanding at June 30, 2017 and December 31, 2016 |
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– |
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– |
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Common stock, par value $0.001, 50,000,000 shares authorized, 31,134,394 and 30,429,014 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively |
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31 |
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30 |
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Additional paid-in capital |
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345,860 |
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335,059 |
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Accumulated deficit |
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(380,985 |
) |
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(368,400 |
) |
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Total stockholders' deficit |
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(35,094 |
) |
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(33,311 |
) |
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Total liabilities and stockholders' deficit |
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$ |
173,040 |
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$ |
180,410 |
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The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
3
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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Revenue |
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$ |
63,348 |
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$ |
57,874 |
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$ |
127,519 |
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$ |
112,666 |
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Cost of revenue |
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28,828 |
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29,750 |
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60,429 |
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59,047 |
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Gross profit |
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34,520 |
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28,124 |
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67,090 |
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53,619 |
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Operating expenses: |
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Sales and marketing |
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17,646 |
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14,761 |
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34,923 |
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28,335 |
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Research and development |
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12,473 |
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14,180 |
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24,654 |
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29,195 |
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General and administrative |
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5,877 |
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8,274 |
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13,634 |
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16,669 |
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Total operating expenses |
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35,996 |
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37,215 |
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73,211 |
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74,199 |
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Loss from operations |
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(1,476 |
) |
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(9,091 |
) |
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(6,121 |
) |
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(20,580 |
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Other income (expense): |
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Interest income |
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47 |
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36 |
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74 |
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92 |
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Interest expense on building lease financing obligations |
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(1,861 |
) |
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(1,710 |
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(3,721 |
) |
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(3,426 |
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Interest expense on other borrowings |
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(1,210 |
) |
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(231 |
) |
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(2,272 |
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(429 |
) |
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Other expense |
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(1 |
) |
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(3 |
) |
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(149 |
) |
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(3 |
) |
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Total other expense, net |
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(3,025 |
) |
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(1,908 |
) |
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(6,068 |
) |
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(3,766 |
) |
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Loss before income taxes |
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(4,501 |
) |
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(10,999 |
) |
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(12,189 |
) |
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(24,346 |
) |
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Income tax expense |
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5 |
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5 |
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5 |
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10 |
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Net loss |
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$ |
(4,506 |
) |
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$ |
(11,004 |
) |
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$ |
(12,194 |
) |
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$ |
(24,356 |
) |
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Comprehensive loss |
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$ |
(4,506 |
) |
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$ |
(11,004 |
) |
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$ |
(12,194 |
) |
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$ |
(24,356 |
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Net loss per common share: |
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Basic and diluted |
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$ |
(0.14 |
) |
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$ |
(0.37 |
) |
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$ |
(0.40 |
) |
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$ |
(0.83 |
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Weighted-average common shares outstanding: |
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Basic and diluted |
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31,076,995 |
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29,459,341 |
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30,868,888 |
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29,336,270 |
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The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
4
Unaudited Consolidated Statement of Changes in Stockholders’ Deficit
(in thousands, except share and per share data)
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Common Stock, |
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Additional |
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Total |
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$0.001 Par Value |
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Paid-in |
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Accumulated |
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Stockholders' |
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Shares |
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Par Value |
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Capital |
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Deficit |
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Deficit |
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Balance, December 31, 2016 |
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30,429,014 |
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$ |
30 |
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$ |
335,059 |
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$ |
(368,400 |
) |
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$ |
(33,311 |
) |
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Cumulative effect adjustment from adoption of new accounting standard |
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– |
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– |
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391 |
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(391 |
) |
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– |
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Exercise of stock options |
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412,538 |
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1 |
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3,048 |
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— |
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3,049 |
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Issuance of common stock upon vesting of restricted stock units |
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288,877 |
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— |
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– |
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— |
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– |
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Issuance of common stock under Employee Stock Purchase Plan, or ESPP |
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3,965 |
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— |
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112 |
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— |
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112 |
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Stock-based compensation expense |
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— |
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— |
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7,250 |
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— |
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7,250 |
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Net loss |
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— |
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— |
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— |
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(12,194 |
) |
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(12,194 |
) |
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Balance, June 30, 2017 |
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31,134,394 |
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$ |
31 |
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$ |
345,860 |
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$ |
(380,985 |
) |
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$ |
(35,094 |
) |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
5
Unaudited Consolidated Statements of Cash Flows
(in thousands)
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Six Months Ended June 30, |
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2017 |
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2016 |
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Cash flows from operating activities |
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Net loss |
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$ |
(12,194 |
) |
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$ |
(24,356 |
) |
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Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: |
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Depreciation and amortization |
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7,945 |
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6,310 |
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Stock-based compensation expense |
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7,250 |
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9,183 |
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Interest accrual on financing obligation |
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3,747 |
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3,426 |
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Loss on disposal or impairment of property and equipment |
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149 |
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7 |
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Provision for doubtful accounts |
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61 |
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(22 |
) |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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5,047 |
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(1,582 |
) |
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Accrued interest on short-term investments |
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7 |
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158 |
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Prepaid expenses and other current assets |
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(1,798 |
) |
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(72 |
) |
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Other non-current assets |
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359 |
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291 |
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Accounts payable |
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(1,288 |
) |
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(1,279 |
) |
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Accrued expenses |
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(1,805 |
) |
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|
741 |
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Accrued compensation and benefits |
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(2,669 |
) |
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(3,196 |
) |
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Deferred revenue |
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(10,740 |
) |
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(9,932 |
) |
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Other non-current liabilities |
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(467 |
) |
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87 |
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Net cash and cash equivalents used in operating activities |
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(6,396 |
) |
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(20,236 |
) |
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Cash flows from investing activities |
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Purchases of short-term investments held to maturity |
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– |
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(2,004 |
) |
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Proceeds from maturity of short-term investments held to maturity |
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2,000 |
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31,225 |
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Purchases of property and equipment |
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(3,825 |
) |
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(4,964 |
) |
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Net cash and cash equivalents (used in) provided by investing activities |
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(1,825 |
) |
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24,257 |
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Cash flows from financing activities |
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Draws on revolving line of credit |
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53,000 |
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34,000 |
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Payments on revolving line of credit |
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(41,000 |
) |
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(25,000 |
) |
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Proceeds from exercises of stock options and ESPP |
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|
3,161 |
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|
1,593 |
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Remittance of taxes upon vesting of restricted stock units |
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– |
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(202 |
) |
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Payments on financing and capital lease obligations |
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|
(4,398 |
) |
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(5,557 |
) |
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Net cash and cash equivalents provided by financing activities |
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|
10,763 |
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|
4,834 |
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Net increase in cash and cash equivalents |
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|
2,542 |
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|
8,855 |
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Cash and cash equivalents, beginning of period |
|
|
56,853 |
|
|
|
48,074 |
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Cash and cash equivalents, end of period |
|
$ |
59,395 |
|
|
$ |
56,929 |
|
|
|
|
|
|
|
|
|
|
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Supplemental disclosure of non-cash investing and financing activities |
|
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|
|
|
|
|
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Property and equipment purchases in accounts payable and accrued expenses |
|
$ |
732 |
|
|
$ |
1,397 |
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Property and equipment purchased with financing and capital lease obligations |
|
$ |
— |
|
|
$ |
2,099 |
|
|
Post contract support purchased with financing obligations |
|
$ |
— |
|
|
$ |
1,182 |
|
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Organization and Description of Business
Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, insurance carriers and brokers under a software-as-a-service (“SaaS”) model. The financial statements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. and BenefitStore, Inc.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We are not the primary beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly, we have not consolidated any variable interest entity.
Interim Unaudited Consolidated Financial Information
The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity and cash flows. The results of operations for the six-month period ended June 30, 2017 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, 2016 included in the Company’s Annual Report on Form 10-K filed with the United States Securities and Exchange Commission on February 24, 2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include revenue recognition and the customer relationship period, allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, warrants, capitalizable software development costs and the related amortization, stock-based compensation, the determination of the useful lives of assets, and the impairment assessment of acquired intangibles and goodwill. Determination of these transactions and account balances are based on the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.
Revenue and Deferred Revenue
The Company derives the majority of its revenue from software services fees, which consist primarily of monthly subscription fees paid by customers for access to and usage of the Company’s cloud-based benefits software solutions for a specified contract term. The Company also derives revenue from professional services which primarily include fees related to the integration of customers’ systems with the Company’s platform, which typically includes discovery, configuration, deployment, testing, and training.
The Company recognizes revenue when there is persuasive evidence of an arrangement, the service has been provided, the fees to be paid by the customer are fixed and determinable and collectability is reasonably assured. The Company considers delivery of its cloud-based software services has commenced once access to a configured and live instance to its platform has been granted to the customer.
The Company’s arrangements generally contain multiple elements comprised of software services and professional services. The Company evaluates each element in an arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable and within the Company’s control.
7
When multiple deliverables included in an arrangement are separable into different units of accounting, the arrangement consideration is allocated to the identified units of accounting based on their relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence (“TPE”) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently exist for any of the Company’s deliverables. Accordingly, for arrangements with multiple deliverables that can be separated into different units of accounting, the arrangement consideration is allocated to the separate units of accounting based on the Company’s best estimate of selling price. The amount of arrangement consideration allocated is limited by contingent revenues, if any.
The Company has established standalone value for Benefitfocus Marketplace implementation services in the Employer segment. Accordingly, revenues related to implementation services for the Benefitfocus Marketplace solution in the Employer segment are recognized separately from the revenues earned from the Employer software subscription services. Revenues related to such implementation services are recognized at the time that the professional services have been completed. Certain of the Company’s other professional services, including implementation services related to the Carrier segment, are not sold separately from the software services and there is no alternative use for them. As such, the Company has determined that those professional services do not have standalone value. Accordingly, software services and professional services are combined and recognized as a single unit of accounting. The Company generally recognizes software services fees monthly based on the number of employees covered by the relevant benefits plans at contracted rates for a specified period of time, once the criteria for revenue recognition described above have been satisfied. The Company recognizes revenue on Benefitfocus Marketplace implementation services in the Employer segment that have standalone value at the time the services have been completed and the related software services have commenced. The Company defers recognition of revenue for fees from professional services that do not have standalone value and begins recognizing such revenue once the services are delivered and the related software services have commenced, ratably over the longer of the contract term or the estimated expected life of the customer relationship. Costs incurred by the Company in connection with providing such professional services are charged to expense as incurred and are included in “Cost of revenue.”
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, marketable securities and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The bank deposits of the Company might, at times, exceed federally insured limits and are generally uninsured and uncollateralized. The Company has not experienced any losses on cash and cash equivalents to date.
To manage credit risk related to marketable securities, the Company invests in various types of highly rated corporate bonds, commercial paper, and various U.S. government backed securities with maturities of less than two years. The weighted average maturity of the portfolio of investments must not exceed nine months, per the Company’s investment policy.
To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts. Accounts receivable are unsecured and derived from revenue earned from customers located in the United States. Mercer LLC (“Mercer”), a related party, represented approximately 14% of the total accounts receivable at December 31, 2016. Revenue from Mercer was approximately 10% and 12% of the total revenue for the three months ended June 30, 2017 and 2016, respectively and 11% in each of the six-month periods ended June 30, 2017 and 2016. For more information regarding Mercer revenue, please see Note 11. Accounts receivable from one other customer approximated 13% of the total accounts receivable at December 31, 2016.
Accounts Receivable and Allowance for Doubtful Accounts and Returns
Accounts receivable are stated at realizable value, net of allowances for doubtful accounts and returns. The Company utilizes the allowance method to provide for doubtful accounts based on management’s evaluation of the collectability of amounts due, and other relevant factors. Bad debt expense is recorded in general and administrative expense on the consolidated statements of operations and comprehensive loss. The Company’s estimate is based on historical collection experience and a review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’s estimates. The Company removes recorded receivables and the associated allowances when they are deemed permanently uncollectible. However, if bad debts are higher than expected, future write-offs will be greater than the Company’s estimates. The allowance for doubtful accounts was $708 and $691 as of June 30, 2017 and December 31, 2016, respectively.
The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodic assessment of historical experience and trends. The Company considers factors such as the
8
time lag since the initiation of revenue recognition, historical reasons for adjustments, new customer volume, complexity of billing arrangements, timing of software availability, and past due customer billings. The allowance for returns was $3,312 and $3,904 as of June 30, 2017 and December 31, 2016, respectively.
Capitalized Software Development Costs
The Company capitalizes certain costs related to its software developed or obtained for internal use. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred during the application development stage, including upgrades and enhancements representing modifications that will result in significant additional functionality, are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment and are amortized on a straight-line basis to cost of revenue over the software’s estimated useful life, which is three years. The Company evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
In the three months ended June 30, 2017 and 2016, the Company capitalized software development costs of $1,102 and $1,501, respectively, and amortized capitalized software development costs of $794 and $693, respectively. In the six months ended June 30, 2017 and 2016, the Company capitalized software development costs of $2,329 and $2,985, respectively, and amortized capitalized software development costs of $1,625 and $1,319, respectively. The net book value of capitalized software development costs was $7,139 and $6,435 at June 30, 2017 and December 31, 2016, respectively.
Comprehensive Loss
The Company’s net loss equals comprehensive loss for all periods presented.
Recently Adopted Accounting Standards
The Company adopted the guidance in Accounting Standards Update ("ASU") 2016-09, “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting,” on January 1, 2017. Under this ASU, entities are permitted to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and the impact of that change in accounting policy has been recorded as a $391 cumulative effect adjustment to its accumulated deficit as of January 1, 2017. Additionally, ASU 2016-09 requires that all income tax effects related to settlements of share-based payment awards be reported in earnings as an increase or decrease to income tax expense (benefit), net. Previously, income tax benefits at settlement of an award were reported as an increase (or decrease) to additional paid-in capital to the extent that those benefits were greater than (or less than) the income tax benefits reported in earnings during the award's vesting period. The requirement to report those income tax effects in earnings has been applied on a prospective basis to settlements occurring on or after January 1, 2017 and the impact of applying that guidance was not material to the condensed consolidated financial statements for the three and six months ended June 30, 2017. ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based payments be reported as operating activities in the statement of cash flows. Previously, income tax benefits at settlement of an award were reported as a reduction to operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the award's vesting period. The Company has elected to apply that change in cash flow classification on a prospective basis. However, there is no impact to the statement of cash flows for the three and six months ended June 30, 2017 as the Company did not have any cash flows related to excess tax benefits during that time. The remaining provisions of ASU 2016-09 did not have a material impact on the accompanying consolidated financial statements.
Accounting Standards Not Yet Adopted
In May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” The purpose of this ASU is to reduce both the diversity in practice and the cost and complexity when applying Topic 718 to a change to the terms and conditions of share-based payment awards. This guidance is effective for the Company beginning January 1, 2018. Early adoption is permitted. The amendments in this ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of this updated standard 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.
9
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for the Company beginning January 1, 2019, but early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which amends the revenue recognition requirements in the FASB Accounting Standards Codification. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for those goods and services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.
The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective), or retrospectively with the cumulative effect of initially applying this statement recognized at the date of initial application (modified retrospective transition method). The new standard will be effective for the Company beginning January 1, 2018, with an option to early adopt. The Company plans to adopt the standard on the effective date but has not made a determination on the adoption method.
The Company is currently assessing the impact of the new standard on its accounting policies, processes, and controls, including system requirements, and has assigned internal resources and engaged third party service providers to assist in its assessment. Based on the Company’s current assessment, areas affected by the Company’s adoption of the revenue recognition standard will be related to the estimation of variable consideration, the accounting for contract modifications, and the allocation of the transaction price to the Company’s multiple performance obligations. In addition, the Company expects an impact from the adoption of the new standard related to the Company’s costs to fulfill certain contracts as well as its costs to obtain contracts with customers, which are both currently expensed as incurred. The Company is also continuing to review the impact of this standard on potential disclosure changes in its consolidated financial statements as well as the transition approach that will be applied. While the Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipates the standard could have a material impact on its consolidated financial statements, the Company does not know or cannot reasonably estimate quantitative information related to the impact of the new standard on the Company’s financial statements at this time.
3. Net Loss Per Common Share
Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following common share equivalent securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the periods presented:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Anti-Dilutive Common Share Equivalents |
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
Restricted stock units |
|
|
1,808,890 |
|
|
|
1,474,403 |
|
|
|
1,808,890 |
|
|
|
1,474,403 |
|
|
Stock options |
|
|
314,937 |
|
|
|
1,458,140 |
|
|
|
314,937 |
|
|
|
1,458,140 |
|
|
Warrant to purchase common stock |
|
|
580,813 |
|
|
|
580,813 |
|
|
|
580,813 |
|
|
|
580,813 |
|
|
Employee Stock Purchase Plan |
|
|
4,204 |
|
|
|
- |
|
|
|
4,204 |
|
|
|
- |
|
|
Total anti-dilutive common share equivalents |
|
|
2,708,844 |
|
|
|
3,513,356 |
|
|
|
2,708,844 |
|
|
|
3,513,356 |
|
10
Basic and diluted net loss per common share is calculated as follows:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,506 |
) |
|
$ |
(11,004 |
) |
|
$ |
(12,194 |
) |
|
$ |
(24,356 |
) |
|
Net loss attributable to common stockholders |
|
$ |
(4,506 |
) |
|
$ |
(11,004 |
) |
|
$ |
(12,194 |
) |
|
$ |
(24,356 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted |
|
|
31,076,995 |
|
|
|
29,459,341 |
|
|
|
30,868,888 |
|
|
|
29,336,270 |
|
|
Net loss per common share, basic and diluted |
|
$ |
(0.14 |
) |
|
$ |
(0.37 |
) |
|
$ |
(0.40 |
) |
|
$ |
(0.83 |
) |
4. Fair Value Measurement
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to their short-term nature. The carrying value of the Company’s financing obligations and revolving line of credit approximates fair value, considering the borrowing rates currently available to the Company with similar terms and credit risks.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:
|
|
Level 1. |
Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
|
Level 2. |
Other inputs that are directly or indirectly observable in the marketplace. |
|
|
Level 3. |
Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above categories, as of the periods presented.
|
|
|
June 30, 2017 |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds (1) |
|
$ |
52,922 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52,922 |
|
|
Total assets |
|
$ |
52,922 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
52,922 |
|
|
|
|
December 31, 2016 |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds (1) |
|
$ |
51,285 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
51,285 |
|
|
Total assets |
|
$ |
51,285 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
51,285 |
|
11
|
(1) |
Money market funds are classified as cash equivalents in the Company’s unaudited consolidated balance sheets. As short-term, highly liquid investments readily convertible to known amounts of cash with remaining maturities of three months or less at the time of purchase, the Company’s cash equivalent money market funds have carrying values that approximate fair value. |
5. Marketable Securities
Marketable securities consist of corporate bonds, commercial paper, U.S. Treasury and agency bonds and are classified as held-to-maturity. Investments held in marketable securities had contractual maturities of less than 1 month as of December 31, 2016. As of June 30, 2017, the Company did not have any marketable securities. The following presents information about the Company’s marketable securities as of:
|
|
|
December 31, 2016 |
|
|
|
Aggregate cost basis and net carrying amount |
|
$ |
2,007 |
|
|
Gross unrealized holding gains |
|
|
- |
|
|
Gross unrealized holding losses |
|
|
- |
|
|
Aggregate fair value determined by Level 2 inputs |
|
$ |
2,007 |
|
No investments were in an unrealized loss position as of December 31, 2016.
6. Revolving Line of Credit
As of June 30, 2017 and December 31, 2016, the amount outstanding under the Company’s revolving line of credit was $52,246 and $40,246, respectively. As of June 30, 2017, the additional amount available to borrow, adjusted by the borrowing base limit, was $16,612 and the interest rate was 5.25%.
In January 2017, the Company repaid $20,000 of the amount outstanding under its line of credit. In March 2017, the Company borrowed $28,000 under its line of credit for general operating purposes. In the three months ended June 30, 2017, the Company repaid $21,000 of the amount outstanding under its line of credit. In June 2017, the Company borrowed $25,000 for general operating purposes.
7. Stock-based Compensation
Restricted Stock Units
During the six months ended June 30, 2017, the Company granted 308,803 restricted stock units to employees with an aggregate grant date fair value of $8,490. These restricted stock units vest in equal annual installments generally over 4 years from the grant date. The Company amortizes the fair value of the stock subject to the restricted stock units at the time of grant on a straight-line basis over the period of vesting.
On March 31, 2017, the Company granted 62,748 restricted stock units and 94,121 performance restricted stock units to officers with an aggregate grant date fair value of $4,384. Vesting of the performance restricted stock units is contingent upon meeting specific sales related growth targets through December 31, 2017. The actual number of shares issued upon vesting of the performance restricted stock units could range from 0% to 100% of the number granted. These awards will vest in equal annual installments for 4 years starting April 1, 2018.
Also on March 31, 2017, the Company granted 28,594 performance restricted stock units to officers with an aggregate grant date fair value of $799. The awards were granted in lieu of a portion of the target cash bonus that would otherwise be payable under the Company’s Management Incentive Bonus Program for the calendar year ended 2017. The awards vest upon achievement of specific annual financial targets for 2017. The actual number of shares issued upon vesting could range from 0% to 100% of the number granted. These awards will vest on April 1, 2018.
On April 1, 2017, the Company granted 299,493 performance restricted stock units with aggregate grant date fair values of $8,176. The aggregate grant date fair value of the performance restricted stock units assuming target achievement was $5,550. The restricted stock units vest in equal annual installments of over 4 years from the grant date. The number of performance restricted stock units that will vest will be determined upon the achievement of certain financial targets for 2017, and vesting will then occur in equal annual installments over various periods ranging from 1 to 4 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 was 3.1 years as of the grant date.
12
Common Stock
The holders of common stock are entitled to one vote for each share. The voting, dividend and liquidation rights of the holders of common stock are subject to and qualified by the rights, powers and preferences of the holders of preferred stock.
At the 2017 annual meeting of stockholders of the Company, stockholders approved the Benefitfocus, Inc. Amended and Restated 2012 Stock Plan (the “Plan”), which increases the total number of shares of common stock reserved for issuance under the Plan by 2,700,000 shares to 9,244,525 shares and includes other administrative changes.
At June 30, 2017, the Company had reserved a total of 5,728,862 of its authorized 50,000,000 shares of common stock for future issuance as follows:
|
Outstanding stock options |
|
|
314,937 |
|
|
Restricted stock units |
|
|
1,808,890 |
|
|
Available for future issuance under stock award plans |
|
|
2,878,187 |
|
|
Available for future issuance under ESPP |
|
|
146,035 |
|
|
Warrant to purchase common stock |
|
|
580,813 |
|
|
Total common shares reserved for future issuance |
|
|
5,728,862 |
|
9. Income Taxes
The Company’s effective federal tax rate for the three and six months ended June 30, 2017 was less than one percent, primarily as a result of estimated tax losses for the fiscal year offset by the increase in the valuation allowance in the net operating loss carryforwards. Current tax expense relates to estimated state income taxes.
10. Segments and Geographic Information
Operating segments are defined as components of an enterprise for which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financial performance. The Company’s CODM, the Chief Executive Officer, reviews financial information presented on a consolidated basis, accompanied by information about operating segments, for purposes of allocating resources and evaluating financial performance.
The Company’s reportable segments are based on the type of customer. The Company determined its operating segments to be: Employer, which derives substantially all of its revenue from customers that use the Company’s services for the provision of benefits to their employees, and administrators acting on behalf of employers; and Carrier, which derives substantially all of its revenue from insurance companies that provide coverage at their own risk.
Segments are evaluated based on gross profit. The Company does not allocate interest income, interest expense or income tax expense by segment. Accordingly, the Company does not report such information. Additionally, Employer and Carrier segments share the majority of the Company’s assets. Therefore, no segment asset information is reported.
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
Revenue from external customers by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer |
|
$ |
38,847 |
|
|
$ |
36,261 |
|
|
$ |
79,477 |
|
|
$ |
68,454 |
|
|
Carrier |
|
|
24,501 |
|
|
|
21,613 |
|
|
|
48,042 |
|
|
|
44,212 |
|
|
Total net revenue from external customers |
|
$ |
63,348 |
|
|
$ |
57,874 |
|
|
$ |
127,519 |
|
|
$ |
112,666 |
|
|
Depreciation and amortization by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer |
|
$ |
2,483 |
|
|
$ |
1,975 |
|
|
$ |
5,009 |
|
|
$ |
3,767 |
|
|
Carrier |
|
|
1,457 |
|
|
|
1,292 |
|
|
|
2,936 |
|
|
|
2,543 |
|
|
Total depreciation and amortization |
|
$ |
3,940 |
|
|
$ |
3,267 |
|
|
$ |
7,945 |
|
|
$ |
6,310 |
|
|
Gross profit by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer |
|
$ |
16,781 |
|
|
$ |
15,269 |
|
|
$ |
33,273 |
|
|
$ |
27,551 |
|
|
Carrier |
|
|
17,739 |
|
|
|
12,855 |
|
|
|
33,817 |
|
|
|
26,068 |
|
|
Total gross profit |
|
$ |
34,520 |
|
|
$ |
28,124 |
|
|
$ |
67,090 |
|
|
$ |
53,619 |
|
13
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 with which two of the Company’s directors, significant stockholders, and executives are affiliated. The Company’s headquarters building lease and an additional building lease are accounted for as build-to-suit leases and recorded as financing obligations in the Consolidated Balance Sheets. The remaining lease, also for office space, is accounted for as a capital lease. The three lease agreements have 15-year terms which end on December 31, 2031. The leases contain options to renew the leases for five additional years. The arrangements provide for 3.0% fixed annual rent increases. Payments under these agreements were $2,355 and $2,286 for the three months ended June 30, 2017 and 2016, respectively, and $5,563 and $5,666 for the six months ended June 30, 2017 and 2016, respectively. Other amounts due to the related parties were $444 and $854 as of June 30, 2017 and December 31, 2016, respectively, and were recorded in “Accrued expenses.”
Other Related Party Expenses
The Company utilizes the services of three companies that are owned and controlled by a Company director, significant stockholder, and executive. The companies provide construction project management services and private air transportation. There were no expenses related to these companies for the three months ended June 30, 2017. Expenses related to these companies were $11 for the three months ended June 30, 2016, and $19 and $37 for the six months ended June 30, 2017 and 2016, respectively. There were no amounts due to these companies as of June 30, 2017 or December 31, 2016.
Related Party Revenues
Mercer became a related party when the Company sold it over 10% beneficial ownership of the Company’s outstanding common stock in February 2015. Revenue from Mercer was $6,062 and $6,712 for the three months ended June 30, 2017 and 2016, respectively, and $14,569 and $12,258 for the six months ended June 30, 2017 and 2016, respectively, and was reflected in “Revenues,” within the accompanying statements of operations and comprehensive loss. The amounts due from Mercer were $907 and $4,626 as of June 30, 2017 and December 31, 2016, respectively. The amount of deferred revenue associated with Mercer was $5,865 and $7,683 as of June 30, 2017 and December 31, 2016, respectively, and was reflected in the balances of deferred revenue in the consolidated balance sheets.
Related Party Revolving Line of Credit
In conjunction with an amendment to the Company’s revolving line of credit agreement in October 2016, Goldman Sachs Lending Partners, LLC was added to the lending syndicate. Goldman Sachs Lending Partners, LLC is an affiliate of The Goldman Sachs Group, Inc., as are the Goldman Sachs funds that owned approximately 20.1% of the Company’s outstanding common stock as of June 30, 2017. Goldman Sachs Lending Partners, LLC committed $10,000 to the revolving commitment and participates in amounts borrowed under the credit facility at a rate of approximately 10.5%. Accordingly, amounts due to Goldman Sachs Lending Partners, LLC was approximately $5,486 of the $52,246 outstanding under the revolving line of credit as of June 30, 2017 and $4,226 of the $40,246 outstanding under the revolving line of credit as of December 31, 2016.
12. Subsequent Events
Restricted Stock Units
On July 1, 2017, the Company granted 52,724 restricted stock units with an aggregate grant date fair value of $1,840. The restricted stock units generally vest in equal annual installments of over 4 years from the grant date.
On August 1, 2017, the Company granted 120,735 restricted stock units with an aggregate grant date fair value of $4,256. The restricted stock units vest in equal annual installments over 4 years from the grant date. The Company also granted 21,470 performance restricted stock units with an aggregate grant date fair value of $757. The aggregate grant date fair value of the performance restricted stock units assuming target achievement was $378. The performance restricted stock units vest in 4 equal annual installments starting April 1, 2018. The number of performance restricted stock units that will vest will be determined upon the achievement of certain sales targets for 2017. The actual number of shares issued upon vesting could range between 0% and 100% of the number of awards granted.
Common Stock
During July 2017, employees exercised stock options and restricted stock units vested resulting in the issuance of 24,408 shares.
14
In July 2017, the Company repaid $20,000 under its revolving line of credit.
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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, 2016. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers, employers, insurance carriers, and brokers. The Benefitfocus Platform simplifies how organizations and individuals shop for, enroll in, manage, and exchange benefits. Our employer and insurance carrier customers rely on our platform to manage, scale and exchange data. Our web-based platform has a user-friendly interface designed to enable the insured consumers to access all of their benefits in one place. Our comprehensive solutions support core benefits plans, including healthcare, dental, life, and disability insurance, and voluntary benefits offerings such as income protection, digital health and financial wellness. As the number of employer benefits plans has increased, with each plan subject to many different business rules and requirements, demand for the Benefitfocus Platform has grown.
We serve two separate but related market segments. Our fastest growing market segment, the employer market, consists of employers offering benefits to their employees. Within this segment, we mainly target large employers with more than 1,000 employees, of which we believe there are over 18,000 in the United States. In our other market segment, we sell our solutions to insurance carriers, enabling us to expand our overall footprint in the benefits marketplace by aggregating many key constituents, including consumers, employers, and brokers. Our business model capitalizes on the close relationship between carriers and their members, and the carriers’ ability to serve as lead generators for potential employer customers. Carriers pay for services at a rate reflective of the aggregated nature of their customer base on a per application basis. Carriers can then deploy their applications to employer groups and members. As employers become direct customers through our employer segment, we provide them our platform offering that bundles many software applications into a comprehensive benefits solution through Benefitfocus Marketplace. We believe our presence in both the employer and insurance carrier markets gives us a strong position at the center of the benefits ecosystem.
We sell the Benefitfocus Platform on a subscription basis, typically through annual contracts with employer customers and multi-year contracts with our insurance carrier customers, with subscription fees paid monthly, quarterly and annually. The multi-year contracts with our carrier customers are generally only cancellable by the carrier in an instance of our uncured breach, although some of our carrier customers are able to terminate their respective contracts without cause or for convenience. Software services revenue accounted for approximately 85% and 88% of our total revenue during the three months ended June 30, 2017 and 2016, respectively, and 87% and 89% of our total revenue during the six months ended June 30, 2017 and 2016, respectively.
Another component of our revenue is professional services. We derive the majority of our professional services revenue from the implementation of our customers onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and training. In general, it takes from four to five months to implement a new employer customer’s benefits systems and eight to 10 months to implement a new carrier customer’s benefits systems. We also provide customer support services and customized media content that supports our customers’ effort to educate and communicate with consumers. Professional services revenue accounted for approximately 15% and 12% of our total revenue during the three months ended June 30, 2017 and 2016, respectively, and 13% and 11% of our total revenue during the six months ended June 30, 2017 and 2016, respectively.
Increasing our base of large employer customers is an important source of revenue growth for us. We actively pursue new employer customers in the U.S. market, and we have increased the number of large employer customers utilizing our solutions from 141 as of December 31, 2010 to 893 as of June 30, 2017. We believe that our continued innovation and new solutions, such as online benefits marketplaces, also known as private exchanges, enhanced mobile offerings, and more robust data analytics capabilities will help us attract additional large employer customers and increase our revenue from existing customers.
We believe that there is a substantial market for our services, and we have been investing in growth over the past five years. In particular, we have continued to invest in technology and services to better serve our larger employer customers, which we believe are an important source of growth for our business. We have also substantially increased our marketing and sales efforts and expect those increased efforts to continue. As we have invested in growth, we have had operating losses in each of the last six years, and expect our operating losses to
17
continue for at least the next year. Due to the nature of our customer relationships, which have been very stable with relatively few customer losses over the past years, and the subscription nature of our financial model, we believe that our current investment in growth should lead to substantially increased revenue, which will allow us to achieve profitability in the relatively near future. Of course, our ability to achieve 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, as well as segment revenue and segment gross profit, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Operating Results”. In addition, we utilize other key metrics as described below.
Number of Large Employer and Carrier Customers
We believe the number of large employer and carrier customers is a key indicator of our market penetration, growth, and future revenue. We intend to continue to invest in our direct sales force to grow our customer base. We generally define a customer as an entity with an active software services contract as of the measurement date. The following table sets forth the number of large employer and carrier customers for the periods indicated:
|
|
|
As of June 30, |
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|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
Number of customers: |
|
|
|
|
|
|
|
|
|
Large employer |
|
|
893 |
|
|
|
803 |
|
|
Carrier |
|
|
53 |
|
|
|
53 |
|
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as our software services revenue retention rate. We calculate this metric for a particular period by establishing the group of our customers that had active contracts for a given period. We then calculate our software services revenue retention rate by taking the amount of software services revenue we recognized for this group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the software services revenue we recognized for the group in the prior period.
For the three- and six-month periods ended June 30, 2017 and 2016, our software services revenue retention rate exceeded 95%.
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest, taxes, and depreciation and amortization expense, adjusted to eliminate stock-based compensation, impairment of goodwill and intangible assets, 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.
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; |
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|
|
• |
adjusted EBITDA does not reflect interest or tax payments that would reduce the cash available to us; and |
|
|
• |
other companies, including companies in our industry, might calculate adjusted EBITDA or a similarly titled measure differently, which reduces their usefulness as comparative measures. |
Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss and our other GAAP financial results. The following table presents for each of the periods indicated a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure, net loss (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
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|
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
Reconciliation from Net Loss to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,506 |
) |
|
$ |
(11,004 |
) |
|
$ |
(12,194 |
) |
|
$ |
(24,356 |
) |
|
Depreciation |
|
|
3,081 |
|
|
|
2,509 |
|
|
|
6,192 |
|
|
|
4,862 |
|
|
Amortization of software development costs |
|
|
794 |
|
|
|
693 |
|
|
|
1,624 |
|
|
|
1,319 |
|
|
Amortization of acquired intangible assets |
|
|
65 |
|
|
|
65 |
|
|
|
129 |
|
|
|
129 |
|
|
Interest income |
|
|
(47 |
) |
|
|
(36 |
) |
|
|
(74 |
) |
|
|
(92 |
) |
|
Interest expense on building lease financing obligations |
|
|
1,861 |
|
|
|
1,710 |
|
|
|
3,721 |
|
|
|
3,426 |
|
|
Interest expense on other borrowings |
|
|
1,210 |
|
|
|
231 |
|
|
|
2,272 |
|
|
|
429 |
|
|
Income tax expense |
|
|
5 |
|
|
|
5 |
|
|
|
5 |
|
|
|
10 |
|
|
Stock-based compensation expense |
|
|
2,862 |
|
|
|
4,450 |
|
|
|
7,250 |
|
|
|
9,183 |
|
|
Costs not core to our business |
|
|
121 |
|
|
|
- |
|
|
|
121 |
|
|
|
- |
|
|
Total net adjustments |
|
|
9,952 |
|
|
|
9,627 |
|
|
|
21,240 |
|
|
|
19,266 |
|
|
Adjusted EBITDA |
|
$ |
5,446 |
|
|
$ |
(1,377 |
) |
|
$ |
9,046 |
|
|
$ |
(5,090 |
) |
Components of Operating Results
Revenue
We derive the majority of our revenue from software services fees, which consist primarily of monthly subscription fees paid to us by our employer and carrier customers for access to, and usage of, our cloud-based benefits software solutions for a specified contract term. We also derive revenue from professional services fees, which primarily include fees related to the implementation of our customers onto our platform. Our professional services typically include discovery, configuration and deployment, integration, testing, and training.
The following table sets forth a breakdown of our revenue between software services and professional services for the periods indicated (in thousands):
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
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|
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
|
Software services |
|
$ |
53,554 |
|
|
$ |
51,021 |
|
|
$ |
110,274 |
|
|
$ |
100,013 |
|
|
Professional services |
|
|
9,794 |
|
|
|
6,853 |
|
|
|
17,245 |
|
|
|
12,653 |
|
|
Total revenue |
|
$ |
63,348 |
|
|
$ |
57,874 |
|
|
$ |
127,519 |
|
|
$ |
112,666 |
|
We generally recognize software services fees monthly based on the number of employees covered by the relevant benefits plans at contracted rates for a specified period of time, provided that an enforceable contract has been signed by both parties, access to our software has been granted to the customer and it is available for their use, the fee for the software services is fixed or determinable, and collection is reasonably assured.
We recognize revenue from professional services with standalone value, for example implementation services for the Benefitfocus Marketplace solution in the Employer segment, at the time that the professional services have been completed. We defer recognition of our professional services fees paid by customers related to implementation services that are determined to not have stand-alone value and are sold with our software services, and recognize them, beginning once the software services have commenced, ratably over the longer of the contract term or the estimated expected life of the customer relationship, which was 7 years. We periodically evaluate the term over which revenue is recognized for professional services as we gain more experience with customer contract renewals.
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We generally invoice our employer and carrier customers for software services in advance, in monthly, quarterly or annual installments. We invoice our employer customers for implementation fees at the inception of the arrangement. We generally invoice our carrier customers for implementation fees at various contractually defined times throughout the implementation process. Implementation fees that have been invoiced are initially recorded as deferred revenue until recognized to revenue as described above.
We earn commissions from brokerage services from our voluntary benefit insurance offerings. We recognize revenue when these commissions are earned.
Overhead Allocation
Expenses associated with our facilities, security, information technology, and depreciation and amortization, are allocated between cost of revenue and operating expenses based on employee headcount determined by the nature of work performed.
Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of revenue include co-location facility costs for our data centers, depreciation expense for computer equipment directly associated with generating revenue, infrastructure maintenance costs, professional fees, amortization expenses associated with capitalized software development costs, allocated overhead, and other direct costs.
We expense our cost of revenue as we incur the costs. However, the related revenue from fees we receive for our implementation services, performed before a customer is operating on our platform, that is determined to not have stand-alone value is deferred until the commencement of the monthly subscription and recognized as revenue ratably over the longer of the related contract term or the estimated expected life of the customer relationship. For those implementation services that have standalone value, the related revenue is recognized as revenue upon completion of service. Therefore, the cost incurred in providing these services is expensed in periods prior to the recognition of the corresponding revenue. Our cost associated with providing implementation services has been significantly higher as a percentage of revenue than our cost associated with providing our monthly subscription services due to the labor associated with implementation.
We plan to continue to expand our capacity to support our growth, which will result in higher cost of revenue in absolute dollars. However, we expect cost of revenue as a percentage of revenue to decline and gross margins to increase primarily from the growth of the percentage of our revenue from large employers and the realization of economies of scale driven by retention of our customer base.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries and personnel-related costs are the most significant component of each of these expense categories. We expect to continue to hire new associates in these areas in order to support our antic