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, 2017

or

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

For the transition period from                      to                      .

Commission File Number: 001-36061

 

Benefitfocus, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

46-2346314

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

100 Benefitfocus Way

Charleston, South Carolina 29492

(Address of principal executive offices and zip code)

(843) 849-7476

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically 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:  

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

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 April 21, 2017, there were approximately 31,042,568 shares of the registrant’s common stock outstanding.

 

 

 

 

 


Benefitfocus, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2017

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

3

 

 

Unaudited Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

3

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016

4

 

 

Unaudited Consolidated Statement of Changes in Stockholders' Deficit for the Three Months Ended March 31, 2017   

5

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016  

6

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

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

16

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

27

 

 

ITEM 4. CONTROLS AND PROCEDURES

28

 

 

PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

29

 

 

ITEM 5. OTHER INFORMATION

45

 

 

ITEM 6. EXHIBITS

46

 

 

SIGNATURES

47

 

 

2


PART I. FINANCI AL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Benefitfocus, Inc.

Unaudited Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

As of

March 31,

2017

 

 

As of

December 31,

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

57,671

 

 

$

56,853

 

Marketable securities

 

 

 

 

 

2,007

 

Accounts receivable, net

 

 

23,898

 

 

 

28,340

 

Accounts receivable, related party, net

 

 

3,393

 

 

 

4,626

 

Prepaid expenses and other current assets

 

 

5,838

 

 

 

4,449

 

Total current assets

 

 

90,800

 

 

 

96,275

 

Property and equipment, net

 

 

78,032

 

 

 

80,518

 

Intangible assets, net

 

 

343

 

 

 

408

 

Goodwill

 

 

1,634

 

 

 

1,634

 

Other non-current assets

 

 

1,227

 

 

 

1,575

 

Total assets

 

$

172,036

 

 

$

180,410

 

Liabilities and stockholders' deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,024

 

 

$

5,829

 

Accrued expenses

 

 

10,133

 

 

 

10,867

 

Accrued compensation and benefits

 

 

10,754

 

 

 

17,347

 

Deferred revenue, current portion

 

 

29,545

 

 

 

35,426

 

Revolving line of credit, current portion

 

 

14,000

 

 

 

20,000

 

Financing and capital lease obligations, current portion

 

 

3,154

 

 

 

2,604

 

Total current liabilities

 

 

72,610

 

 

 

92,073

 

Deferred revenue, net of current portion

 

 

39,366

 

 

 

40,412

 

Revolving line of credit, net of current portion

 

 

34,246

 

 

 

20,246

 

Financing and capital lease obligations, net of current portion

 

 

57,137

 

 

 

57,934

 

Other non-current liabilities

 

 

2,834

 

 

 

3,056

 

Total liabilities

 

 

206,193

 

 

 

213,721

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

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

   no shares issued and outstanding at March 31, 2017

   and December 31, 2016

 

 

 

 

 

 

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

   30,786,234 and 30,429,014 shares issued and outstanding

   at March 31, 2017 and December 31, 2016, respectively

 

 

30

 

 

 

30

 

Additional paid-in capital

 

 

342,292

 

 

 

335,059

 

Accumulated deficit

 

 

(376,479

)

 

 

(368,400

)

Total stockholders' deficit

 

 

(34,157

)

 

 

(33,311

)

Total liabilities and stockholders' deficit

 

$

172,036

 

 

$

180,410

 

 

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,

 

 

 

2017

 

 

2016

 

Revenue

 

$

64,171

 

 

$

54,792

 

Cost of revenue

 

 

31,601

 

 

 

29,297

 

Gross profit

 

 

32,570

 

 

 

25,495

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing

 

 

17,277

 

 

 

13,574

 

Research and development

 

 

12,181

 

 

 

15,015

 

General and administrative

 

 

7,757

 

 

 

8,395

 

Total operating expenses

 

 

37,215

 

 

 

36,984

 

Loss from operations

 

 

(4,645

)

 

 

(11,489

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

27

 

 

 

56

 

Interest expense on building lease financing obligations

 

 

(1,860

)

 

 

(1,716

)

Interest expense on other borrowings

 

 

(1,062

)

 

 

(198

)

Other expense

 

 

(148

)

 

 

 

Total other expense, net

 

 

(3,043

)

 

 

(1,858

)

Loss before income taxes

 

 

(7,688

)

 

 

(13,347

)

Income tax expense

 

 

 

 

 

5

 

Net loss

 

$

(7,688

)

 

$

(13,352

)

Comprehensive loss

 

$

(7,688

)

 

$

(13,352

)

Net loss per common share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.25

)

 

$

(0.46

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

Basic and diluted

 

 

30,658,468

 

 

 

29,213,198

 

 

 

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

 

 

4


Benefitfocus, Inc.

Unaudited Consolidated Statement of Changes in Stockholders’ Deficit

(in thousands, except share and per share data)

 

 

 

Common Stock,

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

$0.001 Par Value

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Par Value

 

 

Capital

 

 

Deficit

 

 

Deficit

 

Balance, December 31, 2016

 

 

30,429,014

 

 

$

30

 

 

$

335,059

 

 

$

(368,400

)

 

$

(33,311

)

Cumulative effect adjustment from adoption of new accounting standard

 

 

 

 

 

 

 

 

391

 

 

 

(391

)

 

 

 

Exercise of stock options

 

 

318,230

 

 

 

 

 

 

2,342

 

 

 

 

 

 

2,342

 

Issuance of common stock upon vesting of restricted stock units

 

 

35,025

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

3,965

 

 

 

 

 

 

112

 

 

 

 

 

 

112

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

4,388

 

 

 

 

 

 

4,388

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(7,688

)

 

 

(7,688

)

Balance, March 31, 2017

 

 

30,786,234

 

 

$

30

 

 

$

342,292

 

 

$

(376,479

)

 

$

(34,157

)

 

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,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(7,688

)

 

$

(13,352

)

Adjustments to reconcile net loss to net cash and cash

   equivalents used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,005

 

 

 

3,043

 

Stock-based compensation expense

 

 

4,388

 

 

 

4,733

 

Interest accrual on financing obligation

 

 

1,873

 

 

 

1,716

 

Loss on disposal or impairment of property and equipment

 

 

148

 

 

 

 

Provision for doubtful accounts

 

 

22

 

 

 

(22

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5,654

 

 

 

(3,562

)

Accrued interest on short-term investments

 

 

7

 

 

 

130

 

Prepaid expenses and other current assets

 

 

(1,389

)

 

 

(2

)

Other non-current assets

 

 

349

 

 

 

(508

)

Accounts payable

 

 

(899

)

 

 

(3,911

)

Accrued expenses

 

 

(140

)

 

 

2,715

 

Accrued compensation and benefits

 

 

(6,594

)

 

 

(5,304

)

Deferred revenue

 

 

(6,927

)

 

 

(5,419

)

Other non-current liabilities

 

 

(222

)

 

 

(75

)

Net cash and cash equivalents used in operating activities

 

 

(7,413

)

 

 

(19,818

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of short-term investments held to maturity

 

 

 

 

 

(2,004

)

Proceeds from maturity of short-term investments held to maturity

 

 

2,000

 

 

 

26,525

 

Purchases of property and equipment

 

 

(2,103

)

 

 

(2,610

)

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

 

 

(103

)

 

 

21,911

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Draws on revolving line of credit

 

 

28,000

 

 

 

 

Payments on revolving line of credit

 

 

(20,000

)

 

 

(25,000

)

Proceeds from exercises of stock options and ESPP

 

 

2,454

 

 

 

163

 

Remittance of taxes upon vesting of restricted stock units

 

 

 

 

 

(202

)

Payments on financing and capital lease obligations

 

 

(2,120

)

 

 

(2,875

)

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

 

 

8,334

 

 

 

(27,914

)

Net increase (decrease) in cash and cash equivalents

 

 

818

 

 

 

(25,821

)

Cash and cash equivalents, beginning of period

 

 

56,853

 

 

 

48,074

 

Cash and cash equivalents, end of period

 

$

57,671

 

 

$

22,253

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Property and equipment purchases in accounts payable and accrued expenses

 

$

200

 

 

$

428

 

Property and equipment purchased with financing and capital lease obligations

 

$

 

 

$

733

 

Post contract support purchased with financing obligations

 

$

 

 

$

1,048

 

 

 

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

 

 

6


BENEFITFOCUS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

1. Organization and Description of Business

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

 

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Interim Unaudited Consolidated Financial Information

The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ equity and cash flows. The results of operations for the   three-month period ended March 31, 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 arrangement s 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 del iverables. 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 pri ce. 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 12% and 14% of the total accounts receivable at March 31, 2017 and December 31, 2016, respectively, and 13% and 10% of total revenue for the three months ended March 31, 2017 and 2016, respectively. 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 $705 and $691 as of March 31, 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 time lag since the initiation of revenue recognition, historical reasons for adjustments, new customer volume,

8


complexity of billing arrangements, timing of software availability, and past due customer billings. The all owance for returns was $2,956 and $3,904 as of March 31, 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 March 31, 2017 and 2016, the Company capitalized software development costs of $1,227 and $1,484, respectively, and amortized capitalized software development costs of $831 and $626, respectively. The net book value of capitalized software development costs was $6,831 and $6,435 at March 31, 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 months ended March 31, 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 months ended March 31, 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 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 beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” 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

9


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 FA SB 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.

While the Company is continuing to assess all potential impacts of the standard, it has initially identified certain areas that might be more significantly affected, including the timing of revenue recognition for certain of its professional services and the accounting for sales commissions, which are 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 which transition approach will be applied. The Company cannot currently estimate the impact of adopting this standard. The Company is also in the process of evaluating changes to its business process and controls in order to support revenue recognition and disclosure under the new standard.

 

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

 

2017

 

 

2016

 

Restricted stock units

 

 

1,597,423

 

 

 

1,277,677

 

Stock options

 

 

409,038

 

 

 

1,662,626

 

Warrant to purchase common stock

 

 

580,813

 

 

 

580,813

 

Employee Stock Purchase Plan

 

 

3,063

 

 

 

-

 

Total anti-dilutive common share equivalents

 

 

2,590,337

 

 

 

3,521,116

 

 

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

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,688

)

 

$

(13,352

)

Net loss attributable to common stockholders

 

$

(7,688

)

 

$

(13,352

)

Denominator:

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding, basic and diluted

 

 

30,658,468

 

 

 

29,213,198

 

Net loss per common share, basic and diluted

 

$

(0.25

)

 

$

(0.46

)

 

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.

10


The Company uses a thre e-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 measureme nt. 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.

 

 

 

March 31, 2017

 

Description

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash Equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds (1)

 

$

51,356

 

 

$

 

 

$

 

 

$

51,356

 

Total assets

 

$

51,356

 

 

$

 

 

$

 

 

$

51,356

 

 

 

 

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

 

 

(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 March 31, 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 March 31, 2017 and December 31, 2016, the amount outstanding under the Company’s revolving line of credit was $48,246 and $40,246, respectively.  The amount available to borrow, adjusted by the borrowing base limit, was $37,377 and the interest rate was 5.0% as of March 31, 2017.

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 .  

 

11


7. Stock-based Compensation

Restricted Stock Units

During the three-months ended March 31, 2017, the Company granted 85,026 restricted stock units to employees with an aggregate grant date fair value of $2,422. 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 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 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.

 

8. Stockholders’ Deficit

Common Stock

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

At March 31, 2017, the Company had reserved a total of 3,376,731 of its authorized 50,000,000 shares of common stock for future issuance as follows:

 

Outstanding stock options

 

 

409,038

 

Restricted stock units

 

 

1,597,423

 

Available for future issuance under stock award plans

 

 

643,422

 

Available for future issuance under ESPP

 

 

146,035

 

Warrant to purchase common stock

 

 

580,813

 

Total common shares reserved for future issuance

 

 

3,376,731

 

 

9. Income Taxes

The Company’s effective federal tax rate for the three-month period ended March 31, 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.

12


Segments are evaluated based on gross profit. The C ompany 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 se gment asset information is reported.

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Revenue from external customers by segment:

 

 

 

 

 

 

 

 

Employer

 

$

40,630

 

 

$

32,193

 

Carrier

 

 

23,541

 

 

 

22,599

 

Total net revenue from external customers

 

$

64,171

 

 

$

54,792

 

Depreciation and amortization by segment:

 

 

 

 

 

 

 

 

Employer

 

$

2,526

 

 

$

1,792

 

Carrier

 

 

1,479

 

 

 

1,251

 

Total depreciation and amortization

 

$

4,005

 

 

$

3,043

 

Gross profit by segment:

 

 

 

 

 

 

 

 

Employer

 

$

16,492

 

 

$

12,282

 

Carrier

 

 

16,078

 

 

 

13,213

 

Total gross profit

 

$

32,570

 

 

$

25,495

 

 

11. 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 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   $3,209 and $3,380 for the three months ended March 31, 2017 and 2016, respectively. Other amounts due to the related parties were $222 and $854 as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016 amounts due to the related parties were recorded in “Accrued expenses.”

Other Related Party Expenses

The Company utilizes the services of three companies that are owned and controlled by a Company director, significant stockholder, and executive. The companies provide construction project management services and private air transportation. Expenses related to these companies were   $19 and $26 for the three months ended March 31, 2017 and 2016, respectively. Amounts due to these companies were $16 and $0 as of March 31, 2017 and December 31, 2016, respectively.

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 $8,507 and $5,546 for the three months ended March 31, 2017 and 2016, respectively, and was reflected in “Revenues,” within the accompanying statements of operations and comprehensive loss. The amounts due from Mercer were $3,393 and $4,626 as of March 31, 2017 and December 31, 2016, respectively. The amount of deferred revenue associated with Mercer was $5,620 and $7,683 as of March 31, 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 20.3% of the Company’s outstanding common stock as of March 31, 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 $5,066 of the $48,246 outstanding under the revolving line of credit as of March 31, 2017 and $4,226 of the $40,246   outstanding under the revolving line of credit as of December 31, 2016.

13


 

12. Subsequent Events

Restricted Stock Units

On April 1, 2017, the Company granted 288,238 restricted stock units and 302,148 performance restricted stock units with aggregate grant date fair values of $7,869 and $8,249, respectively.  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.

Common Stock

During April 2017, employees exercised stock options and restricted stock units vested resulting in the issuance of 256,334 shares.

Revolving Line of Credit

In April 2017, the Company repaid $14,000 under its revolving line of credit. It also amended its revolving line of credit agreement. The amendment alters definitions in the revolving line of credit agreement, including Consolidated EBITDA and Liquidity, and changes the Minimum Liquidity and Minimum Consolidated EBITDA requirements. It also includes consents by the lenders to certain administrative actions by us, including with respect to intellectual property and certain company bank accounts. The amendment also modifies the definition of Excluded Assets in the Guarantee and Collateral Agreement, dated as of February 20, 2015, which was entered into in connection with the revolving line of credit agreement.

 

 

14


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.

 

 

15


ITEM 2. MANAGEMENT’S DISCUSSION AND A NALYSIS 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 88% and 89% of our total revenue during the three months ended March 31, 2017 and 2016.

Another component of our revenue is professional services. We derive the majority of our professional services revenue from the implementation of our customers onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and training. In general, it takes from four to five months to implement a new employer customer’s benefits systems and eight to 10 months to implement a new carrier customer’s benefits systems. We also provide customer support services and customized media content that supports our customers’ effort to educate and communicate with consumers. Professional services revenue accounted for approximately 12% and 11% of our total revenue during the three months ended March 31, 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 853 as of March 31, 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 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

16


our current investment in growth should lead to substantially increased revenue, which will allow us to achieve profitability in the relativ ely 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 March 31,

 

 

 

2017

 

 

2016

 

Number of customers:

 

 

 

 

 

 

 

 

Large employer

 

 

853

 

 

 

741

 

Carrier

 

 

53

 

 

 

54

 

 

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-month periods ended March 31, 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 and impairment of goodwill and intangible assets. Beginning with the first quarter of 2017, we revised our definition of adjusted EBITDA to exclude 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. The revision to the definition of adjusted EBITDA had no material impact on our reported adjusted EBITDA for the months ended March 31, 2017 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;

17


 

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

March 31,

 

 

 

2017

 

 

2016

 

Reconciliation from Net Loss to Adjusted EBITDA:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,688

)

 

$

(13,352

)

Depreciation

 

 

3,111

 

 

 

2,353

 

Amortization of software development costs

 

 

830

 

 

 

626

 

Amortization of acquired intangible assets

 

 

64

 

 

 

64

 

Interest income

 

 

(27

)

 

 

(56

)

Interest expense on building lease financing obligations

 

 

1,860

 

 

 

1,716

 

Interest expense on other borrowings

 

 

1,062

 

 

 

198

 

Income tax expense

 

 

-

 

 

 

5

 

Stock-based compensation expense

 

 

4,388

 

 

 

4,733

 

Total net adjustments

 

 

11,288

 

 

 

9,639

 

Adjusted EBITDA

 

$

3,600

 

 

$

(3,713

)

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

March 31,

 

 

 

2017

 

 

2016

 

Software services

 

$

56,720

 

 

$

48,992

 

Professional services

 

 

7,451

 

 

 

5,800

 

Total revenue

 

$

64,171

 

 

$

54,792

 

 

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.

18


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 v arious 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 anticipated revenue growth; however, we expect to decrease our operating expenses, as a percentage of revenue, as we achieve economies of scale.

Sales and marketing expense .    Sales and marketing expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, stock-based compensation, and commissions for our sales and marketing associates. We record expense for commissions at the time of contract signing. Additional expenses include advertising, lead generation, promotional event programs, corporate communications, travel, and allocated overhead. For instance, our most significant promotional event is One Place, which we have held annually. We expect our sales and marketing expense to increase, in absolute dollars, in the foreseeable future as we further increase the number of our sales and marketing professionals and expand our marketing activities in order to continue to grow our business.

Research and development expense .    Research and development expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for our research and development associates. Additional expenses include costs related to the development, quality assurance, and testing of new technology, and enhancement of our existing platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position. We expect our research and development expense to decrease, as a percentage of revenue, as we achieve economies of scale.

19


General and ad ministrative expense .     General and administrative expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for administrative, finance and accounting, information systems, legal, and human resource associates. Additional expenses include consulting and professional fees, insurance and other corporate expenses, and travel. We expect our general and administrative expenses to increase in absolute terms as a result of ongoing public c ompany costs, including those associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, increased costs of directors’ and officers’ liability insurance, and increased professional services expenses, particular ly associated with the new revenue recognition standard.

Other Income and Expense

Other income and expense consists primarily of interest income and expense and gain (loss) on disposal of fixed assets. Interest income represents interest received on our cash and cash equivalents and marketable securities. Interest expense consists primarily of the interest incurred on outstanding borrowings under our financing obligations, capital leases and credit facility.

Income Tax Expense

Income tax expense consists of U.S. federal and state income taxes. We incurred minimal income tax expense for the three months ended March 31, 2017 and 2016.

Results of Operations

Consolidated Statements of Operations Data

The following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands).

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Revenue

 

$

64,171

 

 

$

54,792

 

Cost of revenue (1)

 

 

31,601

 

 

 

29,297

 

Gross profit

 

 

32,570

 

 

 

25,495

 

Operating expenses:

 

 

 

 

 

 

 

 

Sales and marketing (1)

 

 

17,277

 

 

 

13,574

 

Research and development (1)

 

 

12,181

 

 

 

15,015

 

General and administrative (1)

 

 

7,757

 

 

 

8,395

 

Total operating expenses

 

 

37,215

 

 

 

36,984

 

Loss from operations

 

 

(4,645

)

 

 

(11,489

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

27

 

 

 

56

 

Interest expense on building lease financing obligations

 

 

(1,860

)

 

 

(1,716

)

Interest expense on other borrowings

 

 

(1,062

)

 

 

(198

)

Other expense

 

 

(148

)

 

 

 

Total other expense, net

 

 

(3,043

)

 

 

(1,858

)

Loss before income taxes

 

 

(7,688

)

 

 

(13,347

)

Income tax expense

 

 

 

 

 

5

 

Net loss

 

$

(7,688

)

 

$

(13,352

)

 

 

(1)

Cost of revenue and operating expenses include stock-based compensation expense as follows (in thousands):

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Cost of revenue

 

$

662

 

 

$

548

 

Sales and marketing

 

 

1,332

 

 

 

632

 

Research and development

 

 

718

 

 

 

1,468

 

General and administrative

 

 

1,676

 

 

 

2,085

 

 

20


The following table sets forth our consolidated statements of operations data as a percentage of revenue for each of the periods indicated (as a percentage of revenue):

 

 

Three Months Ended

March 31,

 

 

 

 

2017

 

 

2016

 

 

Revenue

 

 

100.0

 

%

 

100.0

 

%

Cost of revenue

 

 

49.2

 

 

 

53.5

 

 

Gross profit

 

 

50.8

 

 

 

46.5

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

26.9

 

 

 

24.8

 

 

Research and development

 

 

19.0

 

 

 

27.4

 

 

General and administrative

 

 

12.1

 

 

 

15.3

 

 

Total operating expenses

 

 

58.0

 

 

 

67.5

 

 

Loss from operations

 

 

(7.2

)

 

 

(21.0

)

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

 

-

 

 

 

0.1

 

 

Interest expense on building lease financing obligations

 

 

(2.9

)

 

 

(3.1

)

 

Interest expense on other borrowings

 

 

(1.7

)

 

 

(0.4

)

 

Other expense

 

 

(0.2

)

 

 

-

 

 

Total other expense, net

 

 

(4.7

)

 

 

(3.4

)

 

Loss before income taxes

 

 

(12.0

)

 

 

(24.4

)

 

Income tax expense

 

 

-

 

 

 

-

 

 

Net loss

 

 

(12.0

)

%

 

(24.4

)

%

Our Segments

The following table sets forth segment results for revenue and gross profit for the periods indicated (in thousands):

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

Revenue from external customers by segment:

 

 

 

 

 

 

 

 

Employer

 

$

40,630

 

 

$

32,193

 

Carrier

 

 

23,541

 

 

 

22,599

 

Total net revenue from external customers

 

$

64,171

 

 

$

54,792

 

Gross profit by segment:

 

 

 

 

 

 

 

 

Employer

 

$

16,492

 

 

$

12,282

 

Carrier

 

 

16,078

 

 

 

13,213

 

Total gross profit

 

$

32,570

 

 

$

25,495

 

 

21


Comparison of Three Months Ended March 31, 2017 and 2016

Revenue

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

Percentage of

 

 

 

Period-to-Period Change

 

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Percentage

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Software services

 

$

56,720

 

 

 

88.4

 

%

 

$

48,992

 

 

 

89.4

 

%

 

$

7,728

 

 

 

15.8

 

%

Professional services

 

 

7,451

 

 

 

11.6

 

 

 

 

5,800

 

 

 

10.6

 

 

 

 

1,651

 

 

 

28.5

 

 

Total revenue

 

$

64,171

 

 

 

100.0

 

%

 

$

54,792

 

 

 

100.0

 

%

 

$

9,379

 

 

 

17.1

 

%

Growth in software services revenue was primarily attributable to existing customers adding covered lives to our offerings, or volume increases, and purchasing additional products as well as to the net addition of new customers, as the number of large employer and carrier customers increased to 906 as of March 31, 2017 from 795 as of March 31, 2016.

The increase in professional services revenue in absolute terms was in part attributable to the recognition of $1.0 million of implementation services provided to newly activated customers and new products provided to existing customers and $1.2 million attributable to the acceleration of the customer relationship period for certain customers. These increases were partially offset by a decrease in revenue of $0.6 million from customer specific customizations.

Segment Revenue

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

Percentage of

 

 

 

Period-to-Period Change

 

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Percentage

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Employer

 

$

40,630

 

 

 

63.3

 

%

 

$

32,193

 

 

 

58.8

 

%

 

$

8,437

 

 

 

26.2

 

%

Carrier

 

 

23,541

 

 

 

36.7

 

 

 

 

22,599

 

 

 

41.2

 

 

 

 

942

 

 

 

4.2

 

 

Total revenue

 

$

64,171

 

 

 

100.0

 

%

 

$

54,792

 

 

 

100.0

 

%

 

$

9,379

 

 

 

17.1

 

%

Growth in our employer revenue was primarily attributable to a $7.8 million increase in our employer software services revenue driven primarily by new customers and volume increases, as well as additional products sold to existing customers.  Additionally, employer professional services revenue increased by $0.6 million.

The increase in carrier revenue in absolute terms was primarily attributable to a $1.0 million increase in professional services revenue, offset by a decrease of $0.1 million in software services revenue. The professional services revenue increase was primarily driven by implementations related to additional products with existing customers and the acceleration of the customer relationship period for certain customers.

22


Cost of Revenue

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

Percentage of

 

 

 

Period-to-Period Change

 

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Percentage

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

$

31,601

 

 

 

49.2

 

%

 

$

29,297

 

 

 

53.5

 

%

 

$

2,304

 

 

 

7.9

 

%

The increase in cost of revenue in absolute terms was attributable to professional fees associated with third-party deliveries. This increase included an increase in stock-based compensation of $0.1 million. The remaining increase was attributable to other operating expenses related to security, technology infrastructure, depreciation and amortization, and facilities costs to support our organization. However, cost of revenue as a percentage of revenue has continued to decrease as a result of economies of scale as our revenues have grown.

Gross Profit

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

Percentage of

 

 

 

Period-to-Period Change

 

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Percentage

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Software services

 

$

34,947

 

 

 

61.6

 

%

 

$

31,471

 

 

 

64.2

 

%

 

$

3,476

 

 

 

11.0

 

%

Professional services

 

 

(2,377

)

 

 

(31.9

)

 

 

 

(5,976

)

 

 

(103.0

)

 

 

 

3,599

 

 

 

(60.2

)

 

Gross profit

 

$

32,570

 

 

 

50.8

 

%

 

$

25,495

 

 

 

46.5

 

%

 

$

7,075

 

 

 

27.8

 

%

The increase in software services gross profit in absolute terms was driven by a $7.7 million, or 15.8%, increase in software services revenue. This increase was partially offset by a $4.3 million, or 24.3%, increase in software services cost of revenue. Software services cost of revenue included $0.5 million and $0.3 million of stock-based compensation expense for the three months ended March 31, 2017 and 2016, respectively, and $2.7 million and $2.0 million of depreciation and amortization for the three months ended March 31, 2017 and 2016, respectively.

The improvement in professional services gross loss was driven by a $1.7 million, or 28.5%, increase in professional services revenue and a decrease in professional services cost of revenue of $1.9 million. Professional services cost of revenue included $0.2 million and $0.3 million of stock-based compensation expense for the three months ended March 31, 2017 and 2016, respectively. In addition, professional services cost of revenue included $0.3 million and $0.4 million in depreciation and amortization for the three-month periods ended March 31, 2017 and 2016, respectively. As discussed in “Components of Operating Results—Cost of Revenue”, we expense our cost of revenue as we incur the costs. However, recognition of the related revenue from implementation services performed before a customer is operating on our platform is generally deferred until the commencement of the monthly subscription. Therefore, we expense the cost incurred in providing these services prior to the recognition of the corresponding revenue. For this reason, as well as due to the personnel-related costs associated with providing implementation services, our cost associated with providing implementation services has been significantly higher as a percentage of related revenue than our cost associated with providing our monthly subscription services.  

Segment Gross Profit

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

Percentage of

 

 

 

Period-to-Period Change

 

 

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Percentage

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Employer

 

$

16,492

 

 

 

40.6

 

%

 

$

12,282

 

 

 

38.2

 

%

 

$

4,210

 

 

 

34.3

 

%

 

Carrier

 

 

16,078

 

 

 

68.3

 

 

 

 

13,213

 

 

 

58.5

 

 

 

 

2,865

 

 

 

21.7

 

 

 

Gross profit

 

$

32,570

 

 

 

50.8

 

%

 

$

25,495

 

 

 

46.5

 

%

 

$

7,075

 

 

 

27.8

 

%

 

The increase in employer gross profit in absolute terms was driven by an $8.4 million, or 26.2%, increase in employer revenue partially offset by a $4.2 million, or 21.2%, increase in employer cost of revenue as we continued to achieve economies of scale. The increase in cost of revenue was primarily attributable to increased personnel-related costs to support our customer base as well as increased depreciation and amortization, technology infrastructure costs and security-related costs. Our employer cost of revenue included $1.8 million and $1.4 million of depreciation and amortization for the three months ended March 31, 2017 and 2016, respectively. In addition, our employer cost of revenue included $0.5 million and $0.4 million of stock-based compensation expense for the three months ended March 31, 2017 and 2016, respectively.

23


The increase in carrier gross profit in absolute terms was driven by an increase in carrier revenue of $ 0.9 million, or 4.2 %, in combination with a decrease in carrier cost of reve nue of $ 1.9 million, or 20.5 %. The decrease in cost of revenue was primarily attributable to a decrease in customer-specific development, as opposed to platform enhancements and development. Our carrier cost of revenue included $ 1.2 million and $ 1.0 millio n in depreciation and amortization for the three month s ended March 31, 201 7 and 201 6 , respectively. In addition, our carrier cost of revenue included $ 0.2 million of stock-based compensation expense for each of the three-month periods ended March 31, 201 7 and 201 6 , respectively.

Operating Expenses

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of

 

 

 

 

 

 

 

Percentage of

 

 

 

Period-to-Period Change

 

 

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Revenue

 

 

 

Amount

 

 

Percentage

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

17,277

 

 

 

26.9

 

%

 

$

13,574

 

 

 

24.8

 

%

 

$

3,703

 

 

 

27.3

 

%

 

Research and development

 

 

12,181

 

 

 

19.0

 

 

 

 

15,015

 

 

 

27.4

 

 

 

 

(2,834

)

 

 

(18.9

)

 

 

General and administrative

 

 

7,757

 

 

 

12.1

 

 

 

 

8,395

 

 

 

15.3

 

 

 

 

(638

)

 

 

(7.6

)

 

 

The increase in sales and marketing expense in absolute terms was primarily attributable to a $2.5 million increase in salaries and personnel-related costs, including an increase in stock-based compensation of $0.3 million, due to sales and marketing associates hired to continue driving revenue growth. We experienced $0.7 million of separation expenses primarily related to the departure of certain associates, including accelerated stock-based compensation of $0.4 million. Additionally, we experienced an increase of $0.5 million in costs related to facilities and overhead allocation, recruiting, professional fees and travel-related costs.

The decrease in research and development expense in absolute terms reflects cost-saving efforts undertaken during 2017. We experienced a $1.3 million decrease in salaries and personnel-related costs as the result of a decrease in the number of associates engaged in research and development activities. This decrease includes a $0.7 million decrease in stock-based compensation primarily due to the accrual of separation expenses related to the departure of our former Chief Technology Officer in the first quarter of 2016.  Additionally, costs related to external development and engineering consulting decreased $1.4 million.  Lastly, we experienced a $0.1 million decrease in travel-related costs.

The decrease in general and administrative expense in absolute terms was primarily attributable to separation expenses related to the retirement of our Chief Financial Officer in the first quarter of 2016.  We experienced a $0.4 million decrease in salaries and personnel-related costs as increases in salary and personnel-related costs of $0.3 million were offset by a decrease in separation expenses of $0.7 million, of which $0.3 million was stock-based compensation. We experienced additional decreases in professional and consulting fees of $0.2 million attributable to the implementation of our enterprise resource planning system that went live in January 2016.    

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances. Actual results might differ from these estimates under different assumptions or conditions and, to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. During the three months ended March 31, 2017, there were no material changes to our critical accounting policies and use of estimates, which are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Liquidity and Capital Resources

Sources of Liquidity

As of March 31, 2017, our primary sources of liquidity were our cash and cash equivalents totaling $57.7 million, $27.3 million in accounts receivables, net of allowances, and an unused revolving line of credit of $46.8 million, without taking into account the borrowing base limit.

We are bound by customary affirmative and negative covenants in connection with the revolving line of credit, including financial covenants related to liquidity and EBITDA. In the event of a default, the lenders may declare all obligations immediately due and stop advancing money or extending credit under the line of credit. The line of credit

24


is collateralized by substantially all of our tangible and intangible assets, including intellectual property and the equity of our subsidiaries.

Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and existing cash balances will be sufficient to meet our cash requirements for at least the next 12 months.

Going forward, we may access capital markets to raise additional equity or debt financing for various business reasons, including required debt payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing on favorable terms or at all.

Cash Flows

The following table summarizes our cash flows for the periods indicated:

 

 

 

Three Months Ended
March 31,

 

 

 

2017

 

 

2016

 

 

 

(in thousands)

 

Cash (used in) provided by:

 

 

 

 

 

 

 

 

Operating activities

 

$

(7,413

)

 

$

(19,818

)

Investing activities

 

 

(103

)

 

 

21,911

 

Financing activities

 

 

8,334

 

 

 

(27,914

)

Operating Activities

For the three months ended March 31, 2017, our operating activities used $7.4 million of cash, as $10.4 million for non-cash adjustments were more than offset by our net loss of $7.7 million and $10.2 million of cash used in changes in working capital. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $4.0 million, accrual of interest on financing obligations of $1.9 million, and non-cash stock compensation expense of $4.4 million. The cash used in changes in working capital primarily consisted of a decrease in deferred revenue of $6.9 million, a decrease in accrued compensation and benefits of $6.6 million as the result of timing of payments of accrued amounts, a decrease in accounts payable not associated with the purchase of property and equipment of $0.9 million and an increase in prepaid expenses and other current assets of $1.4 million. Changes in working capital that provided cash totaled $5.7 million and were primarily comprised of a decrease of accounts receivable.

For the three months ended March 31, 2016, our operating activities used $(19.8) million of cash, as $9.5 million for non-cash adjustments were more than offset by $(15.9) million of cash used in changes in working capital and by a net loss of $(13.4) million. Adjustments for non-cash items primarily consisted of depreciation and amortization expense of $3.0 million, accrual of interest on financing obligations of $1.7 million, and non-cash stock compensation expense of $4.7 million. The cash used in changes in working capital primarily consisted of an increase in accounts receivable of $3.6 million and a decrease in deferred revenue of $5.4 million, driven in part by the achievement of standalone value for recognition of certain professional services fees. The increase in accounts receivable was attributable to a delay in customer billings that occurred during the first quarter of 2016 related to the implementation of our new accounting system. The impact of this delay caused an increase in accounts receivable of approximately $6.0 million as of the end of the first quarter of 2016. Additional changes in working capital that used cash were comprised of decreases in accrued compensation and benefits of $5.3 million, a decrease in accounts payable of $3.9 million, and an increase in other non-current assets of $0.5 million. The decrease in accrued compensation and benefits is the result of a change in the timing of funding of our defined contribution plan and payroll payment timing. We have typically funded our defined contribution plan in the second quarter of each year. In 2016, we funded the plan in the first quarter of 2016 which resulted in a use of cash during the quarter in the amount of $2.6 million. Changes in the timing of the payment of payroll attributed to an additional use of cash in the amount $3.6 million. This was the result of switching to a payroll service in the third quarter of 2015. The April 1st payroll was withdrawn in the first quarter of 2016 compared to 2015 when the April 1st payroll was paid in the second quarter. The decrease in accounts payable was primarily attributable to early vendor payments in the amount of $1.8 million that occurred in the first quarter of 2016 related to the implementation of our new accounting system.

Investing Activities

For the three months ended March 31, 2017 and 2016, net cash used in investing activities was $2.1 million and $2.6 million, respectively, for the purchase of property and equipment as well as $2.0 million for the purchase of short-term investments held to maturity for the three months ended March 31, 2016. Additionally, during the three months ended March 31, 2017 and 2016, the maturity of short-term investments held to maturity provided $2.0 million and $26.5 million, respectively, as our portfolio matured.

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Financing Activities

For the three months ended March 31, 2017, net cash provided by financing activities was $8.3 million, consisting primarily of net draws on the revolving line of credit of $8.0 million and $2.4 million from stock option exercises. These were offset by payments of $2.1 million of financing and capital lease obligations.

For the three months ended March 31, 2016, net cash used by financing activities was $(27.9) million, consisting primarily of payments on the revolving line of credit of $25.0 million, payments of $2.9 million of financing and capital lease obligations, and payments of $0.2 million for the remittance of taxes upon the vesting of restricted stock units. These were offset by $0.2 million from stock option exercises.

During the first half of 2016, we changed our method of settling tax liabilities associated with the vesting of restricted stock units.  Starting with the April 1, 2016 vest date, we settle the tax liability by selling shares in the market to cover the tax liability, which results in no cash outflow from the Company related to the vesting of restricted stock.

Off-Balance Sheet Arrangements

As of March 31, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the Securities Act, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.

Recent Accounting Pronouncements

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 (the modified retrospective method). The new standard will be effective for us beginning January 1, 2018, with an option to early adopt. We will adopt the standard on the effective date, but have not yet made a determination on the adoption method.

While we are continuing to assess all potential impacts of the standard, we have initially identified certain areas that might be more significantly affected, including the timing of revenue recognition for certain of our professional services and the accounting for sales commissions, which are currently expensed as incurred. We are also continuing to review the impact of this standard on potential disclosure changes in our consolidated financial statements as well as which transition approach will be applied. We cannot currently estimate the impact of adopting this standard.  We are also in the process of evaluating changes to our business processes and controls in order to support revenue recognition and disclosure under the new standard.

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 beginning after December 15, 2019. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).” The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be effective for us beginning January 1, 2019, but early adoption is permitted. We are currently evaluating the impact of this update on our consolidated financial statements.

We are evaluating other accounting standards and exposure drafts that have been issued or proposed by the FASB or other standards setting bodies that do not require adoption until a future date to determine whether adoption will have a material impact on our consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK .

Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument might change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. Borrowings under our revolving line of credit bear interest at rates that are variable. Increases in the Prime Rate would increase the revolving line of credit.

Interest Rate Sensitivity

We are subject to interest rate risk in connection with borrowings under the revolving line of credit, which are subject to a variable interest rate. At March 31, 2017, we had borrowings under the revolving line of credit of $48.2 million. As a result, each change of one percentage point in interest rates would result in an approximate $0.5 million change in our annual interest expense on our outstanding borrowings at March 31, 2017. Any debt we incur in the future may also bear interest at variable rates.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.


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ITEM 4. CONTROLS AND PROCEDURES .

(a)

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2017 our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of March 31, 2017.

 

(b)

Changes in Internal Control Over Financial Reporting 

 

No change in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II. OTHER INFORMATION.

ITEM 1A. RIS K FACTORS.

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this Quarterly Report on Form 10-Q, including the consolidated financial statements and the related notes, before deciding to invest in shares of our common stock. If any of the following risks were to materialize, our business, financial condition, results of operations, and future growth prospects could be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose part or all of your investment in our common stock.

 

Risks Related to Our Business

 

We have had a history of losses, and we might not be able to achieve or sustain profitability.

 

We experienced net losses of $ 40.1 million, $62.1 million, and $63.2 million for the years ended December 31, 2016, 2015, and 2014, respectively, and net losses of $7.7 million and $13.4 million for the three months ended March 31, 2017 and 2016, respectively. We cannot predict if we will achieve sustained profitability in the near future or at all. We expect to make significant future expenditures to develop and expand our business. In addition, as a public company, we incur significant legal, accounting, and other expenses that we did not incur as a private company. These increased expenditures will make it harder for us to achieve and maintain future profitability. Our recent growth in revenue and number of customers might not be sustainable, and we might not achieve sufficient revenue to achieve or maintain profitability. We could incur significant losses in the future for a number of reasons, including the other risks described in this Quarterly Report on Form 10-Q, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we might not be able to achieve or maintain profitability and we may incur significant losses for the foreseeable future.

 

Our quarterly operating results have fluctuated in the past and might continue to fluctuate, causing the value of our common stock to decline substantially.

 

Our quarterly operating results might fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis might not be meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealistic or that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. For example, on February 24, 2017, the first trading day after we publically announced our operating results for the fourth quarter and full year ended December 31, 2016, our stock price dropped almost $3.25 per share, or 11.5%, to $25.10.

 

Our operating results have varied in the past. In addition to other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly operating results include:

 

 

 

our ability to hire and retain qualified personnel, including the rate of expansion of our sales force;

 

 

the extent to which our products and services achieve or maintain market acceptance;

 

 

changes in the regulatory environment related to benefits and healthcare;

 

 

our ability to introduce new products and services and enhancements to our existing products and services on a timely basis;

 

 

new competitors and the introduction of enhanced products and services from competitors;

 

 

the financial condition of our current and potential customers;

 

 

changes in customer budgets and procurement policies;

 

 

the amount and timing of our investment in research and development activities;

 

 

technical difficulties with our products or interruptions in our services;

 

 

regulatory compliance costs;

 

 

the timing, size, and integration success of potential future acquisitions; and

 

 

unforeseen legal expenses, including litigation and settlement costs.

 

In addition, a significant portion of our operating expense is relatively fixed in nature, and planned expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time.

 

Because we recognize revenue and expense relating to monthly subscriptions and professional services over varying periods, downturns or upturns in sales are not immediately reflected in full in our operating results.

 

As a SaaS company, we recognize our subscription revenue monthly for the term of our contracts and recognize the majority of our professional services revenue ratably over the longer of the contract term or the estimated expected life of the customer relationship. As a result, a portion of the revenue we report each quarter is the recognition of deferred revenue from contracts we entered into during previous quarters. Consequently, a shortfall in demand for our software solutions and professional services or a

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decline in new or renewed contracts in any one quarter might not significa ntly reduce our revenue for that quarter, but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our products and services is not reflected in full in our results of operation s until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, because revenue from new customers must be recognized over the applicable term of the contracts or the estimated expected life of the customer relationship period. In addition, we recognize professional services expenses as incurred, which could cause professional services gross margin to be negative.

 

As a result of our variable sales and implementation cycles, we might not be able to recognize revenue to offset expenditures, which could result in fluctuations in our quarterly results of operations or otherwise harm our future operating results.

 

The sales cycle for our products and services can be variable, averaging four months in our employer market segment and 15 months in our carrier market segment, each from initial contact to contract execution. During the sales cycle, we expend time and resources, and we do not recognize any revenue to offset such expenditures.

 

After a customer contract is signed, we provide an implementation process for the customer during which we establish and test appropriate integrations, connections and registrations, load data into our system, and train customer personnel. Our implementation cycle is also variable, typically ranging from four to five months for employer implementations and from eight to 10 months for complex carrier implementations, each from contract execution to completion of implementation. Some of our new customer projects are complex and require a lengthy set-up period and significant implementation work. During the implementation cycle, we expend substantial time, effort, and financial resources implementing our products and services, but accounting principles do not allow us to recognize the resulting revenue until implementation is complete and the services are available for use, at which time we begin recognition of implementation revenue over the longer of the life of the contract or the expected life of the customer relationship. Each customer’s situation is different, and unanticipated difficulties and delays might arise as a result of failure by us or by the customer to complete our respective responsibilities. If implementation periods are extended, revenue recognition could be delayed and our financial condition might be adversely affected. In addition, cancellation of any implementation after it has begun might result in lost time, effort, and expenses invested in the cancelled implementation process and lost opportunity for implementing paying clients in that same period of time.

 

These factors might contribute to continuing losses and substantial fluctuations in our quarterly operating results. As a result, in future quarters, our operating results could fall below the expectations of securities analysts or investors, in which event our stock price would likely decline.

 

Changes in, or interpretations of, existing accounting principles, including regarding revenue recognition and accounting for leases, and their implementation could have an adverse impact on our reported financial results.

 

We prepare our financial statements in accordance with U.S. GAAP. These rules are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. Changes in these rules or their interpretation could have a negative impact on our reported financial results and may retroactively affect previously reported transactions.  For example, in May 2014, the Financial Accounting Standards Board, or FASB, issued an accounting standards update on revenue recognition, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.  The new standard will be effective for us beginning January 1, 2018.  While we are continuing to assess all potential impacts of the standard, we have initially identified certain areas that might be more significantly affected, including the timing of revenue recognition for professional services and accounting for sales commissions.  In addition, in February 2016, FASB issued an accounting standards update on leases, requiring 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, which will be effective beginning January 1, 2019 with early adoption permitted, also introduces new disclosure requirements for leasing arrangements. We are currently evaluating the impact of this update on the consolidated financial statements, which could be material, given our related party leases. Implementation of these new standards, and any future accounting pronouncements, implementation guidelines or interpretations, could have an adverse impact on our reported financial results, require that we make significant changes to our systems, processes and controls, or the way we conduct our business.

 

We depend on our senior management team, and the loss of one or more key associates or an inability to attract and retain highly skilled associates could adversely affect our business.

 

Our success depends largely upon the continued services of our key executive officers and other associates. We also rely on our leadership team in the areas of research and development, marketing, services, finance, and general and administrative functions, and on mission-critical individual contributors in sales and research and development. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. For example, in 2015 three of our executive officers announced they were leaving the Company or transitioned into different roles, and in 2016 we hired a new Chief Technology Officer, a new Chief Financial Officer who subsequently resigned for family reasons, and his replacement, who has also resigned effective April 30, 2017 for personal reasons. The loss of one or more of our executive officers or key associates could have a serious adverse effect on our business.

 

To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense for sales people and for engineers with high levels of experience in designing and developing software and Internet-related services. We might not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled

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personnel with appropriate qualifications. The pool of qualified personnel with SaaS experience and/or experience working with the benefits market is limited overall and specifically in Charl eston, South Carolina, where our principal office is located. In addition, many of the companies with which we compete for experienced personnel have greater resources than we have and are located in geographic areas, like Silicon Valley, that may attract more qualified technology workers.

 

In addition, in making employment decisions, particularly in the Internet and high-technology industries, job candidates often consider the value of the equity awards they are to receive in connection with their employment. Volatility in the price of our stock might, therefore, adversely affect our ability to attract or retain highly skilled personnel. Furthermore, the requirement to expense certain stock awards might discourage us from granting the size or type of stock awards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

 

We operate in a highly competitive industry, and if we are not able to compete effectively, our business and operating results will be harmed.

 

The benefits management software market is highly competitive and is likely to attract increased competition, which could make it hard for us to succeed. Small, specialized providers continue to become more sophisticated and effective. In addition, large, well-financed, and technologically sophisticated software companies might focus more on our market. The size and financial strength of these entities is increasing as a result of continued consolidation in both the IT and healthcare industries. We expect large integrated software companies to become more active in our market, both through acquisitions and internal investment. In addition, insurance carriers may seek to bring certain of their benefits software solutions in-house, whether through acquisitions or internal investment. For example, Aetna, a customer of ours, owns bswift, a provider of insurance exchange technology solutions and benefits administration technology solutions and services. If Aetna were to decide to use bswift’s solution in place of any portion of the solutions we currently provide to them, then our business and operating results could be materially and adversely affected. As costs fall and technology improves, increased market saturation might change the competitive landscape in favor of our competitors.

 

Some of our current large competitors have greater name recognition, longer operating histories, and significantly greater resources than we do. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, current and potential competitors have established, and might in the future establish, cooperative relationships with vendors of complementary products, technologies, or services to increase the availability of their products in the marketplace. Accordingly, new competitors or alliances might emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. Further, in light of these advantages, even if our products and services are more effective than those of our competitors, current or potential customers might accept competitive offerings in lieu of purchasing our offerings. Increased competition is likely to result in pricing pressures, which could negatively impact our sales, profitability, or market share. In addition to new niche vendors, who offer standalone products and services, we face competition from existing enterprise vendors, including those currently focused on software solutions that have information systems in place with potential customers in our target market. These existing enterprise vendors might promise products or services that offer ease of integration with existing systems and which leverage existing vendor relationships. In addition, large insurance carriers often have internal technology staffs and proprietary software for benefits management, making them less likely to buy our solutions.

 

The market for our products and services is immature and volatile, and if it does not develop or if it develops more slowly than we expect, the growth of our business will be harmed.

 

The cloud-based benefits management software market is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness of employers, carriers, and consumers to increase their use of benefits management software. Many employers and carriers have invested substantial personnel and financial resources to integrate internally developed solutions or traditional enterprise software into their businesses for benefits management, and therefore might be reluctant or unwilling to migrate to our cloud-based solutions. Furthermore, some businesses might be reluctant to use cloud-based solutions because they have concerns about the security of their data and the reliability of the technology delivery model associated with these solutions. If employers, carriers and consumers do not perceive the benefits of our solutions, then our market might not develop at all, or it might develop more slowly than we expect, either of which could significantly adversely affect our operating results. In addition, we might make errors in predicting and reacting to relevant business trends, which could harm our business. If any of these risks occur, it could materially adversely affect our business, financial condition or results of operations.

 

The SaaS pricing model is evolving and our failure to manage its evolution and demand could lead to lower than expected revenue and profit.

 

We derive most of our revenue growth from subscription offerings and, specifically, SaaS offerings. This business model depends heavily on achieving economies of scale because the initial upfront investment is costly and the associated revenue is recognized on a ratable basis. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and demand of the SaaS pricing model, then our business and operating results could be adversely affected.

 

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If we do not continue to innovate and provide products and services that are useful to consumers, employers, insurance carriers , and brokers and provide high quality support services, we might not remain competitive, and our revenue and operating results could suffer.

 

Our success depends in part on providing products and services that consumers, employers, insurance carriers, and brokers will use to manage benefits. We must continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high quality products and services that customers will want. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we might lose customers. Our operating results would also suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market opportunity, or are not effectively brought to market. As technology continues to develop, our competitors might be able to offer results that are, or that are perceived to be, substantially similar to or better than those generated by us. This would force us to compete on additional product and service attributes and to expend significant resources in order to remain competitive.

 

In addition, we may experience difficulties with software development, industry standards, design, or marketing that could delay or prevent our development, introduction, or implementation of new solutions and enhancements. The introduction of new solutions by competitors, the emergence of new industry standards, or the development of entirely new technologies to replace existing offerings could render our existing or future solutions obsolete.

 

Our success also depends on providing high quality support services to resolve any issues related to our products and services. High quality education and customer support is important for the successful marketing and sale of our products and services and for the renewal of existing customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell additional products and services to existing customers would suffer and our reputation with existing or potential customers would be harmed.

 

If we are unable to retain our existing customers, our revenue and results of operations would be adversely affected.

 

We sell our products and services pursuant to agreements that are generally one year for employers and three to five years for carriers. While our employer contracts generally automatically renew on an annual basis, our carrier customers have no obligation to renew their contracts after their contract period expires, and these contracts might not be renewed on the same or on more profitable terms if at all. Additionally, some of our carrier customers are able to terminate their respective contracts without cause or for convenience, although generally our carrier contracts are only cancellable by the carrier in an instance of our uncured breach. As a result, our ability to grow depends in part on the continuance and renewal of our carrier contracts. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including their level of satisfaction or dissatisfaction with our services, the cost of our services, the cost of services offered by our competitors, or reductions in our customers’ spending levels. If our carrier customers terminate or do not renew their contracts for our services, renew on less favorable terms, or do not purchase additional functionality or products, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.

 

A significant amount of our revenue is derived from our largest customers, and any reduction in revenue from any of these customers would reduce our revenue and net income.

 

Our ten largest customers by revenue accounted for approximately 42.9%, 42.4% and 40.4% of our consolidated revenue in each of 2016, 2015 and 2014, respectively. Our largest customer by revenue accounted for approximately 11.4% and 8.5% of our revenue in each of 2016 and 2015, respectively. In addition, one customer represented 14.0% of our accounts receivable at December 31, 2016 and another represented 12.8% and 22.2% at December 31, 2016 and 2015, respectively. If any of our large customers or strategic partners decides not to renew its contracts with us, or to renew on less favorable terms, our business, revenues, reputation, and our ability to obtain new customers could be materially and adversely affected.

 

Our growth depends in part on the success of our strategic relationships with third parties.

 

In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties, including Mercer LLC, or Mercer, and its affiliates, SAP SE, and others such as technology and content providers, and third party system integrators. Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. Our expanded relationship with and February 2015 sale of stock to Mercer increases our reliance on it and related risks, including Mercer’s competitors being less likely to do business with us. Our competitors might be effective in providing incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our products and services. In addition, acquisitions of our partners by our competitors could result in a decrease in the number of our current and potential customers, as our partners may no longer facilitate the adoption of our applications by potential customers. If we are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increased customer use of our applications or increased revenue.

 

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If the number of individuals covered by our employer and carrier customers decreases or the number of products or services to which our employer and carrier customers subscribe decreases, our revenue will decrease.

 

Under most of our customer contracts, we base our fees on the number of individuals to whom our customers provide benefits and the number of products or services subscribed to by our customers. Many factors may lead to a decrease in the number of individuals covered by our customers and the number of products or services subscribed to by our customers, including:

 

 

 

failure of our customers to adopt or maintain effective business practices;

  

 

changes in the nature or operations of our customers;

  

 

government regulations; and

  

 

increased competition or other changes in the benefits marketplace.

 

If the number of individuals covered by our customers or the number of products or services subscribed to by our customers decreases for any reason, our revenue will likely decrease.

 

Failure to manage our rapid growth effectively could increase our expenses, decrease our revenue, and prevent us from implementing our business strategy.

 

We have been experiencing a period of rapid growth, which puts strain on our business. To manage this and our anticipated future growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems, and controls. We also must attract, train, and retain a significant number of qualified sales and marketing personnel, customer support personnel, professional services personnel, software engineers, technical personnel, and management personnel. Failure to effectively manage our rapid growth could lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems, or controls, give rise to operational mistakes, losses, loss of productivity or business opportunities, and result in loss of employees and reduced productivity of remaining employees. Our growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. If our management is unable to effectively manage our growth, our expenses might increase more than expected, our revenue could decline or might grow more slowly than expected, and we might be unable to implement our business strategy. The quality of our products and services might suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

 

Economic uncertainties or downturns in the general economy or the industries in which our customers operate could disproportionately affect the demand for our solutions and negatively impact our results of operations.

 

General worldwide economic conditions have experienced significant downturns in the past, and market volatility and uncertainty remain widespread, including as a result of the U.S. presidential administration change.  All of this makes it extremely difficult for our customers and us to accurately forecast and plan future business activities. In addition, these conditions could cause our customers or prospective customers to decrease headcount, benefits, or HR budgets, which could decrease corporate spending on our products and services, resulting in delayed and lengthened sales cycles, a decrease in new customer acquisition, and/or loss of customers. Furthermore, during challenging economic times, our customers may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If that were to occur, our financial results could be harmed. Further, challenging economic conditions might impair the ability of our customers to pay for the products and services they already have purchased from us and, as a result, our write-offs of accounts receivable could increase. We cannot predict the timing, strength, or duration of any economic slowdown or recovery. If the condition of the general economy or markets in which we operate worsens, our business could be harmed.

 

If we fail to maintain awareness of our brand cost-effectively, our business might suffer.

 

We believe that maintaining awareness of our brand in a cost-effective manner is critical to continuing the widespread acceptance of our existing solutions and is an important element in attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Our efforts to build, maintain and market changes to our brand nationally have involved significant expenses. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incur in maintaining our brand. If we fail to successfully maintain our brand, or incur substantial expenses in an unsuccessful attempt to maintain our brand, we may fail to attract enough new customers or retain our existing customers to the extent necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.

 

If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for past sales and our future sales may decrease.

 

We might lose sales or incur significant expenses if states successfully impose broader guidelines on state sales and use taxes. A successful assertion by one or more states requiring us to collect sales or other taxes on the licensing of our software or sale of our services could result in substantial tax liabilities for past transactions and otherwise harm our business. For example, New York recently completed a tax audit of our Company and while we settled for amounts within our sales tax reserve, other states might audit us in the future. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review these rules and regulations periodically and, when we believe we

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are subject to sales and use taxes in a particular state, voluntarily engage state tax authorities in order to determine how to comply with their rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we currently believe no such taxes are required.

 

Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty charges. Our customer contracts typically provide that our customers must pay all applicable sales and similar taxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and if our clients fail or refuse to reimburse us for all or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our software and services to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.

 

We might not be able to utilize a significant portion of our net operating loss or other tax credit carryforwards, which could adversely affect our profitability.

 

As of December 31, 2016, we had federal and state net operating loss carryforwards due to prior period losses, which if not utilized will begin to expire in 2022 for federal and state purposes. We also have South Carolina jobs tax credit and headquarters tax credit carryforwards, which if not utilized will begin to expire in 2020. These tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.

 

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change”. A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules might apply under state tax laws. Future issuances of our stock could cause an “ownership change”. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability.

 

We might be unable to adequately protect, and we might incur significant costs in enforcing, our intellectual property and other proprietary rights.

 

Our success depends in part on our ability to enforce our intellectual property and other proprietary rights. We rely on a combination of trademark, trade secret, copyright, patent, and unfair competition laws, as well as license and access agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring employees and consultants to enter into confidentiality, noncompetition, and assignment of inventions agreements. Our attempts to protect our intellectual property might be challenged by others or invalidated through administrative process or litigation. While we have five U.S., three Chinese, two Japanese, two Australian and one Taiwanese and Hong Kong patents granted and a number of applications pending, we might not be able to obtain meaningful patent protection for our software. In addition, if any patents are issued in the future, they might not provide us with any competitive advantages, or might be successfully challenged by third parties. Agreement terms that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in certain cases. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, each of which could materially harm our business. Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover, the laws of other countries in which we might in the future conduct operations or contract for services might afford little or no effective protection of our intellectual property. The failure to adequately protect our intellectual property and other proprietary rights could materially harm our business.

 

In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that is necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.

 

We might be sued by third parties for alleged infringement of their proprietary rights.

 

The software and Internet industries are characterized by the existence of a large number of patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in the past, and might receive in the future, communications from third parties claiming that we have infringed the intellectual property rights of others. Our technologies might not be able to withstand any third-party claims or rights against their use. Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, divert management attention from executing our business plan, and require us to pay monetary damages or enter into royalty or licensing agreements. In addition, many of our contracts contain warranties with respect to intellectual property rights, and most require us to indemnify our clients for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim.

 

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Moreover, any settlement or a dverse judgment resulting from such a claim could require us to pay substantial amounts of money or obtain a license to continue to use the software or information that is the subject of the claim, or otherwise restrict or prohibit our use of it. We might not be able to obtain a license on commercially reasonable terms, if at all, from third parties asserting an infringement claim; we might not be able to develop alternative technology on a timely basis, if at all; and we might not be able to obtain a licen se to use a suitable alternative technology to permit us to continue offering, and our clients to continue using, our affected services. Accordingly, an adverse determination could prevent us from offering our services to others.

 

Failure to adequately expand our direct sales force will impede our growth.

 

We believe that our future growth will depend on the development of our direct sales force and its ability to obtain new customers and to manage our existing customer base. Identifying and recruiting qualified personnel and training them in the use of our software requires significant time, expense, and attention. It can take six months or longer before a new sales representative is fully trained and productive. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenues. For example, reduction of our salesforce in 2016 negatively impacted sales, and as a result, revenue going forward. In particular, if we are unable to hire and develop sufficient numbers of productive direct sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, sales of our products and services will suffer and our growth will be impeded.

 

We might require additional capital to support business growth.

 

We intend to continue to make investments to support our business growth and might require additional funds to respond to business challenges or opportunities, including the need to develop new products and services or enhance our existing services, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we might need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

 

If we fail to meet our current credit facility’s financial covenants, our business and financial condition could be adversely affected.

 

Our current credit facility contains financial covenants, including covenants related to financial liquidity and EBITDA. If at any point we fail to comply with the financial covenants, the lenders can demand immediate repayment of our outstanding balance and deny future borrowings under the credit facility. This could have a negative impact on our liquidity, thereby reducing the availability of cash flow for other purposes and adversely affecting our business.

 

Any future litigation against us could be costly and time-consuming to defend.

 

We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our clients in connection with commercial disputes, employment claims made by our current or former associates, or purported securities class actions. Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, overall financial condition, and operating results. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims, and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the trading price of our stock.

 

If we acquire companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value, and adversely affect our operating results and the value of our common stock.

 

As part of our business strategy, we might acquire, enter into joint ventures with, or make investments in complementary companies, services, and technologies in the future. For example, in 2010, we acquired the intellectual property assets of BeliefNetworks, Inc. We spent considerable time, effort, and money pursuing this company and successfully integrating it into our business. Acquisitions and investments involve numerous risks, including:

 

 

 

difficulties in identifying and acquiring products, technologies or businesses that will help our business;

 

 

difficulties in integrating operations, technologies, services and personnel;

 

 

diversion of financial and managerial resources from existing operations;

 

 

risk of entering new markets in which we have little to no experience; and

 

 

delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses.

 

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If we fail to properly evaluate acquisitions or investments, we might not achieve the anticipated benefits of any such acquisitions, we might incur costs in excess of what we anticipate, and management resources and attention might be diverted from other necessary or valuable activities.

 

Future sales to customers outside the United States or with international operations might expose us to risks inherent in international sales which, if realized, could adversely affect our business.

 

An element of our growth strategy is to expand internationally. Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic, and political risks that are different from those in the United States. Because of our limited experience with international operations, our international expansion efforts might not be successful in creating demand for our products and services outside of the United States or in effectively selling our solutions in the international markets we enter. In addition, we will face risks in doing business internationally that could adversely affect our business, including:

 

  

 

unstable regional political and economic conditions, such as those caused by the 2016 U.S. presidential election and subsequent administration change, or the 2016 vote by the U.K. to exit from the European Union;

 

 

the need to localize and adapt our solutions for specific countries, including translation into foreign languages and associated expenses;

 

 

data privacy laws which require that customer data be stored and processed in a designated territory;

 

 

difficulties in staffing and managing foreign operations;

 

 

different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues;

 

 

new and different sources of competition;

 

 

weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;

  

 

laws and business practices favoring local competitors;

  

 

compliance challenges related to the complexity of multiple, conflicting and changing governmental laws and regulations, including employment, tax, privacy, and data protection laws and regulations;

  

 

increased financial accounting and reporting burdens and complexities;

  

 

restrictions on the transfer of funds; and

  

 

adverse tax consequences.

 

If we denominate our international contracts in local currencies, fluctuations in the value of the U.S. dollar and foreign currencies might impact our operating results when translated into U.S. dollars.

 

Risks Related to Our Products and Services Offerings

 

If our security measures are breached or fail, and unauthorized persons gain access to customers’ and consumers’ data, our products and services might be perceived as not being secure, customers and consumers might curtail or stop using our products and services, and we might incur significant liabilities.

 

Our products and services involve the storage and transmission of customers’ and consumers’ confidential information, which may include sensitive individually identifiable information that is subject to stringent legal and regulatory obligations. Because of the sensitivity of this information, security features of our software are very important. If our security measures are breached or fail and/or are bypassed as a result of third-party action, employee error, malfeasance, or otherwise, someone might be able to obtain unauthorized access to our customers’ confidential information and/or patient data. As a result, our reputation could be damaged, our business might suffer, information might be lost, and we could face damages for contract breach, penalties for violation of applicable laws or regulations, and significant costs for remediation and remediation efforts to prevent future occurrences.

 

In addition, we rely on various third parties, including employers’ HR departments, carriers, and other third-party service providers and consumers themselves, as users of our system for key activities to protect and promote the security of our systems and the data and information accessible within them, such as administration of enrollment, consumer status changes, claims, and billing. On occasion, people have failed to perform these activities. For example, employers sometimes have failed to terminate the login/password of former employees, or permitted current employees to share login/passwords. When we become aware of such breaches, we work with employers to terminate inappropriate access and provide additional instruction in order to avoid the reoccurrence of such problems. Although to date these breaches have not resulted in claims against us or in material harm to our business, failures to perform these activities might result in claims against us, which could expose us to significant expense, legal liability, and harm to our reputation, which might result in loss of business.

 

Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we might not be able to anticipate these techniques or to implement adequate preventive measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers. Any significant violations of data privacy could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. In addition, our customers might authorize or enable third parties to access their information and data that is stored on our systems. Because we do not control such access, we cannot ensure the complete integrity or security of such data in our systems.

 

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Failure by our customers to obtain proper permissions and waivers might result in claims against us or may lim it or prevent our use of data, which could harm our business.

 

We require our customers to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of information on the Benefitfocus Platform, and we require contractual assurances from them that they have done so and will do so. If, however, despite these requirements and contractual obligations, our customers do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf might be limited or prohibited by state or federal privacy laws or other laws. This could impair our functions, processes and databases that reflect, contain, or are based upon such data and might prevent use of such data. In addition, this could interfere with, or prevent creation or use of, rules, analyses, or other data-driven activities that benefit us and our business. Moreover, we might be subject to claims or liability for use or disclosure of information by reason of lack of valid notices, agreements, permissions or waivers. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.

 

Our proprietary software might not operate properly, which could damage our reputation, give rise to claims against us, or divert application of our resources from other purposes, any of which could harm our business and operating results.

 

Proprietary software development is time-consuming, expensive, and complex. Unforeseen difficulties can arise. We might encounter technical obstacles, and it is possible that we discover problems that prevent our proprietary applications from operating properly. If they do not function reliably or fail to achieve customer expectations in terms of performance, customers could assert liability claims against us and/or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain customers.

 

Moreover, benefits management software as complex as ours has in the past contained, and may in the future contain, or develop, undetected defects or errors. Material performance problems or defects in our products and services might arise in the future. Errors might result from the interface of our services with legacy systems and data, which we did not develop and the function of which is outside of our control. Defects or errors might arise in our existing or new software or service processes. Because changes in employer, carrier, and legal requirements and practices relating to benefits are frequent, we are continuously discovering defects and errors in our software and service processes compared against these requirements and practices. Undiscovered vulnerabilities could expose our software to unscrupulous third parties who develop and deploy software programs that could attack our software or result in unauthorized access to customer data. Defects and errors and any failure by us to identify and address them could result in loss of revenue or market share, liability to customers or others, failure to achieve market acceptance or expansion, diversion of development and other resources, injury to our reputation, and increased service and maintenance costs. Defects or errors in our product or service processes might discourage existing or potential customers from purchasing services from us. Correction of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability might be substantial and could adversely affect our operating results.

 

In addition, customers that rely on our products and services to collect, manage, and report benefits data might have a greater sensitivity to service errors and security vulnerabilities than customers of software products in general. We market and sell services that, among other things, provide information to assist care providers in tracking and treating ill patients. Any operational delay in or failure of our software service processes might result in the disruption of patient care and could cause harm to our business and operating results.

 

Our customers might assert claims against us in the future alleging that they suffered damages due to a defect, error, or other failure of our product or service processes. A product liability claim or errors or omissions claim could subject us to significant legal defense costs and adverse publicity regardless of the merits or eventual outcome of such a claim.

 

Various events could interrupt customers’ access to the Benefitfocus Platform, exposing us to significant costs.

 

The ability to access the Benefitfocus Platform is critical to our customers. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) power loss and telecommunications failures, (ii) fire, flood, hurricane, and other natural disasters, (iii) software and hardware errors, failures or crashes in our own systems or in other systems, (iv) computer viruses, denial-of-service attacks, hacking and similar disruptive problems in our own systems and in other systems, and (v) civil unrest, war, and/or terrorism. We have implemented various measures to protect against interruptions of customers’ access to our platform. If customers’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims by customers, particularly if the access interruption is associated with problems in the timely delivery of funds due to customers or medical information relevant to patient care. Our plans for disaster recovery and business continuity rely on third-party providers of related services. If those vendors fail us at a time when our systems are not operating correctly, we could incur a loss of revenue and liability for failure to fulfill our obligations. Any significant instances of system downtime could negatively affect our reputation and ability to retain customers and sell our services, which would adversely impact our revenue.

 

In addition, retention and availability of patient care and physician reimbursement data are subject to federal and state laws governing record retention, accuracy, and access. Some laws impose obligations on our customers and on us to produce information for third parties and to amend or expunge data at their direction. Our failure to meet these obligations might result in liability, which could increase our costs and reduce our operating results.

 

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We rely on data center providers, Internet infrastructure, bandwidth providers, third-party computer hardware and software, other third parties, and our own systems for providing services to our customers, and any failure or interruption in the servic es provided by these third parties or our own systems could expose us to litigation and negatively impact our relationships with customers, adversely affecting our brand and our business.

 

We serve all our customers from two data centers, one located in Raleigh, North Carolina and the other located in Charlotte, North Carolina. While we control and have access to our servers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so. Problems faced by our third-party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our third-party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy faced by our third-party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict.

 

In addition, our ability to deliver our web-based services depends on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity, and security. Our services are designed to operate without interruption in accordance with our service level commitments. However, we have experienced and expect that we will experience future interruptions and delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with customers. To operate without interruption, both we and our service providers must guard against:

 

 

 

damage from fire, power loss, natural disasters and other force majeure events outside our control;

 

 

communications failures;

  

 

software and hardware errors, failures, and crashes;

  

 

security breaches, computer viruses, hacking, denial-of-service attacks, and similar disruptive problems; and

  

 

other potential interruptions.

 

We also rely on computer hardware purchased or leased and software licensed from third parties in order to offer our services, including software from Oracle Corporation and Microsoft Corporation, and routers and network equipment from Cisco, Dell and Hewlett-Packard Company. These licenses are generally commercially available on varying terms. However, it is possible that this hardware and software might not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.

 

We exercise limited control over third-party vendors, which increases our vulnerability to problems with technology and information services they provide. Interruptions in our network access and services might in connection with third-party technology and information services reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability, or adversely affect our renewal rates. Although we maintain insurance for our business, the coverage under our policies might not be adequate to compensate us for all losses that may occur. In addition, we might not be able to continue to obtain adequate insurance coverage at an acceptable cost, if at all.

 

The use of open source software in our products and solutions may expose us to additional risks and harm our intellectual property rights.

 

Some of our products and solutions use or incorporate software that is subject to one or more open source licenses. Open source software is typically freely accessible, usable, and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on potentially unfavorable terms or at no cost.

 

The terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our products or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or to release our proprietary software code under the terms of an open source license, any of which could harm our business. Further, given the nature of open source software, it may be more likely that third parties might assert copyright and other intellectual property infringement claims against us based on our use of these open source software programs.

 

While we monitor the use of all open source software in our products, solutions, processes, and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product or solution when we do not wish to do so, it is possible that such use may have inadvertently occurred in deploying our proprietary solutions. In addition, if a third-party software provider has incorporated certain types of open source software into software we license from such third party

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for our products and solutions without our knowledge, we could, under certain circumstances, be required to disclose the source code to our products and solutions. This could harm our intellectual property position and our business, results of operations, and financial condition.

 

Risks Related to Regulation

 

Government regulation of the areas in which we operate creates risks and challenges with respect to our compliance efforts and our business strategies.

 

The employee benefits industry is highly regulated and is subject to changing political, legislative, regulatory, and other influences. The outcome of the U.S. presidential and other elections in 2016 could have a significant impact on the regulatory environment in our industry.  Existing and new laws and regulations affecting the employee benefits industry could create unexpected liabilities for us, cause us to incur additional costs and restrict our operations. These laws and regulations are complex and their application to specific services and relationships are not clear. In particular, many existing laws and regulations affecting employee benefits, when enacted, did not anticipate the services that we provide, and these laws and regulations might be applied to our services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our failure to comply, could create liability for us, result in adverse publicity, and negatively affect our business. Some of the risks we face from the regulation of employee benefits are as follows:

 

 

 

PPACA. Governmental oversight punctuated with the passage of the Patient Protection and Affordable Care Act, or PPACA, has led to an increasingly intricate regulatory framework under which health benefits are obtained, delivered, accessed, and maintained. Although many of the provisions of PPACA do not directly apply to us, PPACA might affect the business of many of our customers. Carriers and large employers might experience changes in the numbers of individuals they insure as a result of Medicaid expansion and the creation of state and national exchanges under PPACA and state Medicaid expansion, and the number of states  that have chosen to implement the Medicaid expansion or adopt state-specific exchanges remains in flux . Although we are unable to predict with any reasonable certainty or otherwise quantify the likely impact of PPACA on our business model, financial condition, or results of operations, changes in the business of our customers and the number of individuals they insure may negatively impact our business. Congress also has repeatedly but unsuccessfully attempted to repeal PPACA, and particularly after the presidential and Congressional elections of 2016, we are unable to predict the impact of any such pending or future attempts.

 

  

 

False or Fraudulent Claim Laws. There are numerous federal and state laws that forbid submission of false information or the failure to disclose information in connection with submission and payment of claims for reimbursement from the government. In some cases, these laws also forbid abuse of existing systems for such submission and payment. Although our business operations are generally not subject to these laws and regulations, any contract we have with a government entity requires us to comply with these laws and regulations. Any failure of our services to comply with these laws and regulations could result in substantial liability, including but not limited to criminal liability, could adversely affect demand for our services, and could force us to expend significant capital, research and development, and other resources to address the failure. Any determination by a court or regulatory agency that our services with government clients violate these laws and regulations could subject us to civil or criminal penalties, invalidate all or portions of some of our government client contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees, cause us to be disqualified from serving not only government clients but also all clients doing business with government payers, and have an adverse effect on our business.

 

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HIPAA and Other Privacy and Security Requirements. There are numerous U.S. federal and state laws and regulations related to the privacy and security of personal health information. In particular, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, established privacy and security standards that limit the use and disclosure of individually identifiable health information, and require the implementation of administrative, physical, and technological safeguards to ensure the confidentiality, integrity, and availability of individually identifiable health information in electronic form. Health plans, healthcare clearinghouses, and most providers are considered by the HIPAA regulations to be “Covered Entities”. With respect to our operations as a healthcare clearinghouse, we are directly subject to the privacy regulations established under HIPAA, or Privacy Standards, and the security regulations established under HIPAA, or Security Standards. In addition, our carrier customers, or payors, are considered to be Covered Entities and are required to enter into written agreements with us, known as Business Associate Agreements, under which we are considered to be a “Business Associate” and that require us to safeguard individually identifiable health information and restrict how we may use and disclose such information. The American Recovery and Reinvestment Act of 2009, or ARRA, and the HIPAA Omnibus Final Rules extended the direct application of certain provisions of the Privacy Standards and Security Standards to us when we are functioning as a Business Associate of our carrier customers. ARRA and the HIPAA Omnibus Final Rule also subject Business Associates to direct oversight and audit by the Department of Health and Human Services.

Violations of the Privacy Standards and Security Standards might result in civil and criminal penalties, and ARRA increased the penalties for HIPAA violations and strengthened the enforcement provisions of HIPAA. For example, ARRA authorizes state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of Privacy Standards and Security Standards that threaten the privacy of state residents. Moreover, the U.S. Department of Health and Human Services’ Office for Civil Rights (“OCR”) launched a formal HIPAA audit program. The audits are intended to assess compliance with HIPAA by both Covered Entities and Business Associates and will be conducted by OCR with assistance

from a third par ty vendor. Issues identified during the audits may result in agency-imposed corrective action plans or civil monetary penalties.

We might not be able to adequately address the business risks created by HIPAA implementation and enforcement. Furthermore, we are unable to predict what changes to HIPAA or other laws or regulations might be made in the future or how those changes could affect our business or the costs of compliance.

Some payors and clearinghouses interpret HIPAA transaction requirements differently than we do. Where payors or clearinghouses require conformity with their interpretations as a condition of a successful transaction, we seek to comply with their interpretations.

In addition to the Privacy Standards and Security Standards, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical and/or health information, and many states have adopted or are considering further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them. Failure by us to comply with any state standards regarding patient privacy may subject us to penalties, including civil monetary penalties and, in some circumstances, criminal penalties. Such failure may injure our reputation and adversely affect our ability to retain customers and attract new customers.

 

 

 

Personal Privacy and Consumer Protection.  There are numerous U.S. federal and state laws and regulations that have been adopted or are being considered regarding the collection, retention, use, and disclosure of personal information. In addition to HIPAA, we might be subject to various laws, rules and regulations related to privacy and information security such as those promulgated under the Gramm-Leach-Bliley Act and various state laws regulating the use and security of personal information.  Those laws, rules, and regulations include requirements such as reasonable and appropriate safeguards to protect personal information, or providing appropriate notice to consumers about how their personal information will be used or disclosed.   Our management believes that we are currently operating in compliance with these regulations. However, continued compliance with these evolving laws, rules and regulations regarding the privacy, security and protection of our customers’ data, or the implementation of any additional privacy rules and regulations, could result in higher compliance and technology costs for us.

 

  

 

Medicare and Medicaid Regulatory Requirements. We have contracts with insurance carriers who offer Medicare Managed Care (also known as Medicare Advantage or Medicare Part C) and Medicaid Managed Care benefits plans. We also have contracts with insurance carriers who offer Medicare prescription drug benefits (also known as Medicare Part D) plans. The activities of the Medicare plans are regulated by the Centers for Medicare & Medicaid Services, or CMS, the federal agency that provides oversight of the Medicare and Medicaid programs. The Medicaid Managed Care plans are regulated by both CMS and the individual states where the plans are offered. Some of the activities that we might perform, such as the enrollment of beneficiaries, may be subject to CMS and/or state regulation, and such regulations may force us to change the way we do business or otherwise restrict our ability to provide services to such plans. Moreover, the regulatory environment with respect to these programs has become, and will likely continue to become, increasingly complex.

 

 

 

Financial Services-Related Laws and Rules. Financial services and electronic payment processing services are subject to numerous laws, regulations and industry standards, some of which might impact our operations and subject us, our vendors, and our customers to liability as a result of the payment distribution and processing solutions we offer. Although we do not act as a bank, we offer solutions that involve banks, or vendors who contract with banks and other regulated providers of financial services. As a result, we might be impacted by banking and financial services industry laws, regulations, and industry standards, such as licensing requirements, solvency standards, requirements to maintain the privacy and security of nonpublic personal financial information, and Federal Deposit Insurance Corporation deposit insurance limits. In addition, our patient billing and payment distribution and processing solutions might be impacted by payment card association operating rules, certification requirements, and rules governing electronic funds transfers. If we fail to comply with applicable payment processing rules or requirements, we might be subject to fines and changes in transaction fees and may lose our ability to process credit and debit card transactions or facilitate other types of billing and payment solutions. Moreover, payment transactions processed using the Automated Clearing House are subject to network operating rules promulgated by the National Automated Clearing House Association and to various federal laws regarding such operations, including laws pertaining to electronic funds transfers, and these rules and laws might impact our billing and payment solutions. Further, our solutions might impact the ability of our payor customers to comply with state prompt payment laws. These laws require payors to pay healthcare claims meeting the statutory or regulatory definition of a “clean claim” within a specified time frame.

 

 

 

Insurance Broker Laws. Insurance laws in the United States are often complex, and states have broad authority to adopt regulations regarding brokerage activities. These regulations typically include the licensing of insurance brokers and agents and govern the handling and investment of client funds held in a fiduciary capacity. Although we believe our activities do not currently constitute the provision of insurance brokerage services, regulations may change from state to state, which could require us to comply with such expanded regulation.

 

40


 

 

 

ERISA. The Employee Retirement Income Security Act of 1974, as amended, or ERISA, regulates how employee benefits are provided to or through certain types of employer-sponsored health benefits plans. ERISA is a set of laws and regulations that

is subject to periodic interpretation by the U.S. Department of Labor as well as the federal courts. In some circumstances, and under certa in customer contracts, we might be deemed to have assumed duties that make us an ERISA fiduciary, and thus be required to carry out our operations in a manner that complies with ERISA in all material respects. We believe that our current operations do not render us subject to ERISA fiduciary obligations, and therefore that we are in material compliance with ERISA and that any such compliance does not currently have a material adverse effect on our operations. However, there can be no assurance that continui ng ERISA compliance efforts or any future changes to ERISA will not have a material adverse effect on us.

 

 

 

Third-Party Administrator Laws. Numerous states in which we do business have adopted regulations governing entities engaged in third-party administrator, or TPA, activities. TPA regulations typically impose requirements regarding enrollment into benefits plans, claims processing and payments, and the handling of customer funds. Although we do not believe we are currently acting as a TPA, changes in state regulations could result in us being obligated to comply with such regulations, which might require us to obtain licenses to provide TPA services in such states.

 

We are subject to banking regulations that may limit our business activities.

 

The Goldman Sachs Group, affiliates of which owned approximately 20.3% of the voting and economic interest in our business at March 31, 2017, is regulated as a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended, or BHC Act. The BHC Act imposes regulations and requirements on The Goldman Sachs Group and on any company that is deemed to be controlled by The Goldman Sachs Group under the BHC Act and the regulations of the Board of Governors of the Federal Reserve System, or the Federal Reserve. Due to the size of its voting and economic interest, we are deemed to be controlled by The Goldman Sachs Group and are therefore considered to be a non-bank “subsidiary” of The Goldman Sachs Group under the BHC Act. We will remain subject to this regulatory regime until The Goldman Sachs Group is no longer deemed to control us for purposes of the BHC Act, which we do not generally have the ability to control and which will not occur until The Goldman Sachs Group has significantly reduced its voting and economic interest in us.

 

As a controlled non-bank subsidiary of The Goldman Sachs Group, we are restricted from engaging in activities that are not permissible under the BHC Act, or the rules and regulations promulgated thereunder. Permitted activities for a bank holding company or any controlled non-bank subsidiary generally include activities that the Federal Reserve has previously determined to be closely related to banking, financial in nature or incidental or complementary to financial activities, including data processing services such as those that we provide with our software solutions. Restrictions placed on The Goldman Sachs Group as a result of supervisory or enforcement actions under the BHC Act or otherwise may restrict us or our activities in certain circumstances, even if these actions are unrelated to our conduct or business. Further, as a result of being subject to regulation and supervision by the Federal Reserve, we may be required to obtain the prior approval of the Federal Reserve before engaging in certain new activities or businesses, whether organically or by acquisition. The Federal Reserve could exercise its power to restrict us from engaging in any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an unsafe or unsound business practice. To the extent that these regulations impose limitations on our business, we could be at a competitive disadvantage because some of our competitors are not subject to these limitations.

 

Additionally, any failure of The Goldman Sachs Group to maintain its status as a financial holding company could result in further limitations on our activities and our growth. In particular, our permissible activities could be restricted to only those that constitute banking or activities closely related to banking. The Goldman Sachs Group’s loss of its financial holding company status could be caused by several factors, including any failure by The Goldman Sachs Group’s bank subsidiaries to remain sufficiently capitalized, by any examination downgrade of one of The Goldman Sachs Group’s bank subsidiaries, or by any failure of one of The Goldman Sachs Group’s bank subsidiaries to maintain a satisfactory rating under the Community Reinvestment Act. In addition, the Dodd-Frank Act broadened the requirements for maintaining financial holding company status by also requiring the holding company to remain “well capitalized” and “well managed”. We have no ability to prevent such occurrences from happening.

 

As a non-bank subsidiary of a bank holding company, we are subject to examination by the Federal Reserve and required to provide information and reports for use by the Federal Reserve under the BHC Act. In addition, we may be subject to regulatory oversight and examination because we are a technology service provider to regulated financial institutions. The Federal Reserve may also impose substantial fines and other penalties for violations of applicable banking laws, regulations and orders. Further, the Dodd-Frank Act, including Title VI thereunder known as the “Volcker Rule”, and related financial regulatory reform call for the issuance of numerous regulations designed to increase and strengthen the regulation of bank holding companies, including The Goldman Sachs Group and its affiliates. The Volker Rule, in relevant part, restricts banking entities from proprietary trading (subject to certain exemptions) and from acquiring or retaining any equity, partnership or other interests in, or sponsoring, a private equity fund, subject to satisfying certain conditions, and from engaging in certain transactions with funds.

 

We have agreed to certain covenants that are intended to facilitate The Goldman Sachs Group’s compliance with the BHC Act, but that may impose certain obligations on our company. In particular, The Goldman Sachs Group has rights to conduct audits on, and access certain information of, our company and certain rights to review the policies and procedures that we implement to comply with the laws and regulations that relate to our activities. In addition, we are obligated to provide The Goldman Sachs Group with notice of certain events and business activities and cooperate with The Goldman Sachs Group to mitigate potential adverse consequences resulting therefrom.

 

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Potential regulatory requirements placed on our software, services, and content could impose increased costs on us, delay or prevent our introduction of new service types, and impair the function or value of our existing service typ es.

 

Our products and services are and are likely to continue to be subject to increasing regulatory requirements in a number of ways. As these requirements proliferate, we must change or adapt our products and services to comply. Changing regulatory requirements might render our services obsolete or might block us from accomplishing our work or from developing new services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new product or service types more costly or more time-consuming than we currently anticipate. It might even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become unprofitable or impossible.

 

Potential government subsidy of services similar to ours, or creation of a single payor system, might reduce customer demand.

 

Recently, entities including brokers and U.S. federal and state governments have offered to subsidize adoption of online benefits platforms or clearinghouses. In addition, federal regulations have been changed to permit such subsidy from additional sources subject to certain limitations. To the extent that we do not qualify or participate in such subsidy programs, demand for our services might be reduced, which may decrease our revenue. In addition, prior proposals regarding healthcare reform have included the concept of creation of a single payor for healthcare insurance. This kind of consolidation of critical benefits activity could negatively impact the demand for our services.

 

Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our associates with respect to third parties.

 

Among other things, certain services offered by us involve collecting payment information from individuals, and this frequently includes check and credit card information. Even though we do not handle direct payments, our services also involve the use and disclosure of personal and business information that could be used to impersonate third parties, commit identity theft, or otherwise gain access to their data or funds. If any of our associates take, convert, or misuse such funds, documents, or data, we could be liable for damages, and our business reputation could be damaged or destroyed. Moreover, if we fail to adequately prevent third parties from accessing personal and/or business information and using that information to commit identity theft, we might face legal liabilities and other losses than can have a negative impact on our business.

 

Risks Related to Ownership of Our Common Stock

 

Our stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the price at which you purchase it.

 

The stock market historically has experienced extreme price and volume fluctuations. As a result of this volatility, you might not be able to sell your common stock at or above the price at which you purchase it. The public market for our stock is new. From our IPO in September 2013 through March 31, 2017, the per share trading price of our common stock has been as high as $77.00 and as low as $19.58. It might continue to fluctuate significantly in response to various factors, some of which are beyond our control. These factors include:

 

 

our operating performance and the operating performance of similar companies;

 

 

the overall performance of the equity markets;

  

 

changes in laws or regulations relating to the sale of health insurance;

  

 

announcements by us or our competitors of acquisitions, business plans, or commercial relationships;

 

 

any major change in our management;

  

 

threatened or actual litigation;

  

 

publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

  

 

large volumes of sales of our shares of common stock by existing stockholders; and

  

 

general political and economic conditions.

 

In addition, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations might be even more pronounced in the relatively new trading market for our stock. Additionally, securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will

42


 

depend upon future appreciation in its value, if any. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased their shares.

 

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

 

Sales of a substantial number of shares of our common stock in the public market or the market perception that the holder or holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. These sales could make it more difficult for us to sell equity or equity related securities in the future at a time and price that we deem appropriate.

 

As of March 31, 2017, we had an aggregate of 30,786,234   shares of common stock outstanding. As of March 31, 2017, there also were outstanding options, restricted stock units and warrants to purchase 2,590,337   shares of our common stock that, if exercised or vested, as applicable, will result in these additional shares becoming available for sale subject in some cases to Rule 144.

 

On November 12, 2013 and June 7, 2016, we also registered an aggregate of 6,399,766 shares of our common stock that we may issue or sell under our stock plans, including the Benefitfocus, Inc. 2016 Employee Stock Purchase Plan. These shares can be freely sold in the public market upon issuance , unless they are held by “affiliates”, as that term is defined in Rule 144 of the Securities Act. If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.

 

A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

 

As of March 31, 2017, our directors, executive officers, and their affiliated entities beneficially owned approximately 40.0% of our outstanding common stock. In particular, GS Capital Partners VI Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI Fund, L.P., and GS Capital Partners VI GmbH & CO. KG, which are affiliates of Goldman, Sachs & Co. and which we refer to as the Goldman Funds, collectively beneficially owned approximately 20.3%. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the amendment of our certificate of incorporation and bylaws, and the approval of mergers or other business combination transactions.

 

Additionally, the Goldman Funds, Mason R. Holland, Jr., our Executive Chairman and a director, and Shawn A. Jenkins, our Chief Executive Officer and a director, entered into a voting agreement for the election of directors. As of March 31, 2017, these stockholders collectively beneficially owned approximately 37.5% of our common stock. Pursuant to the voting agreement, the parties are obligated to vote all of their shares to elect two directors nominated by the Goldman Funds and each of Messrs. Holland and Jenkins to our board of directors. As a result, these stockholders will have significant influence on the outcome of director elections. This concentration of ownership might discourage, delay, or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by other stockholders.

 

Provisions in our restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay, or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay, or prevent a merger, acquisition, or other change in control that stockholders consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions might also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

 

 

 

limitations on the removal of directors;

  

 

advance notice requirements for stockholder proposals and nominations;

  

 

limitations on the ability of stockholders to call special meetings;

  

 

the inability of stockholders to act by written consent once The Goldman Sachs Group and its affiliates cease to own at least 35% of our voting equity;

  

 

the inability of stockholders to cumulate votes at any election of directors;

  

 

the classification of our board of directors into three classes with only one class, representing approximately one-third of our directors, standing for election at each annual meeting; and

  

 

the ability of our board of directors to make, alter or repeal our bylaws.

 

Our Board of Directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

 

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors are willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

43


 

Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control over financial reporting, and other compliance areas that will increase both our costs and the risk of noncompliance .

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, and the rules and regulations of our stock exchange. The requirements of these rules and regulations will increase our legal, accounting, and financial compliance costs, will make some activities more difficult, time-consuming, and costly, and may also place undue strain on our personnel, systems, and resources.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with our fiscal year ending December 31, 2014, we performed system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our ongoing compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts.

 

We are required to disclose changes made to our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, if we take advantage of the exemption available under the JOBS Act to the auditor attestation requirement in Section 404(b) of the Sarbanes-Oxley Act. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities, which would require additional financial and management resources.

 

Failure to develop and maintain adequate financial controls could cause us to have material weaknesses, which could adversely affect our operations and financial position.

 

As previously reported, in the first quarter of 2014, we identified a material weakness in internal controls over the accounting for leasing transactions which resulted in the identification of a material error in the accounting for our headquarters lease executed in May 2005. We might in the future discover other material weaknesses that require remediation. In addition, an internal control system, no matter how well-designed, cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we might not be able to produce timely and accurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities.

 

Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internal controls also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we are required to include in our periodic reports filed with the SEC under Section 404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers, and employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not be effective, however, in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price could decline.

 

We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

For as long as we continue to be an emerging growth company, we intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and exemptions from the requirements of auditor attestation reports on the effectiveness of our internal control over financial

44


 

reporting. We cannot predict if investors will find our common stock less a ttractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of that fiscal year, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year, (iii) the date on which we issue more than $1 billion in non-convertible debt in a three-year period, or (iv) September 17, 2018.

 

If securities or industry analysts do not publish research or reports about our business, or publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.

 

The trading market for our common stock depends, to some extent, on the research and reports that securities or industry analysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

 

 

 

ITEM 5.

  OTHER INFORMATION.

On April 26, 2017, we and certain of our subsidiaries entered into the Sixth Amendment Agreement, or the Amendment, to the Credit Agreement, dated as of February 20, 2015, as amended on June 16, 2015, December 18, 2015, March 24, 2016, October 28, 2016 and December 12, 2016, with Silicon Valley Bank, a lender and the administrative agent and collateral agent, and several other lenders party thereto.  The Amendment alters definitions in the Credit Agreement, including Consolidated EBITDA and Liquidity, and changes the Minimum Liquidity and Minimum Consolidated EBITDA requirements. It also includes consents by the lenders to certain administrative actions by us, including with respect to intellectual property and certain of our bank accounts. The Amendment also modifies the definition of Excluded Assets in the Guarantee and Collateral Agreement, dated as of February 20, 2015, which was entered into in connection with the Credit Agreement. The description of the Amendment provided above is qualified in its entirety by reference to the full and complete terms of the Amendment, which is filed as Exhibit 10.20.6 to this Quarterly Report on Form 10-Q, and incorporated herein by reference.

In addition, effective May 1, 2017, Raymond A. August, our President and Chief Operating Officer, will assume additional responsibilities as our principal financial and accounting officer. As previously disclosed in a Form 10-K filed with the SEC on February 24, 2017, Jeffrey M. Laborde resigned as our Chief Financial Officer effective April 30, 2017. Our board of directors is in the process of conducting a search for a permanent Chief Financial Officer and will name Mr. Laborde’s successor at the completion of the search. Information regarding Mr. August’s business experience is included in our Form 10-K filed with the SEC on February 24, 2017 and is incorporated herein by reference.  Mr. August, age 55, has no familial relationships with any executive officer or director of the Company. Other than his employment by us, there have been no transactions in which we have participated and in which Mr. August had a direct or indirect material interest that would be required to be disclosed under Item 404(a) of Regulation S-K.

45


 

ITEM 6. EXHIBITS .

 

 

 

 

 

 

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit Number

 

Exhibit Title

 

Form

 

File

 

Exhibit

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

10.20.6

 

Sixth Amendment Agreement, dated as of April 26, 2017, by and among Benefitfocus, Inc., Benefitfocus.com, Inc., and BenefitStore, Inc., several banks and other financial institutions or entities and Silicon Valley Bank, as administrative agent and collateral agent for lenders.+

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

Filed herewith

________

+ Confidential treatment requested with respect to portions of this exhibit.

 

 

46


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: April 28, 2017

 

Benefitfocus, Inc.

 

 

By:

/s/ Jeffrey M. Laborde

 

Jeffrey M. Laborde

 

Chief Financial Officer

 

(Principal financial and accounting officer)

 

 

47


 

 

EXHIBIT INDEX  

 

 

 

 

Incorporated by Reference

(Unless Otherwise Indicated)

Exhibit Number

 

Exhibit Title

 

Form

 

File

 

Exhibit

 

Filing Date

 

 

 

 

 

 

 

 

 

 

 

10.20.6

 

Sixth Amendment Agreement, dated as of April 26, 2017, by and among Benefitfocus, Inc., Benefitfocus.com, Inc., and BenefitStore, Inc., several banks and other financial institutions or entities and Silicon Valley Bank, as administrative agent and collateral agent for lenders.+

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

32.1

 

Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

Filed herewith

 

________

+ Confidential treatment requested with respect to portions of this exhibit.

 

 

 

48

Exhibit 10.20.6

Portions of this exhibit marked [ * ] are requested to be treated confidentially.

EXECUTION COPY

SIXTH A mendment Agreement

 

This Sixth Amendment Agreement (this Amendment ”) is entered into this 26th day of April 2017, by and among BENEFITFOCUS, INC. , a Delaware corporation (the “ Parent ”), BENEFITFOCUS.COM, INC. , a South Carolina corporation (“ Benefitfocus.com ”), and BENEFITSTORE, INC. , a South Carolina corporation (“ BenefitStore ”, and together with the Parent and Benefitfocus.com, each individually, a “ Borrower ”, and collectively, the “ Borrowers ”), the several banks and other financial institutions or entities party hereto (each a “ Lender ” and, collectively, the “ Lenders ”), and SILICON VALLEY BANK , as administrative agent and collateral agent for the Lenders (in such capacity, the “ Administrative Agent ”).

R ecitals

A.     The Borrowers, the Lenders and the Administrative Agent have entered into that certain Credit Agreement dated as of February 20, 2015, as amended pursuant to that certain First Amendment Agreement dated June 16, 2015, pursuant to that certain Second Amendment Agreement dated December 18, 2015, pursuant to that certain Third Amendment Agreement dated March 24, 2016, pursuant to that certain Fourth Amendment Agreement dated October 28, 2016, and pursuant to that certain Fifth Amendment Agreement dated December 12, 2016 (as amended and as the same may from time to time be further amended, modified, supplemented or restated, the “ Credit Agreement ”), pursuant to which the Lenders have extended credit to the Borrowers for the purposes permitted in the Credit Agreement.

B.     In connection with the Credit Agreement, the Borrowers have entered into that certain Guarantee and Collateral Agreement dated as of February 20, 2015, in favor of the Administrative Agent for the benefit of the Lenders (as the same may from time to time be amended, modified, supplemented or restated, the “ Guarantee and Collateral Agreement ”).

C.     The Borrowers have requested and the Required Lenders and the Administrative Agent agree to modify and amend certain terms and conditions of the Credit Agreement and the Guarantee and Collateral Agreement and to consent to certain transactions to be entered into by the Borrowers that would otherwise be prohibited by the covenants in the Credit Agreement and the Guarantee and Collateral Agreement.

A greement

Now, Therefore, in consideration of the foregoing recitals and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be legally bound, the parties hereto agree as follows:

1.     Definitions.   Capitalized terms used but not defined in this Amendment shall have the meanings given to them in the Credit Agreement.

2.     Amendments to Loan Documents.

 


 

2.1     Amendments to Credit Agreement.

2.1.1     Section 1.1 (Defined Terms).  

(a)     The definition of “ Consolidated EBITDA ” is amended and restated in its entirety as follows:

““ Consolidated EBITDA ”: with respect to the Parent and its consolidated Subsidiaries for any trailing sixth month period for which a calculation is to be made under this Agreement, (a) the sum , without duplication, of the amounts for such period of (i) Consolidated Net Income, plus (ii) Consolidated Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) non-cash compensation expense, plus (vii) the fees, costs and expenses incurred in connection with this Agreement and the other Loan Documents and the transactions hereunder and thereunder, plus (viii) reasonable one-time fees, costs and expenses incurred in connection with a Permitted Acquisition or a successful offering or issuance of Capital Stock, in each case to the extent approved in writing by the Administrative Agent as an ‘add-back’ to Consolidated EBITDA, plus (ix) other non‑cash items reducing Consolidated Net Income (excluding any such non‑cash item to the extent that it represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a prior period) approved by the Administrative Agent in writing as an ‘add back’ to Consolidated EBITDA, plus (x) any extraordinary or non-recurring losses, expenses or charges not to exceed $1,000,000 in the aggregate for such trailing six month period (or such higher amounts as may be approved by the Required Lenders as an ‘add-back’ to Consolidated EBITDA), minus (b) the sum , without duplication of the amounts for such period of (i) other non‑cash items increasing Consolidated Net Income for such period (excluding any such non‑cash item to the extent it represents the reversal of an accrual or reserve for potential cash item in any prior period), plus (ii) interest income.”

(b)     The definition of “ Liquidity ” is amended and restated in its entirety as follows:

Liquidity ”:  at any time, the sum of (i) the aggregate amount of unrestricted cash and Cash Equivalents (including short term marketable securities) held by the Borrowers and the Guarantors in Deposit Accounts or Securities Accounts maintained with SVB or SVB’s Affiliates or another Lender or an Affiliate thereof, or with National Bank of South Carolina (“ NBSC ”, provided that the aggregate amounts held in deposit accounts with NBSC shall not exceed $6,500,000 at any time), and in each case subject to a first priority lien in favor of the Administrative Agent, including, without limitation, pursuant to a Deposit Account Control Agreement with respect to each such Deposit Account or Securities Account Control Agreement with respect to each such Securities Account, plus (ii) the Available Revolving Commitment at such time; provided that, in connection with any calculation of Liquidity required hereunder, at least $25,000,000 must consist

 


 

of unrestricted cash and Cash Equivalents (including short term marketable securities) satisfying the requirements of clause (i) above.

2.1.2     Section 7.1 ( Financial Covenants ).  

(a)     Section 7.1(a) of the Credit Agreement (Minimum Liquidity) is hereby amended and restated as follows:

Minimum Liquidity .  Permit Liquidity at any time, as tested on the last day of each month, to be less than $40,000,000; provided that, in connection with any calculation of Liquidity required under this Section 7.1(a), at least $25,000,000 must consist of unrestricted cash and Cash Equivalents (including short term marketable securities) satisfying the requirements of clause (i) of the definition of Liquidity.

(b)     Section 7.1(b) of the Credit Agreement (Minimum Consolidated EBITDA) is hereby amended by deleting the grid set forth therein and by substituting the following in its stead:

Quarter Ending

Minimum Consolidated EBITDA for Applicable Trailing Sixth Month Period

 

March 31, 2017

$ [ * ]

June 30, 2017

$ [ * ]

September 30, 2017

$ [ * ]

December 31, 2017

$ [ * ]

March 31, 2018

$ [ * ]

June 30, 2018

$ [ * ]

September 30, 2018

$ [ * ]

December 31, 2018

$ [ * ]

March 31, 2019

$ [ * ]

June 30, 2019

$ [ * ]

September 30, 2019

$ [ * ]

December 31, 2019

$ [ * ]

 

 

                                               

[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 


 

2.1.3     Exhibit B (Form of Compliance Certificate) .  Exhibit B to the Credit Agreement is hereby deleted in its entirety and the Exhibit A attached hereto is substituted in its stead.

2.2     Amendment to Guarantee and Collateral Agreement .  The definition of “ Excluded Assets ” is amended and restated in its entirety as follows:

Excluded Assets ”:  collectively,

(a)     margin stock (within the meaning of Regulation U issued by the Board) to the extent the creation of a security interest therein in favor of the Administrative Agent (for the ratable benefit of the Secured Parties) will result in a violation of Regulation U issued by the Board;

(b)     motor vehicles and other equipment covered by certificates of title;

(c)     capital stock of any Excluded Foreign Subsidiary (other than Capital Stock representing up to 66% of the total outstanding voting Capital Stock of any Excluded Foreign Subsidiary); provided , however , that any Proceeds, substitutions or replacements of any Excluded Assets shall not be Excluded Assets (unless such Proceeds, substitutions or replacements are otherwise, in and of themselves, Excluded Assets); and

(d)     Deposit Accounts opened by any Grantor that are notional and custodial accounts used exclusively for the maintenance of third-party and employee funds in connection with account administration and billing services offered by Grantors.

2.3     Amendment to Schedules .  Schedules 1, 5 and 6 to the Guarantee and Collateral Agreement attached hereto hereby amend and restate the related schedules contained in the Guarantee and Collateral Agreement.

3.     Consents and Acknowledgments.

3.1     Borrowers have advised that Benefitfocus.com has previously granted a license for its “Imax” product to Acord Corporation (“ Acord ”) pursuant to that certain Exclusive License Agreement dated as of November 11, 2016.  Benefitfocus.com intends to transfer legal title to the “Imax” product and will retain a perpetual, irrevocable, worldwide, right and license to continue to use the “Imax” product.  The Required Lenders hereby consent to the legal transfer of the “Imax” product notwithstanding the terms of (a) Section 7.5 or any other provision of the Credit Agreement, and (b) Section 5.16 or any other provision of the Guarantee and Collateral Agreement.

3.2     Borrowers have advised that Benefitfocus.com has determined it is desirable in the conduct of its business to cease prosecution of all non-U.S. patent applications.  The Required Lenders hereby (a) acknowledge that such abandonment, cancellation, non-renewal or discontinuance of use or maintenance of all non-U.S. patent applications is permitted pursuant to Section 7.5(l) of the Credit Agreement, (b) consent to such abandonment, cancellation, non-renewal or discontinuance of use or maintenance of all

 


 

non-US patent applications notwithstanding the terms of Section 5.8(g) of the Guarantee and Collateral Agreement and (c) waive any requirement for the Borrowers to provide notice to the Administrative Agent with respect thereto under Section 5.8(e) of the Guarantee and Collateral Agreement.

3.3     Borrowers have advised that one or more of them intend to offer “Account Administration and Billing Services”.  In connection with providing such services, Borrowers will be required to maintain notional and custodial accounts at a third party bank.  The Required Lenders hereby consent to the formation and maintenance of such notional and custodial accounts and agree that such accounts will not constitute Collateral to the extent such accounts are used exclusively for the maintenance of third-party and employee funds.

4.     Conditions Precedent to Effectiveness .  This Amendment shall not be effective until each of the following conditions precedent have been fulfilled to the satisfaction of (and in form and substance satisfactory to, as applicable) the Administrative Agent (such date, the “ Sixth Amendment Effective Date ”):

4.1     This Amendment shall have been duly executed and delivered by the respective parties hereto.  The Administrative Agent shall have received a fully executed copy hereof.

4.2     All necessary consents and approvals to this Amendment shall have been obtained by the Loan Parties.

4.3     After giving effect to this Amendment, each of the representations and warranties herein and in the Credit Agreement and the other Loan Documents (i) that is qualified by materiality shall be true and correct, and (ii) that is not qualified by materiality, shall be true and correct in all material respects, in each case, on and as of the Sixth Amendment Effective Date as if made on and as of such date, except to the extent any such representation and warranty expressly relates to an earlier date, in which case such representation and warranty shall have been true and correct in all material respects as of such earlier date.

4.4     The payment by the Borrower to the Administrative Agent, for the ratable benefit of each Lender party to this amendment based on such Lender’s Revolving Percentage, an amendment fee equal to .10% of the Revolving Commitment of each Lender party hereto.

For purposes of determining compliance with the conditions specified in this Section 4 , each Lender that has executed this Amendment shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent (or made available) by the Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to such Lender, unless an officer of the Administrative Agent responsible for the transactions contemplated by the Loan Documents shall have received notice from such Lender prior to the Sixth Amendment Effective Date specifying such Lender’s objection thereto and such objection shall not have been withdrawn by notice to the Administrative Agent to that effect on or prior to the Sixth Amendment Effective Date.

 


 

5.     Limitation of Amendment .

5.1     The amendments set forth in Section 2 , above, are effective for the purposes set forth herein and shall be limited precisely as written and shall not be deemed to (a) be a consent to any amendment, waiver or modification of any other term or condition of any Loan Document, or (b) otherwise prejudice any right or remedy which the Administrative Agent or the Lenders may now have or may have in the future under or in connection with any Loan Document.

5.2     This Amendment shall be construed in connection with and as part of the Loan Documents and all terms, conditions, representations, warranties, covenants and agreements set forth in the Loan Documents, except as herein amended, are hereby ratified and confirmed and shall remain in full force and effect.

6.     Representations and Warranties.   To induce the Administrative Agent and the Required Lenders to enter into this Amendment, the Borrowers hereby represent and warrant as follows:

6.1     Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (b) no Event of Default has occurred and is continuing;

6.2     Each Borrower has the power and authority to execute and deliver this Amendment and to perform its obligations under the Credit Agreement, as amended by this Amendment;

6.3     The execution and delivery by each Borrower of this Amendment and the performance by such Borrower of its obligations under the Credit Agreement, as amended by this Amendment, have been duly authorized;

6.4     The execution and delivery by each Borrower of this Amendment and the performance by each Borrower of its obligations under the Credit Agreement, as amended by this Amendment, do not and will not contravene (a) any law or regulation binding on or affecting such Borrower, (b) any contractual restriction with a Person binding on such Borrower, (c) any order, judgment or decree of any court or other governmental or public body or authority, or subdivision thereof, binding on such Borrower, or (d) the organizational documents of such Borrower;

6.5     The execution and delivery by each Borrower of this Amendment and the performance by such Borrower of its obligations under the Credit Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by any governmental or public body or authority, or subdivision thereof, binding on such Borrower, except as already has been obtained or made; and

6.6     This Amendment has been duly executed and delivered by each Borrower and is the binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization,

 


 

liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

7.     No Defenses of Borrowers.   Each Borrower hereby acknowledges and agrees that such Borrower has no offsets, defenses, claims, or counterclaims against the Administrative Agent or any Lender with respect to the Obligations, or otherwise, and that if such Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against the Administrative Agent or any Lender, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and such Borrower hereby RELEASES the Administrative Agent and each Lender from any liability thereunder.

8.     Integration .  This Amendment and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements.  All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Amendment and the Loan Documents merge into this Amendment and the Loan Documents.

9.     Counterparts.   This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument.

10.     Effect on Loan Documents.

10.1     The amendments set forth herein shall be limited precisely as written and shall not be deemed (a) to be a forbearance, waiver, or modification of any other term or condition of the Credit Agreement or of any Loan Documents or to prejudice any right or remedy which the Administrative Agent may now have or may have in the future under or in connection with the Loan Documents; (b) to be a consent to any future consent or modification, forbearance, or waiver to the Credit Agreement or any other Loan Document, or to any waiver of any of the provisions thereof; or (c) to limit or impair the Administrative Agent’s right to demand strict performance of all terms and covenants as of any date.  The Borrowers, on behalf of each Loan Party, hereby ratify and reaffirm the Borrowers’ obligations under the Credit Agreement and each Loan Party’s obligations under each other Loan Document to which it is a party and agrees that none of the amendments or modifications to the Credit Agreement set forth in this Amendment shall impair any Loan Party’s obligations under the Loan Documents or the Administrative Agent’s rights under the Loan Documents.  The Borrowers, on behalf of each Loan Party, hereby further ratify and reaffirm the validity and enforceability of all of the Liens heretofore granted, pursuant to and in connection with the Guarantee and Collateral Agreement or any other Loan Document to the Administrative Agent on behalf and for the benefit of the Secured Parties, as collateral security for the obligations under the Loan Documents, in accordance with their respective terms, and acknowledge that all of such Liens, and all collateral heretofore pledged as security for such obligations, continues to be and remain collateral for such obligations (as amended hereby) from and after the date hereof.  The Borrowers, on behalf of each Loan Party, acknowledge and agree that the Credit Agreement and each other Loan Document is still in full force and effect and acknowledge as of the date hereof that no Loan Party has any defenses to enforcement of the Loan Documents.  The Borrowers, on behalf of each Loan Party, waive any and all defenses to enforcement of the Credit Agreement as amended hereby and each other Loan Document that

 


 

might otherwise be available as a result of this Amendment.  To the extent any terms or provisions of this Amendment conflict with those of the Credit Agreement or other Loan Documents, the terms and provisions of this Amendment shall control.

10.2     To the extent that any terms and conditions in any of the Loan Documents shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving effect to this Amendment, such terms and conditions are hereby deemed modified or amended accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended hereby.

10.3     This Amendment is a Loan Document.

11.     Severability.   The provisions of this Amendment are severable, and if any clause or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision in this Amendment in any jurisdiction.

12.     Choice of Law. Section 10.13 and Section 10.14 of the Credit Agreement are hereby incorporated by reference in their entity mutatis mutandis .

[Signature page follows.]

 

 


 

In Witness Whereof, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above.

 

BORROWERS:

BENEFITFOCUS.COM, INC.

 

By:     /s/ Jeffrey M. Laborde                             

Name:     Jeffrey M. Laborde                             

Title:     CFO                                                      

 

BENEFITFOCUS, INC.

 

By:     /s/ Jeffrey M. Laborde                             

Name:     Jeffrey M. Laborde                             

Title:     CFO                                                      

 

BENEFITSTORE, INC.

 

By:     /s/ Jeffrey M. Laborde                             

Name:     Jeffrey M. Laborde                             

Title:     CFO                                                       

 

 

 


Signature Page to Sixth Amendment


 

 

 

 

SILICON VALLEY BANK , as Administrative Agent and as a Lender

By:     /s/ Will Deevy                                          

Name:      Will Deevy                                         

Title:        Vice President                                    

 

 

Signature Page to Sixth Amendment


 

 

COMERICA BANK , as a Lender

By:     /s/ John Benetti                                        

Name:      John Benetti                                       

Title:        SVP                                                    

 

Signature Page to Sixth Amendment


 

 

 

PACIFIC WESTERN BANK , as a Lender

By:     /s/ Adam Glick                                         

Name:      Adam Glick                                        

Title:        SVP                                                    

 

 

Signature Page to Sixth Amendment


 

 

 

GOLDMAN SACHS LENDING PARTNERS LLC , as a Lender

By:     /s/ Ushma Dedhiya                                   

Name:      Ushma Dedhiya                                  

Title:        Authorized Signatory                         

 

 

Signature Page to Sixth Amendment

 


EXHIBIT A

EXHIBIT B

FORM OF COMPLIANCE CERTIFICATE

BENEFITFOCUS, INC.
BENEFITFOCUS.COM, INC.
BENEFITSTORE, INC.

 

Date:  ___________ ____, 20____

 

 1.                       This Compliance Certificate is delivered pursuant to Section 6.2(b ) of that certain Credit Agreement, dated as of February 20, 2015, by and among BENEFITFOCUS, INC. , a Delaware corporation (“ Parent ”), BENEFITFOCUS.COM, INC. , a South Carolina corporation (“ Benefitfocus.com ”), and BENEFITSTORE, INC. , a South Carolina corporation (“ BenefitStore ”, and together with Parent and Benefitfocus.com, each individually, a “ Borrower ”, and collectively, the “ Borrowers ”), the several banks and other financial institutions or entities from time to time parties thereto (each a “ Lender ” and, collectively, the “ Lenders ”), S ILICON VALLEY BANK , as the Issuing Lender and the Swingline Lender, Silicon Valley Bank (“ SVB ”), as administrative agent and collateral agent for the Lenders (in such capacity, the “ Administrative Agent ”) and COMERICA BANK , as documentation agent (in such capacity, the “ Documentation Agent ”) (as amended, restated, amended and restated, supplemented, restructured or otherwise modified from time to time, the “ Credit Agreement ”).  Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

2.   The undersigned, a duly authorized and acting Responsible Officer of Parent, hereby certifies, in his/her capacity as an officer of Parent, and not in any personal capacity, as follows:

3.   I have reviewed and am familiar with the contents of this Compliance Certificate.

4.   I have reviewed the terms of the Credit Agreement and the other Loan Documents and have made, or caused to be made under my supervision, a review in reasonable detail of the transactions and condition of Parent and its Subsidiaries during the accounting period covered by the financial statements attached hereto as Attachment 1 (the “ Financial Statements ”).  Except as set forth on Attachment 2 , such review did not disclose the existence during or at the end of the accounting period covered by the Financial Statements, and I have no knowledge of the existence as of the date of this Compliance Certificate, of any condition or event which constitutes a Default or an Event of Default.

5.   Attached hereto as Attachment 3 are the computations showing compliance with the covenants set forth in Section 7.1 of the Credit Agreement.

6.   [To the extent not previously disclosed to the Administrative Agent, a description of any change in the jurisdiction of organization of any Loan Party.]

7.   [To the extent not previously disclosed to the Administrative Agent, a list of any material patents, registered trademarks or registered copyrights issued to or acquired by any Loan Party since [the Closing Date][the date of the most recent report delivered].]

[Remainder of page intentionally left blank; signature page follows]

Exhibit B


IN WITNESS WHEREOF, I have executed this Compliance Certificate as of the date first written above.

PARENT, for itself and on behalf of each other Borrower :

 

BENEFITFOCUS, INC.

 

By:                                                                        

Name:                                                                   

Title:                                                                     

 

 

Exhibit B

 

 

 

 


 

Attachment 1
to Compliance Certificate

[Attach Financial Statements]

 

Attachment 1 to Compliance Certificate


 

Attachment 2
to Compliance Certificate

Except as set forth below, no Default or Event of Default has occurred.  [If a Default or Event of Default has occurred, the following describes the nature of the Default or Event of Default in reasonable detail and the steps, if any, being taken or contemplated by the Borrowers to be taken on account thereof.]

 

 

Attachment 2 to Compliance Certificate


 

Attachment 3
to Compliance Certificate

Preliminary Note to Compliance Certificate Calculations

The information described herein is as of [____________], [____] (the “ Statement Date ”), and pertains to the subject period described below.

 

(a)               Minimum Liquidity .

 

Required: Not permit Liquidity at any time, as tested on the last day of each month, to be less than $40,000,000; provided that at least $25,000,000 must consist of unrestricted cash and Cash Equivalents (including short term marketable securities) satisfying the requirements of clause (i) of the definition of Liquidity.

 

Actual:

 

A.

The Available Revolving Commitment as of the Statement Date

 

   $                        

B.

The aggregate amount of unrestricted cash and Cash Equivalents (including short term marketable securities) held by the Borrowers and the Guarantors in Deposit Accounts or Securities Accounts maintained with SVB or SVB’s Affiliates or another Lender or an Affiliate thereof, or with National Bank of South Carolina (“ NBSC ”, provided that the aggregate amounts held in deposit accounts with NBSC shall not exceed $6,500,000 at any time), and in each case subject to a first priority lien in favor of the Administrative Agent, including, without limitation, pursuant to a Deposit Account Control Agreement with respect to each such Deposit Account or Securities Account Control Agreement with respect to each such Securities Account; provided that, in connection with any calculation of Liquidity required hereunder, at least $25,000,000 must consist of unrestricted cash and Cash Equivalents (including short term marketable securities) satisfying the requirements of clause (i) of the definition of Liquidity.

 

   $                        

C.

MINIMUM LIQUIDITY (the sum of line A plus line B)

 

   $                        

 

Does line C consist of not less than $25,000,000 of unrestricted cash and Cash Equivalents (including short term marketable securities) satisfying the requirements of clause (i) of the definition of Liquidity?

 

              No, not in Compliance                                                        Yes, in Compliance

 

Is line C equal to or greater than $40,000,000?

 

 

              No, not in Compliance                                                         Yes, in Compliance


Attachment 2 to Compliance Certificate


 

(b)            Minimum Consolidated EBITDA .  

 

Required: Permit Consolidated EBITDA for any quarter specified below, as calculated on a trailing six (6) months basis, to be less than the correlative amount specified below:

 

Quarter Ending

Minimum Consolidated EBITDA for Applicable Trailing Six Month Period

 

March 31, 2017

$ [ * ]

June 30, 2017

$ [ * ]

September 30, 2017

$ [ * ]

December 31, 2017

$ [ * ]

March 31, 2018

$ [ * ]

June 30, 2018

$ [ * ]

September 30, 2018

$ [ * ]

December 31, 2018

$ [ * ]

March 31, 2019

$ [ * ]

June 30, 2019

$ [ * ]

September 30, 2019

$ [ * ]

December 31, 2019

$ [ * ]

 

Actual: All amounts measured on a trailing six month basis:

 

 

A.

Consolidated Net Income

 

   $                        

B.

Consolidated Interest Expense

 

   $                        

C.

Provisions for taxes based on income

 

   $                        

D.

 

Total depreciation and amortization expense

   $                        

E.

 

Non-cash compensation expense

   $                        

F.

 

The fees, costs and expenses incurred in connection with the Credit Agreement and the other Loan Documents and the transactions thereunder

   $                        

Exhibit B

 

 

                                               

[*] Confidential treatment requested; certain information omitted and filed separately with the SEC.

 


 

 

G.

 

Reasonable one-time fees, costs and expenses incurred in connection with a Permitted Acquisition or a successful offering or issuance of Capital Stock, in each case to the extent approved in writing by the Administrative Agent as an ‘add-back’ to Consolidated EBITDA

 

   $                        

H.

 

Other non‑cash items reducing Consolidated Net Income (excluding any such non‑cash item to the extent that it represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a prior period) approved by the Administrative Agent in writing as an ‘add back’ to Consolidated EBITDA

 

   $                        

I.

any extraordinary or non-recurring losses, expenses or charges not to exceed $1,000,000 in the aggregate in any trailing sixth month period (or such higher amounts as may be approved by the Required Lenders as an ‘add-back’ to Consolidated EBITDA)

 

 

 

   $                        

J.

The Sum of lines A through I

 

   $                        

K.

 

Other non‑cash items increasing Consolidated Net Income for such period (excluding any such non‑cash item to the extent it represents the reversal of an accrual or reserve for potential cash item in any prior period)

 

   $                        

L.

 

Interest Income

   $                        

M.

 

The Sum of lines K and L

   $                        

N.

 

CONSOLIDATED EBITDA (line J minus line M)

   $                        

 

Is Line N equal to or greater than $[                                               ]?

 

 

 

 

Exhibit B

 

 

 


 

Schedule 1

NOTICE ADDRESSES OF GUARANTORS

Guarantor

Notice Address

Benefitfocus, Inc.

100 Benefitfocus Way

Charleston, SC 29492

Attention: Chief Financial Officer and

General Counsel

E-Mail: Legal1@benefitfocus.com

Benefitfocus.com, Inc.

100 Benefitfocus Way

Charleston, SC 29492

Attention: Chief Financial Officer and

General Counsel

E-Mail: Legal1@benefitfocus.com

BenefitStore, Inc.

100 Benefitfocus Way

Charleston, SC 29492

Attention: Chief Financial Officer and

General Counsel

E-Mail: Legal1@benefitfocus.com

 

 

Schedule 1


 

Schedule 5

LOCATIONS OF EQUIPMENT AND INVENTORY

Grantor

Address Location

Benefitfocus, Inc.

N/A

Benefitfocus.com, Inc.

100 Benefitfocus Way

Charleston, SC 29492

125 Fairchild Street

Charleston, SC 29492

215 Fairchild Street

Charleston, SC 29492

5935 Rivers Avenue

North Charleston, SC 29406

1016 Woods Crossing Road

Suite B

Greenville, SC 29607

400 Riverwalk Terrace, Riverwalk Crossing

Suites 160, 210, 240 & 250

Jenks, OK 74037

Effective May 1, 2017:

400 Riverwalk Terrace, Riverwalk Crossing

Suite 160

Jenks, OK 74037

TierPoint Hosted Solutions LLC f/k/a Windstream Hosted Solutions LLC

5301 Departure Drive, Suite 111

Raleigh, NC 27616

TierPoint Hosted Solutions LLC f/k/a Windstream Hosted Solutions LLC

4021 Rose Lake Drive

Charlotte, NC 28217

Exhibit Concepts, Inc.

700 Crossroads Court

Vandalia, OH 45377

Stockade Storage

460 Seven Farms Drive

Daniel Island, SC 29492

BenefitStore, Inc.

100 Benefitfocus Way

Charleston, SC 29492

 

 

Schedule 5


 

Schedule 6

RIGHTS OF THE GRANTORS RELATING TO PATENTS

Issued Patents of Benefitfocus, Inc.

NONE

Pending Patent Applications of Benefitfocus, Inc.

NONE

Issued Patents and Pending Patent Applications Licensed to Benefitfocus, Inc.

NONE

Issued Patents of Benefitfocus.com, Inc.

Jurisdiction

Patent No.

Issue Date

Inventor

Title

United States

8,412,646

04/02/2013

Theodore C. Tanner, Jr.; Matthew Aldridge; Gregory Jorstad

Systems and methods for automatic creation of agent-based systems

United States

8,572,760

10/29/2013

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

United States

8,935,705

01/13/2015

Jeremy D. Martin

Execution of highly concurrent processing tasks based on updated dependency data structure at run-time

United States

9,430,504

08/30/2016

Michael Rosier

System and method for dynamically intercepting and adjusting persistence behaviors via runtime configuration

United States

9,454,412

09/27/2016

Michael Rosier

Systems and methods for classifying and analyzing runtime events

Australia

2009298151

10/29/2015

Theodore C. Tanner, Jr.; Matthew Aldridge; Gregory Jorstad

Systems and methods for automatic creation of agent-based systems

China

ZL200980126895.0

09/03/2014

Theodore C. Tanner, Jr.; Matthew Aldridge; Gregory Jorstad

Systems and methods for automatic creation of agent-based systems

China

ZL201180039769.9

07/22/2015

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

Schedule 6


 

China

ZL201280021183.4

09/21/2016

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Hong Kong

HK1179722

01/08/2016

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

Japan

5690935

02/06/2015

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

Japan

5989097

08/19/2016

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Taiwan

I531973

05/01/2016

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Australia

2012256399

03/16/2017

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Pending Patent Applications of Benefitfocus.com, Inc.

Jurisdiction

Serial No.

Filing Date

Inventor

Title

United States

13/020,376

02/03/2011

John M. Lunsford

Systems and methods for polymorphic content generation in a multi-application, multi-tenant environment

United States

13/299,112

11/17/2011

William B. Gilbert

Systems and methods for dynamic service integration

United States

13/452,580

04/20/2012

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

United States

14/463,314

08/19/2014

Michael Rosier

Systems and methods for correlating derived metrics for system activity

United States

14/482,437

09/10/2014

Adam Wagner

Systems and methods for a metadata driven user interface framework

PCT

PCT/US2015/045477

08/17/2015

Michael Rosier

Systems and methods for correlating derived metrics for system activity

PCT

PCT/US2015/047882

09/01/2015

Adam Wagner

Systems and methods for a metadata driven user interface framework

PCT

PCT/US2015/048274

09/03/2015

Michael Rosier

System and method for dynamically intercepting and adjusting persistence behaviors via runtime configuration

PCT

PCT/US2015/048822

09/08/2015

Michael Rosier

Systems and methods for classifying and analyzing runtime events

Schedule 6


 

Australia

2011289673

08/08/2011

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

Australia

2012256399

02/24/2012

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Australia

2012337242

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

Australia

2013249909

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

Australia

2015324406

09/08/2015

Michael Rosier

Systems and methods for classifying and analyzing runtime events

Canada

2,726,729

10/05/2009

Theodore C. Tanner, Jr.; Matthew Aldridge; Gregory Jorstad

Systems and methods for automatic creation of agent-based systems

Canada

2,806,461

08/08/2011

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

Canada

2,868,317

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

Canada

2,855,191

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

Canada

2,829,194

02/24/2012

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Canada

N/A

02/01/2017

Michael Rosier

Systems and methods for classifying and analyzing runtime events

China

201280055871.2

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

China

201380020635.1

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

China

201580041662.6

09/08/2015

Michael Rosier

Systems and methods for classifying and analyzing runtime events

Europe

09818612.5

10/05/2009

Theodore C. Tanner, Jr.; Matthew Aldridge; Gregory Jorstad

Systems and methods for automatic creation of agent-based systems

Europe

11816869.0

08/08/2011

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

Europe

12785376.0

02/24/2012

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Schedule 6


 

Europe

12849965.4

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

Europe

13777746.0

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

Europe

15847866.9

09/08/2015

Michael Rosier

Systems and methods for classifying and analyzing runtime events

Hong Kong

See Chinese Patent No. ZL200980126895.0 above

[   ]

Theodore C. Tanner, Jr.; Matthew Aldridge; Gregory Jorstad

Systems and methods for automatic creation of agent-based systems

Hong Kong

14103513.6

02/24/2012

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

Hong Kong

15101068.8

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

India

984/DELNP/2013

08/08/2011

Theodore C. Tanner, Jr.; Amit Jain

Systems and methods for secure agent information

India

7410/CHENP/2013

02/24/2012

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

India

2117/CHENP/2014

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

India

8112/DELNP/2014

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

India

201647044611

09/08/2015

Michael Rosier

Michael Rosier

Japan

2014-542317

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

Japan

2015-506985

02/14/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

Japan

2016-574917

09/08/2015

Michael Rosier

Systems and methods for classifying and analyzing runtime events

Taiwan

101142364

11/14/2012

William B. Gilbert

Systems and methods for dynamic service integration

Taiwan

102113431

04/16/2013

Jason Shaun McDonald

System and method for enabling the styling and adornment of multiple, disparate web pages through remote method calls

Schedule 6


 

Taiwan

104122891

07/15/2015

Michael Rosier

Systems and methods for correlating derived metrics for system activity

Taiwan

104129322

09/04/2015

Adam Wagner

Systems and methods for a metadata driven user interface framework

Taiwan

104128936

09/02/2015

Michael Rosier

System and method for dynamically intercepting and adjusting persistence behaviors via runtime configuration

Taiwan

104128937

09/02/2015

Michael Rosier

Systems and methods for classifying and analyzing runtime events

South Korea

10/2013/7029824

02/24/2012

Jeremy D. Martin

Registration and execution of highly concurrent processing tasks

South Korea

10/2014/7012950

10/22/2012

William B. Gilbert

Systems and methods for dynamic service integration

Issued Patents and Pending Patent Applications Licensed to Benefitfocus.com, Inc.

NONE

Issued Patents of BenefitStore, Inc.

NONE

Pending Patent Applications of BenefitStore, Inc.

NONE

Issued Patents and Pending Patent Applications Licensed to BenefitStore, Inc.

NONE


Schedule 6


 

RIGHTS OF THE GRANTORS RELATING TO TRADEMARKS

Registered Trademarks of Benefitfocus, Inc.

NONE

Pending Trademark Applications of Benefitfocus, Inc.

NONE

Registered Trademarks and Pending Trademark Applications Licensed to Benefitfocus, Inc.

NONE

Registered Trademarks of Benefitfocus.com, Inc.

Jurisdiction

Registration No.

Registration Date

Filing Date

Registered Owner

Mark

United States

4649999

12/02/2014

07/22/2013

Benefitfocus.com, Inc.

HR INTOUCH

United States

4565511

07/08/2014

07/22/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

United States

4527136

05/06/2014

07/19/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

United States

4261142

12/18/2012

04/30/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

United States

4261146

12/18/2012

04/30/2012

Benefitfocus.com, Inc.

HR INTOUCH

United States

4111384

03/13/2012

06/30/2011

Benefitfocus.com, Inc.

SHOP ENROLL MANAGE EXCHANGE

United States

4102028

02/21/2012

06/30/2011

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. ONE PLACE.

United States

3826875

08/03/2010

12/12/2008

Benefitfocus.com, Inc.

ICYOU

United States

3578457

02/24/2009

05/16/2007

Benefitfocus.com, Inc.

United States

2496059

10/09/2001

08/04/2000

Benefitfocus.com, Inc.

BENEFITFOCUS

United States

4758876

06/23/2015

07/21/2014

Benefitfocus.com, Inc.

ONE PLACE

Australia

International Reg. No. 1106495

Trademark No. 1476309

12/30/2011

12/30/2011

Benefitfocus.com, Inc.

BENEFITFOCUS

Schedule 6


 

Australia

International Reg. No. 1142954

Trademark No. 1534903

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

Australia

International Reg. 1138700

Trademark No. 1531065

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH

Australia

International Reg. 1181498

Trademark No. 1591173

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

HR INTOUCH

Australia

International Reg. 1191605

Trademark No. 1605589

12/31/2013

12/31/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

Australia

International Reg. No. 1182012

Trademark No. 1591274

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

Canada

TMA855701

07/19/2013

01/31/2012

Benefitfocus.com, Inc.

BENEFITFOCUS

Canada

TMA867347

12/16/2013

10/30/2012

Benefitfocus.com, Inc.

HR INTOUCH

Canada

TMA867346

12/16/2013

10/29/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

Canada

TMA911121

08/13/2015

12/19/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

Canada

TMA911122

08/13/2015

12/19/2013

Benefitfocus.com, Inc.

HR INTOUCH

Canada

TMA962882

2/15/2017

1/17/2014

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

China

14158487

04/21/2015

03/12/2014

Benefitfocus.com, Inc.

BENEFITFOCUS

China

14158486

04/21/2015

03/12/2014

Benefitfocus.com, Inc.

BENEFITFOCUS

India

International Reg. No. 1191605

12/31/2013

12/31/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

India

International Reg. No. 1182012

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

India

International Reg. No. 1181498

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

HR INTOUCH

Schedule 6


 

Ireland

International Reg. No. 1106495

12/30/2011

12/30/2011

Benefitfocus.com, Inc.

BENEFITFOCUS

Ireland

International Reg. No. 1138700

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH

Ireland

International Reg. No. 1181498

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

HR INTOUCH

Ireland

International Reg. No. 1142954

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

Ireland

International Reg. No. 1182012

10/01/2013

10/1/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

Israel

International Reg. No. 1106495

12/30/2011

12/30/2011

Benefitfocus.com, Inc.

BENEFITFOCUS

Israel

International Reg. No. 1182012

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

Israel

International Reg. No. 1191605

12/31/2013

12/31/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

New Zealand

International Reg. No. 1191605

12/31/2013

12/31/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

New Zealand

International Reg. No. 1182012

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

New Zealand

International Reg. No. 1181498

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

HR INTOUCH

New Zealand

967599

04/24/2013

10/23/2012

Benefitfocus.com, Inc.

HR INTOUCH

New Zealand

967600

04/24/2013

10/23/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

South Africa

2012/28642

03/13/2015

10/23/2012

Benefitfocus.com, Inc.

HR INTOUCH

South Africa

2013/27350

09/28/2015

10/02/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

South Africa

2013/27351

09/28/2015

10/02/2013

Benefitfocus.com, Inc.

HR INTOUCH

South Africa

2014/00310

07/30/2015

01/07/2014

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

United Kingdom

International Reg. No. 1142954

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

United Kingdom

International Reg. No. 1138700

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH

United Kingdom

International Reg. No. 1106495

12/30/2011

12/30/2011

Benefitfocus.com, Inc.

BENEFITFOCUS

Schedule 6


 

United Kingdom

International Reg. No. 1181498

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

HR INTOUCH

United Kingdom

International Reg. No. 1191605

12/31/2013

12/31/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

United Kingdom

International Reg. No. 1182012

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

World Intellectual Property Organization

International Reg. No. 1142954

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

World Intellectual Property Organization

International Reg. No. 1138700

10/22/2012

10/22/2012

Benefitfocus.com, Inc.

HR INTOUCH

World Intellectual Property Organization

International Reg. No. 1106495

12/30/2011

12/30/2011

Benefitfocus.com, Inc.

BENEFITFOCUS

World Intellectual Property Organization

International Reg. No. 1191605

12/31/2013

12/31/2013

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

World Intellectual Property Organization

International Reg. No. 1182012

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

BENEFITFOCUS

World Intellectual Property Organization

International Reg. No. 1181498

10/01/2013

10/01/2013

Benefitfocus.com, Inc.

HR INTOUCH

Pending Trademark Applications of Benefitfocus.com, Inc.

Jurisdiction

Application No.

Filing Date

Applicant

Mark

United States

86/923,373

02/29/2016

Benefitfocus.com, Inc.

BENEFITFOCUS

Canada

1660145

01/17/2014

Benefitfocus.com, Inc.

ALL YOUR BENEFITS. IN YOUR POCKET.

Canada

1797920

08/29/2016

Benefitfocus.com, Inc.

BENEFITFOCUS

India

2419567

10/30/2012

Benefitfocus.com, Inc.

HR INTOUCH

India

2419568

10/30/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

South Africa

2012/28643

10/23/2012

Benefitfocus.com, Inc.

HR INTOUCH MARKETPLACE

South Africa

2016/24461

08/29/2016

Benefitfocus.com, Inc.

BENEFITFOCUS

South Africa

2016/24462

08/29/2016

Benefitfocus.com, Inc.

BENEFITFOCUS

World Intellectual Property Organization

A0061183

08/29/2016

Benefitfocus.com, Inc.

BENEFITFOCUS

Registered Trademarks and Pending Trademark Applications Licensed to Benefitfocus.com, Inc.

Schedule 6


 

NONE

Registered Trademarks of BenefitStore, Inc.

NONE

Pending Trademark Applications of BenefitStore, Inc.

NONE

Registered Trademarks and Pending Trademark Applications Licensed to BenefitStore, Inc.

NONE


Schedule 6


 

RIGHTS OF THE GRANTORS RELATING TO COPYRIGHTS

Registered Copyrights of Benefitfocus, Inc.

NONE

Pending Copyright Applications of Benefitfocus, Inc.

NONE

Registered Copyrights and Pending Copyright Applications Licensed to Benefitfocus, Inc.

NONE

Registered Copyrights of Benefitfocus.com, Inc.

Jurisdiction

Registration No.

Registration Date

Work of Authorship

United States

TX0006032200

11/14/2001

Benefit focus online enrollment and data exchange service application.

United States

TX0006032199

11/14/2001

Benefit focus online enrollment and data exchange services application version 1.14.

United States

V9921D265

02/25/2015

Benefit focus online enrollment and data exchange service application & 1 other title.

Pending Copyright Applications of Benefitfocus.com, Inc.

NONE

Registered Copyrights and Pending Copyright Applications Licensed to Benefitfocus.com, Inc.

NONE

Registered Copyrights of BenefitStore, Inc.

NONE

Pending Copyright Applications of BenefitStore, Inc.

Schedule 6


 

NONE

Registered Copyrights and Pending Copyright Applications Licensed to BenefitStore, Inc.

NONE

OTHER LICENSE RIGHTS RELATING TO INTELLECTUAL PROPERTY

 

1.

Benefitfocus.com, Inc. grants licenses in the ordinary course for the use of its software to its customers pursuant to Terms of Use, Master Services Agreements and related Software License and Service Agreements.

 

2.

Benefitfocus.com, Inc. licenses certain Intellectual Property rights from Oracle America, Inc. pursuant to that Ordering Document, effective November 22, 2013, by and between Arrow Enterprise Computing Solutions Inc., CDW Logistics, Inc., Oracle America, Inc. and Benefitfocus.com, Inc. (incorporating by reference the Oracle Master Agreement, US-OMA-68046).

 

3.

Benefitfocus.com, Inc. licenses certain Intellectual Property rights from John Hopkins University pursuant to that ACG Consultant Production License and Professional Services Agreement, dated May 2, 2011.

Schedule 6

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Shawn A. Jenkins, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Benefitfocus, Inc. (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  April 28, 2017

 

/s/ Shawn A. Jenkins

Shawn A. Jenkins

Chief Executive Officer

(Principal executive officer)

 

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

 

I, Jeffrey M. Laborde, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Benefitfocus, Inc. (the registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  April 28, 2017

 

/s/ Jeffrey M. Laborde

Jeffrey M. Laborde

Chief Financial Officer

(Principal financial and accounting officer)

 

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Shawn A. Jenkins, Chief Executive Officer (principal executive officer) of Benefitfocus, Inc. (the “registrant”), and Jeffrey M. Laborde, Chief Financial Officer (principal financial and accounting officer) of the registrant, each hereby certifies that, to the best of their knowledge:

1. The registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2017, to which this Certification is attached as Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition of the registrant at the end of the period covered by the Report and results of operations of the registrant for the periods covered by the Report.

 

Date:  April 28, 2017

 

/s/ Shawn A. Jenkins

Shawn A. Jenkins

Chief Executive Officer

(Principal executive officer)

 

/s/ Jeffrey M. Laborde

Jeffrey M. Laborde

Chief Financial Officer

(Principal financial and accounting officer)