UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
or
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-36061
Benefitfocus, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
46-2346314 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
100 Benefitfocus Way
Charleston, South Carolina 29492
(Address of principal executive offices and zip code)
(843) 849-7476
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
Common Stock, $0.001 Par Value |
BNFT |
Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
|
☐ |
Large accelerated filer |
☒ |
Accelerated filer |
☐ |
Non-accelerated filer |
|
|
|
|
|
|
|
|
☐ |
Smaller reporting company |
☐ |
Emerging growth company |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 4, 2020, there were approximately 32,260,650 shares of the registrant’s common stock outstanding.
Benefitfocus, Inc.
Form 10-Q
For the Quarterly Period Ended June 30, 2020
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Benefitfocus, Inc.
Unaudited Consolidated Balance Sheets
(in thousands, except share and per share data)
|
|
|
As of June 30, 2020 |
|
|
As of December 31, 2019 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
183,496 |
|
|
$ |
130,976 |
|
|
Accounts receivable, net |
|
|
29,872 |
|
|
|
33,754 |
|
|
Contract, prepaid and other current assets |
|
|
17,851 |
|
|
|
21,523 |
|
|
Total current assets |
|
|
231,219 |
|
|
|
186,253 |
|
|
Property and equipment, net |
|
|
31,430 |
|
|
|
28,669 |
|
|
Financing lease right-of-use assets |
|
|
73,372 |
|
|
|
78,520 |
|
|
Operating lease right-of-use assets |
|
|
1,529 |
|
|
|
1,715 |
|
|
Intangible assets, net |
|
|
11,530 |
|
|
|
12,667 |
|
|
Goodwill |
|
|
12,857 |
|
|
|
12,857 |
|
|
Deferred contract costs and other non-current assets |
|
|
10,263 |
|
|
|
11,002 |
|
|
Total assets |
|
$ |
372,200 |
|
|
$ |
331,683 |
|
|
Liabilities and stockholders' deficit |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,648 |
|
|
$ |
9,563 |
|
|
Accrued expenses |
|
|
6,526 |
|
|
|
10,526 |
|
|
Accrued compensation and benefits |
|
|
11,107 |
|
|
|
15,246 |
|
|
Deferred revenue, current portion |
|
|
31,020 |
|
|
|
33,429 |
|
|
Lease liabilities and financing obligations, current portion |
|
|
6,536 |
|
|
|
6,871 |
|
|
Total current liabilities |
|
|
61,837 |
|
|
|
75,635 |
|
|
Deferred revenue, net of current portion |
|
|
4,638 |
|
|
|
5,079 |
|
|
Convertible senior notes |
|
|
193,843 |
|
|
|
187,949 |
|
|
Lease liabilities and financing obligations, net current portion |
|
|
82,294 |
|
|
|
88,572 |
|
|
Other non-current liabilities |
|
|
2,000 |
|
|
|
92 |
|
|
Total liabilities |
|
|
344,612 |
|
|
|
357,327 |
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
Redeemable preferred stock: |
|
|
|
|
|
|
|
|
|
Series A preferred stock, par value $0.001, 5,000,000 shares authorized, 1,777,778 and 0 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively, liquidation preference $45 per share as of June 30, 2020 |
|
|
79,193 |
|
|
|
– |
|
|
Stockholders' deficit: |
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001, 50,000,000 shares authorized, 32,175,444 and 32,788,980 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively |
|
|
32 |
|
|
|
33 |
|
|
Additional paid-in capital |
|
|
423,122 |
|
|
|
426,025 |
|
|
Accumulated deficit |
|
|
(474,759 |
) |
|
|
(451,702 |
) |
|
Total stockholders' deficit |
|
|
(51,605 |
) |
|
|
(25,644 |
) |
|
Total liabilities and stockholders' deficit |
|
$ |
372,200 |
|
|
$ |
331,683 |
|
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
3
Benefitfocus, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Revenue |
|
$ |
62,174 |
|
|
$ |
68,579 |
|
|
$ |
128,328 |
|
|
$ |
136,878 |
|
|
Cost of revenue |
|
|
30,397 |
|
|
|
32,802 |
|
|
|
64,309 |
|
|
|
65,654 |
|
|
Gross profit |
|
|
31,777 |
|
|
|
35,777 |
|
|
|
64,019 |
|
|
|
71,224 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
11,828 |
|
|
|
19,318 |
|
|
|
27,458 |
|
|
|
38,937 |
|
|
Research and development |
|
|
11,045 |
|
|
|
14,461 |
|
|
|
22,813 |
|
|
|
27,551 |
|
|
General and administrative |
|
|
9,381 |
|
|
|
11,785 |
|
|
|
19,896 |
|
|
|
23,581 |
|
|
Restructuring costs |
|
|
5,616 |
|
|
|
– |
|
|
|
5,616 |
|
|
|
– |
|
|
Total operating expenses |
|
|
37,870 |
|
|
|
45,564 |
|
|
|
75,783 |
|
|
|
90,069 |
|
|
Loss from operations |
|
|
(6,093 |
) |
|
|
(9,787 |
) |
|
|
(11,764 |
) |
|
|
(18,845 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
97 |
|
|
|
762 |
|
|
|
523 |
|
|
|
1,422 |
|
|
Interest expense |
|
|
(5,862 |
) |
|
|
(5,837 |
) |
|
|
(11,753 |
) |
|
|
(11,651 |
) |
|
Other income (expense) |
|
|
2 |
|
|
|
(73 |
) |
|
|
7 |
|
|
|
(64 |
) |
|
Total other expense, net |
|
|
(5,763 |
) |
|
|
(5,148 |
) |
|
|
(11,223 |
) |
|
|
(10,293 |
) |
|
Loss before income taxes |
|
|
(11,856 |
) |
|
|
(14,935 |
) |
|
|
(22,987 |
) |
|
|
(29,138 |
) |
|
Income tax expense |
|
|
6 |
|
|
|
3 |
|
|
|
11 |
|
|
|
9 |
|
|
Net loss |
|
|
(11,862 |
) |
|
|
(14,938 |
) |
|
|
(22,998 |
) |
|
|
(29,147 |
) |
|
Preferred dividends |
|
|
(462 |
) |
|
|
– |
|
|
|
(462 |
) |
|
|
– |
|
|
Net loss available to common stockholders |
|
$ |
(12,324 |
) |
|
$ |
(14,938 |
) |
|
$ |
(23,460 |
) |
|
$ |
(29,147 |
) |
|
Comprehensive loss |
|
$ |
(12,324 |
) |
|
$ |
(14,938 |
) |
|
$ |
(23,460 |
) |
|
$ |
(29,147 |
) |
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.38 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.90 |
) |
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
32,058,387 |
|
|
|
32,613,718 |
|
|
|
32,348,673 |
|
|
|
32,336,864 |
|
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
4
Benefitfocus, Inc.
Unaudited Consolidated Statements of Changes in Stockholders’ Deficit
(in thousands, except share and per share data)
|
|
|
Common Stock, |
|
|
Additional |
|
|
|
|
|
|
Total |
|
|||||||
|
|
|
$0.001 Par Value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders' |
|
||||||||
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Deficit |
|
|||||
|
Balance, December 31, 2019 |
|
|
32,788,980 |
|
|
$ |
33 |
|
|
$ |
426,025 |
|
|
$ |
(451,702 |
) |
|
$ |
(25,644 |
) |
|
Cumulative effect adjustment from adoption of credit standard |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(59 |
) |
|
|
(59 |
) |
|
Exercise of stock options |
|
|
13,584 |
|
|
|
– |
|
|
|
73 |
|
|
|
– |
|
|
|
73 |
|
|
Issuance of common stock upon vesting of restricted stock units |
|
|
43,315 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Stock-based compensation expense |
|
|
– |
|
|
|
– |
|
|
|
3,677 |
|
|
|
– |
|
|
|
3,677 |
|
|
Common stock repurchased |
|
|
(1,070,665 |
) |
|
|
(1 |
) |
|
|
(9,382 |
) |
|
|
– |
|
|
|
(9,383 |
) |
|
Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(11,136 |
) |
|
|
(11,136 |
) |
|
Balance, March 31, 2020 |
|
|
31,775,214 |
|
|
$ |
32 |
|
|
$ |
420,393 |
|
|
$ |
(462,897 |
) |
|
$ |
(42,472 |
) |
|
Exercise of stock options |
|
|
10,685 |
|
|
|
– |
|
|
|
69 |
|
|
|
– |
|
|
|
69 |
|
|
Issuance of common stock upon vesting of restricted stock units |
|
|
416,848 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Issuance of common stock under Employee Stock Purchase Plan, or ESPP |
|
|
8,205 |
|
|
|
– |
|
|
|
83 |
|
|
|
– |
|
|
|
83 |
|
|
Stock-based compensation expense |
|
|
– |
|
|
|
– |
|
|
|
3,323 |
|
|
|
– |
|
|
|
3,323 |
|
|
Common stock repurchased |
|
|
(35,508 |
) |
|
|
– |
|
|
|
(284 |
) |
|
|
– |
|
|
|
(284 |
) |
|
Preferred dividends |
|
|
– |
|
|
|
– |
|
|
|
(462 |
) |
|
|
– |
|
|
|
(462 |
) |
|
Net loss |
|
|
– |
|
|
|
|
|
|
|
– |
|
|
|
(11,862 |
) |
|
|
(11,862 |
) |
|
Balance, June 30, 2020 |
|
|
32,175,444 |
|
|
$ |
32 |
|
|
$ |
423,122 |
|
|
$ |
(474,759 |
) |
|
$ |
(51,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, |
|
|
Additional |
|
|
|
|
|
|
Total |
|
|||||||
|
|
|
$0.001 Par Value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders' |
|
||||||||
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Deficit |
|
|||||
|
Balance, December 31, 2018 |
|
|
32,017,773 |
|
|
$ |
32 |
|
|
$ |
403,631 |
|
|
$ |
(413,873 |
) |
|
$ |
(10,210 |
) |
|
Cumulative effect adjustment from adoption of lease standard |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
7,687 |
|
|
|
7,687 |
|
|
Exercise of stock options |
|
|
18,600 |
|
|
|
– |
|
|
|
89 |
|
|
|
– |
|
|
|
89 |
|
|
Issuance of common stock upon vesting of restricted stock units |
|
|
34,255 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Stock-based compensation expense |
|
|
– |
|
|
|
– |
|
|
|
6,253 |
|
|
|
– |
|
|
|
6,253 |
|
|
Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(14,209 |
) |
|
|
(14,209 |
) |
|
Balance, March 31, 2019 |
|
|
32,070,628 |
|
|
$ |
32 |
|
|
$ |
409,973 |
|
|
$ |
(420,395 |
) |
|
$ |
(10,390 |
) |
|
Exercise of stock options |
|
|
6,200 |
|
|
|
– |
|
|
|
45 |
|
|
|
– |
|
|
|
45 |
|
|
Issuance of common stock upon vesting of restricted stock units |
|
|
565,878 |
|
|
|
1 |
|
|
|
– |
|
|
|
– |
|
|
|
1 |
|
|
Stock-based compensation expense |
|
|
– |
|
|
|
– |
|
|
|
6,203 |
|
|
|
– |
|
|
|
6,203 |
|
|
Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(14,938 |
) |
|
|
(14,938 |
) |
|
Balance, June 30, 2019 |
|
|
32,642,706 |
|
|
$ |
33 |
|
|
$ |
416,221 |
|
|
$ |
(435,333 |
) |
|
$ |
(19,079 |
) |
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
5
Benefitfocus, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(22,998 |
) |
|
$ |
(29,147 |
) |
|
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,105 |
|
|
|
10,949 |
|
|
Stock-based compensation expense |
|
|
7,000 |
|
|
|
10,086 |
|
|
Accretion of interest on convertible senior notes |
|
|
5,894 |
|
|
|
5,541 |
|
|
Interest accrual on finance lease liabilities |
|
|
44 |
|
|
|
– |
|
|
Rent expense (less than) in excess of payments |
|
|
(16 |
) |
|
|
3 |
|
|
Provision for doubtful accounts |
|
|
111 |
|
|
|
265 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
3,711 |
|
|
|
(10,671 |
) |
|
Contract, prepaid and other current assets |
|
|
3,672 |
|
|
|
(476 |
) |
|
Deferred costs and other non-current assets |
|
|
740 |
|
|
|
2,851 |
|
|
Accounts payable and accrued expenses |
|
|
(7,318 |
) |
|
|
(4,085 |
) |
|
Accrued compensation and benefits |
|
|
(4,139 |
) |
|
|
273 |
|
|
Deferred revenue |
|
|
(2,850 |
) |
|
|
(6,004 |
) |
|
Other non-current liabilities |
|
|
1,910 |
|
|
|
(46 |
) |
|
Net cash and cash equivalents used in operating activities |
|
|
(2,134 |
) |
|
|
(20,461 |
) |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
Business combination, net of cash acquired |
|
|
– |
|
|
|
(20,914 |
) |
|
Purchases of property and equipment |
|
|
(7,075 |
) |
|
|
(7,401 |
) |
|
Net cash and cash equivalents used in investing activities |
|
|
(7,075 |
) |
|
|
(28,315 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
Draws on revolving line of credit |
|
|
10,000 |
|
|
|
– |
|
|
Payments on revolving line of credit |
|
|
(10,000 |
) |
|
|
– |
|
|
Payments of debt issuance costs |
|
|
(154 |
) |
|
|
(357 |
) |
|
Proceeds from issuance of preferred stock, net of issuance costs |
|
|
79,840 |
|
|
|
– |
|
|
Payments of preferred dividends |
|
|
(462 |
) |
|
|
– |
|
|
Repurchase of common stock |
|
|
(9,667 |
) |
|
|
– |
|
|
Proceeds from exercises of stock options and ESPP |
|
|
225 |
|
|
|
134 |
|
|
Payments on financing obligations |
|
|
(416 |
) |
|
|
(841 |
) |
|
Payments of principal on finance lease liabilities |
|
|
(7,637 |
) |
|
|
(2,699 |
) |
|
Net cash and cash equivalents provided by (used in) financing activities |
|
|
61,729 |
|
|
|
(3,763 |
) |
|
Net increase (decrease) in cash and cash equivalents |
|
|
52,520 |
|
|
|
(52,539 |
) |
|
Cash and cash equivalents, beginning of period |
|
|
130,976 |
|
|
|
190,928 |
|
|
Cash and cash equivalents, end of period |
|
$ |
183,496 |
|
|
$ |
138,389 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
Property and equipment purchases in accounts payable and accrued expenses |
|
$ |
37 |
|
|
$ |
437 |
|
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
6
BENEFITFOCUS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Organization and Description of Business
Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, insurance carriers and brokers that is designed to simplify how organizations and individuals transact benefits. The financial statements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. and BenefitStore, Inc.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity.
Interim Unaudited Consolidated Financial Information
The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ deficit and cash flows. The results of operations for the three- and six-month periods ended June 30, 2020 are not necessarily indicative of the results for the full year or for any other future period. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and the related amortization, incremental borrowing rate used in lease accounting, the determination of the useful lives of assets, and the impairment assessment of acquired intangibles and goodwill as well as the estimates disclosed in association with revenue recognition. Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.
Restructuring Costs
On April 28, 2020, the Company announced a restructuring plan to contain costs and further strengthen its liquidity profile in response to the impact of the COVID-19 pandemic. This plan resulted in a reduction in the Company’s U.S. workforce of approximately 17%. The Company recorded restructuring costs of $5,616 in the second quarter of 2020 from one-time severance charges, continuation of health benefits and outplacement services. Restructuring costs are presented separately in operating expenses in the unaudited consolidated statements of operations and comprehensive loss. The plan was implemented and completed in the second quarter of 2020.
Revenue and Deferred Revenue
The Company derives its revenue primarily from fees for subscription services and professional services sold to employers and insurance carriers as well as platform revenue derived from the value of products sold on our platform. Revenue is recognized when control of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenue.
The Company determines revenue recognition through the following steps:
|
|
• |
Identification of each contract with a customer; |
|
|
• |
Identification of the performance obligations in the contract; |
|
|
• |
Determination of the transaction price; |
|
|
• |
Allocation of the transaction price to the performance obligations in the contract; and |
|
|
• |
Recognition of revenue when, or as, performance obligations are satisfied. |
7
Software Services Revenue
Software services revenue consists of subscription revenue and platform revenue.
Subscription Revenue
Subscription revenue primarily consists of monthly subscription fees paid to the Company by its employer and insurance carrier customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.
Subscription services revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. The Company’s subscription service contracts are generally three years.
Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.
Platform Revenue
Platform revenue is generated from the value of policies or products enrolled in through the Company’s marketplace. Platform revenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where the Company sells policies to employees of its customers as the broker, it earns broker commissions. Revenue from insurance broker commissions and supplier transactions is recognized at a point in time when the orders for the policies are received and transferred to the insurance carrier or supplier, and is reduced by estimates for risks from collectability, policy cancellation and termination.
Professional Services Revenue
Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services and support services are also included in professional services revenue.
The Company determined that implementation services for certain of its insurance carrier customers significantly modify or customize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these insurance carrier customers are generally recognized over the contract term of the associated subscription services contract, including any extension periods representing a material right. In certain arrangements, the Company utilizes estimates of hours as a measure of progress to determine revenue.
Revenue from implementation services with employer customers is generally recognized as those services are performed.
Revenue from support and training fees is recognized over the service period.
Contracts with Multiple Performance Obligations
Certain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The Company allocates the transaction price to the separate performance obligations based on their relative standalone selling prices. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the subscription services sold, customer size and complexity, and the number and types of users under the contracts.
Contract Costs
The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions. Payments of sales commissions generally include multiple payments. The Company capitalizes only those payments made within an insignificant time from the contract inception, typically three months or less. Subsequent payments are expensed as incurred. The capitalized costs are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is generally four to five years. The Company expenses the costs to obtain a contract when the amortization period is less than one year. Deferred costs related to obtaining contracts are included in deferred contract costs and other non-current assets.
The Company capitalizes contract fulfillment costs directly associated with customer contracts that are not related to satisfying performance obligations. The costs are amortized to cost of revenue expense over the estimated period of benefit, which is generally five years. Deferred fulfillment costs are included in deferred contract costs and other non-current assets.
The following tables present information about deferred contract costs:
|
Balance of deferred contract costs |
|
As of June 30, 2020 |
|
|
As of December 31, 2019 |
|
||
|
Costs to obtain contracts |
|
$ |
5,749 |
|
|
$ |
6,676 |
|
|
Costs to fulfill contracts |
|
$ |
3,400 |
|
|
$ |
3,112 |
|
8
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Amortization of deferred contract costs |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Costs to obtain contracts included in sales and marketing expense |
|
$ |
831 |
|
|
$ |
870 |
|
|
$ |
1,712 |
|
|
$ |
1,917 |
|
|
Costs to fulfill contracts included in cost of revenue |
|
$ |
307 |
|
|
$ |
802 |
|
|
$ |
682 |
|
|
$ |
1,604 |
|
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The bank deposits of the Company might at times, exceed federally insured limits and are generally uninsured and uncollateralized. The Company has not experienced any losses on cash and cash equivalents to date.
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. No customer exceeded 10% of accounts receivable as of June 30, 2020. Accounts receivable from one customer represented approximately 11% of the total accounts receivable as of December 31, 2019. No customer exceeded 10% of total revenue in any of the three and six-month periods ended June 30, 2020 and 2019.
Allowance for Doubtful Accounts
Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments” on January 1, 2020, the Company shifted to a current expected credit loss model. Accounts receivable and allowance for doubtful accounts are discussed in Note 5.
Capitalized Software Development Costs
The Company capitalizes certain costs related to its software developed or obtained for internal use. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred during the application development stage, including upgrades and enhancements representing modifications that will result in significant additional functionality, are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment and are amortized on a straight-line basis to cost of revenue over the software’s estimated useful life, which is three years. The Company evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
The following tables present information about capitalized software development costs:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Capitalized software development costs |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Capitalized |
|
$ |
3,100 |
|
|
$ |
2,620 |
|
|
$ |
6,572 |
|
|
$ |
4,683 |
|
|
Amortized |
|
$ |
1,727 |
|
|
$ |
1,319 |
|
|
$ |
3,246 |
|
|
$ |
2,497 |
|
|
Capitalized software development costs |
|
As of June 30, 2020 |
|
|
As of December 31, 2019 |
|
||
|
Net book value |
|
$ |
17,785 |
|
|
$ |
14,459 |
|
Leases
The Company periodically enters into finance leases for property and equipment. The leasing arrangements for the Company’s office space at its headquarters campus are classified as finance leases. The Company also leases office space under operating leases.
The Company determines if an arrangement is a lease at inception. Right of use, or ROU, assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent an obligation to make lease payments arising from the lease. Leases with a term of 12 months or less are not included in the recognized ROU assets and lease liabilities for all classes of assets.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because the Company’s operating leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on information available at commencement date to determine the present value of lease payments. The ROU asset also consists of any prepaid lease payments, lease incentives, or initial direct costs. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
9
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense. The Company has lease agreements which require payments for lease and non-lease components (e.g. common area maintenance and equipment maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as maintenance costs based on future obligations, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.
Comprehensive Loss
The Company’s net loss equals comprehensive loss for all periods presented.
Recently Adopted Accounting Standards
Financial Instruments
On January 1, 2020, the Company adopted ASU No. 2016-13. The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. On adoption, the Company recorded an immaterial cumulative-effect adjustment to retained earnings in connection with expected credit losses on its trade receivables.
Fair Value Measurement
On January 1, 2020 the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement”. The ASU modifies the disclosure requirements required for fair value measurements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. ASU No. 2019-12 is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This ASU is effective for the Company for the interim and annual reporting periods starting January 1, 2021. Early adoption is permitted. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.
3. Net Loss Per Common Share
Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following common share equivalent securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the periods presented:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
Anti-Dilutive Common Share Equivalents |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Restricted stock units |
|
|
2,930,636 |
|
|
|
2,139,570 |
|
|
|
2,930,636 |
|
|
|
2,139,570 |
|
|
Stock options |
|
|
151,178 |
|
|
|
208,447 |
|
|
|
151,178 |
|
|
|
208,447 |
|
|
Convertible senior notes |
|
|
4,513,824 |
|
|
|
4,513,824 |
|
|
|
4,513,824 |
|
|
|
4,513,824 |
|
|
Conversion of preferred stock |
|
|
5,333,334 |
|
|
|
- |
|
|
|
5,333,334 |
|
|
|
- |
|
|
Employee Stock Purchase Plan |
|
|
- |
|
|
|
6,650 |
|
|
|
- |
|
|
|
6,650 |
|
|
Total anti-dilutive common share equivalents |
|
|
12,928,972 |
|
|
|
6,868,491 |
|
|
|
12,928,972 |
|
|
|
6,868,491 |
|
Basic and diluted net loss per common share is calculated as follows:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(11,862 |
) |
|
$ |
(14,938 |
) |
|
$ |
(22,998 |
) |
|
$ |
(29,147 |
) |
|
Preferred dividends |
|
|
(462 |
) |
|
|
- |
|
|
|
(462 |
) |
|
|
- |
|
|
Net loss attributable to common stockholders |
|
$ |
(12,324 |
) |
|
$ |
(14,938 |
) |
|
$ |
(23,460 |
) |
|
$ |
(29,147 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted |
|
|
32,058,387 |
|
|
|
32,613,718 |
|
|
|
32,348,673 |
|
|
|
32,336,864 |
|
|
Net loss per common share, basic and diluted |
|
$ |
(0.38 |
) |
|
$ |
(0.46 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.90 |
) |
10
4. Fair Value Measurement
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to their short-term nature. The carrying value of the Company’s financing obligations approximates fair value, considering the borrowing rates currently available to the Company with similar terms and credit risks.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:
|
|
Level 1. |
Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
|
|
Level 2. |
Other inputs that are directly or indirectly observable in the marketplace. |
|
|
Level 3. |
Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above categories, as of the periods presented.
|
|
|
June 30, 2020 |
|
|||||||||||||
|
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
|
Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds(1) |
|
$ |
177,798 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
177,798 |
|