The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Organization and Description of Business
Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, insurance carriers and brokers that is designed to simplify how organizations and individuals transact benefits. The financial statements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. and BenefitStore, Inc.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity.
Interim Unaudited Consolidated Financial Information
The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in stockholders’ deficit and cash flows. The results of operations for the three-month period ended March 31, 2020 are not necessarily indicative of the results for the full year or for any other future period. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and the related amortization, incremental borrowing rate used in lease accounting, the determination of the useful lives of assets, and the impairment assessment of acquired intangibles and goodwill as well as the estimates disclosed in association with revenue recognition. Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.
Revenue and Deferred Revenue
The Company derives its revenue primarily from fees for subscription services and professional services sold to employers and insurance carriers as well as platform revenue derived from the value of products sold on our platform. Revenue is recognized when control of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenue.
The Company determines revenue recognition through the following steps:
|
•
|
Identification of each contract with a customer;
|
|
•
|
Identification of the performance obligations in the contract;
|
|
•
|
Determination of the transaction price;
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract; and
|
|
•
|
Recognition of revenue when, or as, performance obligations are satisfied.
|
Software Services Revenue
Software services revenue consists of subscription revenue and platform revenue.
Subscription Revenue
Subscription revenue primarily consists of monthly subscription fees paid to the Company by its employer and insurance carrier customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.
7
Subscription services revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. The Company’s subscription service contracts are generally three years.
Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.
Platform Revenue
Platform revenue is generated from the value of policies or products enrolled in through the Company’s marketplace. Platform revenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where the Company sells policies to employees of its customers as the broker, it earns broker commissions. Revenue from insurance broker commissions and supplier transactions is recognized at a point in time when the orders for the policies are received and transferred to the insurance carrier or supplier, and is reduced by estimates for risks from collectability, policy cancellation and termination.
Professional Services Revenue
Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services and support services are also included in professional services revenue.
The Company determined that implementation services for certain of its insurance carrier customers significantly modify or customize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these insurance carrier customers are generally recognized over the contract term of the associated subscription services contract, including any extension periods representing a material right. In certain arrangements, the Company utilizes estimates of hours as a measure of progress to determine revenue.
Revenue from implementation services with employer customers is generally recognized as those services are performed.
Revenue from support and training fees is recognized over the service period.
Contracts with Multiple Performance Obligations
Certain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The Company allocates the transaction price to the separate performance obligations based on their relative standalone selling prices. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the subscription services sold, customer size and complexity, and the number and types of users under the contracts.
Contract Costs
The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions. Payments of sales commissions generally include multiple payments. The Company capitalizes only those payments made within an insignificant time from the contract inception, typically three months or less. Subsequent payments are expensed as incurred. The capitalized costs are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is generally four to five years. The Company expenses the costs to obtain a contract when the amortization period is less than one year. Deferred costs related to obtaining contracts are included in deferred contract costs and other non-current assets.
The Company capitalizes contract fulfillment costs directly associated with customer contracts that are not related to satisfying performance obligations. The costs are amortized to cost of revenue expense over the estimated period of benefit, which is generally five years. Deferred fulfillment costs are included in deferred contract costs and other non-current assets.
The following tables present information about deferred contract costs:
Balance of deferred contract costs
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Costs to obtain contracts
|
|
$
|
6,205
|
|
|
$
|
6,676
|
|
Costs to fulfill contracts
|
|
$
|
3,055
|
|
|
$
|
3,112
|
|
|
|
Three Months Ended March 31,
|
|
|
Amortization of deferred contract costs
|
|
2020
|
|
|
2019
|
|
|
Costs to obtain contracts included in sales and marketing expense
|
|
$
|
881
|
|
|
$
|
1,047
|
|
|
Costs to fulfill contracts included in cost of revenue
|
|
$
|
375
|
|
|
$
|
802
|
|
|
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The bank deposits of the Company might, at times, exceed federally insured limits and are generally uninsured and uncollateralized. The Company has not experienced any losses on cash and cash equivalents to date.
8
To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts. Accounts receivable are unsecured and derived from revenue earned from customers located in the United States. Accounts receivable from one customer represented approximately 13% and 11% of the total accounts receivable as of March 31, 2020 and December 31, 2019, respectively. Accounts receivable from another customer represented approximately 10% of the total accounts receivable as of March 31, 2020. No other customer exceeded 10% of accounts receivable as of December 31, 2019. No customer exceeded 10% of total revenue in the three-month period ended March 31, 2020. Revenue from one customer was approximately 11% of the total revenue in the three-month period ended March 31, 2019.
Allowance for Doubtful Accounts
Historically, the Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments” on January 1, 2020, the Company shifted to a current expected credit loss model. Accounts receivable and allowance for doubtful accounts are discussed in Note 5.
Capitalized Software Development Costs
The Company capitalizes certain costs related to its software developed or obtained for internal use. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred during the application development stage, including upgrades and enhancements representing modifications that will result in significant additional functionality, are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment and are amortized on a straight-line basis to cost of revenue over the software’s estimated useful life, which is three years. The Company evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.
The following tables present information about capitalized software development costs:
|
|
Three Months Ended March 31,
|
|
|
Capitalized software development costs
|
|
2020
|
|
|
2019
|
|
|
Capitalized
|
|
$
|
3,472
|
|
|
$
|
2,063
|
|
|
Amortized
|
|
$
|
1,519
|
|
|
$
|
1,178
|
|
|
Capitalized software development costs
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Net book value
|
|
$
|
16,412
|
|
|
$
|
14,459
|
|
Leases
The Company periodically enters into finance leases for property and equipment. The leasing arrangements for the Company’s office space at its headquarters campus are classified as finance leases. The Company also leases office space under operating leases.
The Company determines if an arrangement is a lease at inception. Right of use, or ROU, assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent an obligation to make lease payments arising from the lease. Leases with a term of 12 months or less are not included in the recognized ROU assets and lease liabilities for all classes of assets.
ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because the Company’s operating leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on information available at commencement date to determine the present value of lease payments. The ROU asset also consists of any prepaid lease payments, lease incentives, or initial direct costs. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense. The Company has lease agreements which require payments for lease and non-lease components (e.g. common area maintenance and equipment maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as maintenance costs based on future obligations, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.
Comprehensive Loss
The Company’s net loss equals comprehensive loss for all periods presented.
9
Recently Adopted Accounting Standards
Financial Instruments
On January 1, 2020, the Company adopted ASU No. 2016-13. The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. On adoption, the Company recorded an immaterial cumulative-effect adjustment to retained earnings in connection with expected credit losses on its trade receivables.
Fair Value Measurement
On January 1, 2020 the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU modifies the disclosure requirements required for fair value measurements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU No. 2019-12 is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This ASU is effective for the Company for the interim and annual reporting periods starting January 1, 2021. Early adoption is permitted. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.
3. Net Loss Per Common Share
Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following common share equivalent securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the periods presented:
|
|
Three Months Ended
March 31,
|
|
Anti-Dilutive Common Share Equivalents
|
|
2020
|
|
|
2019
|
|
Restricted stock units
|
|
|
1,508,263
|
|
|
|
2,013,082
|
|
Stock options
|
|
|
179,363
|
|
|
|
214,647
|
|
Convertible senior notes
|
|
|
4,513,824
|
|
|
|
4,513,824
|
|
Employee Stock Purchase Plan
|
|
|
5,982
|
|
|
|
1,959
|
|
Total anti-dilutive common share equivalents
|
|
|
6,207,432
|
|
|
|
6,743,512
|
|
Basic and diluted net loss per common share is calculated as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,136
|
)
|
|
$
|
(14,209
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(11,136
|
)
|
|
$
|
(14,209
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
32,638,805
|
|
|
|
32,056,934
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.44
|
)
|
4. Fair Value Measurement
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to their short-term nature. The carrying value of the Company’s financing obligations approximates fair value, considering the borrowing rates currently available to the Company with similar terms and credit risks.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:
|
Level 1.
|
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
Level 2.
|
Other inputs that are directly or indirectly observable in the marketplace.
|
10
|
Level 3.
|
Unobservable inputs for which there is little or no market data, which require the Company to develop its own assumptions.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made.
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above categories, as of the periods presented.
|
|
March 31, 2020
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds(1)
|
|
$
|
112,199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112,199
|
|
Total assets
|
|
$
|
112,199
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112,199
|
|
|
|
December 31, 2019
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds(1)
|
|
$
|
124,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,503
|
|
Total assets
|
|
$
|
124,503
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124,503
|
|
________________
(1)
|
Money market funds are classified as cash equivalents in the Company’s unaudited consolidated balance sheets. As short-term, highly liquid investments readily convertible to known amounts of cash with remaining maturities of three months or less at the time of purchase, the Company’s cash equivalent money market funds have carrying values that approximate fair value.
|
5. Accounts Receivable, net
Accounts receivable, net include:
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Accounts receivable
|
|
$
|
37,022
|
|
|
$
|
36,669
|
|
Less: Allowance for doubtful accounts
|
|
|
(242
|
)
|
|
|
(155
|
)
|
Less: Allowance for returns
|
|
|
(3,330
|
)
|
|
|
(2,760
|
)
|
Total accounts receivable, net
|
|
$
|
33,450
|
|
|
$
|
33,754
|
|
Accounts receivable are stated at their amortized cost adjusted for any write-offs and net allowances for returns. The Company estimates expected credit losses related to accounts receivable balances based on a review of available and relevant information including current economic conditions, projected economic conditions, historical loss experience, account aging, and other factors that could affect collectability. Expected credit losses are determined individually or collectively depending on whether the accounts receivable balances share similar risk characteristics. The allowance for doubtful accounts is the best estimate of the amount of expected credit losses related to existing accounts receivable. The Company does not have any off-balance sheet credit exposure related to its customers.
Allowance for doubtful accounts
|
|
Three Months Ended March 31, 2020
|
|
Beginning of period
|
|
$
|
155
|
|
Provision for credit losses (including effect of adoption)
|
|
|
131
|
|
Write-offs and recoveries
|
|
|
(44
|
)
|
End of period
|
|
$
|
242
|
|
The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodic assessment of historical experience and trends. The Company considers factors such as historical reasons for adjustments, service and delivery issues or delays, and past due customer billings.
6. Convertible Senior Notes
In December 2018, the Company issued $240,000 aggregate principal amount of 1.25% convertible senior notes (“Notes”) due December 15, 2023, unless earlier repurchased by the Company or converted by the holder pursuant to their terms. Interest is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2019.
The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes are unsecured and rank: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment to the Company’s unsecured indebtedness that is not subordinated; effectively junior
11
in right of payment to any of the Company’s senior, secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election.
The Notes have an initial conversion rate of 18.8076 shares of common stock per $1 principal amount of Notes. This represents an initial effective conversion price of approximately $53.17 per share of common stock and 4,513,824 shares issuable upon conversion. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock paid or delivered, as the case may be, to the holder upon conversion of Notes.
Prior to the close of business on September 14, 2023, the Notes will be convertible at the option of holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after September 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion price at any time regardless of whether the conditions set forth below have been met.
Holders may convert all or a portion of their Notes prior to the close of business on September 14, 2023, in multiples of $1 principal amount, only under the following circumstances:
|
•
|
during any calendar quarter commencing after the calendar quarter ending on March 31, 2019 (and only during such calendar quarter), if the last reported sales price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
|
|
•
|
during the five business day period after any five consecutive trading day period, or the Notes measurement period, in which the “trading price” (as defined in the Indenture) per $1 principal amount of notes for each trading day of the Notes measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
|
|
•
|
if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on September 14, 2023; or
|
|
•
|
upon the occurrence of specified corporate events.
|
As of March 31, 2020, the Notes were not convertible.
Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied market interest rate of its Notes to be approximately 7.30%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component of the Notes, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $181,500 upon issuance, calculated as the present value of future contractual payments based on the $240,000 aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes. The $58,500 difference between the gross proceeds received from issuance of the Notes of $240,000 and the estimated fair value of the liability component represents the equity component of the Notes and was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components in proportion to the allocation of proceeds. Transaction costs attributable to the liability component, totaling $4,808, are being amortized to expense over the term of the Notes, and transaction costs attributable to the equity component, totaling $1,550, and were included with the equity component in shareholders’ equity.
The Notes consist of the following as of:
|
|
As of
|
|
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
240,000
|
|
|
$
|
240,000
|
|
Less: Debt discount, net of amortization
|
|
|
(49,127
|
)
|
|
|
(52,051
|
)
|
Net carrying amount
|
|
$
|
190,873
|
|
|
$
|
187,949
|
|
Equity component (a)
|
|
|
56,950
|
|
|
|
56,950
|
|
|
(a)
|
Recorded in the consolidated balance sheet within additional paid-in capital, net of $1,550 transaction costs in equity.
|
12
The following table sets forth total interest expense recognized related to the Notes:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
1.25% coupon
|
|
$
|
750
|
|
|
$
|
750
|
|
Amortization of debt discount and transaction costs
|
|
|
2,924
|
|
|
|
2,749
|
|
|
|
$
|
3,674
|
|
|
$
|
3,499
|
|
As of March 31, 2020, the fair value of the Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Notes classified in equity) were as follows:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
Convertible senior notes
|
|
$
|
180,000
|
|
|
$
|
190,873
|
|
|
$
|
207,600
|
|
|
$
|
187,949
|
|
In connection with the issuance of the Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the Notes. Under the capped call transactions, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock underlying the Notes, with an initial strike price of approximately $53.17 per share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $89.98. The cost of the purchased capped calls of $33,024 was recorded to stockholders’ deficit and will not be re-measured provided it continues to meet the conditions for equity classification.
Based on the closing price of our common stock of $8.91 on March 31, 2020, the last trading day of the quarter, the if-converted value of the Notes was less than their respective principal amounts.
7. Revolving Line of Credit
On February 20, 2020, the Company’s Senior Revolver expired. Other than unused line fees, which have all been paid, there was no outstanding indebtedness under the Senior Revolver when it expired.
On March 3, 2020, the Company entered into a new credit facility with Silicon Valley Bank providing for a revolving line of credit agreement. The three-year agreement has a borrowing limit of $50,000, with the ability for the Company to increase it to up to $100,000. Interest is payable monthly. Advances under the agreement bear interest at (a) the higher of (i) the prime rate as published in the Wall Street Journal or (ii) the federal funds effective rate plus 0.50%, plus (b) an applicable margin ranging from (0.50%) to 0.50% based on the Company’s Average Daily Usage (“ADU”) of the credit facility in the preceding month. The Company also is charged for amounts unused under this arrangement at a rate ranging from 0.00% to 0.40% based on the Company’s ADU in the preceding month. Any outstanding principal is due at the end of the term.
The obligations of the Company under the new credit facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of the personal property assets of the Company and its subsidiaries pursuant to the terms of a Guarantee and Collateral Agreement, dated March 3, 2020 and the other security documents.
The new credit facility contains customary representations and warranties and restrictive covenants. In addition, the Company is required to maintain a Consolidated Adjusted Quick Ratio (“AQR”) of (i) Consolidated Quick Assets to (ii) Consolidated Current Liabilities minus the current portion of Deferred Revenue of at least 1.25 to 1.00 as of the last day of any fiscal quarter, and, if the AQR is less than 2.00 to 1.00, a Minimum Consolidated EBITDA of at least $1.00 for any such fiscal quarter calculated on a trailing 12 month basis. The Company has also agreed to fiscal year dollar limits on its capital expenditures.
The new credit facility contains customary events of default, including payment and covenant defaults (subject to grace and cure periods), breaches of representations and warranties, defaults under certain other indebtedness, change of control, insolvency events, and the occurrence of a material adverse effect. If an event of default occurs, the lender would be entitled to take various actions, including the acceleration of amounts due under the credit facility and all actions permitted to be taken by a secured creditor.
As of March 31, 2020, the amount outstanding under the Company’s revolving line of credit was $10,000. The amount available to borrow was $40,000 and the interest rate was 2.75% as of March 31, 2020. In March 2020, the Company borrowed $10,000 under its line of credit for general operating purposes.
8. Commitments
Supplemental cash flow information related to the Company’s operating and finance leases was as follows:
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Cash Paid for Amounts Included in the Measurement of Lease Liabilities
|
|
Three Months Ended March 31, 2020
|
|
Financing cash flows from finance leases
|
|
$
|
5,600
|
|
Operating cash flows from finance leases
|
|
$
|
2,067
|
|
Operating cash flows from operating leases
|
|
$
|
195
|
|
ROU Assets Obtained in Exchange for New Lease Obligations
|
|
|
|
|
Finance lease liabilities
|
|
$
|
3,593
|
|
Operating lease liabilities
|
|
$
|
-
|
|
As of March 31, 2020, the Company had no additional significant operating or finance leases that had not yet commenced.
Finance Leases
On March 13, 2020, the Company executed an amendment to its three leases for office space on its headquarters campus. Pursuant to this amendment, the Company paid the lessor, a related party, $3,993 for future rent due in the first half of 2021, representing an approximately 17% discount on rent due for those periods. The ROU assets and financing lease liabilities were adjusted to reflect the effect of the amendment and associated payments.
In February 2020, the Company entered into a financing lease arrangement for servers and networking equipment used in operations. Total payments under the agreement are $3,723, including the first annual payment of $784 and two annual payments of $1,470, each. In connection with this lease, the Company recorded financing ROU assets and financing lease liabilities of $3,593.
9. Stock-based Compensation
Restricted Stock Units
During the three months ended March 31, 2020, the Company granted 49,800 restricted stock units, or RSUs, to employees and officers with an aggregate grant date fair value of $890. These RSUs generally vest in equal annual installments over various periods ranging from less than one year to up to four years from the grant date, subject to continued service to the Company. The Company amortizes the grant date fair value of the stock subject to the RSUs on a straight-line basis over the period of vesting. The weighted-average vesting period for these RSUs is approximately 3.88 years from the date of grant.
10. Stockholders’ Deficit
Common Stock
The holders of common stock are entitled to one vote for each share. The voting, dividend and liquidation rights of the holders of common stock are subject to and qualified by the rights, powers and preferences of the holders of preferred stock.
At March 31, 2020, the Company had reserved a total of 5,415,582 of its authorized 50,000,000 shares of common stock for future issuance as follows:
Outstanding stock options
|
|
|
179,363
|
|
Restricted stock units
|
|
|
1,508,263
|
|
Available for future issuance under stock award plans
|
|
|
3,622,233
|
|
Available for future issuance under ESPP
|
|
|
105,723
|
|
Total common shares reserved for future issuance
|
|
|
5,415,582
|
|
Under its stock repurchase program, the Company purchased 1,070,665 shares of its outstanding common stock, for an aggregate of $9,383 during the three months ended March 31, 2020. Of these shares, 1,067,804 have been canceled and returned to its pool of authorized shares to be used for general purposes. The balance of shares repurchased, if any, will be canceled in future periods. As of March 31, 2020, approximately $10,617 remains available for potential repurchases.
11. Revenue
Disaggregation of Revenue
The following tables provide information about disaggregation of revenue by service line:
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Service line:
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
45,990
|
|
|
$
|
47,869
|
|
|
Platform
|
|
|
6,005
|
|
|
|
5,143
|
|
|
Total software services
|
|
$
|
51,995
|
|
|
$
|
53,012
|
|
|
Professional services
|
|
|
14,159
|
|
|
|
15,287
|
|
|
Total
|
|
$
|
66,154
|
|
|
$
|
68,299
|
|
|
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Contract Balances
The following table provides information about contract assets and contract liabilities from contracts with customers:
|
|
Balance at Beginning of Period
|
|
|
Balance at End of Period
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
16,685
|
|
|
$
|
13,870
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
38,508
|
|
|
$
|
34,539
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
12,798
|
|
|
$
|
12,383
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
45,863
|
|
|
$
|
46,895
|
|
The Company recognizes payments from customers based on contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for completed performance objectives not yet invoiced. Contract liabilities include payments received in advance of performance under the contract and are recognized as revenue when earned under the contract. The Company had no asset impairment charges related to contract assets during the three months ended March 31, 2020 and 2019.
There were no significant changes in the contract assets outside of standard revenue and billing activity.
Revenue recognized during the three months ended March 31, 2020 that was included in the deferred revenue balance at the beginning of the period was $19,766.
The Company recorded favorable adjustments to revenue arising from performance obligations satisfied or partially satisfied in previous periods $660 during the three months ended March 31, 2020.
Performance Obligations
As of March 31, 2020, the aggregate amount of the Company’s performance obligations that are unsatisfied or partially unsatisfied were approximately $190,000, of which a majority are expected to be satisfied within the next three years. The Company excludes from its population of performance obligations contracts with original durations of one year or less, contract renewal periods that renew automatically, and amounts of variable consideration that are allocated to wholly unsatisfied distinct service that forms part of a single performance obligation and meets certain variable allocation criteria.
12. Income Taxes
The Company’s effective federal tax rate for the three months ended March 31, 2020 was less than one percent, primarily as a result of estimated tax losses for the fiscal year to date offset by the increase in the valuation allowance in the net operating loss carryforwards. Current tax expense relates to estimated state income taxes.
13. Segments and Geographic Information
The Company views its operations and manages its business as one operating segment. Segment information matches the consolidated financial information for the current period and prior periods reported.
14. Related Parties
Related Party Leasing Arrangements
The Company leases its office space at its Charleston, South Carolina headquarters campus under the terms of three non-cancellable leases from entities affiliated with an executive who is also a Company director and significant stockholder. The Company’s headquarter campus building leases are accounted for as financing lease right-of-use assets and lease liabilities on the Consolidated Balance Sheet as of March 31, 2020. The three lease agreements have 15-year terms ending on December 31, 2031, with Company options to renew for five additional years. The arrangements provide for 3.0% fixed annual rent increases. Payments under these agreements were $7,358 and $3,331 for the three months ended March 31, 2020 and 2019, respectively. Other amounts due to these related parties were $209 and $791 as of March 31, 2020 and December 31, 2019, respectively, and were recorded in “Accrued expenses.” Payments made for the three months ended March 31, 2020 include amounts paid in connection with the amendment of these leases discussed in Note 8.
Other Related Party Expenses
The Company utilizes the services of various companies that are owned and controlled by an executive who is also a Company director and significant stockholder. The companies provide construction project management services, private air transportation and other services. Expenses related to these companies were $120 and $119 for the three months ended March 31, 2020 and 2019, respectively. There were no amounts due to these companies as of March 31, 2020 and December 31, 2019.
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During 2018, the Company entered into an agreement to purchase software and services from a company affiliated with a Company director. The aggregate amount of payments due under this contract is $115. Payments related to this agreement were $26 and $35 for the three months ended March 31, 2020 and 2019, respectively. Amounts due to this company were $26 as of March 31, 2020. There were no amounts due to this company as of December 31, 2019.
15. Subsequent Events
Restricted Stock Units
During May 2020, the Company granted 1,225,460 RSUs and 785,596 performance RSUs with an aggregate grant date fair value of $12,524 and $8,029, respectively. The aggregate grant date fair value of the performance RSUs assuming target achievement was $6,206. The RSUs generally vest in equal annual installments over four years from the grant date. The number of performance RSUs that will vest will be determined upon the achievement of certain financial targets for 2020, and vesting will then occur in equal annual installments over various periods ranging from less than one to three years. The actual number of shares issued upon vesting could range between 0% and 100% of the number of awards granted. The weighted-average vesting period for these RSUs and performance RSUs is approximately 3.09 and 2.36 years from the date of grant, respectively.
Common Stock
During April and May 2020, employees exercised stock options and RSUs vested resulting in the issuance of 288,232 shares.
The Company purchased 35,508 shares of its outstanding common stock for an aggregate of $285 during April 2020.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. The pandemic did not have a material impact on the Company’s financial statements for the three months ended March 31, 2020. The Company has implemented actions to maintain its financial health and liquidity. The Company is also monitoring the impacts of COVID-19 on the fair value of assets. Future changes in sales, earnings and cash flows related to long-lived assets to be held and used and goodwill could cause these assets to become impaired. In addition, the Company continues to monitor the impacts of the pandemic on its estimates for allowance for doubtful accounts and expected credit losses associated with its accounts receivable and certain contract assets. COVID-19 is discussed in more detail throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Restructuring Plan
On April 28, 2020, the Company announced a restructuring plan to as part of the Company’s actions to ensure the safety and well-being of its employees and customers, contain costs and further preserve its liquidity profile in response to the impact of the COVID-19 pandemic. This plan entailed a reduction in U.S. workforce of approximately 17% in the second quarter of 2020. The Company estimates that the restructuring plan will result in pre-tax charges of approximately $5,000 to $7,000 and will be recorded as restructuring expenses in the second quarter of 2020. The charges will consist of one-time severance charges, acceleration of unvested equity grants, continuation of health benefits and outplacement services. The estimated cash expenditure for these charges is approximately $5,000.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements about our ability to retain and hire necessary associates and appropriately staff our operations; statements about our ability to establish and maintain intellectual property rights; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
As used in this report, the terms “Benefitfocus, Inc.,” “Benefitfocus,” “Company,” “company,” “we,” “us,” and “our” mean Benefitfocus, Inc. and its subsidiaries unless the context indicates otherwise.
17