ITEM 1. 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.
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, health plans (also known as 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 the 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, 2021 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, 2020 included in the Company’s Annual Report on Form 10-K, as amended.
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. Additionally as described in revenue and deferred revenue below, estimates are utilized in association with revenue recognition, in particular the estimation of variable consideration using the expected value method from insurance broker commissions reported in Platform revenue. 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
During January 2021, the Company recorded restructuring costs of $1,400 from a reduction to its workforce. Restructuring costs are comprised of one-time severance charges, continuation of health benefits and outplacement services and are presented separately in operating expenses in the consolidated statements of operations and comprehensive loss.
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
7
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 constraints for variable consideration associated with collectability, policy cancellation and termination risks.
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,
2021
|
|
|
As of
December 31,
2020
|
|
Costs to obtain contracts
|
|
$
|
5,201
|
|
|
$
|
5,624
|
|
Costs to fulfill contracts
|
|
$
|
3,395
|
|
|
$
|
3,639
|
|
|
|
Three Months Ended March 31,
|
|
|
Amortization of deferred contract costs
|
|
2021
|
|
|
2020
|
|
|
Costs to obtain contracts included in sales and marketing expense
|
|
$
|
745
|
|
|
$
|
881
|
|
|
Costs to fulfill contracts included in cost of revenue
|
|
$
|
351
|
|
|
$
|
375
|
|
|
8
Marketable Securities
Marketable securities consist of short-term investments in corporate bonds, commercial paper, and U.S. Treasury and agency bonds. To reflect its intention, the Company classifies its marketable securities as held-to-maturity at the time of purchase. As a result, the marketable securities are recorded at amortized cost and any gains or losses realized upon maturity are reported in other expense, net in the consolidated statements of operations and comprehensive loss.
Debt securities classified as held-to-maturity are subject to the expected credit loss model prescribed under Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments”. The Company utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The Company measures expected credit losses on its held-to-maturity portfolio on a collective basis by major security type. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The Company’s credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as its portfolio. An adjustment factor is applied to these credit loss calculations based upon the Company’s assessment of the expected impact from current economic conditions on its investments. The Company monitors the credit quality of debt securities classified as held-to-maturity through the use of their respective credit rating and updates them on a quarterly basis. The allowance for credit losses is discussed in Note 5.
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 United States 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. No customer exceeded 10% of accounts receivable as of March 31, 2021 and December 31, 2020. No customer exceeded 10% of total revenue in either of the three-month periods ended March 31, 2021 and 2020.
Allowance for Doubtful Accounts
The Company uses a current expected credit loss model. Accounts receivable and allowance for doubtful accounts are discussed in Note 6.
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
|
|
2021
|
|
|
2020
|
|
|
Capitalized
|
|
$
|
1,748
|
|
|
$
|
3,472
|
|
|
Amortized
|
|
$
|
2,162
|
|
|
$
|
1,519
|
|
|
Capitalized software development costs
|
|
As of
March 31,
2021
|
|
|
As of
December 31,
2020
|
|
Net book value
|
|
$
|
17,528
|
|
|
$
|
17,942
|
|
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.
9
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.
Recently Adopted Accounting Standards
On January 1, 2021, the Company adopted ASU No. 2019-12. The purpose of this ASU is to simplify various aspects related to accounting for income taxes, eliminate certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplify when companies recognize deferred taxes in an interim period, and clarify certain aspects of the current guidance to promote consistent application. There was no impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”. The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the timing and impact of the adoption of ASU 2020-06 on its consolidated financial statements, but anticipates that it will result in a reduction in non-cash interest expense related to its convertible senior notes.
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
|
|
2021
|
|
|
2020
|
|
Restricted stock units
|
|
|
2,119,282
|
|
|
|
1,508,263
|
|
Stock options
|
|
|
106,928
|
|
|
|
179,363
|
|
Convertible senior notes
|
|
|
4,161,182
|
|
|
|
4,513,824
|
|
Conversion of preferred stock
|
|
|
5,333,334
|
|
|
|
-
|
|
Employee Stock Purchase Plan
|
|
|
2,604
|
|
|
|
5,982
|
|
Total anti-dilutive common share equivalents
|
|
|
11,723,330
|
|
|
|
6,207,432
|
|
10
Basic and diluted net loss per common share is calculated as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,097
|
)
|
|
$
|
(11,136
|
)
|
Preferred dividends
|
|
|
(1,600
|
)
|
|
|
-
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,697
|
)
|
|
$
|
(11,136
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted
|
|
|
32,490,811
|
|
|
|
32,638,805
|
|
Net loss per common share, basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.34
|
)
|
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.
|
|
March 31, 2021
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds(1)
|
|
$
|
91,356
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,356
|
|
Total assets
|
|
$
|
91,356
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,356
|
|
|
|
December 31, 2020
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market mutual funds(1)
|
|
$
|
87,224
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87,224
|
|
Total assets
|
|
$
|
87,224
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87,224
|
|
________________
(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 and U.S. Treasury and agency bonds, and are classified as held-to-maturity. All marketable securities had contractual maturities of less than one year as of March 31, 2021 and December 31, 2020. The following tables present information about the Company’s marketable securities by major security type.
11
|
|
As of March 31, 2021
|
|
Sector
|
|
Amortized cost
|
|
|
Allowance for credit losses
|
|
|
Net carrying amount
|
|
|
Gross unrealized gains
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
Industrial
|
|
$
|
4,500
|
|
|
$
|
-
|
|
|
$
|
4,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,500
|
|
Financial
|
|
|
60,250
|
|
|
|
-
|
|
|
|
60,250
|
|
|
|
3
|
|
|
|
(11
|
)
|
|
|
60,242
|
|
Government
|
|
|
30,072
|
|
|
|
-
|
|
|
|
30,072
|
|
|
|
10
|
|
|
|
-
|
|
|
|
30,082
|
|
Total
|
|
$
|
94,822
|
|
|
$
|
-
|
|
|
$
|
94,822
|
|
|
$
|
13
|
|
|
$
|
(11
|
)
|
|
$
|
94,824
|
|
|
|
As of December 31, 2020
|
|
Sector
|
|
Amortized cost
|
|
|
Allowance for credit losses
|
|
|
Net carrying amount
|
|
|
Gross unrealized gains
|
|
|
Gross unrealized losses
|
|
|
Fair value
|
|
Industrial
|
|
$
|
8,993
|
|
|
$
|
-
|
|
|
$
|
8,993
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,993
|
|
Financial
|
|
|
55,943
|
|
|
|
-
|
|
|
|
55,943
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
55,938
|
|
Government
|
|
|
30,149
|
|
|
|
-
|
|
|
|
30,149
|
|
|
|
6
|
|
|
|
-
|
|
|
|
30,155
|
|
Total
|
|
$
|
95,085
|
|
|
$
|
-
|
|
|
$
|
95,085
|
|
|
$
|
6
|
|
|
$
|
(5
|
)
|
|
$
|
95,086
|
|
The fair value of marketable securities in the Government major security type is classified as a Level 1 in the Company’s fair value hierarchy described in Note 4. The fair values of the remaining major security types are classified as Level 2.
The Company invests in highly rated securities with maturities of two years or less at the time of purchase. Given the credit quality of the financial assets and the historical loss experience associated their respective credit ratings as well as the duration of these financial assets and the short time horizon over which to consider expectations of future economic conditions, the Company has assessed that non-collection of the cost basis of these financial assets is remote.
6. Accounts Receivable, net
Accounts receivable, net include:
|
|
As of
March 31,
2021
|
|
|
As of
December 31,
2020
|
|
Accounts receivable
|
|
$
|
28,148
|
|
|
$
|
26,791
|
|
Less: Allowance for doubtful accounts
|
|
|
(248
|
)
|
|
|
(200
|
)
|
Less: Allowance for returns
|
|
|
(3,405
|
)
|
|
|
(4,351
|
)
|
Total accounts receivable, net
|
|
$
|
24,495
|
|
|
$
|
22,240
|
|
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.
|
|
Three Months Ended March 31,
|
|
Allowance for doubtful accounts
|
|
2021
|
|
|
2020
|
|
Beginning of period
|
|
$
|
200
|
|
|
$
|
155
|
|
Provision for credit losses
|
|
|
48
|
|
|
|
131
|
|
Write-offs and recoveries
|
|
|
-
|
|
|
|
(44
|
)
|
End of period
|
|
$
|
248
|
|
|
$
|
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.
7. 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
12
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.
At issuance, the Notes had an initial conversion rate of 18.8076 shares of common stock per $1 principal amount of Notes, which represented 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, 2021, 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 represented 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, are included with the equity component in shareholders’ equity.
The Notes consist of the following as of:
|
|
As of
|
|
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
Liability component:
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
221,250
|
|
|
$
|
221,250
|
|
Less: Debt discount, net of amortization
|
|
|
(34,074
|
)
|
|
|
(36,942
|
)
|
Net carrying amount
|
|
$
|
187,176
|
|
|
$
|
184,308
|
|
Equity component (a)
|
|
|
56,539
|
|
|
|
56,539
|
|
|
(a)
|
Recorded in the consolidated balance sheet within additional paid-in capital, net of $1,550 transaction costs in equity.
|
13
The following table sets forth total interest expense recognized related to the Notes:
|
|
Three Months Ended March 31,
|
|
|
Interest expense
|
|
2021
|
|
|
2020
|
|
|
1.25% coupon
|
|
$
|
691
|
|
|
$
|
750
|
|
|
Amortization of debt discount and transaction costs
|
|
|
2,868
|
|
|
|
2,924
|
|
|
Total
|
|
$
|
3,559
|
|
|
$
|
3,674
|
|
|
As of March 31, 2021, 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, 2021
|
|
|
December 31, 2020
|
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
Convertible senior notes
|
|
$
|
203,827
|
|
|
$
|
187,176
|
|
|
$
|
192,587
|
|
|
$
|
184,308
|
|
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.
In connection with the purchase of the Notes described above, the Company terminated a portion of the capped call transactions which resulted in an immaterial amount of payments to the Company in cash and common stock and was recorded in addition paid-in capital.
Based on the closing price of our common stock of $13.81 on March 31, 2021, the last trading day of the quarter, the if-converted value of the Notes was less than their respective principal amounts.
8. Revolving Line of Credit
The Company entered into a credit facility with Silicon Valley Bank providing for a revolving line of credit agreement on March 3, 2020. This agreement replaced the Company’s previous agreement with Silicon Valley Bank, which expired on February 20, 2020. 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 requires the Company 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. 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, 2021 there were no amounts outstanding under the Company’s revolving line of credit. The amount available to borrow was $50,000 and the interest rate was 2.75% as of March 31, 2021.
9. Commitments
Supplemental cash flow information related to the Company’s operating and finance leases was as follows:
14
Cash Paid for Amounts Included in the Measurement of Lease Liabilities
|
|
Three Months Ended March 31, 2021
|
|
Financing cash flows from finance leases
|
|
$
|
2,034
|
|
Operating cash flows from finance leases
|
|
$
|
102
|
|
Operating cash flows from operating leases
|
|
$
|
122
|
|
ROU Assets Obtained in Exchange for New Lease Obligations
|
|
|
|
|
Finance lease liabilities
|
|
$
|
-
|
|
Operating lease liabilities
|
|
$
|
-
|
|
As of March 31, 2021, the Company had no additional significant operating or finance leases that had not yet commenced.
10. Redeemable Preferred Stock
On June 4, 2020, the Company issued and sold 1,777,778 shares of its newly created series of preferred stock, par value of $0.001 per share, designated as “Series A Convertible Preferred Stock” (the “Preferred Stock”) to BuildGroup LLC (the “Buyer”) at a purchase price of $45 per share, resulting in total gross proceeds for the Company of approximately $80,000. A member of the Company’s Board of Directors is the Chief Executive Officer of the Buyer. The Buyer also has a second representative on the Board.
The Preferred Stock ranks senior to the Company’s common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Each share of the Preferred Stock has an initial stated value of $45 per share. Holders of shares of the Preferred Stock are entitled to a dividend equal to 8.00% per annum (the “Regular Dividends”), payable quarterly, beginning on June 30, 2020. The Regular Dividends are payable in cash or in kind, at the Company’s option. In the event a Regular Dividend is paid in kind, the stated value of each share of the Preferred Stock will be increased by an amount equal to the accrued Regular Dividend not paid in cash. As of March 31, 2021, the Company paid all dividends on the Preferred Stock in cash. Holders of the Preferred Stock are also entitled to participate in and receive any dividends declared or paid on the common stock on an as-converted basis, and no dividends may be paid to holders of the common stock unless full participating dividends are concurrently paid to the holders of the Preferred Stock.
Each holder of the Preferred Stock has the right, at its option, to convert its shares of the Preferred Stock, in whole or in part, into fully paid and non-assessable shares of the common stock, at any time and from time to time. The number of shares of the common stock into which a share of the Preferred Stock will convert at any time is equal to the quotient obtained by dividing its stated value then in effect plus any accumulated and unpaid Regular Dividends by its conversion price of $15.00. The conversion price is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events. At closing, before payment of any dividends in kind, the 1,777,778 shares of the Preferred Stock were convertible into 5,333,334 shares of common stock.
The Company may, at its option, redeem the outstanding shares of the Preferred Stock following the fourth anniversary of its issuance. Redemption by the Company is subject to certain liquidity conditions as well conditions connected with the trading price of its common stock. Upon redemption by the Company, the Company will pay the holder of the Preferred Stock 105% of the initial stated value of such share plus any increase in the stated value from the initial stated value plus accumulated and unpaid Regular Dividends. If the Company undergoes a change of control as defined in the purchase agreement, the Company must redeem all of the then-outstanding shares of the Preferred Stock for cash consideration equal to the greater of the amount due for redemption as described above and the amount such holder of shares of the Preferred Stock would have received in respect of the number of shares of the Common Stock that would be issuable upon conversion of such share of the Preferred Stock.
Unless and until approval of the Company’s stockholders is obtained as contemplated by the NASDAQ listing rules, no holder of the Preferred Stock may convert shares of the Preferred Stock into shares of common stock if and to the extent that such conversion would result in the holder beneficially owning in excess of 19.9% of the then-outstanding shares of the common stock.
As long as not less than 60% of the shares of the Preferred Stock originally issued remain outstanding, the holders of a majority of the then-outstanding shares of the Preferred Stock, voting together as a single class, have the right at any election of directors to elect two directors if the Board consists of nine or fewer directors or three directors if the Board consists of 10 directors. At any time, such elected director(s) may be removed with or without cause only by the affirmative vote or written consent of a majority of the holders of the Preferred Stock entitled to elect such director.
Holders of the Preferred Stock generally are entitled to vote with the holders of the shares of the common stock on all matters submitted for a vote of holders of shares of the common stock (voting together with the holders of shares of the common stock as one class) on an as-converted basis, subject to a limitation of ownership of 19.9% of common stock. Additionally, certain matters require the approval of the holders of a majority of the outstanding shares of the Preferred Stock, voting as a separate class.
The Buyer is subject to limitations while it holds at least 10% of the Preferred Stock originally purchased. Furthermore, until the earliest of May 30, 2024 and receipt of a notice of redemption, the Buyer cannot sell, transfer or otherwise dispose of the shares of the Preferred Stock or the underlying shares of the common stock, subject to limited exceptions that include exceptions in the case of transfers to certain permitted transferees.
For so long as the Buyer and its affiliates collectively hold at least 60% of the shares of the Preferred Stock originally purchased by it or the common stock issuable upon conversion thereof, the Company will pay the Buyer a fee of $400 for the first year following closing and $200 per year thereafter. These management and oversight fees are expensed over the period incurred.
15
In the period of issuance, the Company incurred $807 in issuance costs related to the sale of the Preferred Stock, including $150 of reimbursement to the Buyer for reasonable fees and out-of-pocket expenses incurred by the Buyer in connection with the transaction. The issuance costs were netted against the proceeds from this transaction.
11. Stock-based Compensation
Restricted Stock Units
During the three months ended March 31, 2021, the Company granted 61,107 restricted stock units, or RSUs, to employees and officers with an aggregate grant date fair value of $924. These RSUs generally vest in equal annual installments over various periods ranging from three 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 3.78 years from the date of grant.
12. 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, 2021, the Company had reserved a total of 11,472,179 of its authorized 50,000,000 shares of common stock for future issuance as follows:
Outstanding stock options
|
|
|
106,928
|
|
Restricted stock units
|
|
|
2,119,282
|
|
Available for future issuance under stock award plans
|
|
|
3,816,668
|
|
Available for future issuance under ESPP
|
|
|
95,967
|
|
Issuable upon conversion of Series A Preferred Stock
|
|
|
5,333,334
|
|
Total common shares reserved for future issuance
|
|
|
11,472,179
|
|
13. Revenue
Disaggregation of Revenue
The following tables provide information about disaggregation of revenue by service line:
|
|
Three Months Ended March 31,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Service line:
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
$
|
45,579
|
|
|
$
|
45,990
|
|
|
Platform
|
|
|
7,769
|
|
|
|
6,005
|
|
|
Total software services
|
|
$
|
53,348
|
|
|
$
|
51,995
|
|
|
Professional services
|
|
|
11,715
|
|
|
|
14,159
|
|
|
Total
|
|
$
|
65,063
|
|
|
$
|
66,154
|
|
|
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, 2021
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
15,105
|
|
|
$
|
12,311
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
32,204
|
|
|
$
|
32,630
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
16,685
|
|
|
$
|
13,870
|
|
Contract liabilities:
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
$
|
38,508
|
|
|
$
|
34,539
|
|
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
16
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, 2021 and 2020.
During the three months ended March 31, 2021, 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, 2021 that was included in the deferred revenue balance at the beginning of the period was $12,785.
The Company recorded favorable adjustments to revenue arising from performance obligations satisfied or partially satisfied in previous periods $1,529 the three months ended March 31, 2021.
Performance Obligations
As of March 31, 2021, the aggregate amount of the Company’s performance obligations that are unsatisfied or partially unsatisfied were approximately $215,000, 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.
14. Income Taxes
The Company’s effective federal tax rate for the three months ended March 31, 2021 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 and indefinite life intangibles. The limitation on the utilization of net operating losses in the indefinite life period is limited to 80% of taxable income because of provisions in the Tax Cuts and Jobs Act.
15. 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.
16. Related Parties
Series A Preferred Stock
As described in Note 10, the Company sold 1,777,778 shares of Preferred Stock to an entity whose Chief Executive Officer is a member of the Company’s Board of Directors. The Company paid dividends of $1,600 to the buyer for the three months ended March 31, 2021. Additionally, the Company paid management and oversight fees of $100 to the Buyer for three months ended March 31, 2021. The significant terms of the Preferred Stock are described in Note 10.
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 ROU assets and lease liabilities on the Consolidated Balance Sheet as of March 31, 2021. 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 $667 and $7,358 for the three months ended March 31, 2021 and 2020, respectively. In the three months ended March 31, 2020, the Company prepaid rent in the amount of $3,993 for periods during the first half of 2021. Other amounts due to these related parties were $167 and $667 as of March 31, 2021 and December 31, 2020, respectively, and were recorded in “Accrued expenses”.
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 $19 and $120 for the three months ended March 31, 2021 and 2020, respectively. Amounts due to these companies were de minimus as of March 31, 2021 and December 31, 2020.
The Company purchased software and services from a company affiliated with a Company director. Payments related to this agreement were $26 for each of the three months ended March 31, 2021 and 2020. Amounts due to this company were $25 and de minimus as of March 31, 2021 and December 31, 2020, respectively.
17. Subsequent Events
Restricted Stock Units
During April and May 2021, the Company granted approximately 1,068,519 RSUs with an aggregate grant date fair value of approximately $14,843. These RSUs generally vest in equal annual installments over four years from the grant date.
17
The Company granted approximately 690,948 performance RSUs with an aggregate grant date fair value of approximately $9,577 during April and May 2021. The aggregate grant date fair value of the performance RSUs assuming target achievement was approximately $7,234. The number of performance RSUs that will vest will be determined upon the achievement of certain financial targets for 2021, and vesting will then occur in equal annual installments over one- and four-year periods from the grant date. The actual number of shares issued upon vesting could range between 0% and 100% of the number of awards granted. The grant date fair value of the stock subject to the performance RSUs is amortized to expense on an accelerated basis over the period of vesting. The weighted-average vesting period for these performance RSUs is approximately 3.2 years from the date of grant.
Additionally, on May 4, 2021, in connection with the appointment of a new president and chief executive officer, the Company granted approximately 248,826 RSUs and approximately 106,640 performance RSUs. These stock awards were granted from authorized capital and not from the Company’s stock plans. The RSUs vest in equal annual installments over four years starting on May 10, 2021. The performance RSUs vest in a single installment no earlier than May 10, 2024 if the Company’s per share stock price is at least $23 for a period of 20 consecutive trading days between May 10, 2023 and May 10, 2026.
Common Stock
During April and May 2021, RSUs vested resulting in the issuance of approximately 664,589 shares of the Company’s common stock.
Commitments
In April 2021, the Company entered into a non-cancellable sublease agreement for part of one building on its headquarters campus. The sublease term expires May 31, 2028 and may be renewed at the option of the sublessee through November 30, 2031. Payments to the Company under the sublease are less than its current obligation for the asset. Accordingly, the Company expects to recognize an impairment of the financing lease ROU asset during the second quarter of 2021. The Company is currently assessing this asset for impairment and estimates the impairment expense to be between $3,000 and $4,000.
18
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.
19