UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to .
Commission File Number:
(Exact name of registrant as specified in its charter)
|
||
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
(Address of principal executive offices and zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
☐ |
Large accelerated filer |
☒ |
☐ |
Non-accelerated filer |
|
|
|
|
|
|
|
Smaller reporting company |
Emerging growth company |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of November 4, 2022, there were approximately
1
Benefitfocus, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2022
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION |
|
|
|
3 |
|
|
|
Unaudited Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 |
3 |
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
|
|
7 |
|
|
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
23 |
|
|
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
34 |
|
|
34 |
|
|
|
PART II. OTHER INFORMATION |
|
|
|
34 |
|
|
|
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS |
36 |
|
|
37 |
|
|
|
38 |
|
|
|
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Benefitfocus, Inc.
Unaudited Consolidated Balance Sheets
(in thousands, except share and per share data)
|
|
As of |
|
|
As of |
|
||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Marketable securities |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
|
|
|
|
||
Contract, prepaid and other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Financing lease right-of-use assets |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Deferred contract costs and other non-current assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
Liabilities, redeemable preferred stock and stockholders' deficit |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued expenses |
|
|
|
|
|
|
||
Accrued compensation and benefits |
|
|
|
|
|
|
||
Deferred revenue, current portion |
|
|
|
|
|
|
||
Long-term debt, current portion |
|
|
|
|
|
|
||
Lease liabilities and financing obligations, current portion |
|
|
|
|
|
|
||
Contingent consideration |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Deferred revenue, net of current portion |
|
|
|
|
|
|
||
Convertible senior notes |
|
|
|
|
|
|
||
Long-term debt, net of current portion |
|
|
|
|
|
|
||
Lease liabilities and financing obligations, net of current portion |
|
|
|
|
|
|
||
Other non-current liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|||
Redeemable preferred stock: |
|
|
|
|
|
|
||
Series A preferred stock, par value $ |
|
|
|
|
|
|
||
Stockholders' deficit: |
|
|
|
|
|
|
||
Common stock, par value $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Accumulated deficit |
|
|
( |
) |
|
|
( |
) |
Total stockholders' deficit |
|
|
( |
) |
|
|
( |
) |
Total liabilities, redeemable preferred stock and stockholders' deficit |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
3
Benefitfocus, Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cost of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Impairment of lease right-of-use assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Change in fair value of contingently returnable consideration |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loss from operations |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Gain (loss) on repurchase of convertible senior notes |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Other income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total other expense, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Loss before income taxes |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Preferred dividends |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss available to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Comprehensive loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
4
Benefitfocus, Inc.
Unaudited Consolidated Statements of Changes in Stockholders’ Deficit
(in thousands, except share and per share data)
|
|
Common Stock, |
|
|
Additional |
|
|
|
|
|
Total |
|
||||||||
|
|
$0.001 Par Value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders' |
|
||||||||
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Deficit |
|
|||||
Balance, December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Cumulative effect adjustment from adoption of new accounting standard |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Issuance of common stock upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred dividends |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Balance, March 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Issuance of common stock upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred dividends |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Balance, June 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Issuance of common stock upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Issuance of common stock under Employee Stock Purchase Plan, or ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cancellation of convertible senior note capped call hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred dividends |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Balance, September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
Common Stock, |
|
|
Additional |
|
|
|
|
|
Total |
|
||||||||
|
|
$0.001 Par Value |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders' |
|
||||||||
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Deficit |
|
|
Deficit |
|
|||||
Balance, December 31, 2020 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Issuance of common stock upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred dividends |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Balance, March 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Issuance of common stock upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Issuance of common stock under Employee Stock Purchase Plan, or ESPP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred dividends |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Balance, June 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
Issuance of common stock upon vesting of restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cancellation of convertible senior note capped call hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity component of repurchased convertible senior notes |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Preferred dividends |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||
Net loss |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|||
Balance, September 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|||
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
5
Benefitfocus, Inc.
Unaudited Consolidated Statements of Cash Flows
(in thousands)
|
|
Nine Months Ended |
|
|||||
|
|
2022 |
|
|
2021 |
|
||
Cash flows from operating activities |
|
|
|
|
|
|
||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Stock-based compensation expense |
|
|
|
|
|
|
||
Accretion of interest on convertible senior notes |
|
|
|
|
|
|
||
Interest accrual on finance lease liabilities |
|
|
|
|
|
|
||
Rent expense less than payments |
|
|
( |
) |
|
|
( |
) |
Change in fair value of contingently returnable assets |
|
|
( |
) |
|
|
|
|
Non-cash accretion income from investments |
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Impairment or loss on disposal of right-of-use assets and property and equipment |
|
|
|
|
|
|
||
(Gain) loss on extinguishment of debt |
|
|
( |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts receivable, net |
|
|
( |
) |
|
|
|
|
Accrued interest on investments |
|
|
|
|
|
|
||
Contract, prepaid and other current assets |
|
|
|
|
|
|
||
Deferred costs and other non-current assets |
|
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
|
( |
) |
|
|
|
|
Accrued compensation and benefits |
|
|
( |
) |
|
|
( |
) |
Deferred revenue |
|
|
|
|
|
( |
) |
|
Other non-current liabilities |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities |
|
|
|
|
|
|
||
Purchases of investments held-to-maturity |
|
|
|
|
|
( |
) |
|
Proceeds from short-term investments held-to-maturity |
|
|
|
|
|
|
||
Maturities of investments available-for-sale |
|
|
|
|
|
|
||
Sales of investments available-for-sale |
|
|
|
|
|
|
||
Business combination, net of cash acquired |
|
|
( |
) |
|
|
|
|
Purchases of property and equipment |
|
|
( |
) |
|
|
( |
) |
Net cash provided by investing activities |
|
|
|
|
|
|
||
Cash flows from financing activities |
|
|
|
|
|
|
||
Proceeds from long-term debt |
|
|
|
|
|
|
||
Repurchase of convertible senior notes |
|
|
( |
) |
|
|
( |
) |
Payments of debt issuance costs |
|
|
( |
) |
|
|
|
|
Cancellation of convertible senior notes capped call hedge |
|
|
|
|
|
|
||
Payments of preferred dividends |
|
|
( |
) |
|
|
( |
) |
Proceeds from contingently returnable consideration |
|
|
|
|
|
|
||
Payments of contingent consideration |
|
|
( |
) |
|
|
|
|
Proceeds from exercises of stock options and ESPP |
|
|
|
|
|
|
||
Payments on financing obligations |
|
|
( |
) |
|
|
( |
) |
Payments of principal on finance lease liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
( |
) |
|
Cash and cash equivalents, beginning of period |
|
|
|
|
|
|
||
Cash and cash equivalents, end of period |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
||
Property and equipment purchases in accounts payable and accrued expenses |
|
$ |
|
|
$ |
|
||
Debt issuance costs included in accounts payable and accrued expenses |
|
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.
6
BENEFITFOCUS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Organization and Description of Business
Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, 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., BenefitStore, LLC (formerly, BenefitStore, Inc.) and Tango Health, 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 and comprehensive loss, financial position, changes in stockholders’ deficit and cash flows. The results of operations and comprehensive loss for the three- and nine-month periods ended September 30, 2022 are not necessarily indicative of the results for the full year or for any other future periods. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, 2021 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 credit losses and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and the related amortization, contingent consideration, incremental borrowing rate used in lease accounting, the determination of the useful lives of assets, and the impairment assessment of right-of-use assets, 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
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. The Company recorded restructuring costs of $
7
Revenue and Deferred Revenue
The Company derives its revenue primarily from fees for subscription services and professional services sold to employers and health plans as well as platform revenue derived from the value of products sold on its 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:
Software Services Revenue
Software services revenue consists of subscription revenue and platform revenue.
Subscription Revenue
Subscription revenue primarily consists of monthly or annual subscription fees paid to the Company by its employer and health plan 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 insurance 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 health plan 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 health plan 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 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
8
fulfillment costs are reviewed for impairment if changes to customer contracts result in termination or partial termination of services. 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
The following tables present information about deferred contract costs:
Balance of deferred contract costs |
|
As of |
|
|
As of |
|
||
Costs to obtain contracts |
|
$ |
|
|
$ |
|
||
Costs to fulfill contracts |
|
$ |
|
|
$ |
|
||
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Amortization of deferred contract costs |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Costs to obtain contracts included in sales and marketing expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Costs to fulfill contracts included in cost of revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Cost of Revenue
Cost of revenue primarily consists of employee compensation, professional services, data center co-location costs, networking expenses, depreciation expense for computer equipment directly associated with generating revenue, amortization expense for capitalized software development costs, amortization of acquired intangibles, and infrastructure maintenance costs. In addition, the Company allocates a portion of overhead, such as facilities and security costs, additional depreciation and amortization expense, and employee benefit costs to cost of revenue based on headcount.
Cash and Cash Equivalents
Restricted Cash
Marketable Securities
Marketable securities consist of short-term investments in corporate bonds, commercial paper, and U.S. Treasury and agency bonds. During the year ended December 31, 2021, the Company changed the classification of its marketable securities from held-to-maturity to available-for-sale based on its intent to sell the securities. The Company’s available-for-sale marketable securities are recorded at fair value which approximates cost due to the short duration of such securities.
Debt securities classified as either available-for-sale or 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 debt securities at the time the financial asset is originated or acquired. The Company measures expected credit losses on its debt 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 debt 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 through the use of their respective credit rating and updates them on a quarterly basis. The allowance for credit losses is discussed in Note 7.
9
Insurance Recovery
The Company and several other defendants were involved with a legal proceeding regarding a complaint filed by the City of Pittsburgh Comprehensive Municipal Pension Trust Fund in the Supreme Court of the State of New York, County of New York (the “Court”). The complaint asserted claims on behalf of a class of persons who acquired our common stock in or traceable to the Company’s secondary public offering commenced on or about March 1, 2019. The complaint alleged that the defendants violated the federal securities laws by, among other things, making misrepresentations about the Company’s commercial relationships and failing to disclose certain material adverse facts, trends or uncertainties or significant risks that made the secondary public offering speculative and risky. The complaint sought rescission or rescissory damages and compensatory damages. In August 2022, the Company received preliminary approval by the Court for settlement of this case. Based on facts and circumstances known to the Company, which include confirmation of the claim by the Company’s insurance broker and that it is a remote probability that the estimated recovery under the claim will change, in the second quarter of 2022, the Company recorded an insurance recovery of $
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable. All of the Company’s cash, cash equivalents and restricted cash are held at financial institutions that management believes to be of high credit quality. The bank deposits of the Company exceed federally insured limits and are generally uninsured and uncollateralized. The Company has not experienced any losses on cash, cash equivalents and restricted cash to date.
To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for credit losses. Accounts receivable are unsecured and derived from revenue earned from customers located in the United States.
Allowance for Credit Losses
The Company uses a current expected credit loss model. Accounts receivable and allowance for credit losses are discussed in Note 7.
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
The following tables present information about capitalized software development costs:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
Capitalized software development costs |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Capitalized |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Amortized |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Capitalized software development costs |
|
As of |
|
|
As of |
|
||
Net book value |
|
$ |
|
|
$ |
|
||
10
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 (“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 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
Convertible Debt
On January 1, 2022, the Company adopted 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. The Company adopted this update using the modified retrospective transition method at the beginning of the period of adoption. Accordingly, the Company did not adjust prior period financial statements, and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit in 2022 in the amount of $
The adoption of this standard did not impact the manner in which the Company has or will reflect the convertible senior notes in diluted earning per share.
3. Business Combination
On November 19, 2021, the Company purchased
As the valuation of certain assets and liabilities for purposes of purchase price allocations are preliminary in nature, they are subject to adjustment as additional information is obtained about the facts and circumstances regarding these assets and liabilities that existed at the acquisition date. Any adjustments to our estimates of acquisition accounting will be made in the periods in which the adjustments are determined, and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. The preliminary acquisition accounting will be finalized within one year from the date of acquisition. The Company believes the information gathered to date provides a reasonable basis for estimating the preliminary fair and recorded values of assets acquired and liabilities assumed.
11
The following table summarizes the fair value of the consideration paid and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:
Consideration Transferred |
|
|
|
|
Cash consideration transferred |
|
$ |
|
|
Contingently returnable consideration |
|
|
( |
) |
Consideration payable |
|
|
|
|
Contingent consideration |
|
|
|
|
Fair value of total purchase price consideration |
|
|
|
|
Cash acquired |
|
|
( |
) |
Fair value of total purchase price consideration, net of cash acquired |
|
$ |
|
|
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed |
|
|
|
|
Accounts receivable, net |
|
$ |
|
|
Contract, prepaid and other current assets |
|
|
|
|
Intangible assets |
|
|
|
|
Accounts payable and accrued expenses |
|
|
( |
) |
Deferred revenue, current portion |
|
|
( |
) |
Deferred tax liability |
|
|
( |
) |
Total identifiable net assets |
|
|
|
|
Goodwill |
|
|
|
|
Total identifiable net assets and goodwill |
|
$ |
|
|
The goodwill of $
The identifiable intangible assets acquired have a weighted average amortization period of
During the first quarter of 2022, the Company transferred the previously recorded consideration payable of $
Contract assets and deferred revenue balances were recorded at the book amounts acquired as the contract terms and performance obligations were consistent with the Company's application of the provisions of ASC Topic 606, Revenue from Contracts with Customers. All other assets acquired and liabilities were recorded at fair and recorded values.
Revenue recognized by the Company related to the operations of and identifiable expenses associated with the acquired business were immaterial for the three- and nine-month periods ended September 30, 2022.
Supplemental pro forma revenue and earnings information are not presented because the Company determined they were immaterial to the consolidated financial statements. The Company estimates that the difference between pro forma information compared to reported results would not be significant.
4. 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 |
|
|
Nine Months Ended |
|
||||||||||
Anti-Dilutive Common Share Equivalents |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Convertible senior notes |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Conversion of preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total anti-dilutive common share equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
||||
12
Basic and diluted net loss per common share is calculated as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Preferred dividends |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss attributable to common stockholders |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding, basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss per common share, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
5. Fair Value Measurement
The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to their short-term nature. The carrying value of the Company’s financing obligations 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:
|
|
September 30, 2022 |
|
|||||||||||||
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market mutual funds(1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Contingently returnable consideration(2) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
December 31, 2021 |
|
|||||||||||||
Description |
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Money market mutual funds(1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingently returnable consideration(2) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contingent consideration(2) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Total liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(1)
13
Assets Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3)
The following table presents information about the Company’s assets that are measured at fair value on a recurring basis using the above categories:
|
|
2022 |
|
|
|
Balance of contingently returnable consideration at January 1 |
|
$ |
|
|
|
Change in fair value |
|
|
|
|
|
Cash consideration transferred |
|
|
( |
) |
|
Balance of contingently returnable consideration at September 30 |
|
$ |
|
|
|
6. Marketable Securities
Marketable securities consist of corporate bonds, commercial paper and U.S. Treasury and agency bonds. There were
|
|
As of December 31, 2021 |
|
|||||||||||||||||||||
Sector |
|
Amortized cost |
|
|
Allowance for credit losses |
|
|
Net carrying amount |
|
|
Gross unrealized gains |
|
|
Gross unrealized losses |
|
|
Fair value |
|
||||||
Financial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
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 with 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.
7. Accounts Receivable, net
Accounts receivable, net include:
|
|
As of |
|
|
As of |
|
||
Accounts receivable |
|
$ |
|
|
$ |
|
||
Less: Allowance for credit losses |
|
|
( |
) |
|
|
( |
) |
Less: Allowance for returns |
|
|
( |
) |
|
|
( |
) |
Total accounts receivable, net |
|
$ |
|
|
$ |
|
||
Accounts receivable are stated at their amortized cost adjusted for any write-offs and 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 credit losses 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.
|
|
Nine Months Ended September 30, |
|
|||||
Allowance for credit losses |
|
2022 |
|
|
2021 |
|
||
Beginning of period |
|
$ |
|
|
$ |
|
||
Provision for credit losses |
|
|
|
|
|
|
||
Write-offs and recoveries |
|
|
( |
) |
|
|
( |
) |
End of period |
|
$ |
|
|
$ |
|
||
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.
14
8. Convertible Senior Notes
In December 2018, the Company issued $
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 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
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 $
As of September 30, 2022, 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
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 $
In August 2022, the Company repurchased Notes with an aggregate principal amount of $
15
of broker fees, that is presented separately in other income (expense) in the unaudited consolidated statements of operations and comprehensive loss.
In September 2021, the Company repurchased Notes with an aggregate principal amount of $
The Notes consist of the following:
|
|
As of |
|
|||||
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||
Liability component: |
|
|
|
|
|
|
||
Principal |
|
$ |
|
|
$ |
|
||
Less: Debt discount, net of amortization(1) |
|
|
( |
) |
|
|
( |
) |
Net carrying amount |
|
$ |
|
|
$ |
|
||
Equity component (prior to adoption of ASU 2020-06)(2) |
|
|
|
|
|
|
||
Remaining discount amortization period (in years) |
|
|
|
|
|
|
||
The following table sets forth total interest expense recognized related to the Notes:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
||||||||||
Interest expense |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
||||
1.25% coupon |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Amortization of debt discount and transaction costs(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
_________________
As of September 30, 2022, 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 prior to the adoption of ASU 2020-06 on January 1, 2022 as discussed in Note 2) were as follows:
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
||||||||||
|
|
Fair Value |
|
|
Carrying Value(1) |
|
|
Fair Value |
|
|
Carrying Value |
|
||||
Convertible senior notes |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 $
In connection with the repurchases of the Notes described above, the Company terminated a portion of the capped call transactions. This resulted an immaterial amount of cash payments to the Company during the three months ended September 30, 2022, which were recorded in additional paid-in capital. During the three months ended September 30, 2021, the Company received $
Based on the closing price of our common stock of $
16
9. Long-term Debt
The Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, joint lead arranger and sole bookrunner and Wells Fargo Securities, LLC and Regions Bank as joint lead arrangers on August 17, 2022 (the "Effective Date"). This Credit Agreement replaced the Company's previous credit facility with Silicon Valley Bank as discussed in Note 10. The four-year Credit Agreement includes (i) a $
Under the Term Facility, borrowings are available to be drawn prior to the 18th month anniversary of the Effective Date in up to three separate drawings of not less than $
The Company's obligations under the Credit Agreement are secured by a first priority lien (subject to certain permitted liens) in substantially all of the respective personal property assets of the Company and its subsidiaries.
Loans under the Revolving Credit Facility and Term Facility bear interest at a rate per annum determined by the Company's consolidated leverage ratio with a margin on Secured Overnight Financing Rate ("SOFR") priced loans ranging from
The Credit Agreement includes customary affirmative and negative covenants, including financial covenants requiring the Company to maintain a maximum consolidated total net leverage ratio and minimum debt service coverage ratio, and certain limitations on the incurrence of additional indebtedness and liens, as well as usual and customary events of default for credit facilities of this nature.
In August 2022, the Company borrowed $
As of September 30, 2022, the aggregate amount of the Term Facility principal payments was as follows:
|
|
Aggregate Principal Payment |
|
|
Years Ending December 31, |
|
|
|
|
2022 - remaining |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Total required principal payments |
|
$ |
|
|
10. 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 ("SVB Revolver"). The three-year facility had a borrowing limit of $
17
third quarter of 2022 and all related liens were released.
11. Commitments
Supplemental cash flow information related to the Company’s operating and finance leases was as follows:
|
|
Nine Months Ended September 30, |
|
|||||
Cash Paid for Amounts Included in the Measurement of Lease Liabilities |
|
2022 |
|
|
2021 |
|
||
Financing cash flows from finance leases |
|
$ |
|
|
$ |
|
||
Operating cash flows from finance leases |
|
$ |
|
|
$ |
|
||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
||
ROU Assets Obtained in Exchange for New Lease Obligations |
|
|
|
|
|
|
||
Finance lease liabilities |
|
$ |
|
|
$ |
|
||
As of September 30, 2022, the Company had no additional significant operating or finance leases that had not yet commenced.
In May 2022, the Company entered into a non-cancellable sublease agreement for a portion of its headquarters campus. The sublease term expires
In April 2021, the Company entered into a non-cancellable sublease agreement for a portion of its headquarters campus. The sublease term expires
12. Redeemable Preferred Stock
On June 4, 2020, the Company issued and sold
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 $
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 $
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 as 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
18
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
As long as not less than
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
The Buyer is subject to limitations while it holds at least
In the period of issuance, the Company incurred $
13. Stock-based Compensation
Restricted Stock Units
During the nine months ended September 30, 2022, the Company granted
The Company granted
14. 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.
Outstanding stock options |
|
|
|
|
Restricted stock units |
|
|
|
|
Available for future issuance under stock award plans |
|
|
|
|
Available for future issuance under ESPP |
|
|
|
|
Issuable upon conversion of Series A Preferred Stock |
|
|
|
|
Total common shares reserved for future issuance |
|
|
|
19
15. Revenue
Disaggregation of Revenue
The following table provide information about disaggregation of revenue by service line:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Service line: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Subscription |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Platform |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total software services |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Professional services |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 |
|
||
Nine Months Ended September 30, 2022 |
|
|
|
|
|
|
||
Contract assets |
|
$ |
|
|
$ |
|
||
Contract liabilities |
|
|
|
|
|
|
||
Deferred revenue |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
||
Contract assets |
|
$ |
|
|
$ |
|
||
Contract liabilities |
|
|
|
|
|
|
||
Deferred revenue |
|
$ |
|
|
$ |
|
||
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
During the three- and nine-month periods ended September 30, 2022, there were
Revenue recognized during the three- and nine-month periods ended September 30, 2022 that was included in the deferred revenue balance at the beginning of the period was $
During the three- and nine-month periods ended September 30, 2022, there were
Performance Obligations
As of September 30, 2022, the aggregate amount of the Company’s performance obligations that are unsatisfied or partially unsatisfied were approximately $
16. Income Taxes
The Company’s effective tax rate for the nine months ended September 30, 2022 was less than
17. Segments Information
The Company views its operations and manages its business as
20
18. Related Parties
Series A Preferred Stock
As described in Note 12, the Company sold
Expenses
During April 2022, the Company made a one-time reimbursement of $
19. Subsequent Events
Voya Merger Agreement
On November 1, 2022, the Company, Voya Financial, Inc., a Delaware corporation (“Voya”), and Origami Squirrel Acquisition Corp, a Delaware corporation and a wholly owned subsidiary of Voya (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Voya Merger Agreement”). Pursuant to the terms and subject to the conditions set forth in the Voya Merger Agreement, Voya will acquire all outstanding shares of the Company for $1
Support Agreements
On November 1, 2022, concurrently with the execution of the Voya Merger Agreement, Voya, Merger Sub and the Company entered into a Support Agreement (each, a “Support Agreement”) with each of BuildGroup, LLC (“BuildGroup”) and Indaba Capital Management, L.P. (“Indaba”) pursuant to which each of BuildGroup and Indaba agreed to, among other things, vote their shares of capital stock of the Company, which together represent approximately
21
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 related to Voya Financial, Inc.'s proposed acquisition of the Company; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements related to future economic conditions in the United States and the potential impact on our business; 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 as to industry trends; volatility and uncertainty in the global economy and financial markets in light of the evolving COVID-19 pandemic; 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.
22
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as amended for the fiscal year ended December 31, 2021. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings.
Overview
Benefitfocus is an industry-leading, cloud-based benefits administration technology company serving employers and health plans. We help organizations simplify the complexity of benefits administration while engaging people in the right healthcare and benefit programs for them and their families. We also deliver insights to employers, health plans and their advisors to help maximize returns on their healthcare investment; and our services help reduce administrative burden and costs for organizations.
Benefitfocus solutions are based on a multi-tenant architecture and have a user-friendly interface designed for people to access all of their benefits in one place. Our comprehensive one-to-many model supports a broad line-up of benefits including core medical benefit plans; ancillary benefits, such as, dental, life, disability insurance, mental health and financial wellness; and a broad array of voluntary benefits. Our platform includes functionality designed to help consumers identify and evaluate benefit options available to them. We believe that as the number of employer benefits plans has increased, with each plan subject to many different business rules and requirements, demand for Benefitfocus solutions is growing.
Our economic model includes a transaction-oriented solution, known as our Benefit Catalog, that aligns brokers, carriers and suppliers around the needs of employers and employees. In this model, Benefit Catalog sellers, who are carriers and suppliers, offer their voluntary and specialty benefit products in a “marketplace” alongside the benefits enrollment platform. This marketplace is designed to increase the economic value of the employee and consumer lives on our platform by aligning Benefit Catalog products to consumer needs. In exchange for Benefitfocus delivering employee/consumer access, data-driven analysis and operational efficiencies, seller partners pay us a percentage of the purchases completed on our platform. Carrier agreements generally have terms of two to four years and are typically cancellable upon breach of contract or insolvency. Supplier contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to cure, bankruptcy and termination for convenience.
We classify our revenue into three streams – subscription, platform, and professional services revenue. Subscription and platform revenue are combined and reported as software services revenue.
Subscription revenue primarily consists of monthly subscription fees paid to us by our employer and health plan customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Subscription fees are generally charged based on the number of employees or subscribers with access to the solution. Subscription revenue accounted for approximately 73% and 72% of our total revenue during the three-month period ended September 30, 2022 and 2021, respectively, and approximately 73% and 72% of our total revenue during the nine-month period ended September 30, 2022 and 2021, respectively.
Platform revenue includes Benefit Catalog transactional revenue, which is generated from the value of the policies or products enrolled in through our marketplace. Benefit Catalog revenue from insured products is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog supplier transactions is generally recognized at the time when open enrollment is complete and the orders for policies are transferred to the supplier. Platform revenue accounted for approximately 10% of our total revenue during each of the three-month periods ended September 30, 2022 and 2021, and approximately 11% of our total revenue during each of the nine-month periods ended September 30, 2022 and 2021.
Our professional services revenue stream is largely derived from the implementation of our customers onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and training. We also provide customer support services and customized media content that supports our customers’ effort to educate and communicate with consumers. Professional services revenue accounted for approximately 17% and 18% of our total revenue during the three-month period ended September 30, 2022 and 2021, respectively, and approximately 17% and 18% of our total revenue during the nine-month period ended September 30, 2022 and 2021, respectively.
We believe there is a substantial addressable market for our products and services, and we have been investing to further enhance and expand our products over the past several years. We believe that our continued innovation and solutions, which extend the functionality of our offerings, provide more robust data analytics capabilities and enhance our ability to quickly respond to evolving market needs. We believe these innovative capabilities, as well as strong customer service, will help us attract and retain new customers, partners and brokers and increase our revenue from existing customers and relationships. Through our considerable domain expertise, a best-in-class experience, as well as continued innovation on our platform, we believe we will drive better customer retention. We are committed to strengthening our core, growing with intent and increasing our operational efficiencies to deliver exceptional value to our customers and shareholders.
23
As we have invested in growth, we have had operating losses in each of the last eleven years. Although our operating results have improved, we could incur operating losses in future periods. Due to the nature of our customer relationships, which have been stable in spite of some customer losses over the past years, and our hybrid subscription and transaction-based financial model, we believe that our current investment in growth should lead to increased revenue in the long-term, which may allow us to achieve profitability in the relatively near future. Of course, our ability to achieve profitability will continue to be subject to many factors beyond our control.
The primary impact of the COVID-19 pandemic on our business and financial results were longer sales cycles and slowdown in new sales activity in 2020 and 2021, which negatively impacted growth in subscription revenue and platform revenue from new business which is impacting our topline revenue in 2022. While demand from our health plan customers has not returned to pre-pandemic levels, noting health plan administrators redirected focus and resources to competing priorities, we are beginning to see a return in demand from our health plan customers. The trailing impacts of the pandemic on the broader U.S. labor market has resulted in higher seasonal contract labor costs. Additionally, we are continuing to monitor U.S. economic recession risk as an indicator for future impacts on the labor market, which could impact our current customers’ levels of enrollment, as well as future bookings; however, we do not see signs that our customers and prospects have yet been impacted.
However, as a result of the nature of our customer relationships, the stability of our subscription revenue, the cost restructuring actions taken and our ongoing investments in automation and process improvements, we believe we will continue to generate cash flows from operations on an annual basis although there will be fluctuations from quarter to quarter. Of course, our ability to generate cash flows from operations is subject to many risks and factors beyond our control.
Recent Developments
On November 1, 2022, the Company, Voya Financial, Inc., a Delaware corporation (“Voya”), and Origami Squirrel Acquisition Corp, a Delaware corporation and a wholly owned subsidiary of Voya (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Voya Merger Agreement”). Pursuant to the terms and subject to the conditions set forth in the Voya Merger Agreement, Voya will acquire all outstanding shares of the Company for $10.50 per share of common stock in cash, and Merger Sub will merge with and into the Company (the “Voya Merger”), with the Company surviving the Voya Merger as a wholly owned subsidiary of Voya. Each share of our preferred stock issued and outstanding immediately prior to the effective time of the Voya Merger will be converted into the right to receive an amount of cash equal to the Convertible Preferred Liquidation Amount (as such term is defined in the Voya Merger Agreement). The Voya Merger Agreement and the Voya Merger has been unanimously approved by our Board of Directors. The Voya Merger is expected to close in the first quarter of 2023, subject to, among other things, the receipt of approval of the Company’s stockholders and customary closing conditions.
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and project our future performance. These metrics help us develop and refine our growth strategies and make strategic decisions. We discuss revenue, gross margin, and the components of operating loss in “Components of Operating Results” below. In addition, we utilize other key metrics as described below.
Adjusted EBITDA
Adjusted EBITDA represents our losses before net interest, taxes, and depreciation and amortization expense, adjusted to eliminate stock-based compensation; transaction and acquisition-related costs expensed; restructuring costs; impairment of goodwill, intangible assets and long-lived assets; gain or loss on extinguishment of debt; other costs not core to our business; loss on settlement of lawsuits; and, changes in fair value of contingently returnable consideration. Please note that other companies might define their non-GAAP financial measures differently than we do.
We have included adjusted EBITDA in this report because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results.
However, adjusted EBITDA is not a measure calculated in accordance with United States generally accepted accounting principles (“GAAP”), and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP. Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:
24
Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss and our other GAAP financial results. The following table presents for each of the periods indicated a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure, net loss (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Reconciliation from Net Loss to Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss |
|
$ |
(6,986 |
) |
|
$ |
(18,054 |
) |
|
$ |
(21,427 |
) |
|
$ |
(35,171 |
) |
Depreciation |
|
|
2,958 |
|
|
|
3,615 |
|
|
|
9,456 |
|
|
|
10,682 |
|
Amortization of software development costs |
|
|
2,462 |
|
|
|
2,268 |
|
|
|
7,280 |
|
|
|
6,589 |
|
Amortization of acquired intangible assets |
|
|
1,073 |
|
|
|
568 |
|
|
|
3,219 |
|
|
|
1,705 |
|
Interest income |
|
|
(223 |
) |
|
|
(52 |
) |
|
|
(307 |
) |
|
|
(163 |
) |
Interest expense |
|
|
2,918 |
|
|
|
5,556 |
|
|
|
7,876 |
|
|
|
16,757 |
|
Income tax expense |
|
|
49 |
|
|
|
42 |
|
|
|
94 |
|
|
|
125 |
|
Stock-based compensation expense |
|
|
4,218 |
|
|
|
4,595 |
|
|
|
10,722 |
|
|
|
10,494 |
|
Transaction and acquisition-related costs expensed |
|
|
19 |
|
|
|
80 |
|
|
|
115 |
|
|
|
240 |
|
Impairment of lease right-of-use assets |
|
|
- |
|
|
|
- |
|
|
|
1,769 |
|
|
|
4,003 |
|
Change in fair value of contingently returnable consideration |
|
|
- |
|
|
|
- |
|
|
|
(719 |
) |
|
|
- |
|
Restructuring costs |
|
|
- |
|
|
|
- |
|
|
|
1,006 |
|
|
|
4,127 |
|
(Gain) loss on repurchase of convertible senior notes |
|
|
(1,930 |
) |
|
|
7,520 |
|
|
|
(1,930 |
) |
|
|
7,520 |
|
Costs not core to our business |
|
|
1,171 |
|
|
|
542 |
|
|
|
5,926 |
|
|
|
4,140 |
|
Total net adjustments |
|
|
12,715 |
|
|
|
24,734 |
|
|
|
44,507 |
|
|
|
66,219 |
|
Adjusted EBITDA |
|
$ |
5,729 |
|
|
$ |
6,680 |
|
|
$ |
23,080 |
|
|
$ |
31,048 |
|
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us over time is an important component of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on this basis using a metric we refer to as our software services revenue retention rate. We calculate this metric for a particular period by establishing the group of our customers that had revenue for a given period. We then calculate our software services revenue retention rate by taking the amount of software services revenue we recognized for this group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the software services revenue we recognized for the group in the prior period.
Our software services revenue retention rate was approximately 88% and 90% for the three- and nine-month periods ended September 30, 2022, and greater than 95% for each of the three- and nine-month periods ended September 30, 2021. The lower retention rate in 2022 is primarily due to certain health plan customers’ reduction in scope of their engagements with us in the fourth quarter of 2021, which is driving year-over-year revenue decline. Excluding these certain health plan customers, our software revenue retention rate exceeded 93% for the three-month period ended September 30, 2022 and was approximately 95% for the nine-month period ended September 30, 2022. We expect our software revenue retention rate for the full year to return to at or near historical rates.
Contracted Annual Recurring Revenue
Contracted Annual Recurring Revenue (“ARR”) is an indicator of the future trajectory of our recurring revenue. We define Contracted ARR as the annual recurring revenue value under contract with our customers. This is typically the per member or employee recurring fee for use of our products to both Employer and Health Plans and the subscription fees for recurring Professional Services such as our call center. ARR from new customer contracts are included at the time of execution of the contract and ARR from terminated customers are deducted at the time of contract termination. The decline in Contracted ARR at September 30, 2022 as compared to the prior period is due to certain health plan customers’ reduction in scope of their engagements with us.
|
|
As of September 30, |
|
|
|||||
|
|
2022 |
|
|
2021 |
|
|
||
|
|
(in millions) |
|
|
|||||
Contracted Annual Recurring Revenue |
|
|
198.8 |
|
|
|
213.9 |
|
|
25
Net Benefit Eligible Lives
Part of our growth strategy is to expand our customer base. This includes driving revenue growth from adding lives to our platform and driving incremental transaction revenue. We believe the number of net benefit eligible lives is a key indicator of our market penetration and future revenue opportunity. We define a net benefit eligible life as a person with access to a benefits enrollment subscription under standard contracting or a freelancer with access to benefits enrollment, plus their estimated dependents, as of the measurement date. This definition excludes lives from other subscription-related contracts.
The decrease in net benefit eligible lives at September 30, 2022 as compared to the prior period is primarily the result of a decline in lives on our platform from certain health plan customers as a result of lowered counts at the time of renewal in 2021.
|
|
As of September 30, |
|
||
|
|
2022 |
|
2021 |
|
|
|
(in millions) |
|
||
Net benefit eligible lives |
|
15.1 |
|
16.0 |
|
Components of Operating Results
Revenue
We derive the majority of our revenue from monthly subscription fees paid to us by our employer and health plan customers for access to, and usage of, our cloud-based benefits software solutions for a specified contract term. We derive platform revenue from both insurance broker commissions from the sale of voluntary and ancillary benefits policies to employees of our customers and from transaction revenue from life and ancillary insurance carriers and specialty providers. We also derive revenue from professional services fees, which primarily include fees related to the implementation of our customers onto our platform and delivery of our call center services. Our implementation services typically include discovery, configuration and deployment, integration, testing, and training.
The following table sets forth a breakdown of our revenue by stream for the periods indicated (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Subscription |
|
$ |
41,248 |
|
|
$ |
44,790 |
|
|
$ |
126,320 |
|
|
$ |
134,716 |
|
Platform |
|
|
5,643 |
|
|
|
6,157 |
|
|
|
18,786 |
|
|
|
19,801 |
|
Total software services |
|
$ |
46,891 |
|
|
$ |
50,947 |
|
|
$ |
145,106 |
|
|
$ |
154,517 |
|
Professional services |
|
|
9,299 |
|
|
|
11,079 |
|
|
|
28,896 |
|
|
|
33,476 |
|
Total revenue |
|
$ |
56,190 |
|
|
$ |
62,026 |
|
|
$ |
174,002 |
|
|
$ |
187,993 |
|
We recognize revenue when control of these services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenues.
We determine revenue recognition through the following steps:
Software Services Revenue
Software services revenue consists of subscription and platform revenue.
Subscription Revenue
Subscription revenue primarily consists of monthly subscription fees paid to us by our 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 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. Our initial subscription service contracts are generally three years.
Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.
26
Platform Revenue
Platform revenue is generated from the value of the policies or products enrolled in through our marketplace. Platform revenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog supplier transactions is recognized at the point 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 Revenues
Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers. Implementation services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services, call center services, support services and training are also included in professional services revenue.
We determined that implementation services for certain of our health plan 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 health plan customers are generally recognized over the contract term of the associated software services contract, including any extension periods representing a material right.
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 contract period.
We utilize estimates of hours as a measure of progress to determine revenue for certain types of arrangements.
Contracts with Multiple Performance Obligations
Certain of our contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The transaction price is allocated to the separate performance obligations based on their relative standalone selling prices. We determine the standalone selling prices based on their overall pricing objectives, taking into consideration market conditions and other factors, including the value of their contracts, the software services sold, customer size and complexity, and the number and types of users within the contracts.
Overhead Allocation
Expenses associated with our facilities, security, information technology, and depreciation and amortization, are allocated between cost of revenue and operating expenses based on employee headcount determined by the nature of work performed.
Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing services to our customers and supporting our software platform infrastructure. Additional expenses in cost of revenue include co-location facility costs for our data centers, depreciation expense for computer equipment directly associated with generating revenue, infrastructure maintenance costs, contract labor, professional fees, amortization expenses associated with acquired intangibles and capitalized internally developed software costs, allocated overhead, and other direct costs.
We expense cost of revenue associated with fulfilling performance obligations as we incur the costs. Costs that relate directly to a customer contract that are not related to satisfying a performance obligation are capitalized and amortized to cost of revenue over the estimated period of benefit of the contract asset, which is generally five years.
Subscription and platform revenue are both generated from our platform and result from the same set of assets and activities. As such, we are not able to meaningfully separate and assign costs of revenue to subscription and platform revenue separately.
We expect cost of revenue as a percentage of revenue to decline and gross margins to increase as we realize the full impact of our restructuring activities and increased automation. However, this trend may vary on a quarterly basis.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, general and administrative, and restructuring expenses. Salaries and personnel-related costs are the most significant component of each of these expense categories. We expect our operating expenses as a percentage of revenue for 2022 to be near levels realized for 2021. As we continue to invest in our product offerings and see the impacts going forward of our rationalization decisions that we have put in place, we expect to see an overall improvement in our operating expense.
Sales and marketing expense. Sales and marketing expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, stock-based compensation and commissions, for our sales and marketing associates. Costs to obtain a contract that are incremental, such as sales commissions, are capitalized and amortized to expense over the estimated period of benefit of the asset, which is generally four to five years. Additional expenses include advertising, lead generation, promotional event programs, corporate communications, travel, and allocated overhead.
27
Research and development expense. Research and development expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses and stock-based compensation, for our research and development associates. Additional expenses include costs related to the development, quality assurance, and testing of new technology, and enhancement of our existing platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position. We are investing in transforming our development philosophy and practices to that of an agile development organization. We have increased the frequency of new product releases to monthly from quarterly to deliver customer value every month consistently throughout the year. We believe this will allow us to more quickly innovate and adapt to changing market conditions and customer needs.
General and administrative expense. General and administrative expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for administrative, finance and accounting, information systems, legal, and human resource associates. Additional expenses include consulting and professional fees, insurance and other corporate expenses, and travel. We expect our general and administrative expenses to be flat to down despite continued professional services expenses in connection with activist shareholder matters.
Impairment of lease right-of-use assets. Impairment of lease right-of-use assets consists of adjustments to the asset value created by the difference in discounted cash inflows and outflows as described in Note 11 to the financial statements included in this report. During the nine months ended September 30, 2022 and 2021, we recorded impairments related to our sublease agreements for portions of our buildings on our headquarters campus driven by unfavorable market conditions which reduced demand for office space and thus impacted the amount we were able to sublease the space for.
Change in fair value of contingently returnable consideration. Change in fair value of contingently returnable consideration consists of adjustments for assets measured at fair value on a recurring basis using significant unobservable inputs, adjusted for management expectations as the time to settle becomes realizable, as described in Note 5 to the financial statements included in this report. During the three- and nine-month periods ended September 30, 2022, and 2021, we recorded a fair value adjustment related to our acquisition of Tango Health as described in Note 3 to the financial statements included in Part I, Item 1 this report.
Restructuring costs. Restructuring costs are comprised of one-time severance charges, continuation of health benefits and outplacement services. During the nine months ended September 30, 2022, and 2021, we incurred restructuring costs associated with eliminating certain positions in the organization.
Other Income and Expense
Other income and expense consists primarily of interest income and expense, sublease income and gain (loss) on disposal of property and equipment. Interest income represents interest received on our cash and cash equivalents. Interest expense consists of the interest incurred on outstanding convertible debt and lease arrangements.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes. We incurred minimal income tax expense for the three- and nine-month periods ended September 30, 2022 and 2021.
28
Results of Operations
Consolidated Statements of Operations Data
The following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Revenue |
|
$ |
56,190 |
|
|
$ |
62,026 |
|
|
$ |
174,002 |
|
|
$ |
187,993 |
|
Cost of revenue(1) |
|
|
29,864 |
|
|
|
31,247 |
|
|
|
88,845 |
|
|
|
87,870 |
|
Gross profit |
|
|
26,326 |
|
|
|
30,779 |
|
|
|
85,157 |
|
|
|
100,123 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing(1) |
|
|
10,029 |
|
|
|
12,669 |
|
|
|
30,596 |
|
|
|
34,481 |
|
Research and development(1) |
|
|
12,376 |
|
|
|
11,062 |
|
|
|
35,782 |
|
|
|
32,997 |
|
General and administrative(1) |
|
|
10,455 |
|
|
|
12,156 |
|
|
|
33,261 |
|
|
|
35,589 |
|
Impairment of lease right-of-use assets |
|
|
– |
|
|
|
– |
|
|
|
1,769 |
|
|
|
4,003 |
|
Change in fair value of contingently returnable consideration |
|
|
– |
|
|
|
– |
|
|
|
(719 |
) |
|
|
– |
|
Restructuring costs |
|
|
– |
|
|
|
– |
|
|
|
1,006 |
|
|
|
4,127 |
|
Total operating expenses |
|
|
32,860 |
|
|
|
35,887 |
|
|
|
101,695 |
|
|
|
111,197 |
|
Loss from operations |
|
|
(6,534 |
) |
|
|
(5,108 |
) |
|
|
(16,538 |
) |
|
|
(11,074 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
223 |
|
|
|
52 |
|
|
|
307 |
|
|
|
163 |
|
Interest expense |
|
|
(2,918 |
) |
|
|
(5,556 |
) |
|
|
(7,876 |
) |
|
|
(16,757 |
) |
Gain (loss) on repurchase of convertible senior notes |
|
|
1,930 |
|
|
|
(7,520 |
) |
|
|
1,930 |
|
|
|
(7,520 |
) |
Other income |
|
|
362 |
|
|
|
120 |
|
|
|
844 |
|
|
|
142 |
|
Total other expense, net |
|
|
(403 |
) |
|
|
(12,904 |
) |
|
|
(4,795 |
) |
|
|
(23,972 |
) |
Loss before income taxes |
|
|
(6,937 |
) |
|
|
(18,012 |
) |
|
|
(21,333 |
) |
|
|
(35,046 |
) |
Income tax expense |
|
|
49 |
|
|
|
42 |
|
|
|
94 |
|
|
|
125 |
|
Net loss |
|
$ |
(6,986 |
) |
|
$ |
(18,054 |
) |
|
$ |
(21,427 |
) |
|
$ |
(35,171 |
) |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Cost of revenue |
|
$ |
648 |
|
|
$ |
511 |
|
|
$ |
1,852 |
|
|
$ |
1,475 |
|
Sales and marketing |
|
|
916 |
|
|
|
963 |
|
|
|
2,662 |
|
|
|
2,470 |
|
Research and development |
|
|
752 |
|
|
|
589 |
|
|
|
1,766 |
|
|
|
1,210 |
|
General and administrative |
|
|
1,902 |
|
|
|
2,532 |
|
|
|
4,442 |
|
|
|
5,339 |
|
29
The following table sets forth our consolidated statements of operations data for each of the periods indicated (as a percentage of revenue(1)):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
||||
Revenue |
|
|
100.0 |
|
% |
|
100.0 |
|
% |
|
100.0 |
|
% |
|
100.0 |
|
% |
Cost of revenue |
|
|
53.1 |
|
|
|
50.4 |
|
|
|
51.1 |
|
|
|
46.7 |
|
|
Gross profit |
|
|
46.9 |
|
|
|
49.6 |
|
|
|
48.9 |
|
|
|
53.3 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
17.8 |
|
|
|
20.4 |
|
|
|
17.6 |
|
|
|
18.3 |
|
|
Research and development |
|
|
22.0 |
|
|
|
17.8 |
|
|
|
20.6 |
|
|
|
17.6 |
|
|
General and administrative |
|
|
18.6 |
|
|
|
19.6 |
|
|
|
19.1 |
|
|
|
18.9 |
|
|
Impairment of lease right-of-use assets |
|
|
- |
|
|
|
- |
|
|
|
1.0 |
|
|
|
2.1 |
|
|
Change in fair value of contingently returnable consideration |
|
|
- |
|
|
|
- |
|
|
|
(0.4 |
) |
|
|
- |
|
|
Restructuring costs |
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
|
|
2.2 |
|
|
Total operating expenses |
|
|
58.5 |
|
|
|
57.9 |
|
|
|
58.4 |
|
|
|
59.1 |
|
|
Loss from operations |
|
|
(11.6 |
) |
|
|
(8.2 |
) |
|
|
(9.5 |
) |
|
|
(5.9 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest income |
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
Interest expense |
|
|
(5.2 |
) |
|
|
(9.0 |
) |
|
|
(4.5 |
) |
|
|
(8.9 |
) |
|
Gain (loss) on repurchase of convertible senior notes |
|
|
3.4 |
|
|
|
(12.1 |
) |
|
|
1.1 |
|
|
|
(4.0 |
) |
|
Other income |
|
|
0.6 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
Total other expense, net |
|
|
(0.7 |
) |
|
|
(20.8 |
) |
|
|
(2.8 |
) |
|
|
(12.8 |
) |
|
Loss before income taxes |
|
|
(12.3 |
) |
|
|
(29.0 |
) |
|
|
(12.3 |
) |
|
|
(18.6 |
) |
|
Income tax expense |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
Net loss |
|
|
(12.4 |
) |
% |
|
(29.1 |
) |
% |
|
(12.3 |
) |
% |
|
(18.7 |
) |
% |
Comparison of Three Months Ended September 30, 2022 and 2021
Revenue
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue(1) |
|
|
|
Amount |
|
|
Revenue(1) |
|
|
|
Amount |
|
|
Percentage(1) |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Subscription |
|
$ |
41,248 |
|
|
|
73.4 |
|
% |
|
$ |
44,790 |
|
|
|
72.2 |
|
% |
|
$ |
(3,542 |
) |
|
|
(7.9 |
) |
% |
|
Platform |
|
|
5,643 |
|
|
|
10.0 |
|
|
|
|
6,157 |
|
|
|
9.9 |
|
|
|
|
(514 |
) |
|
|
(8.3 |
) |
|
|
Total software services |
|
$ |
46,891 |
|
|
|
83.5 |
|
% |
|
$ |
50,947 |
|
|
|
82.1 |
|
% |
|
$ |
(4,056 |
) |
|
|
(8.0 |
) |
% |
|
Professional services |
|
|
9,299 |
|
|
|
16.5 |
|
|
|
|
11,079 |
|
|
|
17.9 |
|
|
|
|
(1,780 |
) |
|
|
(16.1 |
) |
|
|
Total revenue |
|
$ |
56,190 |
|
|
|
100.0 |
|
% |
|
$ |
62,026 |
|
|
|
100.0 |
|
% |
|
$ |
(5,836 |
) |
|
|
(9.4 |
) |
% |
|
Subscription revenue declined $3.5 million year-over-year primarily driven by attrition with certain health plan customers who reduced the scope of their engagement with us, partially offset by revenue from Tango Health contracts.
Platform revenue decreased $0.5 million, primarily driven by true-ups to platform revenue in the prior year.
Professional services revenue decreased $1.8 million, primarily due to ongoing customer projects being delivered later in the year and continued lower levels of demand from custom requests from health plan customers.
Cost of Revenue
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Percentage |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Cost of revenue |
|
$ |
29,864 |
|
|
|
53.1 |
|
% |
|
$ |
31,247 |
|
|
|
50.4 |
|
% |
|
$ |
(1,383 |
) |
|
|
(4.4 |
) |
% |
|
30
The decrease in cost of revenue was primarily attributable to a reduction in contractor utilization of $0.5 million and costs driven by a reduction in headcount of $0.5 million. Cost of revenue included $0.6 million and $0.5 million of stock-based compensation expense for the three months ended September 30, 2022 and 2021, respectively, and $4.8 million and $5.0 million of depreciation and amortization for the three months ended September 30, 2022 and 2021, respectively.
Gross Profit
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Percentage |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Software services |
|
$ |
28,819 |
|
|
|
61.5 |
|
% |
|
$ |
32,163 |
|
|
|
63.1 |
|
% |
|
$ |
(3,344 |
) |
|
|
(10.4 |
) |
% |
|
Professional services |
|
|
(2,493 |
) |
|
|
(26.8 |
) |
|
|
|
(1,384 |
) |
|
|
(12.5 |
) |
|
|
|
(1,109 |
) |
|
|
(80.1 |
) |
|
|
Gross profit |
|
$ |
26,326 |
|
|
|
46.9 |
|
|
|
$ |
30,779 |
|
|
|
49.6 |
|
|
|
$ |
(4,453 |
) |
|
|
(14.5 |
) |
% |
|
The decrease in software services gross profit was driven by a $4.1 million, or 8.0% decrease in software services revenue driven by lower levels of revenue from new customers and partially offset by a decrease in cost of revenue. The decrease in the software services cost of revenue was primarily driven by decreases in product and computer infrastructure costs. Software services cost of revenue included $0.4 million and $0.3 million of stock-based compensation expense for the three-month periods ended September 30, 2022 and 2021, respectively, and $4.1 million and $4.2 million of depreciation and amortization for the three-month periods ended September 30, 2022 and 2021, respectively.
The decrease in professional services gross profit was driven by a $1.8 million, or 16.1% decrease in professional services revenue and a decrease in professional services cost of revenue of $0.7 million. The decrease in professional services cost of revenue is primarily attributable to a $0.5 million decrease in salary and personnel-related costs. Professional services cost of revenue included approximately $0.2 million of stock-based compensation expense for each of the three months ended September 30, 2022 and 2021. In addition, professional services cost of revenue included $0.7 and $0.8 million of depreciation and amortization for the three-month periods ended September 30, 2022 and 2021, respectively.
Operating Expenses
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Percentage |
|
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Sales and marketing |
|
$ |
10,029 |
|
|
|
17.8 |
|
% |
|
$ |
12,669 |
|
|
|
20.4 |
|
% |
|
$ |
(2,640 |
) |
|
|
(20.8 |
) |
% |
|
|
Research and development |
|
|
12,376 |
|
|
|
22.0 |
|
|
|
|
11,062 |
|
|
|
17.8 |
|
|
|
|
1,314 |
|
|
|
11.9 |
|
|
|
|
General and administrative |
|
|
10,455 |
|
|
|
18.6 |
|
|
|
|
12,156 |
|
|
|
19.6 |
|
|
|
|
(1,701 |
) |
|
|
(14.0 |
) |
|
|
|
The decrease in sales and marketing expense was primarily attributable to a $1.5 million decrease in commissions and sales incentives driven by lower revenue and delays in bookings, a $0.9 million decrease in salary and personnel-related costs, and a $0.1 million decrease in professional fees.
The increase in research and development expense was attributable to a $0.6 million increase in third-party software costs, a $0.3 million increase in depreciation and amortization expense, and a $0.7 million increase in salary and personnel-related costs, partially offset by a $0.3 million decrease in contract labor.
The decrease in general and administrative expense was primarily attributable to a $1.0 million decrease in professional fees related to costs incurred associated with securities class action and executive employment agreement legal defense, a $1.9 million decrease in salary and personnel-related costs, partially offset by a $1.1 million increase in costs incurred associated with activist shareholder matters, $0.1 million in contract labor, and $0.2 million for third-party software costs.
31
Comparison of Nine Months Ended September 30, 2022 and 2021
Revenue
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|||||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue(1) |
|
|
|
Amount |
|
|
Revenue(1) |
|
|
|
Amount |
|
|
Percentage(1) |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Subscription |
|
$ |
126,320 |
|
|
|
72.6 |
|
% |
|
$ |
134,716 |
|
|
|
71.7 |
|
% |
|
$ |
(8,396 |
) |
|
|
(6.2 |
) |
% |
|
Platform |
|
|
18,786 |
|
|
|
10.8 |
|
|
|
|
19,801 |
|
|
|
10.5 |
|
|
|
|
(1,015 |
) |
|
|
(5.1 |
) |
|
|
Total software services |
|
$ |
145,106 |
|
|
|
83.4 |
|
% |
|
$ |
154,517 |
|
|
|
82.2 |
|
% |
|
$ |
(9,411 |
) |
|
|
(6.1 |
) |
% |
|
Professional services |
|
|
28,896 |
|
|
|
16.6 |
|
|
|
|
33,476 |
|
|
|
17.8 |
|
|
|
|
(4,580 |
) |
|
|
(13.7 |
) |
|
|
Total revenue |
|
$ |
174,002 |
|
|
|
100.0 |
|
% |
|
$ |
187,993 |
|
|
|
100.0 |
|
% |
|
$ |
(13,991 |
) |
|
|
(7.4 |
) |
% |
|
Subscription revenue declined $8.4 million year-over-year primarily driven by attrition with certain health plan customers who reduced the scope of their engagement with us, partially offset by revenue from Tango Health contracts.
Platform revenue decreased $1.0 million, primarily driven by accelerated true-ups to platform revenue in the first quarter of 2021, that generally take place later in the year.
Professional services revenue decreased $4.6 million, primarily due to continued lower levels of demand from custom requests from health plan customers.
Cost of Revenue
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Percentage |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Cost of revenue |
|
$ |
88,845 |
|
|
|
51.1 |
|
% |
|
$ |
87,870 |
|
|
|
46.7 |
|
% |
|
$ |
975 |
|
|
|
1.1 |
|
% |
|
The increase in cost of revenue was primarily attributable to increased professional fees of $0.4 million, a $0.7 million increase in salary and personnel-related costs primarily due to costs associated with Tango Health, as well as $0.4 million increase in stock-based compensation expense. Cost of revenue included $1.9 million and $1.5 million of stock-based compensation expense for the nine- months ended September 30, 2022 and 2021, respectively and $14.7 million of depreciation and amortization for the each of the nine- months ended September 30, 2022 and 2021, respectively.
Gross Profit
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Percentage |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Software services |
|
$ |
90,400 |
|
|
|
62.3 |
|
% |
|
$ |
100,245 |
|
|
|
64.9 |
|
% |
|
$ |
(9,845 |
) |
|
|
(9.8 |
) |
% |
|
Professional services |
|
|
(5,243 |
) |
|
|
(18.1 |
) |
|
|
|
(122 |
) |
|
|
(0.4 |
) |
|
|
|
(5,121 |
) |
|
|
4197.5 |
|
|
|
Gross profit |
|
$ |
85,157 |
|
|
|
48.9 |
|
|
|
$ |
100,123 |
|
|
|
53.3 |
|
|
|
$ |
(14,966 |
) |
|
|
(14.9 |
) |
|
|
The decrease in software services gross profit was driven by a $9.4 million, or 6.1% decrease in software services revenue and by an increase in cost of revenue of $0.4 million. The increase in the software services cost of revenue was driven by increases in labor costs and Tango Health. Software services cost of revenue included $1.1 million and $0.8 million of stock-based compensation expense for the nine months ended September 30, 2022 and 2021, respectively, and $12.5 million and $12.4 million of depreciation and amortization for the nine months ended September 30, 2022 and 2021, respectively.
The decrease in professional services gross profit was driven by a $4.6 million, or 13.7% decrease in professional services revenue and an increase in professional services cost of revenue of $0.5 million. The increase in professional services cost of revenue is primarily attributable to a $0.5 million increase in ACA fulfillment expenses. Professional services cost of revenue included approximately $0.8 million and $0.7 million of stock-based compensation expense for the nine months ended September 30, 2022 and 2021, respectively. In addition, professional services cost of revenue included $2.2 million and $2.3 million of depreciation and amortization in the nine-month periods ended September 30, 2022 and 2021, respectively.
32
Operating Expenses
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
|
2022 |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
Percentage of |
|
|
|
|
|
|
Percentage of |
|
|
|
Period-to-Period Change |
|
|
|
|||||||||
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Revenue |
|
|
|
Amount |
|
|
Percentage |
|
|
|
||||||
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
Sales and marketing |
|
$ |
30,596 |
|
|
|
17.6 |
|
% |
|
$ |
34,481 |
|
|
|
18.3 |
|
% |
|
$ |
(3,885 |
) |
|
|
(11.3 |
) |
% |
|
Research and development |
|
|
35,782 |
|
|
|
20.6 |
|
|
|
|
32,997 |
|
|
|
17.6 |
|
|
|
|
2,785 |
|
|
|
8.4 |
|
|
|
General and administrative |
|
|
33,261 |
|
|
|
19.1 |
|
|
|
|
35,589 |
|
|
|
18.9 |
|
|
|
|
(2,328 |
) |
|
|
(6.5 |
) |
|
|
Impairment of lease right-of-use assets |
|
|
1,769 |
|
|
|
1.0 |
|
|
|
|
4,003 |
|
|
|
2.1 |
|
|
|
|
(2,234 |
) |
|
|
(55.8 |
) |
|
|
Change in fair value of contingently returnable consideration |
|
|
(719 |
) |
|
|
(0.4 |
) |
|
|
|
- |
|
|
|
0.0 |
|
|
|
|
(719 |
) |
|
|
(100.0 |
) |
|
|
Restructuring costs |
|
|
1,006 |
|
|
|
0.6 |
|
|
|
|
4,127 |
|
|
|
2.2 |
|
|
|
|
(3,121 |
) |
|
|
(75.6 |
) |
|
|
The $3.9 million decrease in sales and marketing expense was primarily attributable to decreases in commissions and sales incentives as a result of delays in bookings.
Research and development expense increased $2.8 million primarily due to a $1.6 million increase in third-party software costs, $1.0 million increase in salary and personnel-related costs, and a $1.0 million increase in depreciation and amortization expense, partially offset by a $0.6 million decrease in contract labor usage.
The decrease in general and administrative expense was primarily attributable to a $4.3 million decrease in professional fees related to costs incurred associated with securities class action and executive employment agreement legal defense and a $1.6 million decrease in salary and personnel-related costs and contract labor, partially offset by a $2.2 million increase in costs incurred associated with activist shareholder matters, as well as an increase of $1.1 million related to insurance and third-party software costs.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances. Actual results might differ from these estimates under different assumptions or conditions.
During the nine months ended September 30, 2022, there were no material changes to our accounting policies that are critical to the process of making significant judgements and estimates in the preparation of our consolidated financial statements, which are disclosed in our Annual Report on Form 10-K, as amended for the year ended December 31, 2021 except for convertible debt accounting, which changed in connection with the adoption of Accounting Standards Update (“ASU”) 2020-06 on January 1, 2022 described under the heading “Recently Adopted Accounting Standards” at the end of Note 2 to the financial statements included in Part I, Item 1 in this report.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2022, our primary sources of liquidity were our cash and cash equivalents totaling $55.1 million, $27.6 million in accounts receivables, net of allowances, the remaining $15.0 million of our Revolving Credit Facility, and $13.0 million of our Term Facility, the terms of which are described in Note 9 to the financial statements included in Part I, Item 1 in this report.
Cash flow from operations may fluctuate between positive and negative due to the timing of payments and collections of cash on both a quarterly and annual basis.
Based on our current level of operations we believe our future cash flow from operating activities and existing balances of cash, cash equivalents, and availability under our revolving line of credit will be sufficient to meet our cash requirements for at least the next 12 months.
Going forward, we may access capital markets to raise additional equity or debt financing for various business reasons, including required debt payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing on favorable terms or at all.
Operating and Capital Expenditure Requirements and Contractual Obligations
There have been no material changes to our operating and capital expenditure requirements and contractual obligations during the nine-months ending September 30, 2022.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument might change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates, which may rise in the current economic environment. Borrowings under our long-term debt bear interest at rates that are variable. Increases in the SOFR Rate would increase the long-term debt.
Interest Rate Sensitivity
We are subject to variable interest rate risk in connection with borrowings under the Credit Agreement. At September 30, 2022, we had $112.0 million outstanding under the Term Facility. As a result, each change of one percentage point in interest rates would result in an approximate $1.1 million change in our annual interest expense on our outstanding borrowings at September 30, 2022. Any debt we incur in the future may also bear interest at variable rates.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on their evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that as of September 30, 2022 our disclosure controls and procedures were designed to, and were effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of September 30, 2022.
(b) Changes in Internal Control Over Financial Reporting
No changes in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION.
Item 1A. RISK FACTORS.
Our business is subject to risks and events that, if they occur, could adversely affect our financial condition and results of operations and the trading price of our securities. Except for such additional information and the risk factors set forth below, we believe that our risk factors have not changed materially from those described in "Part I, Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission on March 4, 2022, as amended on May 2, 2022. In addition to the information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors described in "Part I, Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission on March 4, 2022, as amended on May 2, 2022.
The risks disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as amended, and information provided elsewhere in this Quarterly Report on Form 10-Q, could materially affect our business, financial condition or results of operations. Additional risks and uncertainties that are not currently known or that we currently deem to be immaterial may materially adversely affect our business, financial condition or results of operations. Except for such additional information and the risk factors set forth below, we believe there have been no other material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as amended.
34
The consummation of the Voya Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Voya Merger Agreement may be terminated and the Voya Merger may not be completed within the expected timeframe or at all.
The consummation of the Voya Merger is subject to various customary conditions, including, among others, (i) the adoption of the Voya Merger Agreement by holders of a majority of the outstanding common stock and preferred stock (voting as a single class with the shares of common stock, on an as-converted basis) entitled to vote on such matters at the Company’s shareholders meeting and who are present at the shareholders meeting, in person or by proxy, (ii) the statutory waiting period (and any extensions thereof) applicable to the consummation of the transactions contemplated by the Voya Merger Agreement under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and, if applicable, any contractual waiting periods under any timing agreements in connection therewith will have expired or been earlier terminated (collectively, “HSR Approval Condition”), (iii) no governmental entity will have enacted or enforced any law or order that is in effect and prevents the consummation of the transactions contemplated by the Voya Merger Agreement and (iv) the absence of a Material Adverse Effect (as defined in the Voya Merger Agreement). The obligation of each party to consummate the Voya Merger is also conditioned on the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions) and the other party’s compliance, in all material respects, with its covenants and agreements under the Voya Merger Agreement. The Voya Merger is not subject to a financing condition.
The failure to satisfy all of the required conditions could delay the completion of the Voya Merger by a significant period of time or prevent it from occurring, which could result in adverse consequences to the Company.
If the Voya Merger is not completed within the expected timeframe or at all, the ongoing and future business and the financial results of the Company could be adversely affected and the Company will be subject to a variety of risks, possible consequences and business uncertainties associated with the failure to complete the Voya Merger within the expected timeframe or at all, including the following: (i) upon termination of the Voya Merger Agreement under specified circumstances, the Company is required to pay Voya a termination fee of $14,000,000; (ii) the Company will incur substantial transaction fees and costs (including non-recurring transaction fees), including legal, accounting, financial advisor, filing, printing and mailing fees, regardless of whether the Voya Merger closes; (iii) under the Voya Merger Agreement, the Company is subject to certain customary restrictions on the conduct of its business prior to the closing of the Voya Merger, which may adversely affect its ability to execute certain of its business strategies, undertake capital projects, pursue significant financing transactions or take other certain actions, even if such actions would prove beneficial and may cause the Company to forego certain opportunities it might otherwise pursue; and (iv) the proposed Voya Merger, whether or not it closes, will divert the attention of certain management and other key employees of the Company from ongoing business activities, including the pursuit of other opportunities that could be beneficial to the Company as an independent company.
If the Voya Merger is not completed within the expected timeframe or at all, these risks could materially affect the Company and its stock price, including to the extent that the current market price of the Company’s common stock is positively affected by a market assumption that the Voya Merger will be completed within the expected timeframe or at all.
We may experience negative reactions from our customers, vendors and employees and be limited in our ability to take certain actions in connection with the pending Voya Merger.
In connection with the pending Voya Merger, some customers, vendors, or employees of the Company or other third parties may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with the Company, which could adversely affect the revenues, earnings, funds from operations, cash flows and expenses of the Company, regardless of whether the Voya Merger is completed. In addition, the pendency of the Voya Merger may cause distractions from the Company’s strategy and day-to-day operations for its current employees and management.
In addition, as a result of the Voya Merger, current and prospective employees could experience uncertainty about their future with the Company. These uncertainties may impair the Company’s ability to retain, recruit or motivate key management and other personnel.
35
The termination fee and customary restrictions on solicitation contained in the Voya Merger Agreement may discourage other companies from trying to acquire us.
The Voya Merger Agreement contains customary "no-shop" restrictions pursuant to which, among other things, the Company is prohibited from initiating, soliciting, causing, proposing or knowingly encouraging, assisting or facilitating any alternative acquisition proposals or from providing non-public information regarding the Company to and engaging in any discussions or negotiations with third parties regarding alternative acquisition proposals, subject to certain limited exceptions. The Voya Merger Agreement also contains certain termination rights, including, but not limited to, the right of the Company to terminate the Voya Merger Agreement to accept a Superior Proposal (as defined in the Voya Merger Agreement), subject to and in accordance with the terms and conditions of the Voya Merger Agreement, and provides that, upon termination of the Voya Merger Agreement by the Company to enter into an alternative acquisition agreement with respect to a Superior Proposal, the Company will be required to pay Voya a termination fee of $14,000,000 in cash. While the Company believes these provisions are reasonable, customary and not preclusive of other offers, the termination fee and restrictions regarding solicitation contained in the Voya Merger Agreement may discourage other companies from trying to acquire the Company even though those other companies might be willing to offer greater value to the Company’s stockholders than Voya has offered in the Voya Merger.
Litigation against us, Voya, or the members of our or Voya's respective boards of directors, could prevent or delay the completion of the Voya Merger or result in the payment of damages following completion of the Voya Merger and incurrence of other costs and expenses.
It is possible that lawsuits may be filed by the Company’s stockholders challenging the Voya Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending or settling these claims or any other liabilities that may be incurred in connection with the litigation of these claims. These lawsuits, including if plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Voya Merger on the agreed-upon terms, may delay the consummation of the Voya Merger in the expected timeframe, or may prevent the Voya Merger from being consummated at all. This type of litigation can also result in significant costs, including the possibility of payment of damages following the completion of the Voya Merger, and divert management’s attention and resources from the closing of the Voya Merger and ongoing business activities, all of which could adversely affect the operations of the Company.
If the Voya Merger is not consummated by April 30, 2023, or, subject to the satisfaction of certain conditions, June 30, 2023, the Voya Merger Agreement may be terminated, and the Company will have incurred significant costs, diverted significant management focus and foregone strategic opportunities.
Either the Company or Voya may terminate the Voya Merger Agreement if the Voya Merger has not been consummated by April 30, 2023, provided that such date may be extended by either party to a date not beyond June 30, 2023, if, as of April 30, 2023, all conditions to the closing of the Voya Merger are satisfied or waived (except for those conditions that by their nature are to be satisfied at closing) other than the HSR Approval Condition. However, this termination right will not be available to a party if that party breached in any material respect any covenant or agreement set forth in the Voya Merger Agreement and such breach shall have proximately caused, or primarily resulted in, the failure to consummate the Voya Merger on or prior to April 30, 2023 or June 30, 2023 (as applicable). In the event the Voya Merger Agreement is terminated by either party due to the failure of the Voya Merger to close by April 30, 2023 or June 30, 2023 (as applicable), the Company will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Voya Merger.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Purchases of Equity Securities by the Company
Set forth below is a summary of the shares repurchased by the Company during the three months ended September 30, 2022 (in thousands):
Period |
|
(a) Total Number of Shares Purchased |
|
(b) Average Price Paid Per Share |
|
(c) Total Number of Shares Purchased as Part of Publicly Announced Plan or Program |
|
(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program |
|
|
Stock Repurchase Program(1) |
|
|
|
|
|
|
|
$ |
10,333 |
|
36
Item 6. EXHIBITS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference (Unless Otherwise Indicated) |
||||||
Exhibit Number |
|
Exhibit Title |
|
Form |
|
File |
|
Exhibit |
|
Filing Date |
|
|
|
|
|
|
|
|
|
|
|
10.1 |
|
|
8-K |
|
000-36061 |
|
10.1 |
|
August 18, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
|
31.2 |
|
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
|
32.1 |
|
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document – the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Document. |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
|
__ |
|
__ |
|
__ |
|
Filed herewith |
|
|
|
|
|
|
|
|
|
|
|
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2022
|
Benefitfocus, Inc. |
|
|
|
|
|
By: |
/s/ Alpana Wegner |
|
|
Alpana Wegner |
|
|
Chief Financial Officer |
|
|
(Principal financial and accounting officer) |
38