UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36061
Benefitfocus, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
46-2346314
(I.R.S. Employer
Identification No.)
100 Benefitfocus Way
Charleston, South Carolina 29492
(Address of principal executive offices and zip code)
(843) 849-7476
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 Par Value
Name of each exchange of which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
(Do not check if a smaller
reporting 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 Act). Yes No
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on June 30, 2017 (based on the closing sale
price of $36.35 on that date), was approximately $426,784,296. Common stock held by each officer and director and by each person known to the
registrant who owned 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant’s common stock outstanding as of March 12, 2018 was 31,331,447.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Stockholders currently scheduled to be held on June 1, 2018
are incorporated by reference into Part III hereof.
Benefitfocus, Inc.
Form 10-K
For Year Ended December 31, 2017
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K 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 Annual Report on Form 10-K that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange
Act”). Such forward-looking statements include any expectation of earnings, revenue or other financial
items; any statements of the plans, strategies and objectives of management for future operations; factors
that may affect our operating results; statements about our ability to establish and maintain intellectual
property rights; statements about our ability to retain and hire necessary associates and appropriately
staff our operations; statements related to future capital expenditures; statements related to future
economic conditions or performance; statements as to industry trends; and other matters that do not
relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-
looking statements are often identified by the use of words such as, but not limited to, “anticipate,”
“believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “will,” “plan,” “project,”
“seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-
looking statements. These statements are based on the beliefs and assumptions of our management
based on information currently available to management. Such forward-looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those discussed
in the section titled “Risk Factors” included in Item 1A of Part I of this Annual Report on Form 10-K, 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.
Item 1. Business.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers,
employers, insurance carriers, and brokers. The Benefitfocus Platform simplifies how organizations and
individuals shop for, enroll in, manage and exchange benefits. Our employer and insurance carrier
customers rely on our platform to manage, scale and exchange benefits data seamlessly. Our web-based
platform has a user-friendly interface designed to enable the insured consumers to access all of their
benefits in one place. Our comprehensive solutions support core benefits plans, including healthcare,
dental, life, and disability insurance, and voluntary benefits offerings such as income protection, digital
health and financial wellness. As the number of employer benefits plans has increased, with each plan
subject to many different business rules and requirements, demand for the Benefitfocus Platform has
grown.
The Benefitfocus Platform enables our customers to simplify the management of complex benefits
processes, from sales through enrollment and implementation to ongoing administration. It provides
consumers with an engaging, highly intuitive, and personalized user interface for selecting and managing
all of their benefits via their desktop browsers or mobile devices. Employers use our solutions to
streamline benefits processes, keep up with complex and changing regulatory requirements, control
costs, and offer a greater variety of plans to attract, retain, and motivate their employees. Insurance
carriers use our solutions to more effectively market offerings, simplify billing, and improve the enrollment
process. We also provide a network of more than 1,500 benefit provider data exchange connections,
which facilitates the otherwise highly fragmented interaction among employees, employers, brokers, and
carriers.
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We serve two separate but related market segments. The employer market consists of employers
offering benefits to their employees. Within this segment, we mainly target large employers with more than
1,000 employees, of which we believe there are over 18,000 in the United States. In our other market
segment, we sell our solutions to insurance carriers, enabling us to expand our overall footprint in the
benefits marketplace by aggregating many key constituents, including consumers, employers, and brokers.
We believe our presence in both the employer and insurance carrier markets gives us a strong position at
the center of the benefits ecosystem. As of December 31, 2017, we served 915 large employer customers,
an increase from 141 in 2010, and 54 carrier customers, an increase from 29 in 2010.
We sell the Benefitfocus Platform on a subscription basis, typically through annual contracts with
our employer customers and multi-year contracts with our insurance carrier customers, with subscription
fees paid monthly, quarterly and annually. The multi-year contracts with our carrier customers are
generally only cancellable by the carrier in an instance of our uncured breach, although some of our
carrier customers are able to terminate their respective contracts without cause or for convenience. Our
software-as-a-service, or SaaS, model provides us significant visibility into our future operating results
through increased revenue predictability, which enhances our ability to manage our business. Our
company was founded in 2000, and we currently employ approximately 1,450 associates, or employees.
Industry Background
The administration and distribution of benefits to employees is a mainstay of the U.S. economy.
Providing these benefits is costly and complex and requires the exchange of information, application of
rules, and transfer of funds among a wide variety of constituents, including consumers, employers,
insurance carriers, brokers, benefits outsourcers, payroll processors, and financial institutions. According
to IBISWorld calculations, in 2017, the market for HR benefits administration in the United States is
expected to grow to over $54 billion. In addition, Gartner estimates that in 2016, the U.S. insurance
industry spent approximately $66 billion on software and related services.1
The variety and complexity of core benefits plans, including healthcare, dental, life, and disability
insurance continues to grow. The Benefitfocus 2017 annual market research report, The State of
Employee Benefits 2018, indicates that a higher proportion of benefits offerings are shifting to high-
deductible health plans coupled with health savings accounts. This added complexity places greater
potential cost burden on employees and creates a greater need for employers to educate employees on
becoming more informed healthcare consumers. To help employees cover added cost burdens,
employers are increasingly offering a wider range of voluntary benefits plans, such as critical illness,
supplemental income, and financial wellness programs. Current point and legacy systems are inadequate
to efficiently manage the complexity, regulation, and the involvement of multiple parties, driving the need
for an enterprise benefits management system to improve operational efficiency along the entire benefits
value chain.
1 Gartner, Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2015-2021 4Q17 Update, United
States Insurance Market Spending on Software, IT Services, and Internal Services. The Gartner Report
described herein, (the "Gartner Report") represents research opinion or viewpoints published, as part of a
syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner
Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions
expressed in the Gartner Report are subject to change without notice.
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Employer Market
Currently, we believe there are over 18,000 entities that employ more than 1,000 individuals in the
United States. A significant and growing portion of employers’ costs is non-salary benefits, such as health
insurance, that they provide to their employees. With healthcare and other premiums increasing, senior
executives are prioritizing benefits administration in their organizations and searching for ways to contain
costs without sacrificing benefits. In addition, the expense burden continues to shift to employees.
Employees’ contributions to premiums for health insurance have grown from approximately $318 per
employee in 1999 to approximately $1,213 per employee in 2017. Employers recognize the importance of
offering a greater variety of core and voluntary benefits as a means to attract, motivate, and retain
employees. They must maintain relationships with multiple insurance carriers and many other benefits
providers, placing a substantial administrative burden on their organizations.
Employers’ distribution, management, and administration of employee benefits has historically
consisted of error-prone, paper-based processes, and a patchwork of customized software tools, which
are costly to maintain, often lack necessary functionality, and fail to address the increasing complexity of
the benefits marketplace. As benefits offerings become more complex and employees bear more of the
cost of those benefits, HR software solutions that streamline information, simplify choices, and engage
employees are increasingly in demand. Employees desire tailored, dynamic, and interactive
communication of critical benefits information as they become accustomed to receiving personalized
content through various consumer applications on a range of devices.
Legacy HR systems were generally designed as extensions of enterprise resource planning, or
ERP, systems, built for back-office responsibilities like finance and accounting. As a result, these systems
lack functionality and ease-of-use for employees. Many legacy HR systems were not designed to
integrate with the broader benefits ecosystem, including brokers, carriers, and wellness providers. This
results in expensive, error-prone, and frustrating experiences for employers and employees. Benefits
outsourcers have attempted to compensate for the shortcomings of legacy HR systems, but they have
generally lacked adequate technology solutions necessary to keep up with the rapidly evolving benefits
landscape. As a result, employees are often not provided with the appropriate functionality and
information required to select and manage their benefits effectively.
Modern technology, changing communication patterns, and a constantly evolving benefits
ecosystem have changed the employee-employer relationship. HR executives continue to search for
effective strategies to increase efficiency and contain costs, while increasing employee engagement and
satisfaction. Employers are increasingly interested in SaaS solutions that can help capture and analyze
benefits data and ultimately lead to healthier, happier, and more productive employees. In order to
manage the distribution and administration of benefits effectively, employers need an integrated platform,
capable of handling all benefits in one place and providing a highly personalized experience for
employees.
Insurance Carrier Market
The employee benefits market consists of a myriad of insurance carriers and products. According to
the U.S. Bureau of Labor Statistics, the single largest benefit provided to employees in the United States
is healthcare insurance, often encompassing more than 90% of all insurance benefits spending by
employers.
Large, national insurance carriers also offer numerous individual health plans of different types,
including health maintenance organizations, preferred provider organizations, point-of-service plans, and
high deductible health plans, across the 50 states, as well as life and ancillary benefits plans. Each carrier
offers a complex variety of health insurance, life and ancillary benefits plans, with each plan requiring
multiple decisions to address the specific needs of employers and their individual employees. Despite
widespread carrier consolidation, numerous disparate systems remain in place, with many large carriers
operating on multiple IT systems. Carriers often rely on manual processes and siloed software
applications to bridge gaps in legacy administration systems. Even as carriers attempt to modernize and
keep up with evolving industry practices and a changing regulatory landscape, they have difficulty
connecting with the broader healthcare system.
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The effective delivery and management of healthcare benefits depends on the timely, continuous
exchange of accurate data among carriers, their employer customers, and individual members. Legacy
benefits management systems often lack important functionality such as web and mobile self-service
capabilities and real-time data exchange. Critical carrier processes, including member enrollment, billing,
communications, and retail marketing have often been under-optimized or neglected by legacy systems,
and carriers have devoted significant internal resources to cover technology gaps. In addition, healthcare
reform mandates and the rise of exchanges have increased focus on carriers’ retail distribution
capabilities, which require additional investment.
Governmental oversight, punctuated with the Patient Protection and Affordable Care Act, or
PPACA, has led to an increasingly dynamic regulatory framework under which health benefits are
delivered, accessed, and maintained. Despite uncertainty regarding the long-term viability of PPACA, we
expect digital transformation of healthcare benefits to continue in the form of public and private
exchanges – online marketplaces that allow insurance carriers to compete directly for new members. We
expect private exchanges will be less rigid, promoting both health and non-health benefits, with
substantially fewer rules around the types of benefits offered. As insurance carriers continue to bolster
their retail distribution capabilities, we believe they will require consolidation of technology solutions to
improve operational efficiency and attract additional members through private exchanges.
Reportable Segments
Our reportable segments, Employer and Carrier, are based on type of customer. Financial
information for Benefitfocus’ reportable segments is included in Note 14 to our consolidated financial
statements included in this Annual Report on Form 10-K.
The Benefitfocus Solutions
We provide a multi-tenant cloud-based benefits management platform to the employer and carrier
markets. The Benefitfocus Platform simplifies how organizations and individuals shop for, enroll in,
manage, and exchange benefits.
We believe our solutions help employers in the following important ways:
Simplify Benefits Enrollment. Our solutions reduce the complexity of benefits enrollment by
integrating all plan information in one place and presenting it to employees in an organized and easy-to-
understand manner. Employees shop and enroll using a highly intuitive and engaging consumer-oriented
interface.
Transition to Defined Contribution Benefits Funding Model. Our solutions help enable employers’
ongoing shift to defined contribution plans. Defined contribution plans differ from traditional defined
benefit plans as they grant employees a stipend with which to purchase benefits of their choosing.
Defined contribution plans also offer more discretion and options compared to defined benefit plans. Our
products support traditional defined benefit plans, allowing employees to select from a list of benefits
offered by their employer, calculating required member contributions, and recording and transmitting
elections and other important information to payroll. Separately, with respect to defined contribution plans,
our exchange solutions help facilitate an online shopping environment with many benefit options that
allows employees to select personalized benefit offerings to suit their individual needs.
Reduce Cost and Increase ROI. Our solutions automate the benefits management process and
reduce the cost associated with clerical errors and covering ineligible employees and dependents. Our
solutions also include advanced analytics that enable employers and employees to quickly gather, report,
and forecast benefit costs.
Attract, Retain, and Motivate Employees. Our solutions help employers attract, retain, and
motivate top talent by delivering benefits information through a highly intuitive and engaging user
interface. We believe that when employees understand the value of their benefits, they are more likely to
be satisfied with and engaged in their jobs.
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Streamline HR Processes. Our solutions eliminate the time-consuming and labor-intensive, often
paper-based, processes associated with managing employee benefits plans, making HR professionals
more efficient. Employers and HR professionals can efficiently enroll users or update information, and
communicate or make changes to plans in real-time.
Integrate Seamlessly with Related Systems. Our solutions can be easily and securely integrated
with a variety of related systems, including carrier membership and billing, payroll and HR, banking, and
other third-party administration. We provide a network of more than 1,500 benefit provider data exchange
connections. Our open architecture further extends our functionality by allowing third parties to develop
and offer apps and services on our platform.
We believe our solutions help insurance carriers in the following important ways:
Attract and Maintain Membership. Our solutions allow carriers to maximize sales capacity and
efficiency by communicating directly with their employer customers and individual members.
Reduce Administrative Costs. The Benefitfocus Platform allows carriers to consolidate IT
systems, automate and simplify various aspects of the benefits administration process, such as
enrollment, plan changes, eligibility updates, and billing, from one centralized location.
Bolster Retail Distribution Capabilities Through Marketplaces. Our solutions help carriers respond
to an evolving marketplace in which retail distribution capabilities are increasingly important to attracting
and retaining new members. Our platform offers carriers a lower cost direct sales channel to employer
groups and individuals. We offer the ability to sell both healthcare and non-healthcare benefit products in
an online shopping environment that serves as an alternative to government-sponsored public
exchanges.
Facilitate Real-Time Data Exchange. Our solutions simplify interactions and data exchange, and
foster collaboration among carriers and their partners, brokers, employer customers, and individual
members. This allows carriers to rapidly tailor and offer new benefits packages.
Our Growth Strategy
We intend to strengthen our position as a leading provider of cloud-based benefits software
solutions. Key elements of our growth strategy include the following:
Expand our Customer Base. We believe that our current customer base represents a small
fraction of our targeted users that could benefit from our solutions. In order to reach new customers in our
existing markets, we are aggressively investing in our sales and marketing resources and our channel
marketing strategy, including in ways intended to expand existing relationships and foster organic growth
opportunities through brokers.
Deepen our Relationships with our Existing Customer Base. We are deepening our employer
relationships by continuing to provide a unified platform with a growing list of additional solutions to manage
increasingly complex benefits processes and simplify the distribution and administration of employee
benefits. We are expanding our carrier relationships through both the upsell of additional software products
and increased adoption across our carriers’ member populations.
Extend our Suite of Applications and Continue our Technology Leadership. We are extending the
number, range, and functionality of our benefits applications. We have also extended the functionality of
our products with various mobile applications. We intend to continue our collaboration with customers and
partners, so we can respond quickly to evolving market needs with innovative applications and support
our leadership position.
Further Develop our Partner Ecosystem. We have established strong relationships with
organizations such as Mercer, SAP, Allstate Insurance Company, Equifax, and others in a variety of
industries to deliver best-in-class applications to our customers. We plan to continue to invest in our
integration infrastructure to allow third parties and customers to build custom applications on the
Benefitfocus Platform and create deep integrations between their systems and ours.
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Leverage our Corporate Culture. We believe our culture inspires our associates and customers
and supports our growth. We plan to continue to invest in our culture to help attract and retain top design
and engineering professionals who are not only passionate about Benefitfocus and motivated to create
superior software technology, but also passionate about contributing positively to their communities.
Target New Markets. We believe substantial demand for our solutions exists in markets and
geographies beyond our current focus. We intend to leverage opportunities we believe will arise from the
complexities of changing government regulation and increased enrollment impacting both Medicare and
Medicaid. We also plan to grow our sales capability internationally by expanding our direct sales force
and collaborating with strategic partners in new, international locations.
Selectively Pursue Strategic Acquisitions and Investments. We might pursue acquisitions of or
investments in complementary businesses and technologies that are consistent with our overall growth
strategy. We believe that a selective acquisition and investment strategy could enable us to gain new
customers, accelerate our expansion into new markets, and enhance our product capabilities.
The Benefitfocus Portfolio of Products
Our portfolio of products, as summarized below, provides a seamless, integrated experience for the
entire life cycle of benefits enrollment and management for insurance carriers and employers. We also
provide extensive applications to help carriers and employers manage their programs more effectively.
Products and Services for Insurance Carriers
Marketplaces:
Large Employer Marketplace
Mid-Market Marketplace
Small Employer Marketplace
eEnrollment
eBilling
eExchange
eSales
Core & Advanced Analytics
Certified Carrier Program
Integrations
Video
Implementation Services
Benefits Service Center
Products and Services for Employers
Benefitfocus Marketplace
Communication Portal
BenefitStore
Core & Advanced Analytics
Benefits Service Center
Video
ACA Management & Reporting
Billing & Payment
Implementation Services
Integrations
Benefitfocus University
Account Services:
Consumer Directed Healthcare
Accounts
COBRA Administration
Products for Insurance Carriers
Marketplaces are online shopping environments, sometimes referred to as exchanges that
allow customers to select from a variety of benefits plan choices to suit their individual needs.
Marketplaces support the shift toward defined contribution benefits plans, which are increasing
in popularity. Marketplaces provide consumer-centric experiences focused on personalization,
and integrate social tools to help drive informed choices while selecting benefits. They also
include features to track plans and compare pricing and features across multiple benefit plans.
eEnrollment is our flagship product for carriers, providing them with online enrollment for all
types of benefits. We designed eEnrollment to enhance our users’ experience by presenting
information in a user-friendly format and integrating educational videos as well as plan
comparison and decision support tools to help users navigate the enrollment process. In
addition to helping customers find suitable plans, eEnrollment supports complex business
rules, such as eligibility and rating criteria. eEnrollment facilitates the following activities:
Initial Enrollment. Employees and brokers can complete applications and health
statements prior to making elections. Once the selection occurs, eEnrollment
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automatically calculates group numbers, finalizes benefit elections, and sends the data to
the insurance carriers’ membership systems.
Open Enrollment. eEnrollment simplifies open enrollment by providing tools to map
employees from one plan to another, such as workflow, to-do lists, e-mail reminders, and
a wide range of reports.
New Hire Enrollment. New hires can enroll in benefits anytime during their initial
enrollment period. eEnrollment calculates wait periods and effective dates automatically
to ensure compliance with the employers’ business rules.
Life Events. Employees can make changes to their elections for specific reasons,
including a birth, marriage, and military leave. eEnrollment calculates effective dates and
helps employees understand what types of coverage changes are permitted with each
type of life event.
eBilling is an electronic invoice presentment and payment solution, or EIPP. It consolidates
invoices from multiple insurance products so employers and individuals receive one invoice
that can be viewed and paid electronically. eBilling automates the synchronization of billing
and membership data to improve the accuracy of billing processes and provides options to
simplify bill payment, such as scheduled one-time and/or recurring payments.
eExchange is a solution that bridges the communication gap between carrier and employer
systems, allowing a seamless exchange of data between the two. Our customers use
eExchange to integrate data from multiple systems, convert data from one format to another,
and manage the flow of employee data between carriers and employers.
eSales gives carriers and brokers tools to organize and proactively manage accounts, track
leads, generate quotes, and create proposals for multiple products. eSales allows carriers to
define their own market segments and configure them with unique workflows and business
rules. It also enables greater data accuracy by automatically incorporating updated products,
options and pricing for the most current rates and quotes. Carriers purchase eSales to
increase productivity in their sales force.
Core & Advanced Analytics is our data analytics solution for use by carriers and their self-
insured employer customers. Core & Advanced Analytics is a privately-labeled analytics
solution that helps carriers and their self-insured employers identify cost drivers, recognize
trends, and predict future risks and costs. Additional analytical capabilities help create “what-if”
scenarios to model different variables, such as co-pay, deductibles, benefits, inflation, and
member populations.
Certified Carrier Program is our partnership program with large life and ancillary product
providers designed to deliver seamless ancillary, voluntary and life-style benefits to
consumers. The program is a combination of technology solutions, preferred pricing and
distribution opportunities.
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Products for Employers
Benefitfocus Marketplace is a cloud-based benefits management portal that streamlines online
enrollment, employee communication, and benefits administration. It also and creates an
exchange environment for large employers who offer defined contribution plans. In one
cohesive, engaging workflow, Benefitfocus Marketplace presents employees with all of the
plans their employers offer. Employees who need extra assistance can access avatars,
animated videos, and live chat sessions as they explore their benefit options. As employees
shop for the plans that best fit their individual needs, a virtual shopping cart keeps a running
tally of the employers’ defined contribution in addition to the employees’ out-of-pocket costs. If
employees choose to purchase more coverage on their own, they can easily view and pay
their bills in the Benefitfocus Marketplace.
Communication Portal is an employee engagement portal that gives employers the tools to
send personalized, targeted text and email communications to specific employee groups
based on location, job level and eligibility status. Features such as an Intelligent Virtual
Assistant provide employees on-demand support while reducing administration burden for
employers, and Self-Service Total Compensation Reports increase transparency into the full
value of benefit offerings, which can contribute to increased engagement and employee
satisfaction.
BenefitStore is a turnkey solution, enabled by BenefitStore, Inc., a wholly owned subsidiary
insurance agency, that makes available directly to employees a broad array of voluntary and
ancillary benefits through insurance consulting and brokerage services for employer
sponsored and individual products such as transit, supplemental life and disability, among
others, to provide a more comprehensive and customizable benefits package.
Core & Advanced Analytics is our data analytics solution that helps employers make more
informed, data-driven decisions about their benefits offerings. This product aggregates benefit
cost and claims data from relevant sources and allows customers to analyze, forecast, and
monitor costs. Core & Advanced Analytics enables employers and their advisors to identify
cost drivers, recognize trends, and predict future risks and costs. Additional analytical
capabilities create “what-if” scenarios to model different variables, such as co-pays,
deductibles, benefits, inflation, and member populations.
ACA Management & Reporting is our solution that helps employers manage ACA compliance
by consolidating and automating IRS reporting. Additionally, Benefitfocus is an approved
transmitter, allowing us to electronically file required ACA compliance documents with the
Internal Revenue Service on behalf of our customers.
Billing & Payment is a comprehensive, dynamic EIPP application that synchronizes enrollment
and billing information to streamline the monthly billing process, automate adjustments and
increase accuracy of payments. Billing & Payment gives employers the ability to automate or
schedule single-invoice payments to all of their benefit providers. Employers can drill down by
employee to see coverage level and plan, or focus in by vendor, benefit type or internal cost
control center to gain more insight into cost drivers.
Consumer-Directed Healthcare Accounts is our solution designed to provide employers and
their employees with a seamless enrollment and account management experience for their
health savings accounts, or HSAs, or similar medical payment products within Benefitfocus
Marketplace.
COBRA Administration is our solution for employers that simplifies management of COBRA, or
the Consolidated Omnibus Budget Reconciliation Act, benefits. COBRA Administration
automates required communication, enrollment, fulfillment and payment processing within
Benefitfocus Marketplace.
Professional Services and Customer Support
Implementation Services. We provide implementation services to our customers in order to
help ensure seamless deployment and effective utilization of our solutions. Our carrier and
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employer implementation teams and third-party system integrators in our Benefitfocus
Implementation Program follow a five-step approach for each implementation:
Discovery, including project planning and coordination to establish key milestones,
documenting business and technical requirements, establishing a deployment strategy,
and planning operational and market adoption activities.
Configuration and deployment, including configuring products to meet requirements
identified during discovery, and defining needs for data exchange, payroll integration,
and file transfer protocol.
Integration, including connecting the Benefitfocus Platform functionality to a customer’s
currently existing systems, such as carrier membership and billing, payroll and HR
systems, employee communications, intranets, and others.
Testing, including testing of various scenarios and uses cases, inbound and outbound
payroll integration, and regression testing.
Training and technical support, including sessions to learn how to implement and access
our products.
Benefits Service Center. We provide employers with expanded support services where our
benefits specialists help customers’ employees understand benefit offerings, navigate the
enrollment process, and find answers to frequently asked HR questions. Our Benefits Service
Center provides employees with personalized, guided support. Additional services, such as
fulfillment, dependent verification, and HR administration, are available to meet unique
organizational needs.
Video. We create video and animated content that can be licensed within our applications or
independently for distribution via client portals or websites. Benefitfocus provides a
comprehensive video library and also can produce custom videos to meet specific
communication requirements of its carrier and employer customers. Our staff of executive
producers, project managers, writers, graphic designers, editors, and on-camera talent guide
customers through the process from concept development to delivery. Benefitfocus hosts
videos, eliminating the need for additional investments or internal IT resources by our
customers. In addition, we incorporate our customers’ unique branding to provide a seamless
extension of corporate websites and messaging.
Partner Offerings
Integrations. We allow our partners and customers to develop custom apps that integrate
directly with Benefitfocus Marketplace. The open and flexible nature of our software
architecture allows us to build deeper integrations with partner organizations and offer custom
services in response to customer demand. Apps are organized into the following categories:
voluntary benefits, health and wellness, benefits administration, finance, and communication.
Some examples include:
RedBrick Health provides access to customizable health assessments, digital coaching,
tracking and challenges.
LifeLock allows employees to purchase identity theft protection when they are enrolling in
other benefit programs.
SAP SuccessFactors provides employee performance management solutions. We
partnered with SAP to create a full HR and benefits management suite that combines
employee talent, profile, and core HR information to help drive employee onboarding,
promotion, and development. The SAP SuccessFactors suite of products provides an
enterprise-class system of record, as well as powerful analytics and intuitive tools.
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Customers
Our customers include employers of all sizes across a variety of industries and some of the nation’s
largest insurance carriers and aggregators. The following is a list of some of our significant employer and
carrier customers.
Employer Customers
American Eagle Outfitters Inc.
Amerigas Propane, Inc.
Brookdale Senior Living Inc.
California Institute of Technology
Carolinas HealthCare System
Fender Musical Instruments Corporation Wellmark, Inc.
Fiesta Restaurant Group, Inc.
Hard Rock Café International (USA), Inc.
Rush University Medical Center
SAP America Inc.
Carrier Customers
American Family Life Assurance Company of Columbus
BlueChoice HealthPlan of South Carolina, Inc.
Blue Cross of Idaho Health Service, Inc.
Blue Cross and Blue Shield of Kansas City
Blue Cross and Blue Shield of South Carolina, Inc.
During the year ended December 31, 2017, one customer accounted for 12% of total revenue. No
other customer accounted for more than 10% of our total revenue.
Sales and Marketing
We sell our software solutions through our direct sales organization. Our direct sales team
comprises employer-focused and carrier-focused field sales professionals who are organized primarily by
geography and account size.
We generate customer leads, accelerate sales opportunities and build brand awareness through
our marketing programs and strategic relationships. Our marketing programs target HR, benefits, and
finance executives, technology professionals, key brokers, and senior business leaders. Our principal
marketing programs include:
use of our website to provide application and company information, as well as learning
opportunities for potential customers;
territory development representatives who respond to incoming leads and convert them into
new sales opportunities;
participation in, and sponsorship of, user conferences, executive events, trade shows and
industry events, including our annual user and partner conference, One Place;
integrated marketing campaigns, including direct email, online web advertising, blogs,
webinars and industry reports, including State of Employee Benefits; and
public relations, analyst relations and social media initiatives.
We also sell our software solutions through strategic partners including Mercer LLC (“Mercer”) and
SAP SE.
Technology Infrastructure and Operations
As an enterprise cloud software vendor, we have always deployed our solutions using a SaaS
model. Our customers access our software via the web or mobile devices, rather than by installing
software on their premises. Through our multi-tenant platform, our customers access a single instance of
our software with multiple possible configurations enabled by our metadata-driven framework. The multi-
tenant approach provides significant operating leverage and improved efficiency as it helps us to reduce
our fixed cost base and minimize unused capacity on our hardware. In addition, our software architecture
gives us an advantage over vendors of legacy systems, who may be using a less flexible architecture that
would require significant time and expense to update.
We host our applications and serve all of our customers from two redundant data centers in
separate locations. We rely on third-party vendors to operate these data centers, which are designed to
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host mission-critical computer systems and have industry-standard measures in place to minimize service
interruptions. Our technical operations staff manages the technology stacks supporting the Benefitfocus
Platform and uses automated monitoring tools throughout our system to detect unusual events or
malfunctions that could interfere with our customers’ or partners’ use of the Benefitfocus Platform. We
monitor application health by verifying that all applications, interfaces and supporting middleware are
operational. If our monitoring tools detect a problem, our dedicated network operations center staff detect
the issue and respond immediately to diagnose and resolve the problem. We take the security of our data
and our systems very seriously, and we focus on minimizing the risk of vulnerabilities in our system at
every level of software design and system and network administration.
Compliance and Certifications
We obtain third-party examinations of our controls relating to security and data privacy. Certain
examinations are conducted under Statement on Standards for Attestation Engagements, or SSAE,
No. 16 (Reporting on Controls at a Service Organization). In particular, we obtain Service Organization
Controls, or SOC, reports known as SOC 1 Type II and SOC 2 Type II audits that test the design and
operating effectiveness of controls over a period of time. An independent auditor conducts these
examinations annually and addresses, among other areas, our physical and environmental safeguards for
production data centers, data availability and procedures covering integrity, change management, and
logical security.
On an annual basis, we complete an internal audit of compliance against the Payment Card Industry
Data Security Standards, or PCI-DSS, applicable to Level 1 service providers. These standards focus on
application and network security controls for companies that transmit and store credit card data on behalf
of clients. Benefitfocus meets PCI compliance requirements as a Level 1 service provider and submits its
Report on Compliance and Attestation of Compliance documenting this assessment to the four major
credit card brands annually.
In addition to PCI-DDS, Benefitfocus meets all applicable security requirements required by the
National Automated Clearinghouse Association, or NACHA, for third-party service providers, as well as all
requirements for Covered Entities as required by HIPAA. We validate both NACHA and HIPAA
compliance annually through internal audits.
Competition
While we do not believe any single competitor offers similarly expansive software solutions, we face
competition from various sources, many of which have greater resources than us. Competition in our
employer segment includes:
ERP software companies, including Oracle (PeopleSoft), Infor (Lawson) and Workday each
offering a cloud-based benefits administration software solution;
HR outsourcing companies, such as Towers Watson;
payroll service providers, such as ADP who expanded their core payroll services to include
some form of cloud-based benefits administration services; and
various niche software vendors.
Competitors in our carrier segment include:
insurance carriers that have invested in internally developed benefit management solutions;
member services companies, including those providing web-based subscriber enrollment and
claims adjudication services, such as Trizetto (acquired by Cognizant) and DST Health
Solutions; and
various niche software vendors.
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We believe that competition for benefits software and services is based primarily on the following
factors:
capability for customization through configuration, integration, security, scalability, and
reliability of applications;
competitive and understandable pricing;
breadth and depth of application functionality;
size of customer base and level of user adoption;
extensive data exchange network;
cloud-based delivery model;
dynamic communication capabilities with contextual media, animation, and acknowledgement
tools;
ability to integrate with legacy enterprise infrastructures and third-party applications;
domain expertise in benefits and healthcare consumerism;
extensive base of rules and event-driven benefit eligibility and enrollment;
accessible on any browser or mobile device;
modern and adaptive technology platform;
access to third-party apps;
clearly defined implementation timeline;
customer-branding and styling; and
ability to innovate and respond to customer and legislative needs rapidly.
We believe that we compete effectively based upon all of these criteria, and that we are likely to
continue to retain a high percentage of our customers from year to year. Nonetheless, we believe that the
increasing acceptance of automated solutions in the healthcare marketplace and the adoption of more
sophisticated technology and continuing legislative reform will result in increased competition, including
potentially from large software companies with greater resources than ours. Other companies might
develop superior or more economical service offerings that our customers could find more attractive than
our offerings. Moreover, the regulatory landscape might shift in a direction that is more strategically
advantageous to competitors.
Research and Development
Our ability to compete depends, in large part, on our continuous commitment to rapidly introduce
new applications, technologies, features, and functionality. We deliver multiple software releases per
year, updating the Benefitfocus Platform to leverage advances in cloud computing, mobile applications,
and data management. Our research and development team is responsible for the design and
development of our applications. We follow state-of-the-art practices in software development using
modern programming languages, data storage systems, and other tools. We use both commercial and
open source products, following a “best tool for the job” philosophy in product selection. Our software has
a multi-tiered architecture that ensures flexibility to add or modify features quickly in response to changing
market dynamics, customer needs, or regulatory requirements.
Our research and development expenses were $49.5 million, $56.6 million and $52.3 million for the
years December 31, 2017, 2016 and 2015, respectively.
Intellectual Property
We rely on a combination of patent, trade secret, copyright, and trademark laws, license
agreements, confidentiality procedures, confidentiality and nondisclosure agreements, and technical
measures to protect the intellectual property used in our business. We generally enter into confidentiality
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and nondisclosure agreements with our associates, consultants, vendors, and customers. We also seek
to control access to and distribution of our software, documentation, and other proprietary information.
We use numerous trademarks for our products and services, and “Benefitfocus”, “HR InTouch”, “HR
InTouch Marketplace”, “All Your Benefits. One Place.”, “All Your Benefits. In Your Pocket.”, and “Shop.
Enroll. Manage. Exchange.” are registered marks of Benefitfocus in the United States. Through claimed
common law trademark protection, we also protect other Benefitfocus marks which identify our services,
such as Benefitfocus eEnrollment, Benefitfocus eBilling, Benefitfocus eExchange, and Benefitfocus
eSales, and we have reserved numerous domain names, including “benefitfocus.com”. We also have
registered trademarks and pending trademark applications in foreign jurisdictions such as Australia,
Canada, India, Israel, Ireland, New Zealand, South Africa, and the United Kingdom.
We have been granted eight U.S. patents (utility patents) and have two U.S. patent applications (all
for utility patents) pending. Our patents provide protections up to 2034. We also have three Chinese, two
Japanese, Australian, Taiwanese, and Hong Kong, and one Canadian patents and a number of pending
patent applications.
We also rely on certain intellectual property rights that we license from third parties. Although we
believe that alternative technologies are generally available to replace such licenses, these third-party
technologies may not continue to be available to us on commercially reasonable terms.
Although we rely on intellectual property rights, including trade secrets, patents, copyrights, and
trademarks, as well as contractual protections to establish and protect our proprietary rights, we believe
that factors such as the technological and creative skills of our personnel, creation of new modules,
features and functionality, and frequent enhancements to our applications are more essential to
establishing and maintaining our technology leadership position.
The steps we have taken to protect our copyrights, trademarks, and other intellectual property may
not be adequate, and the potential exists that third parties could infringe, misappropriate, or misuse our
intellectual property. If this were to occur, it could harm our reputation and adversely affect our
competitive position or operations. In addition, laws of other jurisdictions may not protect our intellectual
property and proprietary rights from unauthorized use or disclosure in the same manner as the United
States. The risk of unauthorized use of our proprietary and intellectual property rights may increase as
our company expands outside of the United States.
Government Regulation
Introduction
The employee benefits industry is required to comply with extensive and complex U.S. laws and
regulations at the federal and state levels. Although many regulatory and governmental requirements do
not directly apply to our business, our customers are required to comply with a variety of U.S. laws, and
we may be impacted by these laws as a result of our contractual obligations. For many of these laws,
there is little history of regulatory or judicial interpretation upon which to rely.
Requirements of PPACA
Our business could be affected by changes in healthcare spending. PPACA changed how
healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured
individuals, reduced Medicare program spending and insurance market reforms. PPACA, as enacted,
required states to expand Medicaid coverage significantly and establish health insurance exchanges to
facilitate the purchase of health insurance by individuals and small employers and provided subsidies to
states to create non-Medicaid plans for certain low-income residents. Insurers have experienced mixed
results providing services through the exchanges and many have exited this market. Increased volatility
following the repeal of the individual mandate in late 2017 could create more uncertainty.
Although numerous lawsuits challenged the constitutionality of PPACA, the U.S. Supreme Court
upheld the constitutionality of PPACA except for provisions that would have allowed the U.S. Department
of Health and Human Services, or HHS, to penalize states that did not implement the Medicaid expansion
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with the loss of existing federal Medicaid funding. Consequently, a number of states opted out of the
Medicaid expansion. Since that time, several states that initially opted out of the Medicaid expansion
changed their minds and expanded Medicaid after all. While many of the provisions of PPACA will not be
directly applicable to us, PPACA, as currently implemented, might affect the business of many of our
customers. Carriers and large employers might experience changes in the numbers of individuals they
insure as a result of Medicaid expansion and the creation of state and national exchanges, though it is
unclear how many states will decline to implement the Medicaid expansion or adopt state-specific
exchanges.
The long-term viability of PPACA remains in doubt. We expect that the current Congress and White
House will continue to seek ways to modify, repeal, or otherwise invalidate all, or certain provisions of
PPACA. For instance, on January 20, 2017, an executive order was issued which stated that it is the
U.S. federal government’s policy to seek the prompt repeal of PPACA, and directed the heads of all
executive departments and agencies to minimize the economic and regulatory burdens of PPACA to the
maximum extent permitted by law. Also, the December 2017 revisions to the tax code eliminated
PPACA’s individual mandate, which could destabilize the insurance markets. Should Congress or the
courts modify, repeal or otherwise invalidate PPACA or any parts of its provisions, the business of our
customers could be substantially affected.
Requirements Regarding the Confidentiality, Privacy and Security of Personal Information
HIPAA and Other Privacy and Security Requirements. There are numerous U.S. federal and state
laws and regulations related to the privacy and security of personal health information. In particular,
regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, establish privacy and security standards that limit the use and disclosure of protected health
information and require the implementation of administrative, physical and technical safeguards to ensure
the confidentiality, integrity, availability, and privacy of protected health information. Health plans,
healthcare clearinghouses and most providers are considered by the HIPAA regulations to be "Covered
Entities." With respect to our operations as a healthcare clearinghouse, we are directly subject to the
Privacy Rule and the Security Rule. In addition, our carrier customers, or payors, are considered to be
Covered Entities and are required to enter into written agreements with us, known as Business Associate
Agreements, under which we are considered to be a Business Associate and that require us to safeguard
protected health information and restrict how we may use and disclose such information. The Privacy
Rule extensively regulates the use and disclosure of protected health information by Covered Entities and
their Business Associates. For example, the Privacy Rule permits Covered Entities and their Business
Associates to use and disclose protected health information for treatment and to process claims for
payment, but other uses and disclosures, such as marketing communications, require written
authorization from the individual or must meet an exception specified under the Privacy Rule. The Privacy
Rule also provides patients with rights related to understanding and controlling how their health
information is used and disclosed. To the extent permitted by the Privacy Rule and our contracts with our
customers, we may use and disclose protected health information to perform our services and for other
limited purposes, such as creating de-identified information. Determining whether data has been
sufficiently de-identified to comply with the Privacy Rule and our contractual obligations may require
complex factual and statistical analyses and may be subject to interpretation. The Security Rule requires
Covered Entities and their Business Associates to implement and maintain administrative, physical and
technical safeguards to protect the security of protected health information that is electronically
transmitted or electronically stored.
If we are unable to properly protect the privacy and security of health information entrusted to us, we
could be found to have breached our contracts with our customers. Further, if we fail to comply with the
Privacy Rule, Security Rule, or Breach Notification Rule while acting as a Covered Entity or Business
Associate, we could face civil penalties of up to $55,910 per violation and a maximum civil penalty of
$1,677,299 in a calendar year for violations of the same requirement, in addition to criminal penalties.
Recently, the U.S. Department of Health and Human Services Office for Civil Rights, which enforces
HIPAA, appears to have increased its enforcement activities. Additionally, state attorneys general may
bring civil actions seeking either injunctions or damages in response to violations of HIPAA that threaten
the privacy of state residents.
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There are additional privacy and data security legal regimes at the federal and state level. For
example, the Federal Trade Commission, or FTC, regularly brings privacy and data enforcement actions
under Section 5 of the Federal Trade Commission Act, alleging that certain activities constitute unfair or
deceptive trade practices. The states have similar laws that prohibit unfair or deceptive trade practices.
There are also state data security laws and state laws that regulate the use and disclosure of health
information, among others. Further, by regulation, the FTC’s Red Flags Rule requires some financial
institutions and creditors, which may include some of our customers, to implement identity theft
prevention programs to detect, prevent and mitigate identity theft in connection with customer accounts.
We may be required to apply additional resources to our existing processes to assist our affected
customers in complying with this rule.
We have implemented and maintain physical, technical and administrative safeguards, including
written policies and procedures, intended to protect all personal data, including protected health
information, and have processes in place to assist us in complying with all applicable laws and
regulations regarding the protection of this data and properly responding to any data breaches or
incidents.
Data Breach Notification Laws. There are numerous federal and state laws that generally require
notice to affected individuals, regulators, and sometimes the media or credit reporting agencies in the
event of a data breach impacting personal information. For example, at the federal level, the HIPAA
Breach Notification Rule mandates notification of breaches affecting protected health information to
affected individuals and regulators under conditions set forth in the Rule. Covered Entities must report
breaches of unsecured protected health information to affected individuals without unreasonable delay,
but not to exceed 60 days of discovery of the breach by a Covered Entity or its agents. Notification must
also be made to HHS and, in certain circumstances involving large breaches, to the media. Business
Associates must report breaches of unsecured protected health information to Covered Entities within 60
days of discovery of the breach by the Business Associate or its agents. Nearly all states, the District of
Columbia, Guam, Puerto Rico, and the Virgin Islands have enacted data breach notification laws. While
some of these breach notification laws contain an exception for entities subject to HIPAA, other laws do
not, and may impose notification obligations in addition to, or inconsistent with, the HIPAA Breach
Notification Rule when a data breach implicates protected health information.
HIPAA Administrative Simplification
HIPAA also mandated a package of interlocking administrative simplification rules to establish
standards and requirements for the electronic transmission of certain healthcare claims and payment
transactions. These regulations are intended to encourage electronic commerce in the healthcare
industry and apply directly to Covered Entities. Some of our businesses, including our healthcare
clearinghouse operations, are considered Covered Entities under HIPAA and its implementing
regulations.
Transaction Standards. The standard transaction regulations established under HIPAA, or
Transaction Standards, mandate certain format and data content standards for the most common electronic
healthcare transactions, using technical standards promulgated by recognized standards publishing
organizations. These transactions include healthcare claims, enrollment, payment and eligibility. The
Transaction Standards are applicable to that portion of our business involving the processing of healthcare
transactions among payors, providers, patients and other healthcare industry constituents. Failure to comply
with the Transaction Standards may subject us to civil and potentially criminal penalties and breach of
contract claims. The Centers for Medicare and Medicaid Services, or CMS, is responsible for enforcing the
Transaction Standards.
Payors who are unable to exchange data in the required standard formats can achieve Transaction
Standards compliance by contracting with a clearinghouse to translate between standard and non-
standard formats. As a result, use of a clearinghouse has allowed numerous payors to establish
compliance with the Transaction Standards independently and at different times, reducing transition costs
and risks. In addition, the standardization of formats and data standards envisioned by the Transaction
Standards has only partially occurred. However, PPACA requires HHS to establish operating rules to
promote uniformity in the implementation of each standardized electronic transaction. We cannot provide
assurance regarding how the CMS will enforce the Transaction Standards. We have modified our
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systems and processes to implement the Transaction Standards and we continue to work with payors,
healthcare information system vendors and other healthcare constituents to maintain our implementation
of the Transaction Standards.
Health Plan and Other Entity Identifiers. HHS has promulgated regulations implementing the
establishment of a unique health plan identifier, or HPID. Similar to a provider’s national provider
identifier, the HPID provides an identification system for health plans to use for electronic transactions.
HHS has also promulgated regulations implementing another entity identifier, or OEID, that serves as an
identifier for entities that are not health plans, health care providers or individuals. These other entities,
which include third-party administrators, transaction vendors, and clearinghouses, are not required to
obtain an OEID, but they could obtain and use one if they needed to be identified in standardized
transactions. The implementation of the enforcement of the HPID and OEID process has been indefinitely
delayed by HHS, and if implemented its impact on our business is unclear at this time.
Financial Services Related Laws and Rules
Financial services and electronic payment processing services are subject to numerous laws,
regulations and industry standards, some of which might impact our operations and subject us, our
vendors and our customers to liability as a result of the payment distribution and processing solutions we
offer. Although we do not act as a bank, we offer solutions that involve banks, or vendors who contract
with banks and other regulated providers of financial services. As a result, we might be impacted by
banking and financial services industry laws, regulations and industry standards, such as licensing
requirements, solvency standards, requirements to maintain the privacy and security of nonpublic
personal financial information and Federal Deposit Insurance Corporation deposit insurance limits. In
addition, our patient billing and payment distribution and processing solutions might be impacted by
payment card association operating rules, certification requirements and rules governing electronic funds
transfers. If we fail to comply with applicable payment processing rules or requirements, we might be
subject to fines and changes in transaction fees and may lose our ability to process credit and debit card
transactions or facilitate other types of billing and payment solutions. Moreover, payment transactions
processed using the Automated Clearing House Network, or ACH, are subject to network operating rules
promulgated by the National Automated Clearing House Association and to various federal laws
regarding such operations, including laws pertaining to electronic funds transfers, and these rules and
laws might impact our billing and payment solutions. Further, our solutions might impact the ability of our
payor customers to comply with state prompt payment laws. These laws require payors to pay healthcare
claims meeting the statutory or regulatory definition of a “clean claim” within a specified time frame.
Banking Regulation
The Goldman Sachs Group, affiliates of which owned approximately 19.9% of the voting and
economic interest in our business as of December 31, 2017, is regulated as a bank holding company and
a financial holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act.
Due to the size of its voting and economic interest, we are deemed to be controlled by The Goldman
Sachs Group and are therefore considered to be a non-bank “subsidiary” of The Goldman Sachs Group
under the BHC Act. As a result, although we do not engage in banking operations, we are subject to
regulation, supervision, examination and potential enforcement action by the Board of Governors of the
Federal Reserve System, or the Federal Reserve, and to most banking laws, regulations and orders that
apply to The Goldman Sachs Group. In addition, certain restrictions applicable to Goldman Sachs under
the BHC Act apply to the Company as well, and we may be subject to regulatory oversight and
examination because we are a technology service provider to regulated financial institutions. The bank
regulatory framework is intended primarily to protect the safety and soundness of depository institutions,
the federal deposit insurance system, and depositors rather than our stockholders. Because of The
Goldman Sachs Group’s status as a bank holding company and a financial holding company, we have
agreed to certain covenants for the benefit of The Goldman Sachs Group that are intended to facilitate its
compliance with the BHC Act.
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act,
was signed into law by President Obama on July 21, 2010, including Title VI known as the “Volcker Rule”.
US financial regulators approved final rules to implement the Volcker Rule in December 2013. The
Volcker Rule, in relevant part, restricts banking entities from proprietary trading (subject to certain
17
exemptions) and from acquiring or retaining any equity, partnership or other interests in, or sponsoring, a
private equity fund, subject to satisfying certain conditions, and from engaging in certain transactions with
funds. On February 3, 2017, President Trump signed an executive order entitled “Presidential Executive
Order on Core Principles for Regulating the United States Financial System”. The executive order
required the Secretary of the Treasury to consult with the heads of the member agencies of the Financial
Stability Oversight Council (including the Federal Reserve) and report to the president within 120 days of
the date of the executive order on the extent to which existing laws, regulations, and other policies
promote the core principles outlined in the order. The report was also required to identify any laws,
regulations, and other policies that inhibit financial regulation in a manner consistent with the core
principles. On June 12, 2017, the U.S. Department of the Treasury published a report identifying
regulations inconsistent with the principles articulated in the order. This was the first of a series of reports
and addressed only the depository system. Future reports are expected to address the regulation of
capital markets, the asset management and insurance industries, and nonbank financial services
companies. The extent to which this executive order and the required reports thereunder may ultimately
result in changes to financial services laws, regulations, and policies applicable to us is not currently
known.
Under the current legislation, we will continue to be deemed to be controlled by The Goldman Sachs
Group for purposes of the BHC Act and, therefore, we will continue to be subject to regulation by the
Federal Reserve and to the BHC Act, as well as certain other banking laws, regulations and orders that
apply to The Goldman Sachs Group. We will remain subject to this regulatory regime until The Goldman
Sachs Group is no longer deemed to control us for bank regulatory purposes, which we do not generally
have the ability to control and which will not occur until The Goldman Sachs Group has significantly
reduced its voting and economic interest in us. We cannot predict the ownership level at which the
Federal Reserve would consider us no longer controlled by The Goldman Sachs Group, but it could be
less than 10%.
The Goldman Sachs Group and its subsidiaries, including Benefitfocus, generally may conduct only
activities that are authorized for a bank holding company or a “financial holding company” under the BHC
Act. The scope of services we may provide to our customers is limited under the BHC Act to those which
are (i) financial in nature or incidental to financial activities (including data processing services such as
those that we provide with our software solutions) or (ii) complementary to a financial activity and which
do not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally. We believe that our current and anticipated business activities are permitted under the
BHC Act.
Any failure of The Goldman Sachs Group to maintain its status as a financial holding company could
result in substantial limitations on our activities and our growth. In particular, our permissible activities
could be further restricted to only those that constitute banking or activities closely related to banking. The
Goldman Sachs Group’s loss of its financial holding company status could be caused by several factors,
including any failure by The Goldman Sachs Group’s bank subsidiaries to remain sufficiently capitalized,
by any examination downgrade of one of The Goldman Sachs Group’s bank subsidiaries, or by any
failure of one of The Goldman Sachs Group’s bank subsidiaries to maintain a satisfactory rating under the
Community Reinvestment Act. In addition, The Goldman Sachs Group is required to remain “well
capitalized” and “well managed” to maintain its status as a financial holding company. We have no ability
to prevent such occurrences from happening.
The Federal Reserve has broad enforcement authority over us, including the power to prohibit us
from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an
unsafe or unsound practice in conducting our business. The Federal Reserve may approve, deny or
refuse to act upon applications or notices for The Goldman Sachs Group and its subsidiaries to conduct
new activities, acquire or divest businesses or assets, or reconfigure existing operations. The Federal
Reserve may also impose substantial fines and other penalties for violations of applicable banking laws,
regulations and orders. We do not believe that any of our current or anticipated business activities will
require Federal Reserve approval.
There are limits on the ability of The Goldman Sachs Group’s bank subsidiaries to extend credit to
or conduct other transactions with us. In general, any loans to us from a bank subsidiary of The Goldman
Sachs Group must be on market terms and secured by designated amounts of specified collateral and
18
are limited to 10% of the lending bank’s capital stock and surplus. The Dodd-Frank Act places certain
additional restrictions on transactions between us and The Goldman Sachs Group, which we do not
expect to be material to us.
Geographic Areas
We operate solely in the United States. As such, we held substantially all our assets and generated
all our revenue in the United States during the fiscal years ended December 31, 2017, 2016 and 2015.
Corporate Information
We were incorporated in June 2000 as Benefitfocus.com, Inc., a South Carolina corporation. In
September 2013, we reincorporated in Delaware as Benefitfocus, Inc. Our principal executive offices are
located at 100 Benefitfocus Way, Charleston, South Carolina 29492, and our phone number is (843) 849-
7476. Our website address is www.benefitfocus.com. The information on, or that can be accessed
through, our website is not part of this report. We currently employ approximately 1,450 associates.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act,
are available free of charge on our website at www.benefitfocus.com as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and Exchange Commission. Such
reports may also be read and copied at the Securities and Exchange Commission’s Public Reference
Room at 100 F Street NE, Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission at (800) SEC-
0330. The Securities and Exchange Commission also maintains a website (www.sec.gov) that includes
our reports, proxy statements and other information.
Executive Officers
The following table sets forth information concerning our executive officers as of March 15, 2018:
Name
Raymond A. August
Mason R. Holland, Jr.
Jonathon E. Dussault
James P. Restivo
Age
Position
56 President and Chief Executive Officer
53 Executive Chairman, Director
44 Chief Financial Officer, Treasurer
58 Chief Technology Officer
Raymond A. August—President and Chief Executive Officer
Raymond August has been our President and Chief Executive Officer since January 2018. Prior to
that, Mr. August served as our Chief Operating Officer since August 2014 and was promoted to the title of
President and Chief Operating Officer in March 2015. Prior to joining Benefitfocus, Mr. August served as
the General Manager of the Computer Sciences Corp. (now DXC Technology Co. (NYSE: DXC)), or
CSC, Financial Services Group since October 2012. Prior to that, from March 2008 to September 2012,
he served as CSC’s President of the Financial Services Group. Since July 2013 he has served as a
member of the Executive Advisory council for Arthur Ventures Private Equity Fund. Mr. August earned a
B.S. in Accounting and Management Science from the University of South Carolina and is a Certified
Public Accountant.
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Mason R. Holland, Jr.—Executive Chairman of the Board
Mason Holland, one of our founders, has been our Executive Chairman and a member of our board
of directors since our founding in June 2000. Mr. Holland is responsible for the coordination of strategic
partnerships with industry leaders and client relations. Mr. Holland founded American Pensions, Inc. in
1988, serving as its Chairman and President from 1988 to 2003. Mr. Holland’s other ventures have
included establishing Holland Properties, LLC, a real estate development firm, in 1989, and acquiring
Eclipse Aerospace, Inc., a jet aircraft manufacturer, in May 2009, for which he served as Chairman and
Chief Executive Officer until its merger with Kestrel Aircraft in April 2015 to form ONE Aviation. Mr.
Holland has served as Chairman of ONE Aviation since its formation. Mr. Holland attended Old Dominion
University in Norfolk, Virginia.
Jonathon E. Dussault—Chief Financial Officer
Jonathon Dussault has been our Chief Financial Officer since August 2017. He also serves as our
Treasurer. Prior to that, since July 2014, Mr. Dussault served as Senior Vice President and Senior
Finance Officer of WEX Health, Inc. (formerly Evolution1, Inc.), a leading provider of health savings
account cloud-based technology and payment solutions for the healthcare industry and a subsidiary of
global payments processing company, WEX Inc. (NYSE: WEX). Prior to that, beginning in April 2003, Mr.
Dussault served in multiple roles at Evolution1, most recently as Chief Financial Officer, from December
2011 until its acquisition by WEX. From April 2003 to July 2010, Mr. Dussault also was Vice President of
Corporate Development at Women’s Health USA, Inc. and, prior to that, was responsible for financial
planning and analysis at Open Solutions, Inc. Mr. Dussault began his career at Arthur Andersen LLP. He
holds a B.S. in accounting from Babson College and earned his CPA certification in Massachusetts.
James P. Restivo—Chief Technology Officer
James Restivo has been our Chief Technology Officer since January 2016. Prior to joining
Benefitfocus, Mr. Restivo served as Vice President, Chief Technology Officer of Dodge Data & Analytics
LLC beginning in February 2015. From December 2012 to September 2014, Mr. Restivo served as Vice
President, Chief Technology Officer of Smarter Workforce at International Business Machines
Corporation, or IBM (NYSE: IBM). Prior to that, beginning in October 2006, Mr. Restivo served as Chief
Technology Officer of Kenexa Corporation where he managed global public Human Capital Management
R&D, SaaS operations and information security before the company was purchased by IBM. Mr. Restivo
received a B.S. in computer science, applied mathematics and statistics from Stony Brook University and
an M.S. from the Massachusetts Institute of Technology in computer science.
As of December 31, 2017, we had approximately 1,450 full-time associates. None of our associates
is represented by a labor union, and we consider our current relations with our associates to be good.
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Item 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should consider carefully the
risks and uncertainties described below, together with all of the other information in this Annual Report on
Form 10-K, including the consolidated financial statements and the related notes, before deciding to
invest in shares of our common stock. If any of the following risks were to materialize, our business,
financial condition, results of operations, and future growth prospects could be materially and adversely
affected. In that event, the market price of our common stock could decline and you could lose part or all
of your investment in our common stock.
Risks Related to Our Business
We have had a history of losses, and we might not be able to achieve or sustain profitability.
We experienced net losses of $25.9 million, $40.1 million, and $62.1 million, for the years ended
December 31, 2017, 2016, and 2015, respectively. We cannot predict if we will achieve sustained
profitability in the near future or at all. We expect to make significant future expenditures to develop and
expand our business. In addition, as a public company, we incur significant legal, accounting, and other
expenses that we did not incur as a private company. These increased expenditures will make it harder
for us to achieve and maintain future profitability. Our recent growth in revenue and number of customers
might not be sustainable, and we might not achieve sufficient revenue to achieve or maintain profitability.
We could incur significant losses in the future for a number of reasons, including the other risks described
in this Annual Report on Form 10-K, and we may encounter unforeseen expenses, difficulties,
complications and delays and other unknown events. Accordingly, we might not be able to achieve or
maintain profitability and we may incur significant losses for the foreseeable future.
Our quarterly operating results have fluctuated in the past and might continue to fluctuate,
causing the value of our common stock to decline substantially.
Our quarterly operating results might fluctuate due to a variety of factors, many of which are outside
of our control. As a result, comparing our operating results on a period-to-period basis might not be
meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our
stock price might be based on expectations of future performance that are unrealistic or that we might not
meet and, if our revenue or operating results fall below the expectations of investors or securities
analysts, the price of our common stock could decline substantially. For example, on August 4, 2017, the
first trading day after we publically announced our operating results for the second quarter ended June
30, 2017, our stock price dropped $7.10 per share, or approximately 20.5%, to $27.50.
Our operating results have varied in the past. In addition to other risk factors listed in this section,
some of the important factors that may cause fluctuations in our quarterly operating results include:
our ability to hire and retain qualified personnel, including the rate of expansion of our sales
force;
the extent to which our products and services achieve or maintain market acceptance;
changes in the regulatory environment related to benefits and healthcare;
our ability to introduce new products and services and enhancements to our existing products
and services on a timely basis;
new competitors and the introduction of enhanced products and services from competitors;
the financial condition of our current and potential customers;
changes in customer budgets and procurement policies;
the amount and timing of our investment in research and development activities;
technical difficulties with our products or interruptions in our services;
regulatory compliance costs;
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the timing, size, and integration success of potential future acquisitions; and
unforeseen legal expenses, including litigation and settlement costs.
In addition, a significant portion of our operating expense is relatively fixed in nature, and planned
expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected
revenue shortfalls might decrease our gross margins and could cause significant changes in our
operating results from quarter to quarter. If this occurs, the trading price of our common stock could fall
substantially, either suddenly or over time.
Because we previously recognized revenue and expense relating to monthly subscriptions and
professional services over varying periods, downturns or upturns in sales were not immediately
reflected in full in our operating results.
As a SaaS company, under ASC 605, we recognized our subscription revenue monthly for the term
of our contracts and recognized the majority of our professional services revenue ratably over the longer
of the contract term or the estimated expected life of the customer relationship. As a result, a portion of
the revenue we reported each quarter was the recognition of deferred revenue from contracts we entered
into during previous quarters. Consequently, a shortfall in demand for our software solutions and
professional services or a decline in new or renewed contracts in any one quarter might not have
significantly reduced our revenue for that quarter, but could have negatively affected our revenue in future
quarters. Accordingly, the effect of significant downturns in new or renewed sales of our products and
services was not reflected in full in our results of operations until future periods. Our revenue recognition
model also made it difficult for us to rapidly increase our revenue through additional sales in any period,
because revenue from new customers had to be recognized over the applicable term of the contracts or
the estimated expected life of the customer relationship period. In addition, we recognized professional
services expenses as incurred, which could have caused professional services gross margin to be
negative.
As a result of our variable sales and implementation cycles, we previously might not have been
able to recognize revenue to offset expenditures, which could have resulted in fluctuations in our
quarterly results of operations or otherwise harm our future operating results.
The sales cycle for our products and services can be variable, averaging four months in our
employer market segment and 15 months in our carrier market segment, each from initial contact to
contract execution. During the sales cycle, we expend time and resources, and we do not recognize any
revenue to offset such expenditures.
After a customer contract is signed, we provide an implementation process for the customer during
which we establish and test appropriate integrations, connections and registrations, load data into our
system, and train customer personnel. Our implementation cycle is also variable, typically ranging from
four to six months for employer implementations and from eight to 10 months for complex carrier
implementations, each from contract execution to completion of implementation. Some of our new
customer projects are complex and require a lengthy set-up period and significant implementation work.
During the implementation cycle, we expend substantial time, effort, and financial resources implementing
our products and services, but under ASC 605 we could not recognize the resulting revenue until
implementation was complete and the services were available for use, at which time we began
recognition of implementation revenue over the longer of the life of the contract or the expected life of the
customer relationship. Each customer’s situation is different, and unanticipated difficulties and delays
might arise as a result of failure by us or by the customer to complete our respective responsibilities. If
implementation periods were extended, under ASC 605 revenue recognition could have been delayed
and our financial condition might have been adversely affected. In addition, cancellation of any
implementation after it began might have resulted in lost time, effort, and expenses invested in the
cancelled implementation process and lost opportunity for implementing paying clients in that same
period of time.
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Changes in, or interpretations of, existing accounting principles, including regarding revenue
recognition and accounting for leases, and their implementation could have an adverse impact on
our reported financial results.
We prepare our financial statements in accordance with U.S. GAAP. These rules are subject to
interpretation by the SEC and various bodies formed to interpret and create appropriate accounting
principles. Changes in these rules or their interpretation could have a negative impact on our reported
financial results and may retroactively affect previously reported transactions. For example, in May 2014,
the Financial Accounting Standards Board, or FASB, issued an accounting standards update on revenue
recognition, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The
new standard was effective for us beginning January 1, 2018. While we are continuing to assess all
potential impacts of the standard, we have identified areas that might be more significantly affected. The
expected effects of the new accounting standard are included in Note 2 to our consolidated financial
statements appearing elsewhere in this Annual Report on Form 10-K. In addition, in February 2016,
FASB issued an accounting standards update on leases, requiring lessees, among other things, to
recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating
leases under previous authoritative guidance. This update, which will be effective beginning January 1,
2019 with early adoption permitted, also introduces new disclosure requirements for leasing
arrangements. We are currently evaluating the impact of this update on the consolidated financial
statements, which could be material, given our related party leases. Implementation of these new
standards, and any future accounting pronouncements, implementation guidelines or interpretations,
could have an adverse impact on our reported financial results, require that we make significant changes
to our systems, processes and controls, or the way we conduct our business. In addition, we are
expending considerable effort and resources preparing for and implementing of both these accounting
updates, which in and of itself could have negative impact on our results of operations.
We depend on our senior management team, and the loss of one or more key associates or an
inability to attract and retain highly skilled associates could adversely affect our business.
Our success depends largely upon the continued services of our key executive officers and other
associates. We also rely on our leadership team in the areas of research and development, marketing,
services, finance, and general and administrative functions, and on mission-critical individual contributors
in sales and research and development. From time to time, there may be changes in our executive
management team resulting from the hiring or departure of executives, which could disrupt our business.
For example: in 2017 we hired a new Chief Financial Officer and an Executive Vice President of Global
Sales; effective January 1, 2018, our Chief Executive Officer became Senior Advisor for Innovation, but
remained on our Board of Directors and our Chief Operating Officer became our Chief Executive Officer;
and, in March 2018, our Senior Advisor for Innovation resigned from employment and our Board, effective
April 1, 2018, for personal reasons. The loss of one or more of our executive officers or key associates
could have a serious adverse effect on our business.
To continue to execute our growth strategy, we also must attract and retain highly skilled personnel.
Competition is intense for sales people and for engineers with high levels of experience in designing and
developing software and Internet-related services. We might not be successful in maintaining our unique
culture and continuing to attract and retain qualified personnel. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly
skilled personnel with appropriate qualifications. The pool of qualified personnel with SaaS experience
and/or experience working with the benefits market is limited overall and specifically in Charleston, South
Carolina, where our principal office is located. In addition, many of the companies with which we compete
for experienced personnel have greater resources than we have and are located in geographic areas, like
Silicon Valley, that may attract more qualified technology workers.
In addition, in making employment decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the equity awards they are to receive in connection
with their employment. Volatility in the price of our stock might, therefore, adversely affect our ability to
attract or retain highly skilled personnel. Furthermore, the requirement to expense certain stock awards
might discourage us from granting the size or type of stock awards that job candidates require to join our
company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our
business and future growth prospects could be severely harmed.
23
We operate in a highly competitive industry, and if we are not able to compete effectively, our
business and operating results will be harmed.
The benefits management software market is highly competitive and is likely to attract increased
competition, which could make it hard for us to succeed. Small, specialized providers continue to become
more sophisticated and effective. In addition, large, well-financed, and technologically sophisticated
software companies might focus more on our market. The size and financial strength of these entities is
increasing as a result of continued consolidation in both the IT and healthcare industries. We expect large
integrated software companies to become more active in our market, both through acquisitions and
internal investment. In addition, insurance carriers may seek to bring certain of their benefits software
solutions in-house, whether through acquisitions or internal investment. For example, Aetna, a customer
of ours, owns bswift, a provider of insurance exchange technology solutions and benefits administration
technology solutions and services. If Aetna were to decide to use bswift’s solution in place of any portion
of the solutions we currently provide to them, then our business and operating results could be materially
and adversely affected. As costs fall and technology improves, increased market saturation might change
the competitive landscape in favor of our competitors.
Some of our current large competitors have greater name recognition, longer operating histories,
and significantly greater resources than we do. As a result, our competitors might be able to respond
more quickly and effectively than we can to new or changing opportunities, technologies, standards, or
customer requirements. In addition, current and potential competitors have established, and might in the
future establish, cooperative relationships with vendors of complementary products, technologies, or
services to increase the availability of their products in the marketplace. Accordingly, new competitors or
alliances might emerge that have greater market share, a larger customer base, more widely adopted
proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces
than we have, which could put us at a competitive disadvantage. Further, in light of these advantages,
even if our products and services are more effective than those of our competitors, current or potential
customers might accept competitive offerings in lieu of purchasing our offerings. Increased competition is
likely to result in pricing pressures, which could negatively impact our sales, profitability, or market share.
In addition to new niche vendors, who offer standalone products and services, we face competition from
existing enterprise vendors, including those currently focused on software solutions that have information
systems in place with potential customers in our target market. These existing enterprise vendors might
promise products or services that offer ease of integration with existing systems and which leverage
existing vendor relationships. In addition, large insurance carriers often have internal technology staffs
and proprietary software for benefits management, making them less likely to buy our solutions.
The market for our products and services is immature and volatile, and if it does not develop or if
it develops more slowly than we expect, the growth of our business will be harmed.
The cloud-based benefits management software market is relatively new and unproven, and it is
uncertain whether it will achieve and sustain high levels of demand and market acceptance. Our success
will depend to a substantial extent on the willingness of employers, carriers, and consumers to increase
their use of benefits management software. Many employers and carriers have invested substantial
personnel and financial resources to integrate internally developed solutions or traditional enterprise
software into their businesses for benefits management, and therefore might be reluctant or unwilling to
migrate to our cloud-based solutions. Furthermore, some businesses might be reluctant to use cloud-
based solutions because they have concerns about the security of their data and the reliability of the
technology delivery model associated with these solutions. If employers, carriers and consumers do not
perceive the benefits of our solutions, then our market might not develop at all, or it might develop more
slowly than we expect, either of which could significantly adversely affect our operating results. In
addition, we might make errors in predicting and reacting to relevant business trends, which could harm
our business. If any of these risks occur, it could materially adversely affect our business, financial
condition or results of operations.
The SaaS pricing model is evolving and our failure to manage its evolution and demand could
lead to lower than expected revenue and profit.
We derive most of our revenue growth from subscription offerings and, specifically, SaaS offerings.
This business model depends heavily on achieving economies of scale because the initial upfront
investment is costly and the associated revenue is recognized on a ratable basis. If we fail to achieve
24
appropriate economies of scale or if we fail to manage or anticipate the evolution and demand of the
SaaS pricing model, then our business and operating results could be adversely affected.
If we do not continue to innovate and provide products and services that are useful to consumers,
employers, insurance carriers, and brokers and provide high quality support services, we might
not remain competitive, and our revenue and operating results could suffer.
Our success depends in part on providing products and services that consumers, employers,
insurance carriers, and brokers will use to manage benefits. We must continue to invest significant
resources in research and development in order to enhance our existing products and services and
introduce new high quality products and services that customers will want. If we are unable to predict user
preferences or industry changes, or if we are unable to modify our products and services on a timely
basis, we might lose customers. Our operating results would also suffer if our innovations are not
responsive to the needs of our customers, are not appropriately timed with market opportunity, or are not
effectively brought to market. As technology continues to develop, our competitors might be able to offer
results that are, or that are perceived to be, substantially similar to or better than those generated by us.
This would force us to compete on additional product and service attributes and to expend significant
resources in order to remain competitive.
In addition, we may experience difficulties with software development, industry standards, design, or
marketing that could delay or prevent our development, introduction, or implementation of new solutions
and enhancements. The introduction of new solutions by competitors, the emergence of new industry
standards, or the development of entirely new technologies to replace existing offerings could render our
existing or future solutions obsolete.
Our success also depends on providing high quality support services to resolve any issues related
to our products and services. High quality education and customer support is important for the successful
marketing and sale of our products and services and for the renewal of existing customers. If we do not
help our customers quickly resolve issues and provide effective ongoing support, our ability to sell
additional products and services to existing customers would suffer and our reputation with existing or
potential customers would be harmed.
If we are unable to retain our existing customers, our revenue and results of operations would be
adversely affected.
We sell our products and services pursuant to agreements that are generally one year for
employers and three to five years for carriers. While our employer contracts generally automatically renew
on an annual basis, our carrier customers have no obligation to renew their contracts after their contract
period expires, and these contracts might not be renewed on the same or on more profitable terms if at
all. Additionally, some of our carrier customers are able to terminate their respective contracts without
cause or for convenience, although generally our carrier contracts are only cancellable by the carrier in an
instance of our uncured breach. As a result, our ability to grow depends in part on the continuance and
renewal of our carrier contracts. We may not be able to accurately predict future trends in customer
renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including
their level of satisfaction or dissatisfaction with our services, the cost of our services, the cost of services
offered by our competitors, consolidations or reductions in our customers’ spending levels. If our carrier
customers terminate or do not renew their contracts for our services, renew on less favorable terms, or do
not purchase additional functionality or products, our revenue may grow more slowly than expected or
decline, and our profitability and gross margins may be harmed.
A significant amount of our revenue is derived from our largest customers, and any reduction in
revenue from any of these customers would reduce our revenue and net income.
Our ten largest customers by revenue accounted for approximately 43%, 43% and 42% of our
consolidated revenue in each of 2017, 2016 and 2015, respectively. Our largest customer by revenue
accounted for approximately 12% and 11% of our revenue in each of 2017 and 2016, respectively. In
addition, one customer represented 12% and 14% of our accounts receivable at December 31, 2017 and
2016, respectively and another represented 13% at December 31, 2016. If any of our large customers or
strategic partners decides not to renew its contracts with us, or to renew on less favorable terms, our
25
business, revenues, reputation, and our ability to obtain new customers could be materially and adversely
affected.
Failure to adequately and effectively expand our direct sales force will impede our growth.
We believe that our future growth will depend on the development of our direct sales force and its
ability to obtain new customers and to manage our existing customer base. Identifying and recruiting
qualified personnel and training them in the use of our software requires significant time, expense, and
attention. It can take six months or longer before a new sales representative is fully trained and
productive. Our business may be adversely affected if our efforts to expand and train our direct sales
force do not generate a corresponding increase in revenues. For example, reduction of our sales force in
2016 negatively impacted sales, and as a result, revenue going forward. In particular, if we are unable to
hire and develop sufficient numbers of productive direct sales personnel or if new direct sales personnel
are unable to achieve desired productivity levels in a reasonable period of time, sales of our products and
services will suffer and our growth will be impeded.
Our growth depends in part on the success of our strategic relationships with third parties.
In order to grow our business, we anticipate that we will continue to depend on our relationships
with third parties, including Mercer LLC, or Mercer, and its affiliates, SAP SE, and others such as
technology and content providers, third party system integrators and referral sources, including brokers.
Identifying partners, negotiating and documenting relationships with them, and developing referral
sources requires significant time and resources. Our expanded relationship with and February 2015 sale
of stock to Mercer increases our reliance on it and related risks, including Mercer’s competitors being less
likely to do business with us. Our competitors might be effective in providing incentives to third parties to
favor their products or services or to prevent or reduce subscriptions to our products and services. In
addition, acquisitions of our partners by our competitors could result in a decrease in the number of our
current and potential customers, as our partners may no longer facilitate the adoption of our applications
by potential customers. If we are unsuccessful in establishing or maintaining our relationships with third
parties, our ability to compete in the marketplace or to grow our revenue could be impaired and our
operating results may suffer. Even if we are successful, we cannot assure you that these relationships will
result in increased customer use of our applications or increased revenue.
If the number of individuals covered by our employer and carrier customers decreases or the
number of products or services to which our employer and carrier customers subscribe
decreases, our revenue will decrease.
Under most of our customer contracts, we base our fees on the number of individuals to whom our
customers provide benefits and the number of products or services subscribed to by our customers. Many
factors may lead to a decrease in the number of individuals covered by our customers and the number of
products or services subscribed to by our customers, including:
failure of our customers to adopt or maintain effective business practices;
changes in the nature or operations of our customers;
government regulations; and
increased competition or other changes in the benefits marketplace.
If the number of individuals covered by our customers or the number of products or services
subscribed to by our customers decreases for any reason, our revenue will likely decrease.
Failure to manage our rapid growth effectively could increase our expenses, decrease our
revenue, and prevent us from implementing our business strategy.
We have been experiencing a period of rapid growth, which puts strain on our business. To manage
this and our anticipated future growth effectively, we must continue to maintain and enhance our IT
infrastructure, financial and accounting systems, and controls. We also must attract, train, and retain a
significant number of qualified sales and marketing personnel, customer support personnel, professional
services personnel, software engineers, technical personnel, and management personnel. Failure to
effectively manage our rapid growth could lead us to over-invest or under-invest in development and
26
operations, result in weaknesses in our infrastructure, systems, or controls, give rise to operational
mistakes, losses, loss of productivity or business opportunities, and result in loss of employees and
reduced productivity of remaining employees. Our growth could require significant capital expenditures
and might divert financial resources from other projects such as the development of new products and
services. If our management is unable to effectively manage our growth, our expenses might increase
more than expected, our revenue could decline or might grow more slowly than expected, and we might
be unable to implement our business strategy. The quality of our products and services might suffer,
which could negatively affect our reputation and harm our ability to retain and attract customers.
Economic uncertainties or downturns in the general economy or the industries in which our
customers operate could disproportionately affect the demand for our solutions and negatively
impact our results of operations.
General worldwide economic conditions have experienced significant downturns in the past, and
market volatility and uncertainty remain widespread, including as a result of the U.S. presidential
administration change. All of this makes it extremely difficult for our customers and us to accurately
forecast and plan future business activities. In addition, these conditions could cause our customers or
prospective customers to decrease headcount, benefits, or HR budgets, which could decrease corporate
spending on our products and services, resulting in delayed and lengthened sales cycles, a decrease in
new customer acquisition, and/or loss of customers. Furthermore, during challenging economic times, our
customers may have difficulty gaining timely access to sufficient credit or obtaining credit on reasonable
terms, which could impair their ability to make timely payments to us and adversely affect our revenue. If
that were to occur, our financial results could be harmed. Further, challenging economic conditions might
impair the ability of our customers to pay for the products and services they already have purchased from
us and, as a result, our write-offs of accounts receivable could increase. We cannot predict the timing,
strength, or duration of any economic slowdown or recovery. If the condition of the general economy or
markets in which we operate worsens, our business could be harmed.
If we fail to maintain awareness of our brand cost-effectively, our business might suffer.
We believe that maintaining awareness of our brand in a cost-effective manner is critical to
continuing the widespread acceptance of our existing solutions and is an important element in attracting
new customers. Furthermore, we believe that the importance of brand recognition will increase as
competition in our market increases. Successful promotion of our brand will depend largely on the
effectiveness of our marketing efforts and on our ability to provide reliable and useful services at
competitive prices. Our efforts to build, maintain and market changes to our brand nationally have
involved significant expenses. Brand promotion activities may not yield increased revenue, and even if
they do, any increased revenue may not offset the expenses we incur in maintaining our brand. If we fail
to successfully maintain our brand, or incur substantial expenses in an unsuccessful attempt to maintain
our brand, we may fail to attract enough new customers or retain our existing customers to the extent
necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to
liability for past sales and our future sales may decrease.
We might lose sales or incur significant expenses if states successfully impose broader guidelines
on state sales and use taxes. A successful assertion by one or more states requiring us to collect sales or
other taxes on the licensing of our software or sale of our services could result in substantial tax liabilities
for past transactions and otherwise harm our business. For example, New York recently completed a tax
audit of our Company and while we settled for amounts within our sales tax reserve, other states might
audit us in the future. Each state has different rules and regulations governing sales and use taxes, and
these rules and regulations are subject to varying interpretations that change over time. We review these
rules and regulations periodically and, when we believe we are subject to sales and use taxes in a
particular state, voluntarily engage state tax authorities in order to determine how to comply with their
rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related
penalties for past sales in states where we currently believe no such taxes are required.
Vendors of services, like us, are typically held responsible by taxing authorities for the collection and
payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes
should have, but have not, been paid with respect to our services, we might be liable for past taxes in
27
addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty
charges. Our customer contracts typically provide that our customers must pay all applicable sales and
similar taxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse
responsibility for interest or penalties associated with those taxes. If we are required to collect and pay
back taxes and the associated interest and penalties, and if our clients fail or refuse to reimburse us for all
or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover,
imposition of such taxes on us going forward will effectively increase the cost of our software and services
to our customers and might adversely affect our ability to retain existing customers or to gain new
customers in the areas in which such taxes are imposed.
We might not be able to utilize a significant portion of our net operating loss or other tax credit
carryforwards, which could adversely affect our profitability.
As of December 31, 2017, we had federal and state net operating loss carryforwards due to prior
period losses, which if not utilized will begin to expire in 2022 for federal and state purposes. We also
have South Carolina jobs tax credit and headquarters tax credit carryforwards, which if not utilized will
begin to expire in 2020. These tax credit carryforwards could expire unused and be unavailable to offset
future income tax liabilities, which could adversely affect our profitability.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our
ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited
if we experience an “ownership change”. A Section 382 “ownership change” generally occurs if one or
more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership
by more than 50 percentage points over their lowest ownership percentage within a rolling three-year
period. Similar rules might apply under state tax laws. Future issuances of our stock could cause an
“ownership change”. It is possible that an ownership change, or any future ownership change, could have
a material effect on the use of our net operating loss carryforwards or other tax attributes, which could
adversely affect our profitability.
We might be unable to adequately protect, and we might incur significant costs in enforcing, our
intellectual property and other proprietary rights.
Our success depends in part on our ability to enforce our intellectual property and other proprietary
rights. We rely on a combination of trademark, trade secret, copyright, patent, and unfair competition
laws, as well as license and access agreements and other contractual provisions, to protect our
intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property
and proprietary information by requiring employees and consultants to enter into confidentiality,
noncompetition, and assignment of inventions agreements. Our attempts to protect our intellectual
property might be challenged by others or invalidated through administrative process or litigation. While
we have eight U.S., three Chinese, two Japanese, Australian, Taiwanese, Hong Kong, and one Canadian
patents granted and a number of applications pending, we might not be able to obtain meaningful patent
protection for our software. In addition, if any patents are issued in the future, they might not provide us
with any competitive advantages, or might be successfully challenged by third parties. Agreement terms
that address non-competition are difficult to enforce in many jurisdictions and might not be enforceable in
certain cases. To the extent that our intellectual property and other proprietary rights are not adequately
protected, third parties might gain access to our proprietary information, develop and market products or
services similar to ours, or use trademarks similar to ours, each of which could materially harm our
business. Existing U.S. federal and state intellectual property laws offer only limited protection. Moreover,
the laws of other countries in which we might in the future conduct operations or contract for services
might afford little or no effective protection of our intellectual property. The failure to adequately protect
our intellectual property and other proprietary rights could materially harm our business.
In addition, if we resort to legal proceedings to enforce our intellectual property rights or to
determine the validity and scope of the intellectual property or other proprietary rights of others, the
proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that is
necessary in the future could result in substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results or financial condition.
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We might be sued by third parties for alleged infringement of their proprietary rights.
The software and Internet industries are characterized by the existence of a large number of
patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or
other violations of intellectual property rights. We have received in the past, and might receive in the
future, communications from third parties claiming that we have infringed the intellectual property rights of
others. Our technologies might not be able to withstand any third-party claims or rights against their use.
Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve,
divert management attention from executing our business plan, and require us to pay monetary damages
or enter into royalty or licensing agreements. In addition, many of our contracts contain warranties with
respect to intellectual property rights, and most require us to indemnify our clients for third-party
intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such
a claim.
Moreover, any settlement or adverse judgment resulting from such a claim could require us to pay
substantial amounts of money or obtain a license to continue to use the software or information that is the
subject of the claim, or otherwise restrict or prohibit our use of it. We might not be able to obtain a license
on commercially reasonable terms, if at all, from third parties asserting an infringement claim; we might
not be able to develop alternative technology on a timely basis, if at all; and we might not be able to
obtain a license to use a suitable alternative technology to permit us to continue offering, and our clients
to continue using, our affected services. Accordingly, an adverse determination could prevent us from
offering our services to others.
We might require additional capital to support business growth.
We intend to continue to make investments to support our business growth and might require
additional funds to respond to business challenges or opportunities, including the need to develop new
products and services or enhance our existing services, enhance our operating infrastructure, and
acquire complementary businesses and technologies. Accordingly, we might need to engage in equity or
debt financings to secure additional funds. If we raise additional funds through further issuances of equity
or convertible debt securities, our existing stockholders could suffer significant dilution, and any new
equity securities we issue could have rights, preferences and privileges superior to those of holders of our
common stock. Any debt financing secured by us in the future could involve restrictive covenants relating
to our capital-raising activities and other financial and operational matters, which might make it more
difficult for us to obtain additional capital and to pursue business opportunities, including potential
acquisitions. In addition, we might not be able to obtain additional financing on terms favorable to us, if at
all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require
it, our ability to continue to support our business growth and to respond to business challenges could be
significantly limited.
If we fail to meet our credit facility’s financial covenants, our business and financial condition
could be adversely affected.
Our credit facility contains financial covenants, including covenants related to financial liquidity and
EBITDA. If at any point we fail to comply with the financial covenants, the lenders can demand immediate
repayment of our outstanding balance and deny future borrowings under the credit facility. This could
have a negative impact on our liquidity, thereby reducing the availability of cash flow for other purposes
and adversely affecting our business.
Any future litigation against us could be costly and time-consuming to defend.
We may become subject, from time to time, to legal proceedings and claims that arise in the
ordinary course of business such as claims brought by our clients in connection with commercial disputes,
employment claims made by our current or former associates, or purported securities class actions.
Litigation might result in substantial costs and may divert management’s attention and resources, which
might seriously harm our business, overall financial condition, and operating results. Insurance might not
cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more
such claims, and might not continue to be available on terms acceptable to us. A claim brought against us
that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating
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results and leading analysts or potential investors to reduce their expectations of our performance, which
could reduce the trading price of our stock.
If we acquire companies or technologies in the future, they could prove difficult to integrate,
disrupt our business, dilute stockholder value, and adversely affect our operating results and the
value of our common stock.
As part of our business strategy, we might acquire, enter into joint ventures with, or make
investments in complementary companies, services, and technologies in the future. For example, in 2010,
we acquired the intellectual property assets of BeliefNetworks, Inc. We spent considerable time, effort,
and money pursuing this company and successfully integrating it into our business. Acquisitions and
investments involve numerous risks, including:
difficulties in identifying and acquiring products, technologies or businesses that will help our
business;
difficulties in integrating operations, technologies, services and personnel;
diversion of financial and managerial resources from existing operations;
risk of entering new markets in which we have little to no experience; and
delays in customer purchases due to uncertainty and the inability to maintain relationships with
customers of the acquired businesses.
If we fail to properly evaluate acquisitions or investments, we might not achieve the anticipated
benefits of any such acquisitions, we might incur costs in excess of what we anticipate, and management
resources and attention might be diverted from other necessary or valuable activities.
Future sales to customers outside the United States or with international operations might expose
us to risks inherent in international sales which, if realized, could adversely affect our business.
An element of our growth strategy is to expand internationally. Operating in international markets
requires significant resources and management attention and will subject us to regulatory, economic, and
political risks that are different from those in the United States. Because of our limited experience with
international operations, our international expansion efforts might not be successful in creating demand
for our products and services outside of the United States or in effectively selling our solutions in the
international markets we enter. In addition, we will face risks in doing business internationally that could
adversely affect our business, including:
unstable regional political and economic conditions, such as those caused by the U.S.
presidential administration change and the U.K. exit from the European Union;
the need to localize and adapt our solutions for specific countries, including translation into
foreign languages and associated expenses;
data privacy laws which require that customer data be stored and processed in a designated
territory;
difficulties in staffing and managing foreign operations;
different pricing environments, longer sales cycles and longer accounts receivable payment
cycles and collections issues;
new and different sources of competition;
weaker protection for intellectual property and other legal rights than in the United States and
practical difficulties in enforcing intellectual property and other rights outside of the United
States;
laws and business practices favoring local competitors;
compliance challenges related to the complexity of multiple, conflicting and changing
governmental laws and regulations, including employment, tax, privacy, and data protection
laws and regulations;
increased financial accounting and reporting burdens and complexities;
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restrictions on the transfer of funds; and
adverse tax consequences.
If we denominate our international contracts in local currencies, fluctuations in the value of the U.S.
dollar and foreign currencies might impact our operating results when translated into U.S. dollars.
Risks Related to Our Products and Services Offerings
If our security measures are breached or fail, and unauthorized persons gain access to
customers’ and consumers’ data, our products and services might be perceived as not being
secure, customers and consumers might curtail or stop using our products and services, and we
might incur significant liabilities.
Our products and services involve the storage and transmission of customers’ and consumers’
confidential information, which may include sensitive individually identifiable information that is subject to
stringent legal and regulatory obligations. Because of the sensitivity of this information, security features
of our software are very important. If our security measures are breached or fail and/or are bypassed as a
result of third-party action, inadvertent disclosures through technological or human error (including
employee error), malfeasance, hacking, ransomware, social engineering (including phishing schemes),
computer viruses, malware, or otherwise, someone might be able to acquire or obtain unauthorized
access to our customers’ confidential information and/or patient data or other personal information. As a
result, our reputation could be damaged, our business might suffer, information might be lost, and we
could face damages for contract breach, penalties for violation of applicable laws or regulations, costly
litigation or government investigations, and significant costs for remediation and remediation efforts to
prevent future occurrences.
In addition, we rely on various third parties, including employers’ HR departments, carriers, and
other third-party service providers and consumers themselves, as users of our system for key activities to
protect and promote the security of our systems and the data and information accessible within them,
such as administration of enrollment, consumer status changes, claims, and billing. Our customers might
authorize or enable third parties to access their information and data that is stored on our systems.
Because we do not control such access, we cannot ensure the complete integrity or security of such data
in our systems. On occasion, people have failed to adhere to appropriate data security practices. For
example, employers sometimes have failed to terminate the login/password of former employees, or
permitted current employees to share login/passwords. When we become aware of such security
incidents, we work with employers to terminate inappropriate access and provide additional instruction in
order to avoid the reoccurrence of such problems. Although to date these security incidents have not
resulted in claims against us or in material harm to our business, failures to perform these activities might
result in claims against us, which could expose us to significant expense, legal liability, and harm to our
reputation, which might result in loss of business.
Because techniques used to obtain unauthorized access or to sabotage systems change frequently and
often are not recognized until launched against a target, we might not be able to anticipate these
techniques or to implement adequate preventive measures. If an actual or perceived breach of our
security, or the security of third parties that we rely on, occurs, the market perception of the effectiveness
of our security measures could be harmed and we could lose sales and customers. Any significant
violations of data privacy or security laws could result in the loss of business, litigation and regulatory
investigations and penalties or settlements that could damage our reputation and adversely impact our
results of operations and financial condition. In addition, our customers might authorize or enable third
parties to access their information and data that is stored on our systems. Because we do not control
such access, we cannot ensure the complete integrity or security of such data in our systems.
Failure by our customers to obtain proper permissions and waivers might result in claims against
us or may limit or prevent our use of data, which could harm our business.
We require our customers to provide necessary notices and to obtain necessary permissions and
waivers for use and disclosure of information on the Benefitfocus Platform, and we require contractual
assurances from them that they have done so and will do so. If, however, despite these requirements and
contractual obligations, our customers do not obtain necessary permissions and waivers, then our use
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and disclosure of information that we receive from them or on their behalf might be limited or prohibited
by state or federal privacy laws or other laws. This could impair our functions, processes and databases
that reflect, contain, or are based upon such data and might prevent use of such data. In addition, this
could interfere with, or prevent creation or use of, rules, analyses, or other data-driven activities that
benefit us and our business. Moreover, we might be subject to claims or liability for use or disclosure of
information by reason of lack of valid notices, agreements, permissions or waivers. These claims or
liabilities could subject us to unexpected costs and adversely affect our operating results.
Our proprietary software might not operate properly, which could damage our reputation, give rise
to claims against us, or divert application of our resources from other purposes, any of which
could harm our business and operating results.
Proprietary software development is time-consuming, expensive, and complex. Unforeseen
difficulties can arise. We might encounter technical obstacles, and it is possible that we discover
problems that prevent our proprietary applications from operating properly. If they do not function reliably
or fail to achieve customer expectations in terms of performance, customers could assert liability claims
against us and/or attempt to cancel their contracts with us. This could damage our reputation and impair
our ability to attract or maintain customers.
Moreover, benefits management software as complex as ours has in the past contained, and may in
the future contain, or develop, undetected defects or errors. Material performance problems or defects in
our products and services might arise in the future. Errors might result from the interface of our services
with legacy systems and data, which we did not develop and the function of which is outside of our
control. Defects or errors might arise in our existing or new software or service processes. Because
changes in employer, carrier, and legal requirements and practices relating to benefits are frequent, we
are continuously discovering defects and errors in our software and service processes compared against
these requirements and practices. Undiscovered vulnerabilities could expose our software to
unscrupulous third parties who develop and deploy software programs that could attack our software or
result in unauthorized access to customer data. Defects and errors and any failure by us to identify and
address them could result in loss of revenue or market share, liability to customers or others, failure to
achieve market acceptance or expansion, diversion of development and other resources, injury to our
reputation, and increased service and maintenance costs. Defects or errors in our product or service
processes might discourage existing or potential customers from purchasing services from us. Correction
of defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any
defects or errors or in responding to resulting claims or liability might be substantial and could adversely
affect our operating results.
In addition, customers that rely on our products and services to collect, manage, and report benefits
data might have a greater sensitivity to service errors and security vulnerabilities than customers of
software products in general. We market and sell services that, among other things, provide information
to assist care providers in tracking and treating ill patients. Any operational delay in or failure of our
software service processes might result in the disruption of patient care and could cause harm to our
business and operating results.
Our customers might assert claims against us in the future alleging that they suffered damages due
to a defect, error, or other failure of our product or service processes. A product liability claim or errors or
omissions claim could subject us to significant legal defense costs and adverse publicity regardless of the
merits or eventual outcome of such a claim.
Various events could interrupt customers’ access to the Benefitfocus Platform, exposing us to
significant costs.
The ability to access the Benefitfocus Platform is critical to our customers. Our operations and
facilities are vulnerable to interruption and/or damage from a number of sources, many of which are
beyond our control, including, without limitation: (i) power loss and telecommunications failures, (ii) fire,
flood, hurricane, and other natural disasters, (iii) software and hardware errors, failures or crashes in our
own systems or in other systems, (iv) computer viruses, denial-of-service attacks, hacking and similar
disruptive problems in our own systems and in other systems, and (v) civil unrest, war, and/or terrorism.
We have implemented various measures to protect against interruptions of customers’ access to our
platform. If customers’ access is interrupted because of problems in the operation of our facilities, we
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could be exposed to significant claims by customers, particularly if the access interruption is associated
with problems in the timely delivery of funds due to customers or medical information relevant to patient
care. Our plans for disaster recovery and business continuity rely on third-party providers of related
services. If those vendors fail us at a time when our systems are not operating correctly, we could incur a
loss of revenue and liability for failure to fulfill our obligations. Any significant instances of system
downtime could negatively affect our reputation and ability to retain customers and sell our services,
which would adversely impact our revenue.
In addition, retention and availability of patient care and physician reimbursement data are subject
to federal and state laws governing record retention, accuracy, and access. Some laws impose
obligations on our customers and on us to produce information for third parties and to amend or expunge
data at their direction. Our failure to meet these obligations might result in liability, which could increase
our costs and reduce our operating results.
We rely on data center providers, Internet infrastructure, bandwidth providers, third-party
computer hardware and software, other third parties, and our own systems for providing services
to our customers, and any failure or interruption in the services provided by these third parties or
our own systems could expose us to litigation and negatively impact our relationships with
customers, adversely affecting our brand and our business.
We serve all our customers from two data centers, one located in Raleigh, North Carolina and the
other located in Charlotte, North Carolina. While we control and have access to our servers, we do not
control the operation of these facilities. The owners of our data center facilities have no obligation to
renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew
these agreements on commercially reasonable terms, or if one of our data center operators is acquired,
we may be required to transfer our servers and other infrastructure to new data center facilities, and we
may incur significant costs and possible service interruption in connection with doing so. Problems faced
by our third-party data center locations, with the telecommunications network providers with whom we or
they contract, or with the systems by which our telecommunications providers allocate capacity among
their customers, including us, could adversely affect the experience of our customers. Our third-party data
centers operators could decide to close their facilities without adequate notice. In addition, any financial
difficulties, such as bankruptcy faced by our third-party data centers operators or any of the service
providers with whom we or they contract may have negative effects on our business, the nature and
extent of which are difficult to predict.
In addition, our ability to deliver our web-based services depends on the development and
maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity, bandwidth capacity, and security. Our
services are designed to operate without interruption in accordance with our service level commitments.
However, we have experienced and expect that we will experience future interruptions and delays in
services and availability from time to time. In the event of a catastrophic event with respect to one or more
of our systems, we may experience an extended period of system unavailability, which could negatively
impact our relationship with customers. To operate without interruption, both we and our service providers
must guard against:
damage from fire, power loss, natural disasters and other force majeure events outside our
control;
communications failures;
software and hardware errors, failures, and crashes;
security breaches, computer viruses, hacking, denial-of-service attacks, and similar disruptive
problems; and
other potential interruptions.
We also rely on computer hardware purchased or leased and software licensed from third parties in
order to offer our services, including software from Oracle Corporation and Microsoft Corporation, and
routers and network equipment from Cisco, Dell and Hewlett-Packard Company. This hardware and
software is generally commercially available on varying terms. However, it is possible that this hardware
and software might not continue to be available on commercially reasonable terms, or at all. Any loss of
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the right to use any of this hardware or software could result in delays in the provisioning of our services
until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.
We exercise limited control over third-party vendors, which increases our vulnerability to problems
with technology and information services they provide. Interruptions in our network access and services
might in connection with third-party technology and information services reduce our revenue, cause us to
issue refunds to customers for prepaid and unused subscription services, subject us to potential liability,
or adversely affect our renewal rates. Although we maintain insurance for our business, the coverage
under our policies might not be adequate to compensate us for all losses that may occur. In addition, we
might not be able to continue to obtain adequate insurance coverage at an acceptable cost, if at all.
The use of open source software in our products and solutions may expose us to additional risks
and harm our intellectual property rights.
Some of our products and solutions use or incorporate software that is subject to one or more open
source licenses. Open source software is typically freely accessible, usable, and modifiable. Certain open
source software licenses require a user who intends to distribute the open source software as a
component of the user’s software to disclose publicly part or all of the source code to the user’s software.
In addition, certain open source software licenses require the user of such software to make any
derivative works of the open source code available to others on potentially unfavorable terms or at no
cost.
The terms of many open source licenses to which we are subject have not been interpreted by U.S.
or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that
imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that
event, we could be required to seek licenses from third parties in order to continue offering our products
or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or
to release our proprietary software code under the terms of an open source license, any of which could
harm our business. Further, given the nature of open source software, it may be more likely that third
parties might assert copyright and other intellectual property infringement claims against us based on our
use of these open source software programs.
While we monitor the use of all open source software in our products, solutions, processes, and
technology and try to ensure that no open source software is used in such a way as to require us to
disclose the source code to the related product or solution when we do not wish to do so, it is possible
that such use may have inadvertently occurred in deploying our proprietary solutions. In addition, if a
third-party software provider has incorporated certain types of open source software into software we
license from such third party for our products and solutions without our knowledge, we could, under
certain circumstances, be required to disclose the source code to our products and solutions. This could
harm our intellectual property position and our business, results of operations, and financial condition.
Risks Related to Regulation
Government regulation of the areas in which we operate creates risks and challenges with respect
to our compliance efforts and our business strategies.
The employee benefits industry is highly regulated and is subject to changing political, legislative,
regulatory, and other influences. Deregulatory efforts following the U.S. presidential and other elections in
2016 are ongoing, and the outcome of the 2018 elections could further impact the regulatory environment
in our industry. Existing and new laws and regulations affecting the employee benefits industry could
create unexpected liabilities for us, cause us to incur additional costs and restrict our operations. These
laws and regulations are complex and their application to specific services and relationships are not clear.
In particular, many existing laws and regulations affecting employee benefits, when enacted, did not
anticipate the services that we provide, and these laws and regulations might be applied to our services in
ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and
regulations, or our failure to comply, could create liability for us, result in adverse publicity, and negatively
affect our business. Some of the risks we face from the regulation of employee benefits are as follows:
PPACA. The Patient Protection and Affordable Care Act, or PPACA, and other healthcare
laws have led to an increasingly intricate regulatory framework under which health benefits are
obtained, delivered, accessed, and maintained. Although many of the provisions of PPACA do
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not directly apply to us, PPACA and continued efforts to repeal or modify the law may affect
the business of many of our customers. Carriers and large employers might experience
changes in the numbers of individuals they insure as a result of Medicaid expansion, the
creation of state and national exchanges under PPACA and state Medicaid expansion, and the
number of states that have chosen to implement the Medicaid expansion or adopt state-
specific exchanges remains in flux. Although we are unable to predict with any reasonable
certainty or otherwise quantify the likely impact of PPACA and related repeal efforts and
deregulatory initiatives on our business model, financial condition, or results of operations,
changes in the business of our customers and the number of individuals they insure may
negatively impact our business.
False or Fraudulent Claim Laws. There are numerous federal and state laws that forbid
submission of false information or the failure to disclose information in connection with
submission and payment of claims for reimbursement from the government. In some cases,
these laws also forbid abuse of existing systems for such submission and payment. In
addition, federal and state laws prohibit kickbacks in association with the provision of
healthcare services. Many of these state laws pertain to all payors, not just items or services
paid for by the federal government. Although our business operations are generally not subject
to these laws and regulations, any contract we have with a government entity requires us to
comply with these laws and regulations. Any failure of our services to comply with these laws
and regulations could result in substantial liability, including but not limited to criminal liability,
could adversely affect demand for our services, and could force us to expend significant
capital, research and development, and other resources to address the failure. Any
determination by a court or regulatory agency that our services with government clients violate
these laws and regulations could subject us to civil or criminal penalties, invalidate all or
portions of some of our government client contracts, require us to change or terminate some
portions of our business, require us to refund portions of our services fees, cause us to be
disqualified from serving not only government clients but also all clients doing business with
government payers, and have an adverse effect on our business.
HIPAA and Other Privacy and Security Requirements. There are numerous U.S. federal and
state laws and regulations related to the privacy and security of personal health information. In
particular, regulations promulgated pursuant to the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, established privacy and security standards that limit the
use and disclosure of protected health information, and require the implementation of
administrative, physical, and technological safeguards to ensure the confidentiality, integrity,
availability, and privacy of protected health information. Health plans, healthcare
clearinghouses, and most providers are “Covered Entities” subject to HIPAA. With respect to
our operations as a healthcare clearinghouse, we are directly subject to the privacy regulations
established under HIPAA, or the Privacy Rule, and the security regulations established under
HIPAA, or the Security Rule. In addition, our carrier customers, or payors, are considered to
be Covered Entities and are required to enter into written agreements with us, known as
Business Associate Agreements, under which we are considered to be a “Business Associate”
and that require us to safeguard protected health information and restrict how we may use and
disclose such information. Both Covered Entities and Business Associates are subject to direct
oversight and audit by the Department of Health and Human Services.
Violations of HIPAA might result in civil fines of up to $55,910 per violation and a maximum
civil penalty of $1,677,299 in a calendar year for violations of the same requirement, as well as
criminal penalties. State attorneys general may bring civil actions seeking either injunctions or
damages in response to violations of HIPAA that threaten the privacy of state residents.
Moreover, the U.S. Department of Health and Human Services’ Office for Civil Rights (“OCR”)
operates a formal HIPAA audit program. The audits are intended to assess compliance with
HIPAA by both Covered Entities and Business Associates and are conducted by OCR with
assistance from third party vendors. Issues identified during the audits may result in agency-
imposed corrective action plans or civil monetary penalties.
We might not be able to adequately address the business risks created by HIPAA
implementation and enforcement. Furthermore, we are unable to predict what changes to
HIPAA or other laws or regulations might be made in the future or how those changes could
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affect our business or the costs of compliance. Noncompliance may result in litigation and
high-dollar fines or settlements.
Some payors and clearinghouses interpret HIPAA transaction requirements differently than we
do. Where payors or clearinghouses require conformity with their interpretations as a condition
of a successful transaction, we seek to comply with their interpretations.
In addition to the Privacy Rule and Security Rule, most states have enacted patient
confidentiality laws that protect against the disclosure of confidential medical and/or health
information, and many states have adopted or are considering further legislation in this area,
including privacy safeguards, security standards, and data security breach notification
requirements. Such state laws, if more stringent than HIPAA requirements, are not preempted
by the federal requirements, and we are required to comply with them. Failure by us to comply
with any state standards regarding patient privacy may subject us to penalties, including civil
monetary penalties and, in some circumstances, criminal penalties. Such failure may injure our
reputation and adversely affect our ability to retain customers and attract new customers.
Personal Privacy and Consumer Protection. There are numerous U.S. federal and state laws
and regulations that have been adopted or are being considered regarding the collection,
retention, use, and disclosure of personal information. In addition to HIPAA, we might be
subject to various laws, rules and regulations related to privacy and information security such
as those promulgated under the Gramm-Leach-Bliley Act and various state laws regulating the
use and security of personal information. Those laws, rules, and regulations include
requirements such as reasonable and appropriate safeguards to protect personal information,
or providing appropriate notice to consumers about how their personal information will be used
or disclosed. Our management believes that we are currently operating in compliance with
these regulations. However, continued compliance with these evolving laws, rules and
regulations regarding the privacy, security and protection of our customers’ data, or the
implementation of any additional privacy rules and regulations, could result in higher
compliance and technology costs for us.
Medicare and Medicaid Regulatory Requirements. We have contracts with insurance carriers
who offer Medicare Managed Care (also known as Medicare Advantage or Medicare Part C)
and Medicaid Managed Care benefits plans. We also have contracts with insurance carriers
who offer Medicare prescription drug benefits (also known as Medicare Part D) plans. The
activities of the Medicare plans are regulated by the Centers for Medicare & Medicaid
Services, or CMS, the federal agency that provides oversight of the Medicare and Medicaid
programs. The Medicaid Managed Care plans are regulated by both CMS and the individual
states where the plans are offered. Some of the activities that we might perform, such as the
enrollment of beneficiaries, may be subject to CMS and/or state regulation, and such
regulations may force us to change the way we do business or otherwise restrict our ability to
provide services to such plans. Moreover, the regulatory environment with respect to these
programs has become, and will likely continue to become, increasingly complex.
Financial Services-Related Laws and Rules. Financial services and electronic payment
processing services are subject to numerous laws, regulations and industry standards, some
of which might impact our operations and subject us, our vendors, and our customers to
liability as a result of the payment distribution and processing solutions we offer. Although we
do not act as a bank, we offer solutions that involve banks, or vendors who contract with banks
and other regulated providers of financial services. As a result, we might be impacted by
banking and financial services industry laws, regulations, and industry standards, such as
licensing requirements, solvency standards, requirements to maintain the privacy and security
of nonpublic personal financial information, and Federal Deposit Insurance Corporation
deposit insurance limits. In addition, our patient billing and payment distribution and
processing solutions might be impacted by payment card association operating rules,
certification requirements, and rules governing electronic funds transfers. If we fail to comply
with applicable payment processing rules or requirements, we might be subject to fines and
changes in transaction fees and may lose our ability to process credit and debit card
transactions or facilitate other types of billing and payment solutions. Moreover, payment
transactions processed using the Automated Clearing House are subject to network operating
rules promulgated by the National Automated Clearing House Association and to various
federal laws regarding such operations, including laws pertaining to electronic funds transfers,
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and these rules and laws might impact our billing and payment solutions. Further, our solutions
might impact the ability of our payor customers to comply with state prompt payment laws.
These laws require payors to pay healthcare claims meeting the statutory or regulatory
definition of a “clean claim” within a specified time frame.
Insurance Broker Laws. Insurance laws in the United States are often complex, and states
have broad authority to adopt regulations regarding brokerage activities. Our business's
regulatory oversight generally also includes activity governing the selection and payment of
insurance products and the licensing of insurance brokers and our wholly owned subsidiary,
BenefitStore, Inc., is an insurance agency. Our continuing ability to provide insurance
brokerage related services in the jurisdictions in which we operate depends on our compliance
with the rules and regulations promulgated from time to time by the regulatory authorities in
each of these jurisdictions.
ERISA. The Employee Retirement Income Security Act of 1974, as amended, or ERISA,
regulates how employee benefits are provided to or through certain types of employer-
sponsored health benefits plans. ERISA is a set of laws and regulations that is subject to
periodic interpretation by the U.S. Department of Labor as well as the federal courts. In some
circumstances, and under certain customer contracts, we might be deemed to have assumed
duties that make us an ERISA fiduciary, and thus be required to carry out our operations in a
manner that complies with ERISA in all material respects. We believe that our current
operations do not render us subject to ERISA fiduciary obligations, and therefore that we are
in material compliance with ERISA and that any such compliance does not currently have a
material adverse effect on our operations. However, there can be no assurance that continuing
ERISA compliance efforts or any future changes to ERISA will not have a material adverse
effect on us.
Third-Party Administrator Laws. Numerous states in which we do business have adopted
regulations governing entities engaged in third-party administrator, or TPA, activities. TPA
regulations typically impose requirements regarding enrollment into benefits plans, claims
processing and payments, and the handling of customer funds. Although we do not believe we
are currently acting as a TPA, changes in state regulations could result in us being obligated to
comply with such regulations, which might require us to obtain licenses to provide TPA
services in such states.
We are subject to banking regulations that may limit our business activities.
The Goldman Sachs Group, affiliates of which owned approximately 19.9% of the voting and
economic interest in our business at December 31, 2017, is regulated as a bank holding company and a
financial holding company under the Bank Holding Company Act of 1956, as amended, or BHC Act. The
BHC Act imposes regulations and requirements on The Goldman Sachs Group and on any company that
is deemed to be controlled by The Goldman Sachs Group under the BHC Act and the regulations of the
Board of Governors of the Federal Reserve System, or the Federal Reserve. Due to the size of its voting
and economic interest, we are deemed to be controlled by The Goldman Sachs Group and are therefore
considered to be a non-bank “subsidiary” of The Goldman Sachs Group under the BHC Act. We will
remain subject to this regulatory regime until The Goldman Sachs Group is no longer deemed to control
us for purposes of the BHC Act, which we do not generally have the ability to control and which will not
occur until The Goldman Sachs Group has significantly reduced its voting and economic interest in us.
As a controlled non-bank subsidiary of The Goldman Sachs Group, we are restricted from engaging
in activities that are not permissible under the BHC Act, or the rules and regulations promulgated
thereunder. Permitted activities for a bank holding company or any controlled non-bank subsidiary
generally include activities that the Federal Reserve has previously determined to be closely related to
banking, financial in nature or incidental or complementary to financial activities, including data
processing services such as those that we provide with our software solutions. Restrictions placed on The
Goldman Sachs Group as a result of supervisory or enforcement actions under the BHC Act or otherwise
may restrict us or our activities in certain circumstances, even if these actions are unrelated to our
conduct or business. Further, as a result of being subject to regulation and supervision by the Federal
Reserve, we may be required to obtain the prior approval of the Federal Reserve before engaging in
certain new activities or businesses, whether organically or by acquisition. The Federal Reserve could
exercise its power to restrict us from engaging in any activity that, in the Federal Reserve’s opinion, is
37
unauthorized or constitutes an unsafe or unsound business practice. To the extent that these regulations
impose limitations on our business, we could be at a competitive disadvantage because some of our
competitors are not subject to these limitations.
Additionally, any failure of The Goldman Sachs Group to maintain its status as a financial holding
company could result in further limitations on our activities and our growth. In particular, our permissible
activities could be restricted to only those that constitute banking or activities closely related to banking.
The Goldman Sachs Group’s loss of its financial holding company status could be caused by several
factors, including any failure by The Goldman Sachs Group’s bank subsidiaries to remain sufficiently
capitalized, by any examination downgrade of one of The Goldman Sachs Group’s bank subsidiaries, or
by any failure of one of The Goldman Sachs Group’s bank subsidiaries to maintain a satisfactory rating
under the Community Reinvestment Act. In addition, The Goldman Sachs Group is required to remain
“well capitalized” and “well managed” in order to maintain its status as a financial holding company. We
have no ability to prevent such occurrences from happening.
As a non-bank subsidiary of a bank holding company, we are subject to examination by the Federal
Reserve and required to provide information and reports for use by the Federal Reserve under the BHC
Act. In addition, we may be subject to regulatory oversight and examination because we are a technology
service provider to regulated financial institutions. The Federal Reserve may also impose substantial fines
and other penalties for violations of applicable banking laws, regulations and orders. Further, the Dodd-
Frank Act, including Title VI thereunder known as the “Volcker Rule”, and related financial regulatory
reform call for the issuance of numerous regulations designed to increase and strengthen the regulation
of bank holding companies, including The Goldman Sachs Group and its affiliates. The Volker Rule, in
relevant part, restricts banking entities from proprietary trading (subject to certain exemptions) and from
acquiring or retaining any equity, partnership or other interests in, or sponsoring, a private equity fund,
subject to satisfying certain conditions, and from engaging in certain transactions with funds.
We have agreed to certain covenants that are intended to facilitate The Goldman Sachs Group’s
compliance with the BHC Act, but that may impose certain obligations on our company. In particular, The
Goldman Sachs Group has rights to conduct audits on, and access certain information of, our company
and certain rights to review the policies and procedures that we implement to comply with the laws and
regulations that relate to our activities. In addition, we are obligated to provide The Goldman Sachs Group
with notice of certain events and business activities and cooperate with The Goldman Sachs Group to
mitigate potential adverse consequences resulting therefrom.
Potential regulatory requirements placed on our software, services, and content could impose
increased costs on us, delay or prevent our introduction of new service types, and impair the
function or value of our existing service types.
Our products and services are and are likely to continue to be subject to increasing regulatory
requirements in a number of ways. As these requirements proliferate, we must change or adapt our
products and services to comply. Changing regulatory requirements might render our services obsolete or
might block us from accomplishing our work or from developing new services. This might in turn impose
additional costs upon us to comply or to further develop our products and services. It might also make
introduction of new product or service types more costly or more time-consuming than we currently
anticipate. It might even prevent introduction by us of new products or services or cause the continuation
of our existing products or services to become unprofitable or impossible.
Potential government subsidy of services similar to ours, or creation of a single payor system,
might reduce customer demand.
Recently, entities including brokers and U.S. federal and state governments have offered to
subsidize adoption of online benefits platforms or clearinghouses. In addition, federal regulations have
been changed to permit such subsidy from additional sources subject to certain limitations. To the extent
that we do not qualify or participate in such subsidy programs, demand for our services might be reduced,
which may decrease our revenue. In addition, prior proposals regarding healthcare reform have included
the concept of creation of a single payor for healthcare insurance. This kind of consolidation of critical
benefits activity could negatively impact the demand for our services.
38
Our services present the potential for embezzlement, identity theft, or other similar illegal
behavior by our associates with respect to third parties.
Among other things, certain services offered by us involve collecting payment information from
individuals, and this frequently includes check and credit card information. Even though we do not handle
direct payments, our services also involve the use and disclosure of personal and business information
that could be used to impersonate third parties, commit identity theft, or otherwise gain access to their
data or funds. If any of our associates take, convert, or misuse such funds, documents, or data, we could
be liable for damages, and our business reputation could be damaged or destroyed. Moreover, if we fail
to adequately prevent third parties from accessing personal and/or business information and using that
information to commit identity theft, we might face legal liabilities and other losses than can have a
negative impact on our business.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, and you
may not be able to resell your shares at or above the price at which you purchase it.
The stock market historically has experienced extreme price and volume fluctuations. As a result of
this volatility, you might not be able to sell your common stock at or above the price at which you
purchase it. The public market for our stock is new. From our IPO in September 2013 through December
31, 2017, the per share trading price of our common stock has been as high as $77.00 and as low as
$19.58. It might continue to fluctuate significantly in response to various factors, some of which are
beyond our control. These factors include:
our operating performance and the operating performance of similar companies;
the overall performance of the equity markets;
changes in laws or regulations relating to the sale of health insurance;
announcements by us or our competitors of acquisitions, business plans, or commercial
relationships;
any major change in our management;
threatened or actual litigation;
publication of research reports or news stories about us, our competitors, or our industry, or
positive or negative recommendations or withdrawal of research coverage by securities
analysts;
large volumes of sales of our shares of common stock by existing stockholders; and
general political and economic conditions.
In addition, the stock market in general, and the market for Internet-related companies in particular,
has experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. These fluctuations might be even
more pronounced in the relatively new trading market for our stock. Additionally, securities class action
litigation has often been instituted against companies following periods of volatility in the overall market
and in the market price of a company’s securities. This litigation, if instituted against us, could result in
substantial costs, divert our management’s attention and resources, and harm our business, operating
results, and financial condition.
We do not currently intend to pay dividends on our common stock and, consequently, your ability
to achieve a return on your investment will depend on appreciation in the price of our common
stock.
We have never declared or paid any cash dividends on our common stock and do not currently
intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund
our growth. Therefore, you are not likely to receive any dividends on your common stock for the
foreseeable future, and the success of an investment in shares of our common stock will depend upon
future appreciation in its value, if any. There is no guarantee that shares of our common stock will
appreciate in value or even maintain the price at which our stockholders purchased their shares.
39
Our stock price could decline due to the large number of outstanding shares of our common
stock eligible for future sale.
Sales of a substantial number of shares of our common stock in the public market or the market
perception that the holder or holders of a large number of shares intend to sell shares, could reduce the
market price of our common stock. These sales could make it more difficult for us to sell equity or equity
related securities in the future at a time and price that we deem appropriate.
As of December 31, 2017, we had an aggregate of 31,307,989 shares of common stock
outstanding. As of December 31, 2017, there also were outstanding options, restricted stock units and
warrants to purchase 2,207,208 shares of our common stock that, if exercised or vested, as applicable,
will result in these additional shares becoming available for sale subject in some cases to Rule 144. On
November 12, 2013, June 7, 2016 and June 9, 2017, we also registered an aggregate of 9,099,766
shares of our common stock that we may issue or sell under our stock plans. These shares can be freely
sold in the public market upon issuance, unless they are held by “affiliates”, as that term is defined in Rule
144 of the Securities Act. If a large number of these shares are sold in the public market, the sales could
reduce the trading price of our common stock.
A limited number of stockholders will have the ability to influence the outcome of director
elections and other matters requiring stockholder approval.
As of December 31, 2017, our directors, executive officers, and their affiliated entities beneficially
owned approximately 37.6% of our outstanding common stock. In particular, GS Capital Partners VI
Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI Fund, L.P., and GS
Capital Partners VI GmbH & CO. KG, which are affiliates of Goldman, Sachs & Co. and which we refer to
as the Goldman Funds, collectively beneficially owned approximately 19.9%. These stockholders, if they
act together, could exert substantial influence over matters requiring approval by our stockholders,
including the amendment of our certificate of incorporation and bylaws, and the approval of mergers or
other business combination transactions.
Additionally, the Goldman Funds, Mason R. Holland, Jr., our Executive Chairman and a director,
and Shawn A. Jenkins, our Senior Advisor for Innovation and a director until April 1, 2018, entered into a
voting agreement for the election of directors. As of December 31, 2017, these stockholders collectively
beneficially owned approximately 36.9% of our common stock. Pursuant to the voting agreement, the
parties are obligated to vote all of their shares to elect two directors nominated by the Goldman Funds
and each of Messrs. Holland and Jenkins to our board of directors, if requested. As a result, these
stockholders will have significant influence on the outcome of director elections. This concentration of
ownership might discourage, delay, or prevent a change in control of our company, which could deprive
our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company
and might reduce our stock price. These actions may be taken even if they are opposed by other
stockholders.
Our business is subject to changing regulations regarding corporate governance, disclosure
controls, internal control over financial reporting, and other compliance areas that will increase
both our costs and the risk of noncompliance.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act
of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-
Frank Act, and the rules and regulations of our stock exchange. The requirements of these rules and
regulations will increase our legal, accounting, and financial compliance costs, will make some activities
more difficult, time-consuming, and costly, and may also place undue strain on our personnel, systems,
and resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls
and procedures and internal control over financial reporting. Commencing with our fiscal year ending
December 31, 2014, we performed system and process evaluation and testing of our internal control over
financial reporting to allow management to report on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. We also are required to disclose
changes made to our internal controls and procedures on a quarterly basis. Our ongoing compliance with
Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and
expend significant management efforts.
40
In addition, we anticipate we will no longer qualify as an “emerging growth company” as defined in
the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, as of September 17, 2018.
Accordingly, our independent registered public accounting firm will be required to formally attest to the
effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-
Oxley Act in our Annual Report on Form 10-K for the year ending December 31, 2018. We will also be
required to include additional information regarding executive compensation in our 2019 proxy statement
and hold a nonbinding advisory vote on executive compensation at our 2019 annual meeting of
stockholders. These additional reporting requirements, among others, may increase our legal and
financial compliance costs and cause management and other personnel to divert attention from
operational and other business matters to devote substantial time to public company reporting
requirements. In addition, if we are not able to comply with changing legal requirements in a timely
manner, the market price of our stock could decline and we could be subject to sanctions or
investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory
authorities, which would require additional financial and management resources.
Failure to develop and maintain adequate financial controls could cause us to have material
weaknesses, which could adversely affect our operations and financial position.
As previously reported, in the first quarter of 2014, we identified a material weakness in internal
controls over the accounting for leasing transactions which resulted in the identification of a material error
in the accounting for our headquarters lease executed in May 2005. We might in the future discover other
material weaknesses that require remediation. In addition, an internal control system, no matter how well-
designed, cannot provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud will be detected. If we are not able to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to
maintain proper and effective internal controls, we might not be able to produce timely and accurate
financial statements. If that were to happen, the market price of our stock could decline and we could be
subject to sanctions or investigations by the stock exchange on which our common stock is listed, the
SEC, or other regulatory authorities.
Any failure to develop or maintain effective controls, or any difficulties encountered in their
implementation or improvement, could harm our operating results or cause us to fail to meet our reporting
obligations. Any failure to implement and maintain effective internal controls also could adversely affect
the results of periodic management evaluations regarding the effectiveness of our internal control over
financial reporting that we are required to include in our periodic reports filed with the SEC under Section
404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over
financial reporting could also cause investors to lose confidence in our reported financial and other
information, which would likely have a negative effect on the trading price of our common stock.
Implementing any appropriate changes to our internal controls may require specific compliance training of
our directors, officers, and employees, entail substantial costs in order to modify our existing accounting
systems, and take a significant period of time to complete. Such changes may not be effective, however,
in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or
consequent inability to produce accurate financial statements on a timely basis, could increase our
operating costs and could materially impair our ability to operate our business. In the event that we are
not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that
our internal controls are perceived as inadequate, or that we are unable to produce timely or accurate
financial statements, investors may lose confidence in our operating results and our stock price could
decline.
While we remain an emerging growth company, we cannot be certain if the reduced disclosure
requirements applicable to emerging growth companies will make our common stock less
attractive to investors.
We anticipate we will no longer qualify as an emerging growth company as of September 17, 2018.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting
standards until such time as those standards apply to private companies. We have irrevocably elected not
to avail ourselves of this exemption from new or revised accounting standards and, therefore, we
continue to be subject to the same new or revised accounting standards as other public companies that
are not emerging growth companies.
41
For as long as we continue to be an emerging growth company, we intend to take advantage of
certain other exemptions from various reporting requirements that are applicable to other public
companies including, but not limited to, reduced disclosure obligations regarding executive compensation
in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments
not previously approved, and exemptions from the requirements of auditor attestation reports on the
effectiveness of our internal control over financial reporting. We cannot predict if investors will find our
common stock less attractive while we continue to rely on these exemptions. If some investors find our
common stock less attractive as a result, there may be a less active trading market for our common stock
and our stock price may be more volatile.
Provisions in our restated certificate of incorporation and amended and restated bylaws and
Delaware law might discourage, delay, or prevent a change in control of our company or changes
in our management and, therefore, depress the trading price of our common stock.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay,
or prevent a merger, acquisition, or other change in control that stockholders consider favorable, including
transactions in which you might otherwise receive a premium for your shares of our common stock. These
provisions might also prevent or frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
limitations on the removal of directors;
advance notice requirements for stockholder proposals and nominations;
limitations on the ability of stockholders to call special meetings;
the inability of stockholders to act by written consent once The Goldman Sachs Group and its
affiliates cease to own at least 35% of our voting equity;
the inability of stockholders to cumulate votes at any election of directors;
the classification of our board of directors into three classes with only one class, representing
approximately one-third of our directors, standing for election at each annual meeting; and
the ability of our board of directors to make, alter or repeal our bylaws.
Our Board of Directors has the ability to designate the terms of and issue new series of preferred
stock without stockholder approval. In addition, Section 203 of the Delaware General Corporation Law
prohibits a publicly held Delaware corporation from engaging in a business combination with an interested
stockholder, generally a person which together with its affiliates owns, or within the last three years has
owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is approved in a prescribed
manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that
investors are willing to pay in the future for shares of our common stock. They could also deter potential
acquirers of our company, thereby reducing the likelihood that you could receive a premium for your
common stock in an acquisition.
If securities or industry analysts do not publish research or reports about our business, or
publish inaccurate or unfavorable research or reports about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends, to some extent, on the research and reports that
securities or industry analysts publish about us and our business. We do not have any control over these
analysts. If one or more of the analysts who cover us downgrade our common stock or change their
opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which could cause our stock price or trading volume to decline.
42
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2017, we occupied approximately 289,000 square feet on the Daniel Island
Executive Center campus in Charleston, South Carolina. This office space is leased under leases
expiring in 2031. As of December 31, 2017, we also leased facilities in Greenville, South Carolina; North
Charleston, South Carolina; Tulsa, Oklahoma; and Salt Lake City, Utah.
We believe that our current and planned facilities are sufficient for our needs. We may add other
facilities or expand existing facilities as we expand our associate base and geographic markets in the
future, and we believe that suitable additional space will be available as needed to accommodate any
such expansion of our operations.
Item 3. Legal Proceedings.
From time to time, we might become involved in legal or regulatory proceedings arising in the
ordinary course of our business. We are not currently a party to any material litigation or regulatory
proceeding and we are not aware of any pending or threatened litigation or regulatory proceeding against
us that could have a material adverse effect on our business, operating results, financial condition or cash
flows.
Item 4. Mine Safety Disclosures.
Not applicable.
43
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Market Information for Common Stock
Our common stock has been listed on the NASDAQ Global Market under the symbol “BNFT” since
September 18, 2013. Prior to that date, there was no public trading market for our common stock. The
following table sets forth for the periods indicated the high and low intraday sales prices per share of our
common stock as reported on the NASDAQ Global Market.
Year Ended December 31, 2017
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2016
First quarter
Second quarter
Third quarter
Fourth quarter
High
Low
$
$
$
$
$
$
$
$
32.00 $
37.10 $
36.95 $
33.90 $
35.72 $
41.24 $
44.98 $
42.49 $
24.55
26.80
26.50
22.30
21.04
29.18
36.10
24.55
As of December 31, 2017, we had 57 holders of record of our common stock. The actual number of
stockholders is greater than this number of record holders and includes stockholders who are beneficial
owners but whose shares are held in street name by brokers and other nominees. This number of holders
of record also does not include stockholders whose shares may be held in trust by other entities.
Dividend Policy
We have never declared or paid any cash dividend on our common stock. We currently intend to
retain all of our future earnings, if any, generated by our operations for the development and growth of our
business for the foreseeable future. The decision to pay dividends is at the discretion of our board of
directors and depends upon our financial condition, results of operations, capital requirements, and other
factors that our board of directors deems relevant.
Stock Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or
incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of
1933, as amended, except to the extent we specifically incorporate it by reference into such filing.
This chart compares the cumulative total return on our common stock with that of the S&P 500
Index and the S&P 1500 Application Software Index. The chart assumes $100 was invested at the close
of market on September 18, 2013, in the common stock of Benefitfocus, Inc., the S&P 500 Index and the
S&P 1500 Application Software Index, and assumes the reinvestment of any dividends. The stock price
performance on the following graph is not necessarily indicative of future stock price performance.
44
Comparison of Cumulative Total Return
$220
$200
$180
$160
$140
$120
$100
$80
$60
$40
9/18/2013
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
Benefitfocus, Inc.
S&P 500 Index
S&P 1500 Application Software Index
Base
Period
Company / Index
Benefitfocus, Inc.
S&P 500 Index
S&P 1500 Application
Software Index
Equity Compensation Plans
9/18/2013 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
$ 100.00 $ 107.82 $
50.42
$ 100.00 $ 107.12 $ 119.32 $ 118.45 $ 129.75 $ 154.95
67.96 $
61.33 $
55.46 $
$ 100.00 $ 107.46 $ 120.00 $ 143.70 $ 154.95 $ 223.38
The information required by Item 5 of Form 10-K regarding equity compensation plans is
incorporated herein by reference to Part III “Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters”.
45
Item 6. Selected Financial Data.
CONSOLIDATED SELECTED FINANCIAL DATA
The following selected consolidated financial data for the years December 31, 2017, 2016, 2015,
2014 and 2013 and the selected consolidated balance sheet data as of December 31, 2017, 2016, 2015,
2014, and 2013 are derived from our audited consolidated financial statements. Our historical results are
not necessarily indicative of the results to be expected in the future. The selected consolidated financial
data should be read together with “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”, our consolidated financial statements, related notes, and other financial
information included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data
Revenue(1)
Cost of revenue(2)
Gross profit
Operating expenses:
Sales and marketing(2)
Research and development(2)
General and administrative(2)
Change in fair value of contingent
consideration
Total operating expenses
Loss from operations
Total other expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss per common share--basic and
diluted
Weighted-average common shares
outstanding--basic and diluted
Other Financial Data
Adjusted EBITDA(3)
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands, except share and per share data)
$
256,735 $
124,156
132,579
233,335 $
120,681
112,654
185,143 $
102,851
82,292
137,420 $
87,470
49,950
104,752
62,411
42,341
69,280
49,549
27,268
55,488
56,584
32,750
58,589
52,250
25,727
48,467
41,729
18,657
–
146,097
(13,518 )
(12,339 )
(25,857 )
15
(25,872 ) $
–
144,822
(32,168 )
(7,873 )
(40,041 )
17
(40,058 ) $
–
136,566
(54,274 )
(7,785 )
(62,059 )
25
(62,084 ) $
–
108,853
(58,903 )
(4,251 )
(63,154 )
25
(63,179 ) $
36,072
23,532
10,974
(43 )
70,535
(28,194 )
(2,198 )
(30,392 )
(31 )
(30,361 )
(0.83 ) $
(1.35 ) $
(2.19 ) $
(2.51 ) $
(2.99 )
$
$
31,052,378 29,589,857 28,344,680 25,207,099 10,144,243
$
19,443 $
(1,097 ) $
(32,160 ) $
(43,844 ) $
(18,915 )
(1)
In the first quarter of 2015, we decreased the estimated expected life of our customer relationships
for both employer and carrier customers from 10 to 7 years. This change shortened the term over
which we will recognize our deferred revenue and results in more revenue recognized in each
period after the change.
(2) Cost of revenue and operating expenses include stock-based compensation expense as follows:
Cost of revenue
Sales and marketing
Research and development
General and administrative
2017
2016
Year Ended December 31,
2015
(in thousands)
2014
2013
$
2,508 $
4,953
2,990
5,686
2,798 $
3,213
4,532
7,545
1,950 $
2,861
2,399
3,244
986 $
1,395
1,376
1,831
274
171
255
502
(3) We define adjusted EBITDA as net loss before net interest and other expense, taxes, and
depreciation and amortization expense, adjusted to eliminate stock-based compensation expense
and expense related to the impairment of goodwill and intangible assets, and costs not core to our
business. See “Adjusted EBITDA” below for more information and for a reconciliation of adjusted
46
EBITDA to net loss, the most directly comparable financial measure calculated and presented in
accordance with GAAP.
Our Segments
Revenue from external customers by
segment:
Employer
Carrier
Total net revenue from external
customers
Gross profit by segment
Employer
Carrier
Total gross profit by segment
Consolidated Balance Sheet Data
Cash and cash equivalents
Marketable securities
Accounts receivable, total, net
Total assets
Deferred revenue, total
Total liabilities
Total redeemable convertible preferred
stock
Common stock
Additional paid-in capital
Total stockholders' (deficit) equity
Adjusted EBITDA
2017
2016
Year Ended December 31,
2015
(in thousands)
2014
2013
$ 163,978 $ 140,522 $
92,813
92,757
94,842 $
90,301
62,016 $
75,404
40,656
64,096
$ 256,735 $ 233,335 $ 185,143 $ 137,420 $ 104,752
$
68,735 $
63,844
53,031 $
59,623
$ 132,579 $ 112,654 $
33,655 $
48,637
82,292 $
16,186 $
33,764
49,950 $
13,316
29,025
42,341
2017
2016
As of December 31,
2015
(in thousands)
2014
2013
$
55,335 $
–
30,156
165,109
58,719
204,440
56,853 $
2,007
32,966
180,410
75,838
213,721
48,074 $
40,448
29,698
182,119
93,529
200,128
51,074 $
5,135
21,311
140,018
94,510
182,841
65,645
13,168
23,668
139,611
80,221
128,179
–
31
355,301
(39,331 )
–
30
335,059
(33,311 )
-
29
310,304
(18,009 )
-
26
223,409
(42,823 )
-
24
214,487
11,432
Within this Annual Report on Form 10-K we use adjusted EBITDA to provide investors with
additional information regarding our financial results. Adjusted EBITDA is a non-GAAP financial measure.
We have provided below a reconciliation of this measure to the most directly comparable GAAP financial
measure, which for adjusted EBITDA is net loss.
We have included adjusted EBITDA in this Annual Report on Form 10-K 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.
Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in
isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these
limitations are:
although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized might have to be replaced in the future, and adjusted EBITDA does not reflect
47
cash capital expenditure requirements for such replacements or for new capital expenditure
requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital
needs;
adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
adjusted EBITDA does not reflect interest or tax payments that would reduce the cash
available to us; and
other companies, including companies in our industry, might calculate adjusted EBITDA or
similarly titled measure differently, which reduces their usefulness as comparative measures.
Because of these and other limitations, you should consider adjusted EBITDA alongside other
GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss
and our other GAAP financial results. The following table presents a reconciliation of adjusted EBITDA to
net loss for each of the periods indicated:
Reconciliation from Net Loss to Adjusted
EBITDA:
Net loss
Depreciation
Amortization of software development
costs
Amortization of acquired intangible assets
Interest income
Interest expense on building lease
financing
obligations
Interest expense on other borrowings
Income tax expense
Stock-based compensation expense
Costs not core to our business
Total net adjustments
Adjusted EBITDA
Year Ended December 31,
2017
2016
2015
2014
2013
(in thousands)
$
(25,872 ) $
12,391
(40,058 ) $
9,959
(62,084 ) $
8,791
(63,179 ) $
6,931
(30,361 )
5,231
3,257
258
(182 )
2,857
257
(138 )
2,587
286
(188 )
2,257
305
(77 )
2,618
323
(46 )
7,450
4,931
15
16,137
1,058
1,768
381
(31 )
1,202
-
$ 45,315 $ 38,961 $ 29,924 $ 19,335 $ 11,446
(18,915 )
$ 19,443 $
7,092
877
25
10,454
-
6,826
1,095
17
18,088
-
3,624
682
25
5,588
-
(32,160 ) $
(43,844 ) $
(1,097 ) $
48
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of
operations together with our consolidated financial statements and the related notes and other financial
information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in
this discussion and analysis or set forth elsewhere in this report including information with respect to our
plans and strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the “Risk Factors” section of this report beginning on page 19 for a
discussion of important factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the following discussion and
analysis.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers,
employers, insurance carriers, and brokers. The Benefitfocus Platform simplifies how organizations and
individuals shop for, enroll in, manage, and exchange benefits. Our employer and insurance carrier
customers rely on our platform to manage, scale and exchange data. Our web-based platform has a user-
friendly interface designed to enable the insured consumers to access all of their benefits in one place.
Our comprehensive solutions support core benefits plans, including healthcare, dental, life, and disability
insurance, and voluntary benefits offerings such as income protection, digital health and financial
wellness. As the number of employer benefits plans has increased, with each plan subject to many
different business rules and requirements, demand for the Benefitfocus Platform has grown.
We serve two separate but related market segments. The employer market which consists of
employers offering benefits to their employees. Within this segment, we mainly target large employers
with more than 1,000 employees, of which we believe there are over 18,000 in the United States. In our
other market segment, we sell our solutions to insurance carriers, enabling us to expand our overall
footprint in the benefits marketplace by aggregating many key constituents, including consumers,
employers, and brokers. Our business model capitalizes on the close relationship between carriers and
their members, and the carriers’ ability to serve as lead generators for potential employer customers.
Carriers pay for services at a rate reflective of the aggregated nature of their customer base on a per
application basis. Carriers can then deploy their applications to employer groups and members. As
employers become direct customers through our employer segment, we provide them our platform
offering that bundles many software applications into a comprehensive benefits solution through
Benefitfocus Marketplace. We believe our presence in both the employer and insurance carrier markets
gives us a strong position at the center of the benefits ecosystem.
We sell the Benefitfocus Platform on a subscription basis, typically through annual contracts with
employer customers and multi-year contracts with our insurance carrier customers, with subscription fees
paid monthly, quarterly and annually. The multi-year contracts with our carrier customers are generally
only cancellable by the carrier in an instance of our uncured breach, although some of our carrier
customers are able to terminate their respective contracts without cause or for convenience. Software
services revenue accounted for approximately 85%, 87%, and 87% of our total revenue during the years
ended December 31, 2017, 2016 and 2015, respectively.
Another component of our revenue is professional services. We derive the majority of our
professional services revenue from the implementation of our customers onto our platform, which typically
includes discovery, configuration and deployment, integration, testing, and training. In general, it takes
from four to six months to implement a new employer customer’s benefits systems and eight to 10 months
to implement a new carrier customer’s benefits systems. We also provide customer support services and
customized media content that supports our customers’ effort to educate and communicate with
consumers. Professional services revenue accounted for approximately 15%, 13%, and 13% of our total
revenue during the years ended December 31, 2017, 2016 and 2015, respectively.
49
Increasing our base of large employer customers is an important source of revenue growth for us.
We actively pursue new employer customers in the U.S. market, and we have increased the number of
large employer customers utilizing our solutions from 141 as of December 31, 2010 to 915 as of
December 31, 2017, a 30.6% compound annual growth rate. We believe that our continued innovation
and new solutions, such as online benefits marketplaces, also known as private exchanges, account
services, enhanced mobile offerings, and more robust data analytics capabilities will help us attract
additional large employer customers and increase our revenue from existing customers.
We believe that there is a substantial market for our services, and we have been investing in growth
over the past six years. In particular, we have continued to invest in technology and services to better
serve our larger employer customers, which we believe are an important source of growth for our
business. We have also substantially increased our marketing and sales efforts and expect those
increased efforts to continue. As we have invested in growth, we have had operating losses in each of the
last seven years, and expect our operating losses to continue for at least the next year. Due to the nature
of our customer relationships, which have been stable in spite of some customer losses over the past
years, and the subscription nature of our financial model, we believe that our current investment in growth
should lead to substantially increased revenue, which will 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.
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current
performance and project our future performance. These metrics help us develop and refine our growth
strategies and make strategic decisions. We discuss revenue, gross margin, and the components of
operating loss, as well as segment revenue and segment gross profit, in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Components of Operating Results”. In
addition, we utilize other key metrics as described below.
Number of Large Employer and Carrier Customers
We believe the number of large employer and carrier customers is a key indicator of our market
penetration, growth, and future revenue. We have aggressively invested in and intend to continue to
invest in our sales function to grow our customer base. We generally define a customer as an entity with
an active software services contract as of the measurement date. The following table sets forth the
number of large employer and carrier customers for the periods indicated:
Number of customers:
Large employer
Carrier
Year Ended December 31,
2017
2016
2015
915
54
833
53
723
54
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us
over time is an important component of our growth strategy and reflects the long-term value of our
customer relationships. We measure our performance on this basis using a metric we refer to as our
software services revenue retention rate. We calculate this metric for a particular period by establishing
the group of our customers that had active contracts for a given period. We then calculate our software
services revenue retention rate by taking the amount of software services revenue we recognized for this
group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the
software services revenue we recognized for the group in the prior period.
For 2017, 2016 and 2015 our software services revenue retention rate exceeded 95%.
50
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest and other expense, taxes, and
depreciation and amortization expense, adjusted to eliminate stock-based compensation and impairment
of goodwill and intangible assets and costs not core to our business. Adjusted EBITDA is not a measure
calculated in accordance with United States generally accepted accounting principles, or GAAP. Please
refer to “Selected Consolidated Financial Data—Adjusted EBITDA” in this report for a discussion of the
limitations of adjusted EBITDA and reconciliation of adjusted EBITDA to net loss, the most comparable
GAAP measurement, respectively, for 2017, 2016 and 2015.
Components of Operating Results
Revenue
We derive the majority of our revenue from software services fees, which consist primarily of
monthly subscription fees paid to us by our employer and carrier customers for access to, and usage of,
our cloud-based benefits software solutions for a specified contract term. We also derive revenue from
professional services fees, which primarily include fees related to the implementation of our customers
onto our platform. Our professional services typically include discovery, configuration and deployment,
integration, testing, and training.
The following table sets forth a breakdown of our revenue between software services and
professional services for the periods indicated (in thousands):
Software services
Professional services
Total revenue
2017
Year Ended December 31,
2016
2015
$
$
218,443 $
38,292
256,735 $
201,797 $
31,538
233,335 $
161,477
23,666
185,143
We generally recognize software services fees monthly based on the number of employees covered
by the relevant benefits plans at contracted rates for a specified period of time, provided that an
enforceable contract has been signed by both parties, access to our software has been granted to the
customer and it is available for their use, the fee for the software services is fixed or determinable, and
collection is reasonably assured.
We defer recognition of our professional services fees paid by customers related to implementation
services that are determined to not have stand-alone value and are sold with our software services, and
recognize them, beginning once the related software services have commenced, ratably over the longer
of the contract term or the estimated expected life of the customer relationship, which was 7 years. We
periodically evaluate the term over which revenue is recognized for professional services to reflect our
experience with customer contract renewals.
As of July 1, 2015, we determined that we had established standalone value for the implementation
services for the Benefitfocus Marketplace solution in the Employer segment as they are now sold
separately from the software services. This was primarily due to the system integrators that have been
trained and certified to perform these implementation services, the successful completion of an
implementation by a trained system integrator, and the sale of several software subscription
arrangements to customers in the Employer segment without the Company’s implementation services.
Accordingly, revenues related to implementation services for the Benefitfocus Marketplace solution in the
Employer segment that are delivered after July 1, 2015 are recognized separately from the revenues
earned from the Employer software subscription services. Revenues related to such implementation
services are recognized at the time that the professional services have been completed and the related
software services have commenced. Prior to July 1, 2015, we did not have standalone value for
implementation services related to the Benefitfocus Marketplace solution as we had historically performed
these services to support our customers’ implementation of this solution. The incremental revenue from
recognition of services upon delivery compared to recognition over the customer relationship period of 7
years was $2.3 million in twelve months ended December 31, 2015.
51
We generally invoice our employer and carrier customers for software services in advance, in
monthly, quarterly or annual installments. We invoice our employer customers for implementation fees at
the inception of the arrangement. We generally invoice our carrier customers for implementation fees at
various contractually defined times throughout the implementation process. Implementation fees that
have been invoiced are initially recorded as deferred revenue until recognized to revenue as described
above.
We earn commissions from brokerage services from our voluntary benefit insurance offerings. We
recognize revenue when these commissions are earned.
We will adopt the new revenue accounting standard on January 1, 2018. The new standard will
significantly affect how we recognize revenue for our products and services. The expected effects of the
new accounting standard are included in Note 2 to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
Overhead Allocation
Expenses associated with our facilities, security, information technology, and depreciation and
amortization, are allocated between cost of revenue and operating expenses based on employee
headcount determined by the nature of work performed.
Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits,
bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing
services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of
revenue include co-location facility costs for our data centers, depreciation expense for computer
equipment directly associated with generating revenue, infrastructure maintenance costs, professional
fees, amortization expenses associated with capitalized software development costs, allocated overhead,
and other direct costs.
We expense our cost of revenue as we incur the costs. However, the related revenue from fees we
receive for our implementation services, performed before a customer is operating on our platform, that is
determined to not have stand-alone value is deferred until the commencement of the monthly subscription
and recognized as revenue ratably over the longer of the related contract term or the estimated expected
life of the customer relationship. For those implementation services that have standalone value, the
related revenue is recognized as revenue upon completion of service. Therefore, the cost incurred in
providing these services is expensed in periods prior to the recognition of the corresponding revenue. Our
cost associated with providing implementation services has been significantly higher as a percentage of
revenue than our cost associated with providing our monthly subscription services due to the labor
associated with implementation.
We plan to continue to expand our capacity to support our growth, which will result in higher cost of
revenue in absolute dollars. However, we expect cost of revenue as a percentage of revenue to decline
and gross margins to increase primarily from the growth of the percentage of our revenue from large
employers and the realization of economies of scale driven by retention of our customer base.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and
administrative expenses. Salaries and personnel-related costs are the most significant component of
each of these expense categories. We expect to continue to hire new associates in these areas in order
to support our anticipated revenue growth; however, we expect to decrease our operating expenses, as a
percentage of revenue, as we achieve economies of scale.
Sales and marketing expense. Sales and marketing expense consists primarily of salaries and
other personnel-related costs, including benefits, bonuses, stock-based compensation, and commissions
for our sales and marketing associates. We record expense for commissions at the time of contract
signing. Additional expenses include advertising, lead generation, promotional event programs, corporate
52
communications, travel, and allocated overhead. For instance, our most significant promotional event is
our annual user and partner conference, One Place, which we have held annually. We expect our sales
and marketing expense to increase, in absolute dollars, in the foreseeable future as we further increase
the number of our sales and marketing professionals and expand our marketing activities in order to
continue to grow our business.
Research and development expense. Research and development expense consists primarily of
salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation
for our research and development associates. Additional expenses include costs related to the
development, quality assurance, and testing of new technology, and enhancement of our existing
platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in
research and development efforts is essential to maintaining our competitive position. We expect our
research and development expense to decrease, as a percentage of revenue, as we achieve economies
of scale.
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 increase in absolute terms as a result
of ongoing public company costs, including those associated with compliance with the Sarbanes-Oxley
Act and other regulations governing public companies, increased costs of directors’ and officers’ liability
insurance, and increased professional services expenses, particularly associated with the implementation
of new accounting standards.
Other Income and Expense
Other income and expense consists primarily of interest income and expense and gain (loss) on
disposal of property and equipment. Interest income represents interest received on our cash and cash
equivalents and marketable securities. Interest expense consists primarily of the interest incurred on
outstanding borrowings under our financing obligations, capital leases and credit facility.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes. We incurred minimal income
tax expense for 2017, 2016, and 2015. Net operating loss carryforwards for federal income tax purposes
were $253.9 million at December 31, 2017. State net operating loss carryforwards were approximately
$221.2 million at December 31, 2017. Federal and state net operating loss carryforwards will expire at
various dates beginning in 2022, if not utilized. Valuation allowances are recorded to reduce deferred tax
assets to the amount we believe is more likely than not to be realized.
On December 22, 2017, the Tax Cuts & Jobs Act (“Tax Reform”) was enacted. Among other things,
we expect that the primary provision of Tax Reform to affect us will be the reduction to the U.S. corporate
income tax rate from 35% to 21%. Accordingly, we revalued our deferred tax assets and liabilities to
reflect the enacted tax rate and adjusted our valuation allowance. As of December 31, 2017, we have
completed our accounting for the income tax effects of Tax Reform except for the impact of state tax
conformity of each change and further evaluation of executive compensation. We are not able to
determine a reasonable estimate for these items and expect to complete our analysis during 2018 as
states make known their conformity with federal tax laws and additional transition guidance is provided
related to executive compensation.
53
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).
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Sales and marketing(1)
Research and development(1)
General and administrative(1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Year Ended December 31,
2017
2016
2015
$
256,735 $
124,156
132,579
233,335 $
120,681
112,654
69,280
49,549
27,268
146,097
(13,518 )
182
(7,450 )
(4,931 )
(140 )
(12,339 )
(25,857 )
15
(25,872 ) $
55,488
56,584
32,750
144,822
(32,168 )
138
(6,826 )
(1,095 )
(90 )
(7,873 )
(40,041 )
17
(40,058 ) $
$
185,143
102,851
82,292
58,589
52,250
25,727
136,566
(54,274 )
188
(7,092 )
(877 )
(4 )
(7,785 )
(62,059 )
25
(62,084 )
(1) Cost of revenue and operating expenses include stock-based compensation expense as follows (in
thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
2017
Year Ended December 31,
2016
2015
2,508 $
4,953
2,990
5,686
2,798 $
3,213
4,532
7,545
1,950
2,861
2,399
3,244
The following table sets forth our consolidated statements of operations data as a percentage of
revenue for each of the periods indicated (as a percentage of revenue).
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
54
Year Ended December 31,
2017
2016
2015
100.0 %
48.4
51.6
100.0 %
51.7
48.3
100.0 %
55.6
44.4
27.0
19.3
10.6
56.9
(5.3 )
0.1
(2.9 )
(1.9 )
(0.1 )
(4.8 )
(10.1 )
-
(10.1 ) %
23.8
24.3
14.0
62.1
(13.8 )
0.1
(2.9 )
(0.5 )
-
(3.4 )
(17.2 )
-
(17.2 ) %
31.6
28.2
13.6
73.8
(29.3 )
0.1
(3.8 )
(0.5 )
-
(4.2 )
(33.5 )
-
(33.5 ) %
Our Segments
The following table sets forth segment results for revenue and gross profit for the periods indicated
(in thousands):
Revenue from external customers by segment:
Employer
Carrier
Total net revenue from external customers
Gross profit by segment
Employer
Carrier
Total gross profit by segment
2017
Year Ended December 31,
2016
2015
$
$
$
$
163,978 $
92,757
256,735 $
68,735 $
63,844
132,579 $
140,522 $
92,813
233,335 $
53,031 $
59,623
112,654 $
94,842
90,301
185,143
33,655
48,637
82,292
Comparison of Years Ended December 31, 2017 and 2016
Revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 218,443
38,292
$ 256,735
(in thousands)
85.1 % $ 201,797
31,538
14.9
100.0 % $ 233,335
86.5 % $ 16,646
6,754
13.5
100.0 % $ 23,400
8.2 %
21.4
10.0 %
Software services
Professional services
Total revenue
Growth in software services revenue was primarily attributable to existing customers adding covered
users to our offerings, or volume increases, and also to existing customers purchasing additional products
as well as to the net addition of new customers, as the number of large employer and carrier customers
increased to 969 as of December 31, 2017 from 886 as of December 31, 2016.
The increase in professional services revenue was in part attributable to the recognition of $2.5
million of implementation services provided to newly activated customers and new products provided to
existing customers, and the remainder from providing consulting services and enhancements to existing
customers.
Segment Revenue
Employer
Carrier
Total revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 163,978
92,757
$ 256,735
(in thousands)
63.9 % $ 140,522
92,813
36.1
100.0 % $ 233,335
60.2 % $ 23,456
(56 )
39.8
100.0 % $ 23,400
16.7 %
(0.1 )
10.0 %
Growth in our employer revenue was primarily attributable to a $17.6 million increase in our
employer software services revenue driven mostly by new customers and volume increases, as well as
additional products sold to existing customers. Additionally, employer professional services revenue
increased $5.8 million due to implementation revenue from new customers and customer consulting to
existing customers.
The slight decrease in carrier revenue was primarily attributable to a $0.9 million increase in
professional services revenue, offset by a decrease of $1.0 million in software services revenue. The
55
professional services revenue increase was primarily driven by additional support and discovery services
to existing customers. Carrier software services revenue decreased as volume decreases from existing
customers exceeded increases in revenue from new customers.
Cost of Revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Cost of revenue
$ 124,156
(in thousands)
48.4 % $ 120,681
51.7 % $
3,475
2.9 %
The increase in cost of revenue in absolute terms was primarily attributable to an increase in
salaries and personnel-related costs to support an increased number of customers and volume, as well
as professional fees associated with third-party deliveries. This increase included a decrease in stock-
based compensation of $0.3 million. Cost of revenue as a percentage of revenue has continued to
decrease as a result of economies of scale as our revenues have grown.
Gross Profit
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Software services
Professional services
Gross profit
$ 134,051
(1,472 )
$ 132,579
(in thousands)
61.4 % $ 122,686
(3.8 )
(10,032 )
51.6 % $ 112,654
60.8 % $ 11,365
(31.8 )
8,560
48.3 % $ 19,925
9.3 %
(85.3 )
17.7 %
The increase in software services gross profit was driven by a $16.6 million, or 8.2%, increase in
software services revenue. This increase was partially offset by a $5.3 million, or 6.7%, increase in
software services cost of revenue. Software services cost of revenue included $1.7 million of stock-based
compensation expense for each of the years ended December 31, 2017 and 2016, and $10.4 million and
$8.9 million of depreciation and amortization for the years ended December 31, 2017 and 2016,
respectively.
The improvement in professional services gross loss was driven by a $6.8 million, or 21.4%,
increase in professional services revenue and a decrease in professional services cost of revenue of $1.8
million. Professional services cost of revenue included $0.8 million and $1.1 million of stock-based
compensation expense for the years ended December 31, 2017 and 2016, respectively. In addition,
professional services cost of revenue included $1.4 million and $1.2 million in depreciation and
amortization for the years ended December 31, 2017 and 2016, respectively.
As discussed in “Components of Operating Results—Cost of Revenue”, we expense our cost of
revenue as we incur the costs. However, recognition of the related revenue from implementation services
performed before a customer is operating on our platform generally is deferred until the commencement
of the monthly subscription. We recognize the revenue ratably over the longer of the related contract term
or the estimated expected life of the customer relationship, which is 7 years. Therefore, we expense the
cost incurred in providing these services prior to the recognition of the corresponding revenue.
56
Segment Gross Profit
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 68,735
63,844
$ 132,579
(in thousands)
41.9 % $ 53,031
59,623
68.8
51.6 % $ 112,654
37.7 % $ 15,704
4,221
64.2
48.3 % $ 19,925
29.6 %
7.1
17.7 %
Employer
Carrier
Gross profit
The increase in employer gross profit was driven by a $23.5 million, or 16.7%, increase in employer
revenue being only partially offset by a $7.8 million, or 8.9%, increase in employer cost of revenue as we
continued to achieve economies of scale. The increase in cost of revenue was primarily attributable to
increased personnel-related costs to support our customer base as well as increased depreciation and
amortization, technology infrastructure costs and security-related costs. Our employer cost of revenue
included $1.9 million and $2.0 million of stock-based compensation expense for the years ended
December 31, 2017 and 2016, respectively. In addition, our employer cost of revenue included $7.3
million and $5.8 million of depreciation and amortization for the years ended December 31, 2017 and
December 31, 2016, respectively.
The increase in carrier gross profit was driven by a decrease in carrier cost of revenue of $4.3
million, or 12.8%, in combination with carrier revenue being essentially flat. The decrease in cost of
revenue was attributable to operational efficiencies achieved in supporting our carrier customers and a
decrease in customer-specific development, as opposed to platform enhancements and development.
Our carrier cost of revenue included $0.6 million and $0.8 million of stock-based compensation expense
for the years ended December 31, 2017 and 2016, respectively. In addition, our carrier cost of revenue
included $4.5 million and $4.2 million in depreciation and amortization for the years ended December 31,
2017 and 2016, respectively.
Operating Expenses
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Sales and marketing
Research and development
General and administrative
$ 69,280
$ 49,549
$ 27,268
(in thousands)
27.0 % $ 55,488
19.3 % $ 56,584
10.6 % $ 32,750
23.8 % $ 13,792
(7,035 )
24.3 % $
(5,482 )
14.0 % $
24.9 %
(12.4 ) %
(16.7 ) %
The increase in sales and marketing expense was attributable to $9.0 million higher salaries and
personnel-related costs as we continued to invest in our direct sales channel. We increased the number
sales associates during 2017, including hiring our Executive Vice-President, Global Sales. This increase
included $1.7 million increase in stock-based compensation. Additionally, travel-related expenses
increased $2.6 million and marketing expense, professional fees, technology infrastructure costs and
other operating costs increased by $1.8 million.
The decrease in research and development expense reflects a $3.5 million decrease in salaries and
personnel-related costs as the result of a decrease in the number of associates engaged in research and
development activities. This decrease includes a $1.5 million decrease in stock-based compensation.
Additionally, costs related to external development and engineering consulting decreased $3.2 million.
The decrease in general and administrative expense was partly attributable to a $1.8 million
decrease in salaries and personnel-related costs, which includes a decrease in stock-based
compensation expense of $1.3 million. Sales tax expense decreased $1.6 million related to resolving
liabilities in certain states. We experienced additional decreases in professional and consulting fees of
$1.0 million attributable to discontinuing the use of certain consultants during 2017 and a decrease in bad
debt expense of $0.6 million.
57
Comparison of Years Ended December 31, 2016 and 2015
Revenue
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 201,797
31,538
$ 233,335
(in thousands)
86.5 % $ 161,477
23,666
13.5
100.0 % $ 185,143
87.2 % $ 40,320
7,872
12.8
100.0 % $ 48,192
25.0 %
33.3
26.0 %
Software services
Professional services
Total revenue
Growth in software services revenue was primarily attributable to existing customers adding covered
users to our offerings, or volume increases, and also to existing customers purchasing additional products
as well as to the net addition of new customers, as the number of large employer and carrier customers
increased to 886 as of December 31, 2016 from 777 as of December 31, 2015.
The increase in professional services revenue was in part attributable to the recognition of $7.5
million of implementation services provided to newly activated customers, new products provided to
existing customers and $4.3 million attributable to the acceleration of the customer relationship period for
certain customers.
Segment Revenue
Employer
Carrier
Total revenue
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 140,522
92,813
$ 233,335
(in thousands)
60.2 % $ 94,842
90,301
39.8
100.0 % $ 185,143
51.2 % $ 45,680
2,512
48.8
100.0 % $ 48,192
48.2 %
2.8
26.0 %
Growth in our employer revenue was primarily attributable to a $42.9 million increase in our
employer software services revenue driven primarily by new customers and volume increases, as well as
additional products sold to existing customers. Additionally, employer professional services revenue
increased $2.7 million, including a $0.7 million increase from services with standalone value.
The increase in carrier revenue in absolute terms was primarily attributable to a $5.1 million
increase in professional services revenue, offset by a decrease of $2.6 million in software services
revenue. The professional services revenue increase was primarily driven by implementations related to
additional products with existing customers and the acceleration of the customer relationship period for
certain customers. Carrier software services revenue decreased as volume decreases from existing
customers exceeded increases in revenue from new customers.
Cost of Revenue
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Cost of revenue
$ 120,681
(in thousands)
51.7 % $ 102,851
55.6 % $ 17,830
17.3 %
The increase in cost of revenue in absolute terms was in part attributable to a $14.4 million increase
in salaries and personnel-related costs to support an increased number of customers and volume, as well
as professional fees associated with third-party deliveries. This increase included an increase in stock-
based compensation of $0.9 million. The remaining increase was attributable to other operating expenses
related to security, technology infrastructure, depreciation and amortization, and facilities costs to support
58
our organization. However, cost of revenue as a percentage of revenue has continued to decrease as a
result of economies of scale as our revenues have grown.
Gross Profit
Software services
Professional services
Gross profit
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 122,686
(10,032 )
$ 112,654
(in thousands)
60.8 % $ 102,301
(31.8 )
(20,009 )
48.3 % $ 82,292
63.4 % $ 20,385
(84.5 )
9,977
44.4 % $ 30,362
19.9 %
(49.9 )
36.9 %
The increase in software services gross profit was driven by a $40.3 million, or 25.0%, increase in
software services revenue. This increase was partially offset by a $19.9 million, or 33.7%, increase in
software services cost of revenue. Software services cost of revenue included $1.7 million and $0.9
million of stock-based compensation expense for the years ended December 31, 2016 and 2015,
respectively, and $8.9 million and $7.7 million of depreciation and amortization for the years ended
December 31, 2016 and 2015, respectively.
The improvement in professional services gross loss was driven by a $7.9 million, or 33.3%,
increase in professional services revenue and a decrease in professional services cost of revenue of $2.1
million. Professional services cost of revenue included $1.1 million and $1.0 million of stock-based
compensation expense for the years ended December 31, 2016 and 2015, respectively. In addition,
professional services cost of revenue included $1.2 million and $1.4 million in depreciation and
amortization for the years ended December 31, 2016 and 2015, respectively.
As discussed in “Components of Operating Results—Cost of Revenue”, we expense our cost of
revenue as we incur the costs. However, recognition of the related revenue from implementation services
performed before a customer is operating on our platform is generally deferred until the commencement
of the monthly subscription. Beginning at that time, we recognize the revenue ratably over the longer of
the related contract term or the estimated expected life of the customer relationship, which is 7 years.
Therefore, we expense the cost incurred in providing these services prior to the recognition of the
corresponding revenue.
Segment Gross Profit
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 53,031
59,623
$ 112,654
(in thousands)
37.7 % $ 33,655
64.2
48,637
48.3 % $ 82,292
35.5 % $ 19,376
53.9
10,986
44.4 % $ 30,362
57.6 %
22.6
36.9 %
Employer
Carrier
Gross profit
The increase in employer gross profit was driven by a $45.7 million, or 48.2%, increase in employer
revenue being only partially offset by a $26.3 million, or 43.0%, increase in employer cost of revenue as
we continued to achieve economies of scale. The increase in cost of revenue was primarily attributable
to increased personnel-related costs to support our customer base as well as increased depreciation and
amortization, technology infrastructure costs and security-related costs. Our employer cost of revenue
included $5.8 million and $4.6 million of depreciation and amortization for the years ended December 31,
2016 and December 31, 2015, respectively. In addition, our employer cost of revenue included $2.0
million and $1.0 million of stock-based compensation expense for the years ended December 31, 2016
and 2015, respectively.
59
The increase in carrier gross profit was driven by an increase in carrier revenue of $2.5 million, or
2.8%, in combination with a decrease in carrier cost of revenue of $8.5 million, or 20.3%. The decrease in
cost of revenue was primarily attributable to a decrease in customer-specific development, as opposed to
platform enhancements and development. Our carrier cost of revenue included $4.2 million and $4.5
million in depreciation and amortization for the years ended December 31, 2016 and December 31, 2015,
respectively. In addition, our carrier cost of revenue included $0.8 million and $0.9 million of stock-based
compensation expense for the years ended December 31, 2016 and 2015, respectively.
Operating Expenses
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Sales and marketing
Research and development
General and administrative
$ 55,488
$ 56,584
$ 32,750
(in thousands)
23.8 % $ 58,589
24.3 % $ 52,250
14.0 % $ 25,727
31.6 % $
28.2 % $
13.9 % $
(3,101 )
4,334
7,023
(5.3 ) %
8.3 %
27.3 %
The decrease in sales and marketing expense was attributable to lower compensation expenses,
including the impact of a significant carrier deal that occurred in the first quarter of 2015 and a large
employer deal that occurred in the third quarter of 2015, as well as the departure of the Chief Commercial
Officer in the fourth quarter of 2015. Additionally, we experienced efficiencies that reduced travel-related
expenses by $0.9 million and experienced a $0.6 million decrease in other operating expenses.
The increase in research and development expense in absolute terms was primarily attributable to a
$4.5 million increase in salaries and personnel-related costs, including an increase in stock-based
compensation of $2.1 million comprised of $0.5 million for the accrual of separation benefits related to the
departure of our former Chief Technology Officer and $1.6 million attributable to equity awards granted to
new and existing research and development associates. These increases were offset by a $2.0 million
increase of personnel-related cost capitalized as part of software development. Additionally, we
experienced a $0.9 million increase in engineering consulting fees for assistance in product development
and a $0.9 million increase in technology infrastructure costs.
The increase in general and administrative expense was primarily attributable to a $5.7 million
increase in salaries and personnel-related costs comprised of a $4.3 million increase in stock-based
compensation expense and a $1.2 million increase due to additional general and administrative
headcount and the accrual of separation benefits related the retirement of our former Chief Financial
Officer. The increase in stock-based compensation is partly attributable to the issuance of stock-based
awards in lieu of cash compensation to certain senior executives and a $3.5 million increase in stock-
based compensation expense due to additional grants. We also experienced a $1.2 million increase in
facilities costs, depreciation expense and technology infrastructure 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.
While our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following
accounting policies are critical to the process of making significant judgments and estimates in the
preparation of our consolidated financial statements.
60
Revenue Recognition and Deferred Revenue
We derive the majority of our revenue from software services fees, which consist primarily of
monthly subscription fees paid by customers for access to and usage of our cloud-based benefits
software solutions for a specified contract term. We also derive revenue from professional services which
primarily include fees related to the integration of customers’ systems with our platform, which typically
includes discovery, configuration, deployment, testing, and training.
We recognize revenue when there is persuasive evidence of an arrangement, the service has been
provided, the fees to be paid by the customer are fixed and determinable and collectability is reasonably
assured. We consider delivery of our cloud-based software services has commenced once access to a
configured and live instance on our platform has been delivered.
Our arrangements generally contain multiple elements comprised of software services and
professional services. We evaluate each element in an arrangement to determine whether it represents a
separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item
has standalone value and delivery of the undelivered element is probable and within our control.
When multiple deliverables included in an arrangement are separable into different units of
accounting, the arrangement consideration is allocated to the identified units of accounting based on their
relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use
when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence
(“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a
standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence
(“TPE”) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently
exist for any of our deliverables. Accordingly, for arrangements with multiple deliverables that can be
separated into different units of accounting, the arrangement fee is allocated to the separate units of
accounting based on our best estimate of selling price. The amount of arrangement fee allocated is
limited by contingent revenues, if any.
Effective July 1, 2015, we determined that we had established standalone value for Benefitfocus
Marketplace implementation services in the Employer segment as they are now sold separately from the
software services. This was primarily due to the system integrators that have been trained and certified to
perform these implementation services, the successful completion of an implementation by a trained
system integrator, and the sale of several software subscription arrangements to customers in the
Employer segment without our implementation services. Accordingly, revenues related to implementation
services for the Benefitfocus Marketplace solution in the Employer segment that are delivered after
July 1, 2015 are recognized separately from the revenues earned from the Employer software
subscription services. Revenues related to such implementation services are recognized at the time that
the professional services have been completed and the related software services have commenced. Prior
to July 1, 2015, we did not have standalone value for implementation services related to the Benefitfocus
Marketplace solution as we had historically performed these services to support customers’
implementation of this solution. The incremental revenue from recognition of services upon delivery
compared to recognition over the customer relationship period of 7 years was $2.3 million for the twelve
months ended December 31, 2015.
Certain of our other professional services, including implementation services related to the Carrier
segment, are not sold separately from the software services and there is no alternative use for them. As
such, we have determined that those professional services do not have standalone value. Accordingly,
software services and professional services are combined and recognized as a single unit of accounting.
We generally recognize software services fees monthly based on the number of employees covered by
the relevant benefits plans at contracted rates for a specified period of time, once the criteria for revenue
recognition described above have been satisfied. We recognize revenue on Benefitfocus Marketplace
implementation services in the Employer segment that have standalone value at the time the services
have been completed. We defer recognition of revenue for fees from professional services that do not
have standalone value and begin recognizing such revenue once the services are delivered and the
related software services have commenced, ratably over the longer of the contract term or the estimated
expected life of the customer relationship. Costs incurred by us in connection with providing such
professional services are charged to expense as incurred and are included in “Cost of revenue.”
61
We also earn commissions from brokerage services from our voluntary benefit insurance offerings.
We recognize revenue when these commissions are earned.
We will adopt the new revenue accounting standard on January 1, 2018. The new standard will
significantly affect how we recognize revenue for our products and services. The expected effects of the
new accounting standard are included in Note 2 to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
Accounts Receivable and Allowances for Doubtful Accounts and Returns
We state accounts receivable at realizable value, net of an allowance for doubtful accounts and
estimated returns. We maintain the allowance for doubtful accounts for estimated losses expected to
result from the inability of some customers to make payments as they become due. We base our
estimated allowance on our analysis of past due amounts and ongoing credit evaluations. Historically, our
actual collection experience has not varied significantly from our estimates, due primarily to our credit and
collection policies and the financial strength of our customers.
The allowances for returns are accounted for as reductions of revenue and are estimated based on
the Company’s periodic assessment of historical experience and trends. The Company considers factors
such as the time lag since the initiation of revenue recognition, historical reasons for adjustments, new
customer volume, complexity of billing arrangements, timing of software availability, and past due
customer billings.
Stock-Based Compensation
We have issued two types of stock-based awards under our stock plans: stock options and
restricted stock units. Stock-based awards granted to associates, directors, and non-associate third
parties are measured at fair value at each grant date. We recognize stock-based compensation expense,
net of forfeitures, ratably over the requisite service period of the option award. Generally, options vest
25% on the one-year anniversary of the grant date with the balance vesting over the following 36 months.
We previously granted options that vest 100% on the fifth anniversary of the grant date. Restricted stock
unit awards generally vest 25% on each anniversary of the grant date over 4 years.
In 2017, 2016 and 2015, we granted performance restricted stock units that vest upon the
achievement of certain financial performance targets. Compensation expense for performance restricted
stock units, which are accounted for as equity awards, is recognized over the requisite service period
when it is probable that the award will vest. Significant judgment is involved in assessing the probability
of achieving performance measures.
We determined fair value for restricted stock unit awards based on the closing price of our common
stock on the date of grant or, if not a trading day, the trading day following the grant date.
We did not grant any stock options in 2017, 2016 or 2015. As of December 31, 2017, all outstanding
options are fully vested and expensed.
On January 1, 2017, we adopted Financial Accounting Standards Board (“FASB”) Accounting
Standard Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” and
elected to account for forfeitures as they occur. Prior to that date, we based our estimate of pre-vesting
forfeitures, or forfeiture rate, on our analysis of historical behavior by stock award holders. We applied the
estimated forfeiture rate to the total estimated fair value of the awards, as derived from the Black-Scholes
model, to compute the stock-based compensation expense, net of pre-vesting forfeitures, to be
recognized in our consolidated statements of operations.
Based upon the closing stock price of $27.00 on December 29, 2017, the last trading day of 2017,
the aggregate intrinsic value of outstanding options to purchase shares of our common stock as of
December 31, 2017 was $4.7 million, all of which was related to vested options. The aggregate intrinsic
value of outstanding restricted stock units as of December 31, 2017 was $52.3 million, of which all were
unvested.
62
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2017, our primary sources of liquidity were our cash and cash equivalents
totaling $55.3 million, $32.0 million in accounts receivables, net of allowance, and unused availability
under a revolving line of credit of $38.8 million, without taking into account the borrowing base limit. The
terms of our revolving line of credit are described in Note 8 of our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
In April 2017, we amended our revolving line of credit agreement. The amendment altered
definitions in the agreement, including Consolidated EBITDA and Liquidity, and changed the Minimum
Liquidity and Minimum Consolidated EBITDA requirements. It also included consents by the lenders to
certain administrative actions by us, including with respect to intellectual property and certain of our bank
accounts. Additionally, the amendment modified the definition of Excluded Assets in the Guarantee and
Collateral Agreement, dated as of February 20, 2015, which was entered into in connection with the
revolving line of credit agreement.
We are bound by customary affirmative and negative covenants in connection with the revolving line
of credit, including financial covenants related to liquidity and EBITDA. In the event of a default, the
lenders may declare all obligations immediately due and stop advancing money or extending credit under
the line of credit. The line of credit is collateralized by substantially all of our tangible and intangible
assets, including intellectual property and the equity of our subsidiaries.
Based on our current level of operations and anticipated growth, we believe our future cash flows
from operating activities and existing cash balances will be sufficient to meet our cash requirements for at
least the next 12 months.
Going forward, we may access capital markets to raise additional equity or debt financing for
various business reasons, including required debt payments and acquisitions. The timing, term, size, and
pricing of any such financing will depend on investor interest and market conditions, and there can be no
assurance that we will be able to obtain any such financing on favorable terms or at all.
Cash Flows
Our cash flows for the years ended December 31, 2017, 2016 and 2015 were as follows:
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net (decrease) increase in cash and cash equivalents
Operating Activities
2017
Year Ended December 31,
2016
(in thousands)
2015
$
$
(5,937 ) $
(6,279 )
10,698
(1,518 ) $
(22,826 ) $
25,516
6,089
8,779 $
(31,545 )
(50,245 )
78,790
(3,000 )
For 2017, our operating activities used $5.9 million of cash, as $39.8 million for non-cash
adjustments were more than offset by our net loss of $25.9 million and $19.8 million of cash used in
changes in working capital. Adjustments for non-cash items primarily consisted of depreciation and
amortization expense of $15.9 million, accrual of interest on financing obligations of $7.5 million, and non-
cash stock compensation expense of $16.1 million. The cash used in changes in working capital primarily
consisted of a decrease in deferred revenue of $17.1 million, a decrease in accounts payable and
accrued expenses not associated with the purchase of property and equipment of $3.0 million, and a
decrease in accrued compensation and benefits of $3.1 million as the result of timing of payments of
accrued amounts. Changes in working capital that provided cash totaled $3.6 million and were primarily
comprised of decreases of accounts receivable and other non-current assets.
For 2016, our operating activities used $22.8 million of cash, as $38.8 million for non-cash
adjustments were more than offset by our net loss of $40.0 million and $21.6 million of cash used in
63
changes in working capital. Adjustments for non-cash items primarily consisted of depreciation and
amortization expense of $13.1 million, accrual of interest on financing obligations of $6.8 million, and non-
cash stock compensation expense of $18.1 million. The cash used in changes in working capital primarily
consisted of a decrease in deferred revenue of $17.7 million, an increase in accounts receivable of $3.9
million, and a decrease in accrued compensation and benefits of $3.3 million as the result of timing of
payments of accrued amounts. Changes in working capital that provided cash totaled $5.2 million and
were primarily comprised of an increase of accrued expenses and other non-current liabilities and a
decrease in prepaid expenses.
For 2015, our operating activities used $31.5 million, as changes in working capital provided $1.3
million cash and adjustments for non-cash items of $29.3 million partially offset a net loss of $62.1 million.
The cash provided by changes in working capital primarily consisted of an increase in accrued
compensation and benefits of $3.3 million, an increase in accrued expenses of $3.0 million, and an
increase in accounts payable of $3.4 million, offset by an increase in accounts receivable of $7.8 million.
The increase in accrued compensation and benefits resulted from an increase in the number of
associates. The increases in accrued expenses and accounts payable are the result of timing of the
receipt of invoices and the timing of payments. The increase in accounts receivable resulted from a few
significant invoices related to new contracts and the normal timing of customer payments.
Investing Activities
For 2017, investing activity used $6.2 million as purchases of property and equipment of $8.2 million
were partially offset by maturity of short-term investments of $2.0 million.
For 2016, investing activities provided $25.5 million as proceeds from the maturity of short-term
investments of $40.2 million were partially offset by purchases of property and equipment of $12.7 million
and investments in marketable securities of $2.0 million.
Net cash used in investing activities totaled $50.2 million for 2015 as net purchases of marketable
securities were $35.5 million and cash purchases of property and equipment were $14.7 million.
Financing Activities
For 2017, net cash provided by financing activities was $10.7 million, as cash from the exercise of
stock options of $3.7 million and net borrowings under the revolving line of credit of $16.0 million were
partially offset by payments on capital lease and financing obligations of $9.0 million. Cash from the
exercise of stock options included $1.8 million related to the exercise of options by our Executive
Chairman that were set to expire in February 2017.
For 2016, net cash provided by financing activities was $6.1 million, as the result of cash from the
exercise of stock options of $6.9 million and net borrowings under the revolving line of credit of $10.0
million, partially offset by payments on capital lease and financing obligations. Cash from the exercise of
stock options included $5.1 million related to the exercise of options by an executive officer that were set
to expire in February 2017.
For 2015, net cash provided by financing activities was $78.8 million, primarily as a result of $74.5
million from the issuance of common stock and a warrant in a private placement to Mercer, and net draws
on the revolving line of credit of $12.6 million offset by payments on financing and capital lease
obligations of $9.9 million.
Operating and Capital Expenditure Requirements
We believe that our existing cash and cash equivalents balances, cash generated from operations,
and our ability to draw on the revolving line of credit will be sufficient to meet our anticipated cash
requirements through at least the next 12 months. Our future capital requirements will depend on many
factors, including our customer growth rate, subscription renewal activity, the timing and extent of
development efforts, the expansion of sales and marketing activities, the introduction of new and
enhanced services offerings, and the continuing market acceptance of our services. We might require
additional capital beyond our currently anticipated amounts. If our available cash and cash equivalents
balances are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible
debt securities or enter into an additional credit facility. The sale of equity and convertible debt securities
may result in dilution to our stockholders and those securities may have rights senior to those of our
64
common shares. If we raise additional funds through the issuance of convertible debt securities, these
securities could contain covenants that would restrict our operations. Additional capital might not be
available on reasonable terms, or at all.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our outstanding credit facility, non-
cancelable leases for our office space and computer equipment and purchase commitments for our co-
location and other support services. The following table summarizes these contractual obligations at
December 31, 2017. Future events could cause actual payments to differ from these estimates.
Contractual Obligations
Long-term debt--Revolving line of
credit (1)
Operating lease obligations
Capital lease obligations
Financing obligations, build-to-suit
leases
Financing obligations, other
Purchase commitments
Payment due by period
Total
Less than 1
year
1-3 years
3-5 years
(in thousands)
More than 5
years
$
56,246 $
- $
56,246 $
- $
-
14,224
50,953
108,658
1,709
6,570
1,400
5,089
6,359
1,400
5,602
2,564
8,197
1,925
5,970
13,297
309
968
14,107
-
-
8,335
31,697
74,895
-
-
Total
$
238,360 $
19,850 $
81,581 $
22,002 $
114,927
(1) Repayment of the revolving line of credit is due at end of the term in 2020. Early repayment is
allowed. Interest is paid monthly.
Borrowing limit under our revolving line of credit agreement is $95.0 million. The agreement
terminates on February 20, 2020. Borrowing capacity under this agreement is subject to a borrowing
base limit that is a function of our monthly recurring revenue as adjusted to reflect lost customer revenue
during the previous three calendar months. Therefore, credit available under our line of credit may be less
than the $95.0 million borrowing limit. Advances under the revolving line of credit agreement bear interest
at the prime rate as published in the Wall Street Journal plus a margin based on the Company’s liquidity
that ranges between 0.75% and 1.25%. The Company is charged an unused line fee under this
arrangement at a rate based on its liquidity of 0.300% to 0.375% per year. Any outstanding principal is
due at the end of the term. Available credit was $15.7 million as of December 31, 2017.
In December 2016, we entered into a cancellable lease agreement to build additional office space
on our headquarters campus. In March 2018, our landlord extended certain terms of the agreement.
Under this agreement and extension, we may commence construction on or about April 1, 2019 for a
target lease commencement date of July 1, 2020. We can terminate the agreement prior to April 1, 2019
subject to reimbursing the lessor for reasonable pre-agreed out-of-pocket expenses. Annual rent
obligation for the first year is $4.4 million and increases 2% each subsequent year during the 15-year
lease term. We can renew the lease for five, one-year terms. The aggregate minimum lease payments
are approximately $75.8 million and are not reflected in the contractual obligations table above.
Off-Balance Sheet Arrangements
As of December 31, 2017, other than as disclosed in Note 15, we did not have any off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, or special purpose entities. We are not the primary
beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly,
we have not consolidated any variable interest entities.
65
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606),” which amends the revenue recognition requirements in the FASB Accounting Standards
Codification. Under the new standard, revenue is recognized when a customer obtains control of
promised goods or services and is recognized in an amount that reflects the consideration that the entity
expects to receive in exchange for those goods and services. In addition, the new standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers. The FASB has issued several amendments to the new standard, including clarification
on accounting for licenses of intellectual property and identifying performance obligations.
We will adopt the new standard effective January 1, 2018 using the full retrospective transition
method and recast each prior reporting period presented.
The more significant impacts of the new standard to our consolidated financial statements are
currently expected to be as follows:
We currently recognize revenue from certain professional services in the Carrier segment over
time, which is the customer relationship period. Under the new standard, revenue from certain of
these services will be recognized over the contract term of the associated software services
contract, including any extension periods representing a material right, or in some cases over the
period of delivery of the professional fees, both of which are typically shorter than the customer
relationship period.
We currently recognize insurance broker commission revenue over the policy period. Under the
new standard, the revenue related to broker commissions will be recognized when the orders for
the policies are received and transferred to the insurance carrier. As a result, software services
revenue from these arrangements in the Employer segment will be recognized earlier under the
new standard in comparison to the current guidance.
The new standard provides guidance on accounting for certain revenue-related costs, including
when to capitalize costs associated with obtaining and fulfilling a contract. The majority of these
costs are currently expensed as incurred. Under the new standard, Carrier segment assets
recognized for the costs to obtain a contract, which includes sales commissions, will be amortized
on a systematic basis that is consistent with the transfer of the services to which the assets
relate, considering anticipated renewals when applicable. Carrier segment assets recognized for
costs to fulfill a contract, which include internal costs related to implementing carrier products, will
be amortized on a systematic basis that is consistent with the transfer of the services to which the
asset relates, which is generally expected to be five years. Costs to fulfill contracts in the
Employer segment will be expensed as incurred.
Our historical net cash flows provided by or used in operating, investing, and financing activities will
not be impacted by adoption of the new revenue standard.
In June 2016, the FASB ASU No. 2016-13, “Measurement of Credit Losses on Financial
Instruments.” The purpose of this ASU is to require a financial asset measured at amortized cost basis to
be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt
securities should be recorded through an allowance for credit losses. This ASU is effective for interim and
annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact of
this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)”. The amendments in
this update require lessees, among other things, to recognize lease assets and lease liabilities on the
balance sheet for those leases classified as operating leases under previous authoritative guidance. This
update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be
effective for us beginning January 1, 2019, but early adoption is permitted. We are currently evaluating
the impact of this update on our consolidated financial statements.
66
We are evaluating other accounting standards and exposure drafts that have been issued or
proposed by the FASB or other standards setting bodies that do not require adoption until a future date to
determine whether adoption will have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Risk.
Market risk is the risk of loss to future earnings, values or future cash flows that may result from
changes in the price of a financial instrument. The value of a financial instrument might change as a result
of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes.
We do not use derivative financial instruments for speculative, hedging or trading purposes, although in
the future we might enter into exchange rate hedging arrangements to manage the risks described below.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. Borrowings under the revolving
line of credit agreement, which was entered into in February 2015 and subsequently amended, bear
interest at rates that are variable. Increases in the Prime Rate would increase the interest rate on
borrowings under the revolving line of credit.
Interest Rate Sensitivity
We are subject to interest rate risk in connection with borrowings under the revolving line of credit
agreement, which are subject to a variable interest rate. At December 31, 2017, we had borrowings under
the agreement of $56.2 million. As a result, each change of one percentage point in interest rates would
result in an approximate $0.6 million increase in our annual interest expense on our outstanding
borrowings at December 31, 2017. Any debt we incur in the future may also bear interest at variable
rates.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or
results of operations. We continue to monitor the impact of inflation in order to minimize its effects through
pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to
significant inflationary pressures, we may not be able to fully offset such higher costs through price
increases. Our inability or failure to do so could harm our business, financial condition, and results of
operations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the Consolidated Financial Statements and
Notes thereto beginning at page F-1 of this Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosures.
None.
Item 9A. Controls and Procedures.
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
67
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 December 31, 2017 our disclosure controls and procedures are designed to, and are
effective to, provide assurance at a reasonable level that the information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and that such information is accumulated and
communicated to our management, including our President and Chief Executive Officer and our Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of December
31, 2017.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our President and Chief Executive Officer and our Chief Financial
Officer, is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S.
GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
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 our internal control over financial reporting as of December 31, 2017, based on the Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) (2013 Framework). Based on this evaluation under the 2013 Framework, our
President and Chief Executive Officer and our Chief Financial Officer have concluded that our internal
control over financial reporting was effective as of December 31, 2017.
Changes in Internal Control Over Financial Reporting
No change in internal control over financial reporting occurred during the most recent fiscal quarter
with respect to our operations, which has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Attestation Report of Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our independent
registered public accounting firm due to an exemption established by the JOBS Act for emerging growth
companies.
Item 9B. Other Information.
On March 12, 2018, Shawn A. Jenkins informed the Company that he is resigning from the Board of
Directors of the Company and from his position as Senior Advisor of Innovation of the Company, effective
as of the close of business on April 1, 2018. His resignation is not related to any disagreement with the
Company on any matter relating to the Company’s operations, policies or practices, but was for personal
reasons.
On March 13, 2018, the Board of Directors appointed Raymond A. August, the Company’s
President and Chief Executive Officer, as a Class I director, effective April 1, 2018, to hold office until the
Company’s 2020 Annual Meeting of Stockholders or until his successor has been duly elected and
68
qualified. There were no arrangements or understandings between Mr. August and any other person
pursuant to which Mr. August was appointed as a director of the Board. Other than his employment by
the Company, there have been no transactions in which the Company has participated and in which Mr.
August had a direct or indirect material interest that would be required to be disclosed under Item 404(a)
of Regulation S-K.
69
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this Item concerning our directors is incorporated by reference from the
sections captioned “Election of Directors” and “Corporate Governance Matters” contained in our proxy
statement related to the 2018 Annual Meeting of Stockholders currently scheduled to be held on June 1,
2018 which we intend to file with the Securities and Exchange Commission within 120 days of the end of
our fiscal year pursuant to General Instruction G(3) of Form 10-K.
Our board of directors has determined that of the members of the Audit Committee, Messrs. Pelzer,
Swad and Dennerline are independent within the meaning of the NASDAQ Stock Market listing rules and
meet the additional test for independence for audit committee members imposed by Securities and
Exchange Commission regulation and the NASDAQ Stock Market listing rules. Our board has also
determined that Mr. Pelzer is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of
Regulation S-K.
We have adopted a code of ethics relating to the conduct of our business by all of our employees,
officers, and directors, as well as a code of conduct specifically for our principal executive officer and
senior financial officers. Each of these policies is posted on our website, www.benefitfocus.com.
The information required by this Item concerning our executive officers is set forth at the end of Part
I of this Annual Report on Form 10-K.
The information required by this Item concerning compliance with Section 16(a) of the United States
Securities Exchange Act of 1934, as amended, is incorporated by reference from the section of the proxy
statement captioned “Section 16(a) Beneficial Ownership Reporting Compliance”.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the information under the
sections captioned “Executive Compensation,” “Director Compensation” and “Compensation Committee
Interlocks and Insider Participation” in the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The following table sets forth the indicated information as of December 31, 2017 with respect to our
equity compensation plans:
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
7,039 $
25.65
134,792
2,115,657 $
0.95
2,632,454
84,512 $
2,207,208 $
4.85
1.18
-
2,767,246
Plan Category
Equity compensation plans
approved by security holders
2016 Employee Stock
Purchase Plan
Amended and Restated 2012
Stock Plan
Amended and Restated 2000
Stock Option Plan
Total
Our equity compensation plans consist of the Benefitfocus, Inc. 2016 Employee Stock Purchase
Plan, Amended and Restated 2012 Stock Plan, and the Amended and Restated 2000 Stock Option Plan,
which were approved by our stockholders. We do not have any equity compensation plans or
arrangements that have not been approved by our stockholders.
70
The other information required by this Item is incorporated by reference to the information under the
section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the
proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the information under the
section captioned “Certain Relationships and Related Party Transactions” and “Corporate Governance
Matters” in the proxy statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the information under the
section captioned “Audit Committee Report” in the proxy statement.
71
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements.
PART IV
The following statements are filed as part of this Annual Report on Form 10-K:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31,
2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and
2015
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts
F-2
F-3
F-4
F-5
F-6
F-7
F-31
Schedules not listed above have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes thereto.
(b) Exhibits.
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
Exhibit Title
Agreement and Plan of Merger,
dated August 29, 2013, by and
among Benefitfocus.com, Inc.,
Benefitfocus, Inc., and
Benefitfocus Mergeco, Inc.
Restated Certificate of
Incorporation of Benefitfocus,
Inc.
Amended and Restated Bylaws
of Benefitfocus, Inc.
Specimen Certificate for
Common Stock.
Form of Second Amended and
Restated Investors’ Rights
Agreement, dated, 2013, by and
among Benefitfocus, Inc. and
certain stockholders named
therein.
Incorporated by Reference
(Unless Otherwise Indicated)
Form
File
Exhibit
Filing Date
S-1/A
333-190610
2.1 September 5, 2013
10-Q
—
3.1.3 November 12, 2013
8-K
—
3.2.1 September 19, 2016
S-1/A
333-190610
4.1 September 5, 2013
S-1/A
333-190610
4.3 September 16, 2013
72
4.2.1
4.3
10.1
10.2
10.3
10.4
10.5
First Amendment to Second
Amended and Restated
Investors’ Rights Agreement,
dated February 24, 2015, by and
among Benefitfocus, Inc. and
certain stockholders named
therein.
Warrant for the Purchase of
Shares of Common Stock of
Benefitfocus, Inc. issued
February 24, 2015.
Form of Second Amended and
Restated Voting Agreement,
dated, 2013, by and among
Benefitfocus, Inc., and certain
stockholders named therein.
Amended and Restated 2000
Stock Option Plan.#
Form of Grant Notice and Stock
Option Agreement under the
Amended and Restated 2000
Stock Option Plan.#
Form of Grant Notice and Stock
Option Agreement under the
2012 Stock Plan, as amended.#
Form of Management Incentive
Bonus Program.#
10-K
—
4.3.1 February 27, 2015
10-K
—
4.5 February 27, 2015
S-1/A
333-190610
10.2 September 5, 2013
S-1
333-190610
10.3
August 14, 2013
S-1
333-190610
10.5
August 14, 2013
S-1
333-190610
10.6
August 14, 2013
S-1
333-190610
10.7
August 14, 2013
10.5.1
Benefitfocus, Inc. Management
Incentive Bonus Program.#
DEF 14A
—
—
April 25, 2014
10.6
10.7
10.7.1
10.8
10.9
10.10
Employment Agreement, dated
January 19, 2007, by and
between Benefitfocus.com, Inc.
and Mason R. Holland, Jr.#
Employment Agreement, dated
January 19, 2007, by and
between Benefitfocus.com, Inc.
and Shawn A. Jenkins.#
Employment Agreement, dated
November 20, 2017, by and
between Benefitfocus.com, Inc.
and Shawn A. Jenkins.#
Form of Employment
Agreement.#
Form of Indemnification
Agreement.#
Lease between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated as
of January 1, 2009, as
amended.
S-1
333-190610
10.8
August 14, 2013
S-1
333-190610
10.9
August 14, 2013
—
—
—
Filed herewith
S-1
333-190610
10.11
August 14, 2013
S-1
333-190610
10.12
August 14, 2013
S-1
333-190610
10.13
August 14, 2013
73
8-K
— 10.13.1 December 14, 2016
S-1
333-190610
10.14
August 14, 2013
8-K
— 10.14.1 December 14, 2016
S-1
333-190610
10.15
August 14, 2013
10-K
—
10.19
March 21, 2014
8-K
— 10.16.1 December 14, 2016
DEF 14A
—
—
April 25, 2014
8-K
10-K
—
10.21
June 23, 2014
—
10.20 February 27, 2015
10-K
—
10.21 February 27, 2015
10.10.1
10.11
10.11.1
10.12
Third Amendment to Lease
between Daniel Island Executive
Center, LLC and
Benefitfocus.com, Inc., dated as
of December 12, 2016.
Lease between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated as
of May 31, 2005.
First Amendment to Lease
between Daniel Island Executive
Center, LLC and
Benefitfocus.com, Inc., dated as
of December 12, 2016.
Master Business Agreement
between Aetna Life Insurance
Company and Benefitfocus.com,
Inc., dated as of November 28,
2006.+
10.13
Lease between DIEC II, LLC
and Benefitfocus.com, Inc.,
dated as of December 13, 2013.
10.13.1
10.14
10.15
10.16
10.17
Amendment to Lease between
DIEC II, LLC and
Benefitfocus.com, Inc., dated as
of December 12, 2016.
Benefitfocus, Inc. Amended and
Restated 2012 Stock Plan.#
Form of Independent Director
Compensation Agreement.
Securities Purchase Agreement,
dated as of February 24, 2015,
by and among Benefitfocus, Inc.
and Mercer LLC.
Right of First Offer Agreement,
dated as of February 24, 2015,
by and among Benefitfocus,
Inc., Mercer LLC, GS Capital
Partners VI Parallel, L.P., GS
Capital Partners VI GmbH & Co.
KG, GS Capital Partners VI
Fund, L.P., GS Capital Partners
VI Offshore Fund, L.P., Oak
Investment Partners XII, Limited
Partnership and certain
stockholders named therein.
74
8-K
—
10.22
April 8, 2015
—
—
—
Filed herewith
10-Q
—
10.23
May 6, 2015
8-K
—
10.25
June 16, 2015
10-K
—
10.23 February 25, 2016
8-K
—
10.26
March 29, 2016
10.18
10.18.1
10.19
10.19.1
10.19.2
10.19.3
Employment Agreement, dated
June 25, 2014, by and between
Benefitfocus.com, Inc. and Ray
August.#
First Amendment to
Employment Agreement, dated
November 20, 2017, by and
between Benefitfocus.com, Inc.
and Raymond A. August.#
Senior Secured Credit Facility,
dated as of February 20, 2015,
by and among Benefitfocus,
Inc., Benefitfocus.com, Inc.,
Benefit Informatics, Inc.,
BenefitStore, Inc., several
lenders, Silicon Valley Bank, as
administrative agent, issuing
lender and swingline lender and
Comerica Bank, as
documentation agent.
First Amendment Agreement,
dated as of June 16, 2015, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several banks and other
financial institutions or entities
and Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
Second Amendment Agreement,
dated as of December 18, 2015,
by and among Benefitfocus,
Inc., Benefitfocus.com, Inc.,
Benefit Informatics, Inc.,
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.
Third Amendment Agreement,
dated as of March 24, 2016, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc.,
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.
75
8-K
—
10.29
October 31, 2016
8-K
—
10.32 December 14, 2016
10-Q
— 10.20.6
April 28, 2017
10-Q
—
10.24
May 6, 2015
10-Q
—
10.26
May 5, 2016
DEF14A
—
—
April 22, 2016
8-K
—
10.28 September 1, 2016
10.19.4
10.19.5
10.19.6
10.20
10.21
10.22
10.23
Fourth Amendment Agreement,
dated as of October 28, 2016,
by and among Benefitfocus,
Inc., Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.+
Fifth Amendment Agreement,
dated as of December 12, 2016,
by and among Benefitfocus,
Inc., Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.
Sixth Amendment Agreement,
dated as of April 26, 2017, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.+
Guarantee and Collateral
Agreement, dated as of
February 20, 2015, made by
Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., and other grantors, in favor
of Silicon Valley Bank, as
administrative agent.
Employment Agreement, dated
April 26, 2016, by and between
Benefitfocus.com, Inc. and
Dennis B. Story.#
Benefitfocus, Inc. 2016
Employee Stock Purchase
Plan.#
Waiver to Credit Agreement,
dated as of September 1, 2016,
by and among the Benefitfocus,
Inc., Benefitfocus.com, Inc. and
BenefitStore, Inc., the several
banks and other financial
institutions or entities party
thereto and Silicon Valley Bank,
as administration agent and
collateral agent for the lenders.
76
10.24
10.25
10.26
Employment Agreement
effective September 15, 2016,
by and between
Benefitfocus.com, Inc. and
Jeffrey M. Laborde.#
Lease between DIEC II, LLC
and Benefitfocus.com, Inc.,
dated as of December 12, 2016.
Employment Agreement, dated
June 30, 2017, by and between
Benefitfocus.com and Jonathon
Dussault.#
21.1
List of Subsidiaries of
Registrant.
23.1
Consent of Ernst & Young LLP.
31.1
31.2
32.1
Certification of the President and
Chief Executive Officer pursuant
to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the Chief
Financial Officer pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the President and
Chief Executive Officer, and the
Chief Financial Officer pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SC
H
XBRL Taxonomy Extension
Schema Document.
101.CAL XBRL Taxonomy Extension
Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension
Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension
Label Linkbase Document.
101.PRE XBRL Taxonomy Extension
Presentation Linkbase
Document.
10-Q
—
10.30 November 4, 2016
8-K
—
10.31 December 14, 2016
10-Q
—
10.29
August 8, 2017
—
—
—
—
—
—
—
—
—
Filed herewith
Filed herewith
Filed herewith
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Filed herewith
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Filed herewith
—
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Filed herewith
Filed herewith
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Filed herewith
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Filed herewith
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Filed herewith
___________
# Management contract or compensatory plan.
+ The registrant has received confidential treatment with respect to portions of this exhibit. Those
portions have been omitted from the exhibit and filed separately with the U.S. Securities and
Exchange Commission.
77
Item 16. Form 10-K Summary.
None.
78
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
Benefitfocus, Inc.
Date: March 15, 2018
By: /s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Mason R. Holland, Jr.
Mason R. Holland, Jr.
/s/ Raymond A. August
Raymond A. August
/s/ Jonathon E. Dussault
Jonathon E. Dussault
/s/ Douglas A. Dennerline
Douglas A. Dennerline
/s/ Joseph P. DiSabato
Joseph P. DiSabato
/s/ Shawn A. Jenkins
Shawn A. Jenkins
/s/ A. Lanham Napier
A. Lanham Napier
/s/ Francis J. Pelzer V
Francis J. Pelzer V
/s/ Stephen M. Swad
Stephen M. Swad
Chairman of the Board of Directors
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
March 15, 2018
President and
Chief Executive Officer (principal
executive officer)
Chief Financial Officer (principal financial
and
accounting officer)
Director
Director
Director
Director
Director
Director
79
BENEFITFOCUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and
2015
Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and Qualifying Accounts
F-2
F-3
F-4
F-5
F-6
F-7
F-31
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Benefitfocus, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Benefitfocus, Inc. (the Company) as
of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive
loss, changes in stockholders' deficit and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes and the financial statement schedule listed in the Index at Item
15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits
we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Raleigh, North Carolina
March 15, 2018
F-2
BENEFITFOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Accounts receivable, related party, net
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Other non-current assets
Total assets
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable
Accrued expenses
Accrued compensation and benefits
Deferred revenue, current portion
Revolving line of credit, current portion
Financing and capital lease obligations, current portion
Total current liabilities
Deferred revenue, net of current portion
Revolving line of credit, net of current portion
Financing and capital lease obligations, net of current portion
Other non-current liabilities
Total liabilities
Commitments and contingencies
Stockholders' deficit:
$
$
$
As of December 31,
2017
2016
55,335 $
–
30,156
–
4,337
89,828
72,681
150
1,634
816
165,109 $
$
4,260
9,136
14,250
38,821
24,000
3,423
93,890
19,898
32,246
55,597
2,809
204,440
56,853
2,007
28,340
4,626
4,449
96,275
80,518
408
1,634
1,575
180,410
5,829
10,867
17,347
35,426
20,000
2,604
92,073
40,412
20,246
57,934
3,056
213,721
Preferred stock, par value $0.001, 5,000,000 shares authorized, no shares
issued and outstanding at December 31, 2017 and 2016
Common stock, par value $0.001, 50,000,000 shares authorized,
31,307,989 and 30,429,014 shares issued and outstanding at
December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders' deficit
Total liabilities and stockholders' deficit
$
-
-
31
355,301
(394,663 )
(39,331 )
165,109
$
30
335,059
(368,400 )
(33,311 )
180,410
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-3
BENEFITFOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing
obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Comprehensive loss
Net loss per common share:
Basic and diluted
Year Ended December 31,
2017
2016
2015
$
$
256,735
124,156
132,579
$
233,335
120,681
112,654
69,280
49,549
27,268
146,097
(13,518 )
55,488
56,584
32,750
144,822
(32,168 )
185,143
102,851
82,292
58,589
52,250
25,727
136,566
(54,274 )
182
138
188
(7,450 )
(4,931 )
(140 )
(12,339 )
(25,857 )
15
(25,872 )
(25,872 )
$
$
(6,826 )
(1,095 )
(90 )
(7,873 )
(40,041 )
17
(40,058 )
(40,058 )
$
$
(7,092 )
(877 )
(4 )
(7,785 )
(62,059 )
25
(62,084 )
(62,084 )
(0.83 )
$
(1.35 )
$
(2.19 )
$
$
$
Weighted-average common shares outstanding:
Basic and diluted
31,052,378
29,589,857
28,344,680
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-4
BENEFITFOCUS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(in thousands, except share and per share data)
Balance, December 31, 2014
Exercise of stock options
Issuance of common stock upon
vesting of restricted stock units,
net of shares surrendered for
taxes
Issuance of common stock for
cashless exercise of warrant
Stock-based compensation expense
Net loss
Balance, December 31, 2015
Exercise of stock options
Issuance of common stock upon
vesting of restricted stock units,
net of shares surrendered for
taxes
Stock-based compensation expense
Net loss
Balance, December 31, 2016
Cumulative effect adjustment from
adoption of new accounting standard
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
Net loss
Balance, December 31, 2017
Common Stock,
$0.001 Par Value
Additional
Paid-in
Par Value Capital
Deficit
Total
Deficit
Accumulated Stockholders'
26 $ 223,409 $
4,229
–
(266,258 ) $
–
(42,823 )
4,229
Shares
25,608,937 $
656,043
111,826
–
(2,116 )
–
(2,116 )
2,817,526
–
–
29,194,332 $
944,706
3
–
–
74,328
10,454
–
29 $ 310,304 $
6,869
1
–
–
(62,084 )
(328,342 ) $
–
74,331
10,454
(62,084 )
(18,009 )
6,870
289,976
–
–
30,429,014 $
–
–
–
(202 )
18,088
–
30 $ 335,059 $
–
–
(40,058 )
(368,400 ) $
(202 )
18,088
(40,058 )
(33,311 )
–
463,870
406,936
–
1
–
391
3,457
(391 )
–
–
3,458
–
–
–
8,169
–
–
31,307,989 $
–
–
–
257
16,137
–
31 $ 355,301 $
–
–
(25,872 )
(394,663 ) $
257
16,137
(25,872 )
(39,331 )
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-5
BENEFITFOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2016
2017
2015
$
(25,872 )
$
(40,058 )
$
(62,084 )
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:
Depreciation and amortization
Stock-based compensation expense
Interest accrual on financing obligations
Provision for doubtful accounts
Loss on disposal or impairment of property and equipment
Changes in operating assets and liabilities:
Accounts receivable, net
Accrued interest on short-term investments
Prepaid expenses and other current assets
Other non-current assets
Accounts payable
Accrued expenses
Accrued compensation and benefits
Deferred revenue
Other non-current liabilities
Net cash and cash equivalents used in operating activities
Cash flows from investing activities
Purchases of short-term investments held to maturity
Proceeds from short-term investments held to maturity
Purchases of property and equipment
Net cash and cash equivalents (used in) provided by investing activities
Cash flows from financing activities
Draws on revolving line of credit
Payments on revolving line of credit
Proceeds from exercises of stock options and ESPP
Proceeds from issuance of common stock and
warrant, net of issuance costs
Payments of deferred financing costs and debt issuance costs
Remittance of taxes upon vesting of restricted stock units
Payments on financing and capital lease obligations
Net cash and cash equivalents provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
Supplemental disclosure of non-cash investing and financing activities
15,906
16,137
7,500
75
157
2,735
7
112
759
(1,372 )
(1,617 )
(3,097 )
(17,119 )
(248 )
(5,937 )
–
2,000
(8,279 )
(6,279 )
105,000
(89,000 )
3,715
–
–
–
(9,017 )
10,698
(1,518 )
56,853
55,335
13,073
18,088
6,827
667
141
(3,936 )
220
1,626
339
(1,849 )
990
(3,337 )
(17,690 )
2,073
(22,826 )
(2,004 )
40,225
(12,705 )
25,516
84,000
(74,000 )
6,870
–
(379 )
(202 )
(10,200 )
6,089
8,779
48,074
56,853
$
$
11,664
10,454
7,092
22
18
(7,800 )
205
(1,328 )
1,380
3,418
2,961
3,310
(1,189 )
332
(31,545 )
(68,185 )
32,667
(14,727 )
(50,245 )
57,492
(44,903 )
4,229
74,538
(566 )
(2,116 )
(9,884 )
78,790
(3,000 )
51,074
48,074
Property and equipment purchases in accounts
payable and accrued expenses
Property and equipment purchased with financing
and capital lease obligations
Post contract support purchased with financing obligations
Allocation of proceeds to deferred revenue from issuance
of common stock based on relative selling price
Supplemental disclosure of cash flow information
Income taxes paid
Interest paid
$
$
$
$
$
$
389
$
699 $
1,489
-
-
$
$
-
$
28,032 $
1,048 $
- $
914
272
207
14
10,911
$
$
7 $
18
6,655 $
6,525
The accompanying notes are an integral part of the Consolidated Financial Statements
F-6
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
1. Organization and Description of Business
Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform
for consumers, employers, insurance carriers and brokers under a software-as-a-service (“SaaS”) model.
The financial statements of the Company include the financial position and operations of its wholly owned
subsidiaries, Benefitfocus.com, Inc. and BenefitStore, Inc.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make
estimates and assumptions that affect the reported amounts in the consolidated financial statements and
accompanying notes. Such estimates include revenue recognition and the customer relationship period,
allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets,
warrants, capitalizable software development costs and the related amortization, stock-based
compensation, the determination of the useful lives of assets, and the impairment assessment of acquired
intangibles and goodwill. Determination of these transactions and account balances are based on the
Company’s estimates and judgments. These estimates are based on the Company’s knowledge of
current events and actions it may undertake in the future as well as on various other assumptions that it
believes to be reasonable. Actual results could differ materially from these estimates.
Revenue and Deferred Revenue
The Company derives the majority of its revenue from software services fees, which consist
primarily of monthly subscription fees paid by customers for access to and usage of the Company’s cloud-
based benefits software solutions for a specified contract term. The Company also derives revenue from
professional services which primarily include fees related to the integration of customers’ systems with the
Company’s platform, which typically includes discovery, configuration, deployment, testing, and training.
The Company recognizes revenue when there is persuasive evidence of an arrangement, the
service has been provided, the fees to be paid by the customer are fixed and determinable and
collectability is reasonably assured. The Company considers delivery of its cloud-based software services
has commenced once access to a configured and live instance to its platform has been granted to the
customer.
The Company’s arrangements generally contain multiple elements comprised of software services
and professional services. The Company evaluates each element in an arrangement to determine
whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting
when the delivered item has standalone value and delivery of the undelivered element is probable and
within the Company’s control.
When multiple deliverables included in an arrangement are separable into different units of
accounting, the arrangement consideration is allocated to the identified units of accounting based on their
relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use
when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence
F-7
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
(“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a
standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence
(“TPE”) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently
exist for any of the Company’s deliverables. Accordingly, for arrangements with multiple deliverables that
can be separated into different units of accounting, the arrangement consideration is allocated to the
separate units of accounting based on the Company’s best estimate of selling price. The amount of
arrangement consideration allocated is limited by contingent revenues, if any.
Effective July 1, 2015, the Company determined it had established standalone value for
Benefitfocus Marketplace implementation services in the Employer segment as they can be sold
separately from the software services. This was primarily due to the system integrators that have been
trained and certified to perform these implementation services, the successful completion of an
implementation by a trained system integrator, and the sale of several software subscription
arrangements to customers in the Employer segment without the Company’s implementation services.
Accordingly, revenues related to implementation services for the Benefitfocus Marketplace solution in the
Employer segment that are delivered after July 1, 2015 are recognized separately from the revenues
earned from the Employer software subscription services. Revenues related to such implementation
services are recognized at the time that the professional services have been completed and the related
software services have commenced. Prior to July 1, 2015, the Company did not have standalone value
for implementation services related to the Benefitfocus Marketplace solution as the Company had
historically performed these services to support customers’ implementation of this solution.
Certain of the Company’s other professional services, including implementation services related to
the Carrier segment, are not sold separately from the software services and there is no alternative use for
them. As such, the Company has determined that those professional services do not have standalone
value. Accordingly, software services and professional services are combined and recognized as a single
unit of accounting. The Company generally recognizes software services fees monthly based on the
number of employees covered by the relevant benefits plans at contracted rates for a specified period of
time, once the criteria for revenue recognition described above have been satisfied. With the exception of
Benefitfocus Marketplace implementation services discussed above, the Company defers recognition of
revenue for fees from professional services that do not have standalone value and begins recognizing
such revenue once the services are delivered and the related software services have commenced,
ratably over the longer of the contract term or the estimated expected life of the customer relationship.
Costs incurred by the Company in connection with providing such professional services are charged to
expense as incurred and are included in “Cost of revenue.”
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,
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
Cash and cash equivalents consist of bank checking accounts and money market accounts. The
Company considers all highly liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
Marketable Securities
Marketable securities consist of short-term investments in corporate bonds, commercial paper, and
various U.S. government backed securities. To reflect its intention, the Company classifies its marketable
securities as held-to-maturity at the time of purchase. As a result, the marketable securities are recorded
F-8
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
at amortized cost and any gains or losses realized upon maturity are reported in other expense, net in the
consolidated statements of operations and comprehensive loss.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist
primarily of cash equivalents, marketable securities and accounts receivable. All of the Company’s cash
and cash equivalents are held at financial institutions that management believes to be of high credit
quality. The bank deposits of the Company might, at times, exceed federally insured limits and are
generally uninsured and uncollateralized. The Company has not experienced any losses on cash and
cash equivalents to date.
To manage credit risk related to marketable securities, the Company invests in various types of
highly rated corporate bonds, commercial paper, and various U.S. government backed securities with
maturities of less than two years. The weighted average maturity of the portfolio of investments must not
exceed nine months, per the Company’s investment policy.
To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers
and maintains an allowance for doubtful accounts. Accounts receivable were unsecured and were derived
from revenue earned from customers located in the United States. Accounts receivable from one
customer represented approximately 12% and 14% of the total accounts receivable at December 31,
2017 and 2016, respectively, and approximately 12% and 11% of total revenue for the year ended
December 31, 2017 and 2016, respectively. The revenue is attributable to the Company’s Employer
segment. Another customer represented approximately 13% of the total accounts receivable at December
31, 2016.
No customer represented more than 10% of total revenue for the year ended December 31, 2015.
Accounts Receivable and Allowance for Doubtful Accounts and Returns
Accounts receivable are stated at realizable value, net of allowances for doubtful accounts and
estimated returns. The Company utilizes the allowance method to provide for doubtful accounts based on
management’s evaluation of the collectability of amounts due, and other relevant factors. Bad debt
expense is recorded in general and administrative expense on the consolidated statements of operations
and comprehensive loss. The Company’s estimate is based on historical collection experience and a
review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts
have not significantly differed from the Company’s estimates. The Company removes recorded
receivables and the associated allowances when they are deemed permanently uncollectible. However,
higher than expected bad debts may result in future write-offs that are greater than the Company’s
estimates. The allowance for doubtful accounts was $654 and $691 as of December 31, 2017 and 2016,
respectively.
The allowances for returns are accounted for as reductions of revenue and are estimated based on
the Company’s periodic assessment of historical experience and trends. The Company considers factors
such as the time lag since the initiation of revenue recognition, historical reasons for adjustments, new
customer volume, delivery issues or delays, and past due customer billings. The allowance for returns
was $2,812 and $3,904 as of December 31, 2017 and 2016, respectively.
Property and Equipment and Capitalized Software Development Costs
Property and equipment, including capitalized software development costs, are stated at cost less
accumulated depreciation and amortization. Expenditures for major additions and improvements are
capitalized. Depreciation and amortization is recognized over the estimated useful lives of the related
assets using the straight-line method.
F-9
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The estimated useful lives for significant property and equipment categories are generally as
follows:
Buildings
Computers and related equipment
Purchased software and licenses
Developed software
Furniture and fixtures
Leasehold improvements
Other equipment
Vehicles
30 years
3-5 years
1-7 years
3 years
7 years
Lesser of estimated useful life of asset or lease term
5-12 years
5 years
Useful lives of significant assets are periodically reviewed and adjusted prospectively to reflect the
Company’s current estimates of the respective assets’ expected utility. Costs associated with
maintenance and repairs are expensed as incurred.
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 over the software’s
estimated useful life which is three years. The Company evaluates these assets for impairment whenever
events or changes in circumstances occur that could impact the recoverability of these assets.
Identifiable Intangible Assets
Identifiable intangible assets with finite lives are recorded at their fair values at the date of
acquisition and are amortized on a straight-line basis over their respective estimated useful lives, which is
the period over which the asset is expected to contribute directly or indirectly to future cash flows. As of
December 31, 2017, the estimated remaining useful life used in computing amortization was 0.6 years.
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets and definite-lived intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset might not be
recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of
the asset or asset group to future undiscounted net cash flows expected to be generated. If such assets
are not recoverable, the impairment to be recognized, if any, is measured as the amount by which the
carrying amount of the assets exceeds the estimated fair value (discounted cash flow) of the assets or
asset group. Assets held for sale are reported at the lower of the carrying amount or fair value, less costs
to sell.
Goodwill represents the excess of the aggregate of the fair value of consideration transferred in a
business combination over the fair value of assets acquired, net of liabilities assumed. Goodwill is not
amortized; rather, goodwill is tested for impairment at the reporting unit level as of October 31 of each
year, or more frequently if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value.
The Company performs a qualitative assessment to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying value before performing a two-step approach to
testing goodwill for impairment for each reporting unit. The reporting units are determined by the
components of the Company’s operating segments that constitute a business for which both (1) discrete
financial information is available and (2) segment management regularly reviews the operating results of
that component. If it is more likely than not that the fair value of a reporting unit is less than its carrying
F-10
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
value, the Company performs the impairment test by applying a fair-value-based test. The first step
measures for impairment by applying fair-value-based tests at the reporting unit level. The second step (if
necessary) measures the amount of impairment by applying fair-value-based tests to the individual assets
and liabilities within each reporting unit.
The Company has identified two reporting units, Employer and Carrier. To determine the fair value
of the Company’s reporting units, the Company has used a discounted cash flow analysis, which requires
significant assumptions and estimates about future operations. Significant judgments inherent in this
analysis include the determination of an appropriate discount rate, estimated terminal value and the
amount and timing of expected future cash flows. The Company may also determine fair value of its
reporting units using a market approach by applying multiples of earnings of peer companies to its
operating results.
Financing Obligations
In its build-to-suit lease arrangements where the Company is involved in the construction of its
buildings, the Company is deemed the owner for accounting purposes during the construction period. The
Company records an asset for the amount of the total project costs in Property and Equipment, net and
the related financing obligation in Financing and Capital Lease Obligations on the Consolidated Balance
Sheet. Once construction is complete, the Company determines if the asset qualifies for sale-leaseback
accounting treatment. If the arrangement does not qualify for sale-lease back treatment, the Company
continues to reduce the obligation over the lease term as payments are made and depreciates the asset
over its useful life. The Company does not report rent expense for the portion of the rent payment
determined to be related to the assets that it owns for accounting purposes. Rather, this portion of the
rent payment under the lease is recognized as a reduction of the financing obligation and as interest
expense.
Financing obligations also include liabilities for the purchase of software licenses.
Sales Commissions
Sales commissions are generally expensed when the sales contract is executed by the customer.
Advertising
The Company expenses advertising costs as they are incurred. Direct advertising costs for the
years ended December 31, 2017, 2016, and 2015 were $168, $635 and $435, respectively.
Comprehensive Loss
The Company’s net loss equals comprehensive loss for all periods presented.
Stock-Based Employee Compensation
Stock-based employee compensation is measured based on the grant-date fair value of the awards
and recognized in the Consolidated Statements of Operations and Comprehensive Loss over the period
during which the award holder is required to perform services in exchange for the award, which is the
vesting period. Compensation expense is recognized over the vesting period of the applicable award
using the straight-line method. Compensation expense related to performance-based restricted stock
units, which are accounted for as equity awards, is recognized when it is probable that the performance
measure will be met. Compensation costs related to restricted stock units (“RSUs”) is based on the
market price on the grant date. The Company uses the Black-Scholes option pricing model for estimating
the fair value of stock options. The use of the option valuation model requires the input of subjective
assumptions, including the expected life of the option and the expected stock price volatility. Additionally,
prior to January 1, 2017, the recognition of stock-based compensation expense required the estimation of
the number of options and RSUs that will ultimately vest and the number of options and RSUs that will
F-11
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
ultimately be forfeited. Starting January 1, 2017, the Company recognizes the effect of forfeitures as they
occur. The recognition of stock-based compensation expense associated with performance-based
restricted stock units requires the estimation of the probability of achieving performance measures.
The Company adopted the guidance in Accounting Standards Update ("ASU") 2016-09,
“Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment
Accounting,” on January 1, 2017. Under this ASU, entities are permitted to make an accounting policy
election to either estimate forfeitures on share-based payment awards, as previously required, or to
recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and
the impact of that change in accounting policy has been recorded as a $391 cumulative effect adjustment
to its accumulated deficit as of January 1, 2017.
Income Taxes
The Company uses the asset and liability method for income tax accounting. This method requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax
rates that are expected to apply to taxable income for the years in which those tax assets and liabilities
are expected to be realized or settled. Valuation allowances are recorded to reduce deferred tax assets to
the amount the Company believes is more likely than not to be realized. The tax benefits of uncertain tax
positions are recognized only when the Company believes it is more likely than not that the tax position
will be upheld on examination by the taxing authorities based on the merits of the position. The Company
recognizes interest and penalties, if any, related to unrecognized income tax benefits in income tax
expense.
In addition to the compensation expense provisions previously discussed, ASU 2016-09 requires
that all income tax effects related to settlements of share-based payment awards be reported in earnings
as an increase or decrease to income tax expense (benefit), net. Previously, income tax benefits at
settlement of an award were reported as an increase (or decrease) to additional paid-in capital to the
extent that those benefits were greater than (or less than) the income tax benefits reported in earnings
during the award's vesting period. The requirement to report those income tax effects in earnings has
been applied on a prospective basis to settlements occurring on or after January 1, 2017 and the impact
of applying that guidance was not material to the consolidated financial statements for the year ended
December 31, 2017.
ASU 2016-09 also requires that all income tax-related cash flows resulting from share-based
payments be reported as operating activities in the statement of cash flows. Previously, income tax
benefits at settlement of an award were reported as a reduction to operating cash flows and an increase
to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in
earnings during the award's vesting period. The Company has elected to apply that change in cash flow
classification on a prospective basis. However, there is no impact to the statement of cash flows for the
year ended December 31, 2017, as the Company did not have any cash flows related to excess tax
benefits during that time. The remaining provisions of ASU 2016-09 did not have a material impact on the
accompanying consolidated financial statements.
Basic and Diluted Net Loss per Common Share
The Company uses the two-class method to compute net loss per common share because the
Company has issued securities, other than common stock, that contractually entitle the holders to
participate in dividends and earnings of the Company. The two-class method requires earnings for the
period to be allocated between common stock and participating securities based upon their respective
rights to receive distributed and undistributed earnings. Holders of each series of the Company’s
redeemable convertible preferred stock were entitled to participate in distributions, when and if declared
by the board of directors that are made to common stockholders, and as a result are considered
participating securities.
F-12
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Under the two-class method, for periods with net income, basic net income per common share is
computed by dividing the net income attributable to common stockholders by the weighted-average
number of shares of common stock outstanding during the period. Net income attributable to common
stockholders is computed by subtracting from net income the portion of current year earnings that the
participating securities would have been entitled to receive pursuant to their dividend rights had all of the
year’s earnings been distributed. No such adjustment to earnings is made during periods with a net loss,
as the holders of the participating securities have no obligation to fund losses. Diluted net loss per
common share is computed under the two-class method by using the weighted-average number of
shares of common stock outstanding plus, for periods with net income attributable to common
stockholders, the potential dilutive effects of stock awards and warrants. In addition, the Company
analyzes the potential dilutive effect of the outstanding participating securities under the “if-converted”
method when calculating diluted earnings per share, in which it is assumed that the outstanding
participating securities convert into common stock at the beginning of the period. The Company reports
the more dilutive of the approaches (two-class or “if-converted”) as its diluted net income per share during
the period. Due to net losses for the years ended December 31, 2017, 2016, and 2015 basic and diluted
loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2017-04, "Simplifying the Test for Goodwill Impairment." It eliminates Step 2 from the
goodwill impairment test and an entity should recognize an impairment charge for the amount by which
the carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount
of goodwill. This guidance is effective for annual and any interim impairment tests starting January 1,
2020. The Company does not expect this guidance to have any impact on its consolidated financial
statements.
In August 2016, the FASB issued ASU No. 2016-15, "Classification of Certain Cash Receipts and
Cash Payments." It provides guidance on eight specific cash flow issues with the objective of reducing the
existing diversity in practice in how they are classified in the statement of cash flows. This guidance is
effective for interim and annual reporting periods starting January 1, 2018. The Company does not expect
this guidance to have a material impact on its consolidated financial statements.
In June 2016, the FASB ASU No. 2016-13, “Measurement of Credit Losses on Financial
Instruments.” The purpose of this ASU is to require a financial asset measured at amortized cost basis to
be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt
securities should be recorded through an allowance for credit losses. This ASU is effective for interim and
annual reporting periods starting January 1, 2020. The Company is currently evaluating the impact of this
guidance on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The amendments in
this update require lessees, among other things, to recognize lease assets and lease liabilities on the
balance sheet for those leases classified as operating leases under previous authoritative guidance. This
update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be
effective for the Company beginning January 1, 2019, but early adoption is permitted. The Company is
currently evaluating the impact of this update on the consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606),” which amends the revenue recognition requirements in the FASB Accounting Standards
Codification. Under the new standard, revenue is recognized when a customer obtains control of
promised goods or services and is recognized in an amount that reflects the consideration that the entity
expects to receive in exchange for those goods and services. In addition, the new standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers. The FASB has issued several amendments to the new standard, including clarification
on accounting for licenses of intellectual property and identifying performance obligations.
F-13
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The Company will adopt the new standard effective January 1, 2018 using the full retrospective
transition method and recast each prior reporting period presented.
The more significant impacts of the new standard to the Company are currently expected to be as
follows:
The Company currently recognizes revenue from certain professional services in the Carrier
segment over time, which is the customer relationship period. Under the new standard, revenue
from certain of these services will be recognized over the contract term of the associated software
services contract, including any extension periods representing a material right, or in some cases
over the period of delivery of the professional fees, both of which are typically shorter than the
customer relationship period.
The Company currently recognizes insurance broker commission revenue over the policy period.
Under the new standard, the revenue related to broker commissions will be recognized when the
orders for the policies are received and transferred to the insurance carrier. As a result, software
services revenue from these arrangements in the Employer segment will be recognized earlier
under the new standard in comparison to the current guidance.
The new standard provides guidance on accounting for certain revenue-related costs, including
when to capitalize costs associated with obtaining and fulfilling a contract. The majority of these
costs are currently expensed as incurred. Under the new standard, Carrier segment assets
recognized for the costs to obtain a contract, which includes sales commissions, will be amortized
on a systematic basis that is consistent with the transfer of the services to which the assets
relate, considering anticipated renewals when applicable. Carrier segment assets recognized for
costs to fulfill a contract, which include internal costs related to implementing carrier products, will
be amortized on a systematic basis that is consistent with the transfer of the services to which the
asset relates, which is generally expected to be five years. Costs to fulfill contracts in the
Employer segment will be expensed as incurred.
The Company’s historical net cash flows provided by or used in operating, investing, and financing
activities will not be impacted by adoption of the new revenue standard.
3. Net Loss Per Common Share
Diluted loss per common share is the same as basic loss per common share for all periods
presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following common share equivalent securities have been excluded from the calculation of weighted-
average common shares outstanding because the effect is anti-dilutive for the periods presented:
2015
2017
Year Ended December 31,
2016
1,937,014 1,467,811 1,017,450
263,155 727,559 1,684,843
- 580,813 580,813
-
2,207,208 2,780,147 3,283,106
3,964
7,039
Anti-Dilutive Common Share Equivalents
Restricted stock units
Stock options
Warrant to purchase common stock
Employee Stock Purchase Plan
Total anti-dilutive common share equivalents
F-14
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Basic and diluted net loss per common share is calculated as follows:
Numerator:
Net loss
Net loss attributable to common
stockholders
Denominator:
Weighted-average common shares
outstanding, basic and diluted
Net loss per common share, basic and diluted
Year Ended December 31,
2017
2016
2015
$
$
(25,872 ) $
(40,058 ) $
(62,084 )
(25,872 ) $
(40,058 ) $
(62,084 )
31,052,378 29,589,857 28,344,680
(2.19 )
$
(1.35 ) $
(0.83 ) $
4. Marketable Securities
Marketable securities consist of corporate bonds, commercial paper and U.S. Treasury and agency
bonds, and are classified as held-to-maturity. Investments held in marketable securities had contractual
maturities of less than one month as of December 31, 2016. As of December 31, 2017, the Company did
not have any marketable securities. The following presents information about the Company’s marketable
securities as of December 31:
Aggregate cost basis and net carrying amount
Gross unrealized holding gains
Gross unrealized holding losses
Aggregate fair value determined by Level 2 inputs
$
$
2016
2,007
-
-
2,007
No investments were in an unrealized loss position as of December 31, 2016.
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 and revolving line of credit approximates fair value, considering the
borrowing rates currently available to the Company for financing obligations 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.
F-15
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a
recurring basis to determine the appropriate level to classify them for each reporting period. This
determination requires significant judgments to be made.
The following tables present information about the Company’s assets and liabilities that are
measured at fair value on a recurring basis using the above categories, as of December 31, 2017 and
2016.
Description
Cash Equivalents:
Level 1
Level 2
Level 3
Total
December 31, 2017
Money market mutual funds (1)
Total assets
$
$
46,730 $
46,730 $
- $
- $
- $
- $
46,730
46,730
Description
Cash Equivalents:
Level 1
Level 2
Level 3
Total
December 31, 2016
Money market mutual funds (1)
Total assets
$
$
51,285 $
51,285 $
- $
- $
- $
- $
51,285
51,285
(1) Money market mutual funds are classified as cash equivalents in the Company’s consolidated
balance sheets. As short-term, highly liquid investments readily convertible to known amounts of
cash, with remaining maturities of three months or less at the time of purchase, the Company’s cash
equivalent money market funds have carrying values that approximate fair value.
6. Property and Equipment
Property and equipment consists of the following as of December 31:
Buildings, leased
Computers and related equipment
Purchased software and licenses
Developed software
Furniture and fixtures
Leasehold improvements
Other equipment
Vehicles
Construction in progress
Total property and equipment, at cost
Accumulated depreciation and amortization
Property and equipment, net
2017
2016
$
$
48,558 $
35,728
27,317
30,624
6,669
4,289
2,260
146
-
155,591
(82,910 )
72,681 $
48,558
33,924
25,982
26,142
6,668
4,348
2,072
111
319
148,124
(67,606 )
80,518
Depreciation and amortization expense on property and equipment was $15,648, $12,816 and
$11,378, for the years ended December 31, 2017, 2016 and 2015, respectively. Property and equipment
includes fixed assets acquired under capital lease agreements of $35,761 for both the years ended
December 31, 2017 and 2016. Accumulated depreciation of assets under capital leases totaled $9,633
and $5,194 as of December 31, 2017 and 2016, respectively. Amortization of assets under capital leases
is included in depreciation expense.
The Company capitalized software development costs of $4,482 and $5,242 for the years ended
December 31, 2017 and 2016, respectively. Amortization of capitalized software development costs
totaled $3,257, $2,857 and $2,587 during the years ended December 31, 2017, 2016 and 2015,
respectively. The net book value of capitalized software development costs was $7,660 and $6,435 at
December 31, 2017, and 2016, respectively.
F-16
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
7. Goodwill and Intangible Assets
The Company’s goodwill balance of $1,634 is solely attributable to the Employer reporting unit. The
gross carrying amount and accumulated impairment losses were $3,304 and $(1,670), respectively, for
the beginning and ending balances in all periods presented. There were no changes in the carrying
amount of goodwill in the years ended December 31, 2017 and 2016.
Information regarding the Company’s acquisition-related intangible assets is as follows:
Trademarks
Customer agreements
Non-compete agreements
Total
$
$
240 $
2,060
126
2,426 $
(240 ) $
(1,910 )
(126 )
(2,276 ) $
-
150
-
150
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
As of December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Weighted-
Average
Remaining
Useful Life
(in years)
-
0.6
-
0.6
Weighted-
Average
Remaining
Useful Life
(in years)
-
1.6
-
1.6
Trademarks
Customer agreements
Non-compete agreements
Total
$
$
240 $
2,060
126
2,426 $
(240 ) $
(1,652 )
(126 )
(2,018 ) $
-
408
-
408
Amortization expense of acquisition-related intangible assets for the years ended December 31,
2017, 2016 and 2015 was $258, $257 and $286, respectively. As of December 31, 2017, expected
amortization expense for the intangible assets for the remaining useful life was $150, to be incurred
during 2018. There were no impairments of intangible assets during the years ended December 31,
2017, 2016 and 2015.
8. Revolving Line of Credit
On August 27, 2013, the Company executed a loan and security agreement with Silicon Valley Bank
for a revolving line of credit (“Revolver”) in the initial amount of up to $15,000 for working capital, to fund
general business requirements, and to repay the indebtedness under its then existing master credit
facility and other senior secured promissory notes. At the beginning of 2014, the borrowing limit under the
Revolver was increased from $15,000 to $35,000 at the request of the Company in accordance with the
terms of the agreement, as amended on December 10, 2013.
In February 2015, the Company replaced its Revolver with a senior revolving line of credit (“Senior
Revolver”) with a syndicate of lenders led by Silicon Valley Bank. The Company borrowed $18,246 under
the Senior Revolver, of which $17,657 repaid the principal of the Revolver and $589 paid accrued
interest, as well as administrative and legal fees related to the issuance of the Senior Revolver. Debt
issuance fees of $591 were capitalized in the Company’s balance sheet and are amortized over the life of
the Senior Revolver.
The Senior Revolver had an original borrowing limit of $60,000 and an original term of three
years. Borrowing capacity under the Senior Revolver is subject to a borrowing base limit that is a function
of the Company’s monthly recurring revenue as adjusted to reflect lost customer revenue during the
previous three calendar months. Therefore, credit available under the Senior Revolver may be less than
F-17
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
the borrowing limit. Interest is payable monthly. Advances under the Senior Revolver bear interest at the
prime rate as published in the Wall Street Journal plus a margin based on the Company’s liquidity, which
originally ranged between 1.0% and 1.5%. The Company is charged an unused line fee under this
arrangement at a rate based on its liquidity, which was originally 0.300% to 0.375% per year. Any
outstanding principal is due at the end of the term.
In October and December 2016, the Company amended its Senior Revolver agreement. The
October amendment, among other things, increased the borrowing capacity to $95,000, extended the
termination date of the facility to February 20, 2020, and added Goldman Sachs Lending Partners LLC to
the lending syndicate. The October amendment altered definitions in the Senior Revolver agreement,
including Alternate Base Rate, Applicable Margin, Consolidated EBITDA, Liquidity and Commitment Fee
Rate. As a result of certain of these definitional changes, the Alternate Base Rate was modified to be the
prime rate as published in the Wall Street Journal plus a margin based on our liquidity that ranges
between 0.75% and 1.25%. Certain covenants were also revised, including those related to accounts
receivable, Minimum Consolidated EBITDA requirements, Indebtedness, permitted Indebtedness and
certain capital expenditure limits. The October amendment further waived any default that may have
occurred as a result of certain Indebtedness previously incurred by the Company and the disclosure to
the lenders of registered Intellectual Property. In connection with the October amendment, debt issuance
fees of $379 were capitalized in the Company’s balance sheet and are being amortized over the
remaining life of the Senior Revolver. The December amendment revised the covenant restricting
Indebtedness in the Senior Revolver agreement to increase the basket for the Company and its
subsidiaries’ building lease obligations, to the extent those would be characterized as Indebtedness under
the Senior Revolver agreement.
In April 2017, the Company further amended its Senior Revolver agreement. The amendment
altered definitions in the Credit Agreement, including Consolidated EBITDA and Liquidity, and changes
the Minimum Liquidity and Minimum Consolidated EBITDA requirements. It also included consents by the
lenders to certain administrative actions by the Company, including with respect to intellectual property
and certain of its bank accounts. The amendment also modifies the definition of Excluded Assets in the
Guarantee and Collateral Agreement, dated as of February 20, 2015, which was entered into in
connection with the Senior Revolver.
The Company is bound by customary affirmative and negative covenants in connection with the
Senior Revolver agreement, including financial covenants related to liquidity and EBITDA. In the event of
a default, the lenders may declare all obligations immediately due and stop advancing money or
extending credit under the line of credit. The line of credit is collateralized by substantially all of the
Company’s tangible and intangible assets, including intellectual property and the equity of subsidiaries.
During 2017, 2016 and 2015, the Company borrowed an aggregate of $105,000, $84,000 and
$39,246, respectively, under the Senior Revolver for general operating purposes and repaid an aggregate
of $89,000, $74,000 and $27,246, respectively. As of December 31, 2017, the amount outstanding under
the Senior Revolver was $56,246 and the amount available to borrow was $16,102. The amount
outstanding, which represents principal and currently bears interest at 5.50%, is due February 2020. No
other principal amounts are due in any other year.
9. Commitments and Contingencies
The Company leases three buildings on its Charleston, South Carolina campus. One leasing
arrangement is accounted for as a capital lease. The remaining two lease agreements are accounted for
as build-to-suit, failed sale-leaseback arrangements. Accordingly, the Company recognized liabilities for
the lease payments related to these two buildings, which have been recorded as financing obligations. A
portion of the lease payment for these two leases has been allocated to land and is accounted for using
F-18
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
operating lease accounting. Information regarding these three leases is incorporated in the following
disclosures.
Operating Lease Commitments
The Company leases office facilities under various non-cancelable operating lease agreements
with original lease periods expiring between 2018 and 2022. Some of the leases provide for renewal
terms at the Company’s option. Certain future minimum lease payments due under these operating lease
agreements contain free rent periods or escalating rent payment provisions. These leases generally do
not contain purchase options. Rent expense on these operating leases is recognized over the term of the
lease on a straight-line basis. Operating lease commitments include rent for land associated with the
Company’s build-to-suit leases expiring through 2031.
In December 2016, the Company amended its three leases for buildings on its Charleston, South
Carolina campus. As a result, one lease, that was previously accounted for as an operating lease was
classified as a capital lease at the end of 2016.
Rent expense totaled $1,605, $4,403 and $4,376 for the years ended December 31, 2017, 2016
and 2015, respectively.
Future minimum lease payments are as follows:
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Operating
Leases
$
$
1,400
1,429
1,135
1,101
824
8,335
14,224
Financing and Capital Lease Obligations
The Company has entered into various purchase arrangements to obtain property and equipment
for operations that are accounted for as capital leases. Certain purchase arrangements contain
payments for licenses, which the Company records as financing obligations. These arrangements have
original terms ranging from 2 to 5 years with interest rates ranging from 0.5% to 10.0%. The leases are
secured by the underlying leased property and equipment.
In December 2016, the Company amended a lease agreement for office space that had been
previously accounted for as an operating lease. The amendment extended the term of the lease by 15
years from the amendment date. This modification required the Company to evaluate the lease as if it
were a new lease. Upon evaluation, the lease was classified as a capital lease because the present
value of the lease payments exceeded 90% of the fair value of the leased asset. Aggregate payments
under this lease are $48,600, including executory costs of $5,938. As of December 31, 2017, capital
lease obligations include amounts under this lease of $20,571. Details of the lease extension are
disclosed under “Contractual Commitments” below.
Financing obligations were $34,233 and $33,665, as of December 31, 2017 and 2016, respectively,
and consist primarily of obligations for build-to-suit lease arrangements. The aggregate amount of future
minimum payments for financing obligations was $110,367 at December 31, 2017 which includes
aggregate payments of $108,659 related to build-to-suit arrangements. Details of the build-to-suit lease
arrangements are disclosed in Note 15.
F-19
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Financing obligations are allocated as follows:
Buildings, build-to-suit
Software and support
Total financing obligations
Less: current portion
Financing obligations, net of current portion
Future minimum lease payments are as follows:
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total minimum lease and financing obligation payments
Less: executory costs
Less: imputed interest
Less: current portion
Capital lease obligations, net of current portion
As of December 31,
2017
2016
32,652 $
1,581
34,233 $
(1,283 )
32,950 $
31,326
2,339
33,665
(757 )
32,908
Capital
Leases
Financing
Obligations
7,759
6,859
6,747
6,949
7,158
74,895
110,367
5,089 $
4,981
3,216
2,941
3,029
31,697
50,953 $
(5,542 )
(20,624 )
(2,140 )
22,647
$
$
$
$
$
Contractual Commitments
In connection with a 2013 lease for office space on its Charleston, South Carolina campus, the
Company entered into an option to lease space in two additional adjacent buildings. The option term was
36 months and required the Company to incur costs annually prior to the exercise of the option in the
amount of up to $466 per year. If the Company terminated the option or did not exercise the option prior
to expiration it would incur termination fees pro-rated through the dates of termination or expiration. The
maximum liability for termination fees was $757. During the year ended December 31, 2016, the
Company determined that the options would expire unexercised and expensed the full amount of the
termination fees.
On December 12, 2016, the Company executed an amendment to each of three lease agreements
for office space on its Charleston, South Carolina campus. The amendments extended the term of the
leases to December 31, 2031. The amendments also provided for the following:
extending from December 13, 2016 to December 31, 2018 the term of an option that allows
the Company to require the lessors to build a two-story building, including potentially for a
welcome center, of approximately 18,500 square feet on its campus (“Building 5”) for the
Company to lease;
waiving accrued and future carrying costs and termination fees otherwise payable to the
lessors by the Company under the existing option in the amount of $1,223; and
contingent upon construction of Building 4 described below, reducing the annual rent
increases from 3% to 2% for the Company’s Customer Success Center, a 145,800 square
foot building on its campus which it first occupied on January 1, 2015.
The waived carrying and termination fees in the amount of $1,223 is being amortized over the 15-
year term of the extension as a reduction of interest and rent expense.
On December 12, 2016, the Company also executed a lease agreement pursuant to which the
lessor will construct a building of approximately 145,800 square feet on its campus for the Company to
F-20
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
accommodate anticipated future growth (“Building 4”). The target commencement date of the lease is July
1, 2019 with a term of 15 years. Under the terms of the lease, the Company agrees to commence
construction on or about April 1, 2018, but can terminate the lease prior to that time, subject to the
payment of reasonable, documented, and agreed-to out-of-pocket costs with respect to the lease and
building to date. If the Company delays beginning construction past December 31, 2018, the lessor may
terminate the lease. The Company may renew the lease upon 365 days’ notice to the lessor for five
additional one-year terms, provided that the Company is not in default at the time of its request.
Significant terms of the lease for Building 4 include annual rent for the first year of the lease of $30.05 per
square foot of rentable area with annual rent increases of 2% of the rent paid for the preceding lease
year. If the Company exercises its option to cause the construction of Building 5, the term of the lease will
reset to 15 years from the date the Company begins paying rent for Building 5. The Company will begin to
capitalize costs associated with the construction of Building 4 when construction has commenced.
The Company also has $6,570 of non-cancellable contractual commitments as of December 31,
2017 related to the purchase of software and maintenance. These commitments are not accrued in the
consolidated balance sheet of the Company.
Legal Contingencies
The Company may become a party to a variety of legal proceedings that arise in the normal course
of business. While the results of such normal course legal proceedings cannot be predicted with certainty,
management believes, based on current knowledge, that the final outcome of any matters will not have a
material adverse effect on the Company’s business, financial position, results of operations or cash flows.
10. Stock-Based Compensation
Employee Stock-based Compensation Plan
The Company maintains the Amended and Restated Benefitfocus.com, Inc. 2000 Stock Option Plan
(the “2000 Plan”) and the Benefitfocus.com, Inc. Amended and Restated 2012 Stock Plan, (the “2012
Plan”), pursuant to which the Company has reserved 4,832,623 shares of its common stock for issuance
to its employees, directors and non-employee third parties. The 2012 Plan, effective on January 31, 2012,
serves as the successor to the 2000 Plan and permits the granting of incentive stock options, non-
statutory stock options, stock bonuses, stock purchase rights, stock appreciation rights, and restricted
stock units and awards. No new awards can be issued under the 2000 Plan after the effective date of the
2012 Plan. Outstanding awards under the 2000 Plan continue to be subject to the terms and conditions of
the 2000 Plan. Shares available for grant under the 2000 Plan, which were reserved but not issued or
subject to outstanding awards under the 2000 Plan as of the effective date, were added to the reserves of
the 2012 Plan. As of December 31, 2017, the Company had 2,632,454 shares allocated to the 2012 Plan,
but not yet issued.
Stock options are granted at exercise prices not less than the estimated fair market value of the
Company’s common stock at the date of grant. The grant date value of restricted stock units is equal to
the closing price of the Company’s stock on the date of grant, or, if not a trading day, the closing price of
the previous trading day. Generally, the Company issues previously unissued shares for the exercise of
stock options or exchange of restricted stock units; however, previously acquired shares may be reissued
to satisfy future issuances. The options and restricted stock unit awards typically vest over a four-year
period. The options expire 10 years from the grant date. Compensation expense for the fair value of the
stock-based awards at their grant date is recognized ratably over the vesting period.
F-21
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The Company has issued two types of awards under these plans: stock options and restricted stock
units. The following table sets forth the number of awards outstanding for each award type is as follows:
Award type
Restricted stock units
Stock options
2017
Outstanding at December 31,
2016
1,937,014 1,467,811 1,017,450
727,559 1,684,843
263,155
2015
Compensation expense related to stock-based awards is included in the following line items in the
accompanying consolidated statements of operations and comprehensive loss for the years ended
December 31:
Cost of revenue
Sales and marketing
Research and development
General and administrative
2017
2016
2015
$
$
2,508 $
4,953
2,990
5,686
16,137 $
2,798 $
3,213
4,532
7,545
18,088 $
1,950
2,861
2,399
3,244
10,454
The total compensation cost related to non-vested awards not yet recognized as of December 31,
2017 was $31,608 and will be recognized over a weighted-average period of approximately 2.74 years.
Restricted Stock Units
During 2017, the Company granted restricted stock units under the 2012 Plan. Restricted stock
units granted to employees vest in equal annual installments generally over 4 years from the grant date.
The fair value of the stock at the time of grant is amortized based on a straight-line basis over the vesting
period.
The summary of unvested restricted stock units is as follows:
Unvested at December 31, 2016
Granted
Forfeited
Vested
Unvested at December 31, 2017
Restricted
stock units
1,467,811 $
1,142,253
(266,114 )
(406,936 )
1,937,014 $
Weighted
average
grant date
fair value
34.33
28.90
33.52
35.23
30.90
As of December 31, 2017, the number and intrinsic value of restricted stock units expected to vest
was 1,471,818 and $39,739, respectively. The aggregate fair value of restricted stock units vested during
the year ended December 31, 2017, 2016 and 2015 was $12,137, $10,311 and $6,261, respectively.
Included in the grants of 2017 restricted stock units are performance restricted stock units for which
vesting is contingent upon meeting various financial targets to support growth initiatives. The Company
granted 448,974 performance restricted stock units to officers and certain employees with an aggregate
grant-date fair value of $12,425. Vesting is contingent upon meeting various financial targets to support
growth initiatives through December 31, 2017. The actual number of shares issued upon vesting could
range from 0% to 100%. As of December 31, 2017, there were 652,223 performance restricted stock
units outstanding with a weighted average grant-date fair value of $29.39 per unit, of which 187,026 units
with a weighted average grant-date fair value of $31.61 per unit were expected to vest.
F-22
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Stock Options
The following is a summary of the option activity for the year ended December 31, 2017:
Outstanding balance at December 31, 2016
Granted
Exercised
Forfeited or expired
Outstanding balance at December 31, 2017
Exercisable at December 31, 2017
Vested and expected to vest at December 31,
2017
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
Weighted-
Average
Exercise
Price
8.09
-
7.45
4.77
9.22
9.22
4.0 $
4.0 $
4,680
4,680
9.22
4.0 $
4,680
Number
of
Options
727,559 $
-
(463,870 )
(534 )
263,155 $
263,155 $
263,155 $
The aggregate intrinsic value of employee options exercised during the years ended December 31,
2017, 2016, and 2015 was $10,829, $21,117 and $18,873, respectively.
No stock options were granted during the years ended December 31, 2017, 2016 and 2015.
11. Stockholders’ Deficit
Preferred stock
The Company has 5,000,000 shares of preferred stock authorized all of which is undesignated.
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.
The Company maintains the Benefitfocus, Inc. 2016 Employee Stock Purchase Plan (“ESPP”)
pursuant to which the Company has reserved 134,792 shares of its common stock for purchase by its
employees who meet certain criteria. Under the ESPP, eligible employees may purchase the Company’s
common stock through accumulated payroll deductions. Options to purchase shares are granted twice
yearly on or about January 1 and July 1 and exercisable on or about the succeeding June 30 and
December 31, respectively, of each year. Shares are purchased at acquisition prices equal to 95% of the
fair market value of the Company’s common stock at the purchase date. No participant may purchase
more than $12 worth of the Company’s common stock in a six-month offering period. As of December 31,
2017, contributions to purchase 7,039 shares had been received but not yet issued.
At December 31, 2017, the Company had reserved a total of 4,967,415 of its authorized 50,000,000
shares of common stock for future issuance as follows:
Outstanding stock options
Restricted stock units
Available for future issuance under stock award plans
Available for future issuance under ESPP
Total common shares reserved for future issuance
263,155
1,937,014
2,632,454
134,792
4,967,415
On February 24, 2015 and in conjunction with the amendment to the commercial contract described
in Note 15, the Company entered into a Securities Purchase Agreement to sell shares of its common
stock to Mercer, a customer of the Company. Pursuant to the agreement, on the same date, the
F-23
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Company sold 2,817,526 shares of its common stock to Mercer for $26.50 per share or an aggregate of
$74,664. At the same time, the Company also issued Mercer a warrant to purchase up to an additional
580,813 shares of its common stock for $26.50 per share at any time during the 30-month term of the
warrant. The agreement, among other things, includes certain standstill provisions and prevents Mercer
from disposing of its shares of Company common stock until the earlier of December 31, 2017, the
expiration or termination of the Mercer Exchange Software as a Service Agreement, as amended
between the Company and Mercer Health & Benefits, LLC, the date on which Mercer and its affiliates
own less than 75% of the shares it purchased pursuant to the Securities Purchase Agreement, and the
date on which Mercer and its affiliates own less than 5% of the outstanding common stock of the
Company. The Company received all of the proceeds from this sale of shares and is using the proceeds
for working capital and other general corporate purposes. On August 24, 2017, the warrant to purchase
580,813 shares of common stock expired unexercised.
The Stock Purchase Agreement, warrant agreement and amended commercial contract are
considered part of a single arrangement and accounted for in accordance with the multiple-element
arrangement guidance outlined in ASC 605-25, Revenue: Multiple-Element Arrangements. The aggregate
consideration from the arrangement was allocated to the units of accounting in the arrangement based on
their estimated relative selling price, which resulted in $74,331 of consideration being allocated to
common stock and warrant net of issuance costs.
12. Employee Benefit Plan
The Company maintains a qualified defined contribution plan under Section 401(k) of the U.S.
Internal Revenue Code (the “401(k) Plan”) covering substantially all employees. Employees are eligible to
participate in the 401(k) Plan after one day of service and upon attainment of age 21, and may elect to
defer an amount or percentage of their annual compensation up to amounts prescribed by law. The
Company makes discretionary matching contributions to employee plan accounts. During each of the
years ended December 31, 2017, 2016 and 2015, the Company matched 50% of the employees’
contribution, with the match limited to 3% of qualifying compensation. Employee vesting in matching
company contributions occurs at a rate of 20% per year after one year of service. During the years ended
December 31, 2017, 2016, and 2015, employer matching contributions were $3,020, $2,649 and $2,570,
respectively.
13. Income Taxes
The Company files income tax returns in the U.S. for federal and various state jurisdictions. The
Company is subject to U.S. federal income tax examination for calendar tax years 2010 through 2016 as
well as state income tax examinations for various years depending on statutes of limitations of those
jurisdictions.
The following summarizes the components of income tax expense for the years ended December
31:
Current:
Federal
State and local
Total current expense
Deferred:
Federal
State and local
Total deferred taxes
2017
2016
2015
$
$
$
$
- $
15
15 $
- $
-
- $
- $
17
17 $
- $
-
- $
-
25
25
-
-
-
F-24
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Reconciliation between the effect of applying the federal statutory rate and the effective income tax
rate used to calculate the Company’s income tax provision is as follows for the years ended December
31:
Federal statutory rate
Effect of:
State income taxes, net of federal benefit
Change in state tax rates
Change in federal tax rates
Change in valuation allowance
State tax credits
Stock-based compensation
Section 162(m)
Other permanent items
Deferred true-up
Income tax provision effective rate
2017
2016
2015
34.0 %
34.0 %
34.0 %
6.8 %
0.8 %
(145.2 %)
98.7 %
0.7 %
7.4 %
(2.4 %)
(0.9 %)
0.0 %
(0.1 %)
6.0 %
2.6 %
0.0 %
(46.4 %)
4.1 %
(0.1 %)
0.0 %
(0.2 %)
0.0 %
0.0 %
6.0 %
1.7 %
0.0 %
(42.9 %)
2.5 %
0.0 %
0.0 %
(0.7 %)
(0.6 %)
0.0 %
The significant components of the Company’s deferred tax asset and liability were as follows as of
December 31:
$
Deferred tax assets relating to:
Net operating loss carryforwards
Deferred revenue
Commissions and incentive accrual
Deferred rent
State tax credits
Stock-based compensation
Compensation and other accruals
Property and equipment and intangible assets
Total gross deferred tax assets
Deferred tax liabilities
Property and equipment and intangible assets
$
Total gross deferred tax liabilities
Deferred tax assets less liabilities
Less: valuation allowance
Net deferred tax asset (liability)
$
2017
2016
69,452 $
12,275
547
471
7,866
4,060
2,539
551
97,761
65,467
19,255
1,563
733
6,348
5,199
5,222
-
103,787
- $
-
97,761
(97,761 )
- $
(578 )
(578 )
103,209
(103,209 )
-
As of December 31, 2017 and 2016, the Company’s gross deferred tax was reduced by a valuation
allowance of $97,761 and $103,209, respectively.
The valuation allowance decreased by $5,448 and increased by $17,894 during the years ended
December 31, 2017 and 2016, respectively. The decrease in the valuation allowance in 2017 resulted
primarily from the revaluation of the deferred tax assets and liabilities in connection with enactment of the
Tax Cuts & Jobs Act (“Tax Reform”) on December 22, 2017. Among other things, the primary provision of
Tax Reform impacting the Company is the reduction to the U.S. corporate income tax rate from 35% to
21%. The valuation allowance increase in 2016 resulted primarily from changes in the deferred tax assets
related to the net operating loss carryforwards and deferred revenue.
On December 22, 2017, the SEC issued Staff Accounting Bulletin 118, which provides guidance on
accounting for tax effects of Tax Reform when a company does not have all the necessary information
available, prepared or analyzed in reasonable detail to complete its accounting for the effect of the
changes in Tax Reform and provides a measurement period for companies to complete its accounting.
As of December 31, 2017, the Company has completed its initial accounting for the income tax effects of
Tax Reform except for the impact of state tax conformity of each change and further evaluation of
F-25
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
executive compensation. The Company is not able to determine a reasonable estimate for these items
and continues to account for these items based on the tax laws that were in effect immediately before the
enactment of Tax Reform. The Company expects to complete its analysis during 2018 as states make
known their conformity with federal tax laws and additional transition guidance is provided related to
executive compensation.
The Company adopted the provisions of ASU 2016-09 as of January 1, 2017, which requires
recognition through opening accumulated deficit of any pre-adoption date net operating loss
carryforwards from nonqualified stock options and other employee share-based payments, as well as
recognition of all income tax effects from share-based payments arising on or after the date of adoption in
income tax expense. As a result, the Company was required to recognize through opening accumulated
deficit the tax impact of pre-adoption date net operating loss carryforwards with remaining carryforward
periods of more than 10 years. Due to the Company’s existing valuation allowance on deferred tax
assets, the amount recognized in opening accumulated deficit was $0. The corresponding deferred tax
asset recorded upon adoption was $18,383. However, the Company has determined that a valuation
allowance is required against this amount due to the fact that it is more likely than not that the net
operating loss carryforwards will expire before use. In addition, due to the valuation allowance, no
windfall tax benefits were recognized in tax expense by the Company in the interim period of adoption as
required by ASU 2016-09.
Net operating loss carryforwards for federal income tax purposes were approximately $253,946 and
$183,528 at December 31, 2017 and 2016, respectively. State net operating loss carryforwards were
$221,189 and $176,389 at December 31, 2017 and 2016, respectively. The federal net operating loss
carryforwards will expire at various dates beginning in 2022 through 2036, if not utilized. Net operating
loss carryforwards and credit carryforwards reflected above may be limited due to historical and future
ownership changes.
South Carolina jobs tax credit and headquarters tax credit carryovers of $10,322 and $10,055 were
available at December 31, 2017 and 2016, respectively. Headquarters credits are expected to be used to
offset future state income tax license fees. The credits expire in various amounts during 2020 through
2032.
The Company follows FASB ASC 740-10 for accounting for unrecognized tax benefits. As of
December 31, 2017, the Company had gross unrecognized tax benefits of $437.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows for
the years ended December 31:
Balance at beginning of year
Additions based on tax positions related to the
current year
Additions for tax positions in prior years
Reductions for tax positions of prior years
Reductions for tax positions due to lapse
of statute
Settlements
Balance at end of year
2017
2016
2015
$
437 $
437 $
437
-
-
-
-
-
-
-
-
437 $
-
-
437 $
$
-
-
-
-
-
437
At December 31, 2017 and 2016, none of the $437 liabilities for unrecognized tax benefits could
impact the Company’s effective tax rate, if recognized. The Company does not expect the unrecognized
tax benefits to change within the next twelve months.
The Company is subject to U.S. income taxes, as well as various taxes state and local jurisdictions.
With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax
examinations by tax authorities for years before the tax year ended December 31, 2013, although
F-26
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
carryforward attributes that were generated prior to 2013 may still be adjusted upon examination by the
taxing authorities if they either have been used or will be used in a future period.
14. Segments and Geographic Information
Operating segments are defined as components of an enterprise for which discrete financial
information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for
purposes of allocating resources and evaluating financial performance. The Company’s CODM, the Chief
Executive Officer, reviews financial information presented on a consolidated basis, accompanied by
information about operating segments, for purposes of allocating resources and evaluating financial
performance.
The Company’s reportable segments are based on the type of customer. The Company determined
its operating segments to be: Employer, which derives substantially all of its revenue from customers that
use the Company’s services for the provision of benefits to their employees, and administrators acting on
behalf of employers; and Carrier, which derives substantially all of its revenue from insurance companies
that provide coverage at their own risk.
Segments are evaluated based on gross profit. The Company does not allocate interest income,
interest expense or income tax expense by segment. Accordingly, the Company does not report such
information. Additionally, Employer and Carrier segments share the majority of the Company’s assets.
Therefore, no segment asset information is reported.
Revenue from external customers by
segment:
Employer
Carrier
$
Total net revenue from external customers $
Depreciation and amortization by segment:
$
Employer
Carrier
Total depreciation and amortization
Gross profit by segment
Employer
Carrier
Total gross profit by segment
$
$
$
Year Ended December 31,
2016
2015
2017
163,978 $
92,757
256,735 $
140,522 $
92,813
233,335 $
94,842
90,301
185,143
10,209 $
5,697
15,906 $
7,950 $
5,123
13,073 $
68,735 $
63,844
132,579 $
53,031 $
59,623
112,654 $
6,024
5,640
11,664
33,655
48,637
82,292
Substantially all assets were held and all revenue was generated in the United States during the
years ended December 31, 2017, 2016 and 2015.
15. Related Parties
Related Party Leasing Arrangements
The Company leases its office space at its Charleston, South Carolina headquarters campus under
the terms of three non-cancellable leases from entities with which two of the Company’s directors,
significant stockholders, and executives are affiliated. The Company’s headquarters building lease and an
additional building lease are accounted for as build-to-suit leases and recorded as financing obligations in
the Consolidated Balance Sheets. The remaining lease, also for office space, was accounted for as an
operating lease during 2016 and periods prior and as a capital lease in 2017 and after. The Company
executed an amendment to each of the three lease agreements on December 12, 2016. These
amendments extended the term of the leases to December 31, 2031. The leases contain options to
renew the leases for five additional years. The arrangements provide for 3.0% fixed annual rent
increases. In addition to extending the lease term, the amendment to the lease for the Company’s
F-27
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Customer Success Center, a 145,800 square foot building on its campus, which commenced January 1,
2015:
extended from December 13, 2016 to December 31, 2018 the term of an option
that allows the Company to require the lessor to build a two-story building,
including potentially for a welcome center of approximately 18,500 square feet on
its campus (“Building 5”) for the Company to lease,
waived certain accrued and future carrying costs and termination fees payable to
the lessor by the Company under the existing option in the amount of $1,223, and
reduced the annual rent increases for the Customer Success Center from 3% to
2% contingent upon construction of Building 4 described below.
On December 12, 2016 and in conjunction with the lease amendments, the Company also executed
a cancellable lease agreement with an entity which two of the Company’s directors, significant
stockholders, and executives are affiliated. Pursuant to the agreement the lessor will construct a building
of approximately 145,800 square feet on its campus for the Company to accommodate anticipated future
growth (“Building 4”). The target commencement date of the lease is July 1, 2019 with a term of 15 years.
Under the terms of the lease, the Company agrees to commence construction on or about April 1, 2018,
but can terminate the lease prior to that time, subject to payment of reasonable, documented, and
agreed-to out-of-pocket costs with respect to the lease and building to date. If the Company delays
beginning construction past December 31, 2018, the lessor may terminate the lease. The Company may
renew the lease upon 365 days’ notice to the lessor for five additional one-year terms, provided that the
Company is not in default at the time of its request. Significant terms of the lease for Building 4 include
annual rent for the first year of the lease of $30.05 per square foot of rentable area with annual rent
increases of 2% of the rent paid for the preceding lease year. If the Company exercises its option to
cause the construction of Building 5, the term of the lease will reset to 15 years from the date the
Company begins paying rent for Building 5.
In connection with the cancellable lease for Building 4 and the option for Building 5 described above,
the leasing entity meets the criteria to be a variable interest entity. The Company is not the primary
beneficiary of the leasing entity, as the activities that are most significant to the leasing entity’s economic
performance, consisting of financing, development, management, and sale of office facilities, are directed by
another party. As such, the Company is not required to consolidate the entity as the primary beneficiary.
The lease terms would not include a residual value guarantee, fixed-price purchase option, or similar feature
that would obligate the Company to absorb decreases in value or would entitle the Company to participate
in increases in the value of Buildings 4 or 5. The Company has not and does not intend to provide financial
or other support to the leasing entity. The Company’s maximum exposure, assuming the exercise of the
option, would consist of rent to be paid over the 15-year term of the lease, construction cost overruns,
agreed upon pre-construction costs incurred prior to termination and operating expenses in excess of a
certain threshold. The Company’s maximum exposure currently cannot be quantified.
Payments related to these agreements were $10,328, $10,417, and $11,940 for the years ended
December 31, 2017, 2016 and 2015, respectively. Amounts due to the related parties were recorded as
$901 and $854 in “Accrued Expenses” as of December 31, 2017 and 2016, respectively.
Related Party Travel Expenses
The Company utilizes the services of various companies that are owned and controlled by one of
the Company’s significant stockholders and executives. Expenses related to these companies were $20,
$80 and $127 for the years ended December 31, 2017, 2016 and 2015 respectively, and consist of
project management and air travel related to the operations of the business. No amounts were due to the
related parties as of December 31, 2017 and 2016.
Related Party Revenues
As disclosed in Note 11, the Company entered into a Stock Purchase Agreement with Mercer, a
customer, on February 24, 2015. As a result of this transaction, Mercer became a related party by virtue
F-28
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
of beneficially owning more than 10% of the voting interest of the Company. At the same time, the
Company entered into an amendment of its commercial contract with Mercer. The amendment to the
commercial contract, among other things, expanded certain terms and conditions of the existing
relationship between the Company and Mercer and its affiliates. On August 24, 2017, Mercer’s warrant to
purchase common stock of the Company expired unexercised resulting in Mercer’s beneficial ownership
of the Company falling below 10%. Accordingly, as of that date, the Company no longer considers Mercer
a related party. As of December 31, 2017, Mercer beneficially owned 9.0% of the Company’s outstanding
common stock. For the period January 1, 2017 to August 24, 2017, revenue from Mercer was $18,638.
For the years ended December 31, 2016 and 2015, revenue from Mercer was $26,720 and $13,552,
respectively. Revenue from Mercer was reflected in “Revenues,” within the accompanying statements of
operations. The amount due from Mercer was $4,626 as of December 31, 2016. The amount of deferred
revenue associated with Mercer was and $7,683 as of December 31, 2016, and was reflected in the
balances of deferred revenue in the consolidated balance sheets.
Related Party Revolving Line of Credit
As disclosed in Note 8, the Company amended its Senior Revolver at various times in 2016 and
2017. As part of the amendment in October 2016, Goldman Sachs Lending Partners, LLC was added to
the lending syndicate. Goldman Sachs Lending Partners, LLC is an affiliate of The Goldman Sachs
Group, Inc., as are the Goldman Sachs funds that owned approximately 19.9% of the Company’s
outstanding common stock as of December 31, 2017. Goldman Sachs Lending Partners, LLC committed
$10,000 to the revolving commitment and participates in amounts borrowed under the credit facility at a
rate of approximately 10.5%. Accordingly, approximately $5,906 of the $56,246 outstanding under the
Senior Revolver as of December 31, 2017 was due to Goldman Sachs Lending Partners, LLC.
16. Selected Quarterly Financial Data (unaudited)
The following tables set forth selected unaudited quarterly statements of operations data for each of
the eight quarters in the years ended December 31, 2017 and 2016.
December 31,
2017
September
30,
2017
June 30,
2017
March 31,
2017
December 31,
2016
September
30,
2016
June 30,
2016
March 31,
2016
Quarter Ended
66,763 $
33,503
62,453 $
31,986
63,348 $
34,520
64,171 $
32,570
62,647 $
30,125
58,022 $
28,910
57,874 $
28,124
54,792
25,495
37,285
(3,782 )
(7,004 ) $
35,601
(3,615 )
(6,674 ) $
35,996
(1,476 )
(4,506 ) $
37,215
(4,645 )
(7,688 ) $
35,189
(5,064 )
(7,099 ) $
35,434
(6,524 )
(8,603 ) $
37,215
(9,091 )
(11,004 ) $
36,984
(11,489 )
(13,352 )
(0.22 ) $
(0.21 ) $
(0.14 ) $
(0.25 ) $
(0.24 ) $
(0.29 ) $
(0.37 ) $
(0.46 )
Consolidated
Statements of
Operations Data:
Revenue
Gross profit
Total operating
expenses
Operating loss
Net loss
Net loss per common
share (a)
Weighted-average
common shares
outstanding--basic and
diluted
$
$
$
31,285,263 31,181,141 31,076,995 30,658,468 30,030,164 29,651,230 29,459,341 29,213,198
(a) Quarterly and year-to-date computations of per share amounts are made independently. Therefore,
the sum of the per-share amounts for the quarters may not agree with per share amounts for the
year.
The quarterly unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements included in this report and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of
such information when read in conjunction with our annual audited consolidated financial statements and
notes appearing in this report. The operating results for any quarter do not necessarily indicate the results
for any subsequent period or for the entire fiscal year.
F-29
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
17. Subsequent Events
Stock-Based Compensation
During January 2018, the Company granted 54,040 restricted stock units to employees with an
aggregate grant date fair value of $1,446. These restricted stock units generally vest in equal annual
installments generally over 4 years from the grant date. The Company amortizes the fair value of the
stock subject to the restricted stock units at the time of grant on a straight-line basis over the period of
vesting.
During January and February 2018, stock option exercises and vesting of restricted stock units
resulted in the issuance of 23,458 shares of common stock.
Revolving Line of Credit
In January 2018, the Company repaid $24,000 that was previously borrowed under the Senior
Revolver.
Related Party Transaction
In March 2018, the Company’s landlord extended the time period to commence construction of
additional office space under its December 12, 2016 lease. Under the extension, the Company agrees to
commence construction on or about April 1, 2019 and the target commencement date extends one year
to July 1, 2020. The Company can terminate the lease prior to April 1, 2019.
F-30
Schedule II—Valuation and Qualifying Accounts (in thousands)
Allowance for doubtful accounts and
returns:
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
Balance at
Beginning
of Period
Additions
Charged To
Expense
Additions
Charged
Against
Revenue
Deductions
Balance
at End of
Period
$
$
$
4,595 $
2,585 $
1,663 $
75 $
667 $
22 $
5,343 $
5,004 $
7,646 $
(6,547 ) $
(3,661 ) $
(6,746 ) $
3,466
4,595
2,585
Balance at
Beginning
of Period
Additions
Charged To
Costs and
Expenses
(1)
Deductions
(2)
Balance
at End of
Period
Deferred tax asset valuation allowance:
Year Ended December 31, 2017
Year Ended December 31, 2016
Year Ended December 31, 2015
$ 103,209 $
$
85,315 $
$
58,850 $
(1) Increase in valuation allowance is related to the generation of net operating losses and other deferred tax
97,761
- $ 103,209
85,315
- $
32,113 $
17,894 $
26,465 $
(37,561 ) $
assets.
(2) Decrease in valuation on allowance is related to the change in the enacted tax rule.
F-31
Exhibit 10.7.1
BENEFITFOCUS.COM, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement"), is made and entered into this 20th day of November 2017, by and
between: Benefitfocus.com, Inc., having its principal place of business at 100 Benefitfocus Way,
Charleston, SC 29492, (hereinafter referred to as "Benefitfocus") and Shawn A. Jenkins whose present
address is: (hereinafter referred to as the
"Associate").
1.
2.
3.
4.
5.
6.
Employment. Benefitfocus hereby agrees to employ the Associate in the capacity of Senior Advisor
for Innovation, upon the terms and conditions set out herein, and the Associate accepts such
employment.
Term. This Agreement shall take effect on January 1, 2018 and shall continue in effect until June
30, 2020. Notwithstanding the previous sentence, the Associate understands and acknowledges
that his employment with Benefitfocus is "at will" and is terminable at any time at the will of
Benefitfocus or the Associate, notwithstanding any other provisions of this Agreement, including
Section 19 hereof.
Duties. The Associate shall perform, for Benefitfocus, the duties set out in the attached Exhibit A
entitled "Job Description," which is incorporated herein and made a part of this Agreement, along
with those other duties as may be assigned to Associate from time to time by Benefitfocus' Chief
Executive Officer or their designee.
Compensation. The Associate's initial compensation shall be paid in accordance with that outlined
in Exhibit B entitled "Compensation Program," which is incorporated herein and made a part hereof,
and is subject to review in accordance with then current compensation practices of Benefitfocus.
Extent of Services. The Associate shall devote the required time, attention, and energies to
Benefitfocus' business and shall not, during the term of this Agreement, be engaged in any other
business activity that conflicts with the Associate's work for Benefitfocus, whether or not such
business activity is pursued for gain, profit or other pecuniary advantage. The Associate further
agrees that he or she will perform all of the duties assigned to the Associate to the best of his or
her ability and in a manner satisfactory to Benefitfocus, that he or she will truthfully and accurately
maintain all records, preserve all such records, and make all such reports as Benefitfocus may
require; that he or she will fully account for all money and all of the property of Benefitfocus of which
the Associate may have custody and will pay over and deliver the same whenever and however
the Associate may be directed to do so.
Expenses. Benefitfocus agrees to reimburse the Associate for travel and other expenses incurred
while conducting business on behalf of Benefitfocus as long as they are reasonable and approved
by Benefitfocus and comply with government regulations covering such expenses for business
purposes. Such expenses will be stated on a Benefitfocus furnished expense form, have required
receipts, be signed by the Associate, and sent to Benefitfocus for approval and reimbursement, all
in accordance with Benefitfocus' reimbursement policies and procedures as may be in effect from
time to time.
CONFIDENTIAL & PROPRIETARY
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7.
Covenant Not to Disclose Trade Secrets and Confidential Information.
a.
As an employee of Benefitfocus, the Associate will be exposed to "Trade Secrets" and
"Confidential Business Information" (as those terms are defined below). "Trade Secrets"
shall mean information or data of or about Benefitfocus or any affiliated entity, including,
but not limited to, technical or non-technical data, formulas, patterns, compilations,
programs, devices, methods, techniques, drawings, processes, financial data, financial
plans, products plans, or lists of actual or potential customers, clients, distributors, or
licensees, that: (i) derive economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons who can
obtain economic value from their disclosure or use; and (ii) are the subject of efforts that
are reasonable under the circumstances to maintain their secrecy. To the extent that the
foregoing definition is inconsistent with a broader definition of "trade secret" under
applicable law, the latter definition shall govern for purposes of interpreting the Associate's
obligations under this Agreement. Except as required to perform his or her obligations under
this Agreement or except with Benefitfocus' prior written permission, the Associate shall not
use, redistribute, market, publish, disclose or divulge to any other person or entity any Trade
Secrets of Benefitfocus. The Associate's obligations under this provision shall remain in
force (during or after the Term) for so long as such information or data shall continue to
constitute a "trade secret" under applicable law. The Associate agrees to cooperate with
any and all confidentiality requirements of Benefitfocus and the Associate shall immediately
notify Benefitfocus of any unauthorized disclosure or use of any Trade Secrets of which the
Associate becomes aware.
b.
remains Confidential Business
The Associate agrees to maintain in strict confidence and, except as necessary to perform
his or her duties for Benefitfocus, not to use or disclose any Confidential Business
Information at any time, during the term of his or her employment or for a period of one (1)
year after the Associate's last date of employment, so long as the pertinent data or
information
Information. "Confidential Business
Information" shall mean any non-public Information of a competitively sensitive or
personal nature, other than Trade Secrets, acquired by the Associate, directly or indirectly,
in connection with the Associate's employment (including his or her employment with
Benefitfocus prior to the date of this Agreement), including (without limitation) oral and
written information concerning Benefitfocus or its affiliates relating to financial position and
results of operations (revenues, margins, assets, net income, etc.), annual and long-range
business plans, marketing plans and methods, account invoices, oral or written customer
information, and personnel information. Confidential Business Information also includes
information recorded in manuals, memoranda, projections, minutes, plans, computer
programs, and records, whether or not legended or otherwise identified by Benefitfocus and
its affiliates as Confidential Business Information, as well as information which is the subject
of meetings and discussions and not so recorded; provided, however, that Confidential
Business Information shall not include information that is generally available to the public,
other than as a result of disclosure, directly or indirectly, by the Associate, or that was
available to the Associate on a non-confidential basis prior to its disclosure to the Associate.
CONFIDENTIAL & PROPRIETARY
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c.
d.
e.
Without limiting any of the foregoing, Associate acknowledges that Trade Secrets and
Confidential Business Information exist in all formats in which information is preserved,
including electronic, print, or any other form, and that each term includes all originals,
copies, notes, or other reproductions or replicas thereof.
Upon termination of employment, the Associate shall leave with Benefitfocus all Trade
Secrets, Confidential Business Information, and any other business records relating to
Benefitfocus and its affiliates including, without limitation, all contracts, calendars, and other
materials or business records concerning its business or customers, including all physical,
electronic, and computer copies thereof, whether or not the Associate prepared such
materials or records himself, and Associate shall retain no copies of any such materials. In
addition, upon termination of employment. Associate will immediately return to Benefitfocus
all other property whatsoever of Benefitfocus in his possession or under his control. If
requested, Associate shall certify in writing to Benefitfocus that no such materials are in his
possession.
As set forth above, the Associate shall not disclose Trade Secrets or Confidential Business
Information. However, nothing in this Section 7 shall prevent the Associate from (i)
disclosing Trade Secrets or Confidential Business Information pursuant to a court order or
court-issued subpoena, so long as the Associate first notifies Benefitfocus of said order or
subpoena in sufficient time to allow Benefitfocus to seek an appropriate protective order,
and provided that Associate only discloses such information as he or she is actually
required to disclose, or (ii) from reporting violations of law to any governmental agency or
entity, or otherwise making disclosures that are protected under a whistleblower any law.
The Associate agrees that if he or she receives any formal or informal discovery request,
court order, or subpoena requesting that the Associate disclose Trade Secrets or
Confidential Business Information, he or she will immediately notify Benefitfocus and
provide Benefitfocus with a copy of said request, court order, or subpoena.
8. Covenant Not to Solicit Customers.
a.
The Associate covenants and agrees that during his or her employment and for a period of
one (1) year following the date of termination of the Associate's employment with
Benefitfocus, for any reason, whether by the Associate or Benefitfocus, the Associate shall
not (except on behalf of or with the prior written consent of Benefitfocus) either directly or
indirectly, on the Associate's own behalf or in the service or on behalf of others, (i) solicit,
divert or appropriate to or for a Competing Business (as defined below), or (ii) attempt to
solicit, divert, or appropriate to or for a Competing Business, any person or entity that was
a customer or prospective customer of Benefitfocus on the date of termination and with
whom the Associate had direct material contact within six months of the Associate's last
date of employment. For purposes of this Agreement, the term "Competing Business"
shall mean the business of offering benefit administration services to companies via a Web-
based system.
b.
The Associate recognizes and acknowledges that Benefitfocus' customers and the specific
needs of such customers are essential to the success of its business and its continued
goodwill and that its customer list and customer information constitute a property interest
of Benefitfocus, having been developed by Benefitfocus at great effort and expense.
CONFIDENTIAL & PROPRIETARY
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9.
10.
11.
12.
Covenant Not to Solicit Employees/Consultants. The Associate covenants and agrees that
during his or her employment and for a period of one (1) year following the date of termination of
the Associate's employment with Benefitfocus, for any reason, whether by Associate or
Benefitfocus, Associate will not, either directly or indirectly, on the Associate's own behalf or in the
service or on behalf of others, (i) solicit, divert, or hire away, or (ii) attempt to solicit, divert, or hire
away any employee of or consultant to Benefitfocus or any of its affiliates engaged or experienced
in the Business (as defined herein), regardless of whether the employee or consultant is full-time or
temporary, the employment or engagement is pursuant to written agreement, or the employment is
for a determined period or is at will. For purposes of this Agreement, the term "Business" shall
mean the business of offering benefit administration services to companies via a Web-based
system.
Covenant Not to Compete. The Associate covenants and agrees that during his or her employment
and for a period of one (1) year following the termination of the Associate's employment with
Benefitfocus (by either party and regardless of the reason for such termination). Associate will not,
hold a position based in or with responsibility for all or part of the Restricted Territory (as defined
below), with any Competing Business (as defined above) whether as employee, consultant, or
otherwise, in which Associate will have duties, or will perform or be expected to perform services
for such Competing Business, that is or are the same as or substantially similar to the position held
by Associate or those duties or services actually performed by Associate for Benefitfocus within the
twelve (12) month period immediately preceding the termination of Associate's employment with
Benefitfocus, or in which Associate will use or disclose or be reasonably expected to use or disclose
any confidential or proprietary information of Benefitfocus for the purpose of providing, or attempting
to provide, such Competing Business with a competitive advantage with respect to the Business.
As used herein, "Restricted Territory" means the United States of America, it being understood
that Benefitfocus' business is nationwide in scope, provided, however, that if a court of competent
jurisdiction determines that the foregoing definition is too broad to be enforced under applicable
law, then the parties agree that "Restricted Territory" will mean any State, province, or similar
political subdivision to which Associate directed, or in which Associate performed, employment-
related activities on behalf of Benefitfocus at the time of, or during the twelve (12) month period
for any reason.
prior
Notwithstanding the provisions of this Section 10, the parties acknowledge that from time to time
Associate may invest in companies that are engaged in businesses related to Benefitfocus'
Business. Associate will disclose such investments to the board of directors so that the board may
determine in good faith whether such investment may present a conflict of interest in light of
Associate's obligations hereunder. The parties will work cooperatively to address any such
concerns.
termination of Associate's employment with Benefitfocus
the
to,
Covenants are Independent. The covenants on the part of the Associate contained in paragraphs
7, 8, 9,10, 22, 24 and 25 hereof, as well as in each subsection thereof, shall each be construed as
agreements independent of each other and of any other provision in this Agreement and the
unenforceability of one shall not affect the remaining covenants.
Consideration. The Associate acknowledges and agrees that valid consideration has been given
to the Associate by Benefitfocus in return for the promises of the Associate set forth herein, including
the promise of additional compensation to which the Associate was not entitled prior to the
execution of this Agreement.
13.
Extension of Periods. Each of the time periods described in this Agreement shall be automatically
CONFIDENTIAL & PROPRIETARY
BENEFITFOCUS.COM, INC.
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(02/2016)
14.
15.
16.
17.
18.
19.
20.
21.
extended by any length of time during which the Associate is in breach of the corresponding
covenant contained herein. The provisions of this Agreement shall continue in full force and effect
throughout the duration of the extended periods.
Reasonable Restraint. It is agreed by the parties that the foregoing covenants in this Agreement
are necessary for the legitimate business interests of Benefitfocus and impose a reasonable
restraint on the Associate in light of the activities and Business of Benefitfocus on the date of the
execution of this Agreement.
Notices. Any notice required or desired to be given under this Agreement shall be given in writing,
sent by certified mail, return receipt requested, to his or her residence as shown in the records of
Benefitfocus in the case of the Associate, or to its principal place of business to the attention of
General Counsel, in the case of Benefitfocus.
Waiver of Breach. The waiver by Benefitfocus of a breach of any provision of this Agreement by
the Associate shall not operate or be construed as a waiver of any subsequent breach by the
Associate. No waiver shall be valid unless in writing and signed by Benefitfocus.
Assignment. The Associate acknowledges that the services to be rendered by the Associate are
unique and personal. Accordingly, the Associate may not assign any of his or her rights or delegate
any of his or her duties or obligations under this Agreement. The rights and obligations of
Benefitfocus under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Benefitfocus. The Associate agrees that this Agreement, and the
covenants contained herein, may be assigned by Benefitfocus to any successor company.
Paid Time Off. Associate is not eligible to receive paid time off in accordance with Benefitfocus'
paid time off policies as detailed in its Associate Handbook, the provisions of which are subject to
change on a prospective basis.
Termination. Either party may terminate this Agreement at any time, with or without cause. In the
event that Associate chooses to resign his employment, Benefitfocus requests fourteen (14) days
written notice to Benefitfocus. In such event, the Associate shall continue (if agreed to by
Benefitfocus) to render his services and shall be paid his regular compensation up to the effective
date of termination.
Entire Agreement; Amendment. This Agreement, and attached Exhibits, contain the entire
understanding of the parties with respect to the subject matter hereof and supersedes all prior
agreements (whether written or oral and whether express or implied) between the parties to the
extent related to such subject matter. Without limiting the generality of the preceding sentence, the
parties acknowledge and agree that as of the commencement of the term of this Agreement, any
and all prior employment agreements between Associate and Benefitfocus are superseded and
replaced by this Agreement. This Agreement may be changed only by an agreement in writing,
signed by the parties hereto.
Construction of Agreement. Should any of the provisions or terms of this Agreement require
judicial interpretation, it is agreed that the court interpreting or construing this Agreement shall not
apply a presumption that such provision(s) or term(s) shall be more strictly construed against one
party by reason of the rule of construction that a document is to be construed more strictly against
the party who prepared it, it being agreed that all parties have participated in the preparation and
CONFIDENTIAL & PROPRIETARY
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(02/2016)
22.
23.
24.
25.
review of this Agreement and have had the opportunity to be represented by counsel.
Arbitration: Governing Law; and Venue. This Agreement, and all transactions contemplated
hereby, shall be governed by, construed and enforced in accordance with the laws of the State of
South Carolina. The parties agree that any dispute, controversy or claim arising out of or related to
this Agreement or any breach of this Agreement shall be submitted to and decided by binding
arbitration in South Carolina. Arbitration shall be administered exclusively by American Arbitration
Association and shall be conducted by a neutral arbitrator consistent with the rules, regulations and
requirements thereof, including discovery, which can be accessed at www.adr.org, as well as any
requirements imposed by state law. The parties agree to arbitrate solely on an individual basis, and
that this agreement does not permit class arbitration or any claims brought as a plaintiff or class
member in any class or representative arbitration proceeding. The arbitral tribunal may not
consolidate more than one person's claims, and may not otherwise preside over any form of a
representative or class proceeding. Any award of the Arbitrator(s), is final and binding, and may be
entered as a judgment in any court of competent jurisdiction. In the event the prohibition on class
arbitration is deemed invalid or unenforceable, then the remaining portions of the arbitration
agreement will remain in force.
Work Facilities. The Associate shall be provided with such other facilities and services as are
suitable to the Associate's position and appropriate for the performance of his or her duties.
Severability. To the extent that any provision or language of this Agreement is deemed
unenforceable, by virtue of the scope of the business activity prohibited or the length of time the
activity is prohibited, Benefitfocus and Associate agree that this Agreement shall be enforced to the
fullest extent permissible under the laws and public policies of the State of South Carolina.
Remedies for Breach. The Associate recognizes and agrees that a breach by the Associate of any
covenant contained in this Agreement would cause immeasurable and irreparable harm to
Benefitfocus. In the event of a breach or threatened breach of any covenant contained herein,
Benefitfocus shall be entitled to temporary and permanent injunctive relief, restraining the Associate
from violating or threatening to violate any covenant contained herein, as well as all costs and fees
incurred by Benefitfocus, including attorneys' fees, as a result of the Associate's breach or
threatened breach of the covenant. Benefitfocus and the Associate agree that the relief described
herein is in addition to such other and further relief as may be available to Benefitfocus at equity or
by law. Nothing herein shall be construed as prohibiting Benefitfocus from pursuing any other
remedies available to it for such breach or threatened breach, including the recovery of damages
from the Associate.
26.
Additional Representations and Warranties of Associate. Indemnification by Associate. The
Associate acknowledges and agrees that: (i) the covenants contained in this Agreement are the
essence of this Agreement; (ii) the Associate has received good, adequate and valuable
consideration for each of these covenants; (iii) each of these covenants is reasonable and
CONFIDENTIAL & PROPRIETARY
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necessary to protect and preserve the interests and properties of Benefitfocus; (iv) each of these
covenants in this Agreement is separate, distinct and severable not only from the other covenants
but also from the remaining provisions of this Agreement; (v) the unenforceability of any covenants
or agreements shall not affect the validity or enforceability of any of the other covenants or
agreements or any other provision or provisions of this Agreement; and (vi) if the covenants herein
shall ever be deemed to exceed the time, activity, or geographic limitations permitted by applicable
law, then such provisions shall be and hereby are reformed to the maximum time, activity, or
geographical limitations permitted by applicable law. The Associate represents and warrants that
his acceptance of employment with Benefitfocus has not been improperly induced with
respect to any prior employment and the performance of his duties hereunder will not
conflict with, or result in a violation of, a breach of, or a default under any contract,
agreement, or understanding to which he is a party or is otherwise bound, including any
non-solicitation, non-competition, or other similar covenant or agreement of a prior
employer.
27.
At-Will Employment. THE ASSOCIATE UNDERSTANDS AND AGREES THAT THIS
AGREEMENT SHALL IN NO WAY IMPOSE UPON BENEFITFOCUS ANY OBLIGATION TO
EMPLOY THE ASSOCIATE OR TO CONTINUE THE ASSOCIATE'S EMPLOYMENT FOR ANY
LENGTH OF TIME. THE EMPLOYMENT BY BENEFITFOCUS IS, AND AT ALL TIMES SHALL
REMAIN, IN THE ABSOLUTE DISCRETION OF BENEFITFOCUS, WHICH EMPLOYMENT MAY
BE TERMINATED BY THE ASSOCIATE OR BENEFITFOCUS AT WILL.
Signed, sealed and delivered in the presence of:
BENEFITFOCUS ASSOCIATE
/s/ Mason R. Holland, Jr. /s/ Shawn A. Jenkins
By: Mason R. Holland, Jr. By: Shawn A. Jenkins
Its: Executive Chairman
Date: November 20, 2017 Date: November 20, 2017
CONFIDENTIAL & PROPRIETARY
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EXHIBIT A
Job Description
As directed and requested by the CEO:
• Review and advise on new product ideas and concepts
• Review and advise on new technologies for possible use by the company
• Assist with incubation and potential investments in early stage companies
• Research potential acquisitions. Review product, technology, and business models of
potential acquisitions.
• Review and comment on company product roadmaps.
• Review R&D multi-year plans.
• Assist with near-term and long-term company strategy including R&D strategy, product
strategy, market strategy, and business strategy.
• Research engineering technologies and business models.
• Assist with strategic initiatives.
CONFIDENTIAL & PROPRIETARY
BENEFITFOCUS.COM, INC.
Exhibit A & B to Employment Agreement
1
(11/2017)
EXHIBIT B
Benefitfocus.com, Inc.
Compensation Program for Shawn A. Jenkins
Exhibit B to Employment Agreement dated November 20, 2017.
1.
2.
3.
4.
5.
6.
7.
Compensation: As compensation for services rendered by the Associate, Benefitfocus shall pay
annual compensation totaling $300,000 (the "Compensation") plus associate benefit programs.
The Associate has elected and Benefitfocus agrees to pay the Associate one third of the
Compensation ($100,000) in cash and the remaining two thirds ($200,000) in equity compensation
paid quarterly, all as described below. All compensation paid to Associate shall be subject to
withholding for such federal, state and local taxes as Benefitfocus determines are required to be
withheld pursuant to applicable law.
Salary: The cash salary portion of the Compensation will be payable in accordance with Benefitfocus'
customary payroll practices as in effect from time to time.
Equity Compensation: On the first day of each calendar quarter while this Agreement remains in effect,
Associate will be granted a number of shares of Benefitfocus common stock (BNFT) equal to
$50,000 divided by the average closing price over the 20 trading days immediately preceding the
applicable grant date. Each such grant will be made in accordance with, and subject to the terms
of, Benefitfocus' Amended and Restated 2012 Stock Plan.
Prior Equity Awards: Associate has previously been awarded various equity awards (including
restricted stock units and performance restricted stock units) pursuant to Benefitfocus' Amended
and Restated 2012 Stock Plan and its Management Incentive Bonus Program. All such prior awards
are intended to continue to vest during Associate's employment under this Agreement, subject to
the terms of such awards, except to the extent that acceleration of vesting may occur as described
in Section 7 below.
Normal Hours of Work: Associate is expected to work the amount of time needed to meet or exceed
all job duties and performance expectations as assigned by the President and CEO.
Benefits: Associate will be eligible for all Benefitfocus associate benefit programs including but not
limited to Health Insurance, Life Insurance, Disability Insurance, 401(k) Retirement Program, and
more, subject to the terms and conditions of such programs. Nothing in this Agreement or
Compensation Program alters or limits Benefitfocus' rights to modify or terminate any such programs
in its sole discretion.
Effect of Termination. In the event that Associate's employment hereunder is terminated prior to the
end of the term by Benefitfocus for Cause (as defined below) or by Associate's resignation, then
Associate will be entitled to receive the Compensation and benefits earned through the date of
termination within the time required by applicable law. In the event that Associate's employment
hereunder ends as a result of Associate's death or is terminated prior to the end of the term by
Benefitfocus without Cause, then in addition to the Compensation and benefits earned through the
date of termination, Benefitfocus will continue to pay the Compensation as described above to
Associate (or to his estate, if applicable), and all equity awards that have been granted to Associate
that are not been vested prior to such termination will immediately vest in full to Associate. In the
event that Associate's employment ends as a result of the expiration of the term of the Agreement,
then in addition to the Compensation and benefits earned through the date of termination, all equity
awards that have been granted to Associate that are not been vested prior to such termination will
CONFIDENTIAL & PROPRIETARY
BENEFITFOCUS.COM, INC.
Exhibit A & B to Employment Agreement
2
(11/2017)
8.
immediately vest in full to Associate.
As used herein, the term "Cause" means: (i) an act of dishonesty, fraud or misrepresentation
made by Associate in connection with his responsibilities as an employee that results in a
reasonable probability of material injury to Benefitfocus (whether tangible or reputational); (ii)
Associate's conviction of, or plea of nolo contendere to, a felony or any crime involving fraud,
embezzlement or any other act of moral turpitude, (iii) Associate's gross misconduct that results in
a reasonable probability of material injury (whether tangible or reputational) to Benefitfocus; (iv)
Associate's unauthorized use or disclosure of any proprietary information or trade secrets of
Benefitfocus or any other third party to whom Associate owes an obligation of nondisclosure as a
result of Associate's relationship with Benefitfocus; (v) Associate's material breach of any
obligations under any written agreement with Benefitfocus; or (vi) Associate's continued failure to
substantially perform his material employment duties. Prior to terminating Associate's employment
pursuant to clause (v) or (vi) above, Benefitfocus will provide Associate with (A) written notice
setting forth the basis for Benefitfocus' belief that Associate has engaged in acts or omissions
violating clause (v) or (vi) and (B) an opportunity of not less than fifteen (15) days in which to cure
such breach or non-performance to Benefitfocus' reasonable satisfaction.
Application of Internal Revenue Code Section 409A: All provisions of this Agreement will be interpreted
in a manner consistent with Section 409A of the Internal Revenue Code and the regulations and
other guidance thereunder and any state law of similar effect (collectively "Section 409A").
Notwithstanding anything to the contrary set forth herein, any payments and benefits provided under
this Exhibit B that constitute "deferred compensation" within the meaning of Section 409A will not
commence in connection with Associate's termination of employment unless and until Associate has
also incurred a "separation from service" (as such term is defined in Treasury Regulation Section
1.409A-l(h), unless Benefitfocus reasonably determines that such amounts may be paid without
causing Associate to incur the additional 20% tax under Section 409A. The parties intend that each
installment of the post-termination payments provided for above is a separate "payment" for
purposes of Section 409A. For avoidance of doubt, the parties intend that any post-termination
payments hereunder satisfy, to the greatest extent possible, the exemptions from the application of
Section 409A provided under Treasury Regulation Sections 1.409A-l(b)(4), 1.409A-l(b)(5), and
1.409A-l(b)(9). However, if Benefitfocus determines that the post-termination payments constitute
"deferred compensation" under Section 409A and Associate is, on the termination of service, a
"specified employee" of Benefitfocus, as such term is defined in Section 409A, then, solely to the
extent necessary to avoid the incurrence of the adverse personal tax consequences under Section
409A, the timing of the post-termination payments will be delayed until the earlier to occur of: (i) the
date that is six months and one day after Associate's separation from service, or (ii) the date of
Associate's death (such applicable date, the "Specified Employee Initial Payment Date"), and
Benefitfocus will (A) pay Associate a lump sum amount equal to the sum of the post-termination
payments that Associate would otherwise have received through the Specified Employee Initial
Payment Date if the commencement of the payment of the post-termination payments had not been
so delayed pursuant to this paragraph, and (B) commence paying the balance of the post-
termination payments in accordance with the applicable payment schedules set forth in this
Agreement.
CONFIDENTIAL & PROPRIETARY
BENEFITFOCUS.COM, INC.
Exhibit A & B to Employment Agreement
3
(11/2017)
Exhibit 10.18.1
BENEFITFOCUS.COM, INC.
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") is made and entered
into this 20th day of November 2017, by and between: Benefitfocus.com, Inc., having its principal place of business
at 100 Benefitfocus Way, Charleston, SC 29492, (hereinafter referred to as "Benefitfocus") and Raymond A.
August (hereinafter referred to as the "Associate").
WHEREAS, Associate and Benefitfocus previously entered into an Employment Agreement dated as of
June 25, 2014 (the "Employment Agreement");
WHEREAS, Associate and Benefitfocus wish to alter certain terms of the Employment Agreement with
regard to Associate's title, responsibilities, compensation, and other matters; and
WHEREAS, in light of the foregoing, Associate and Benefitfocus desire to mutually and voluntarily amend
the Employment Agreement, pursuant to the terms as set forth herein, effective as of January 1, 2018 (the
"Amendment Effective Date").
NOW, THEREFORE, in consideration of the foregoing, the mutual promises herein contained, and other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto,
intending to be legally bound, agree as follows.
1.
AMENDMENT TO SECTION 1 OF THE EMPLOYMENT AGREEMENT. Section 1 of the
Employment Agreement is modified as of the Amendment Effective Date by replacing the existing Section 1 in its
entirety with a new Section 1 as follows:
Employment. Benefitfocus hereby agrees to employ the Associate in the capacity of Chief
1.
Executive Officer and President, upon the terms and conditions set out herein, and the Associate
accepts such employment.
2.
AMENDMENT TO SECTION 3 OF THE EMPLOYMENT AGREEMENT. Section 3 of the
Employment Agreement is modified as of the Amendment Effective Date by replacing the existing Section 3 in its
entirety with a new Section 3 as follows:
Duties. In his role as Chief Executive Officer and President, Associate will be responsible
3.
for the overall management and direction of Benefitfocus. Associate will perform such services for
Benefitfocus and have such powers, responsibilities and authority as are customarily associated
with the positions of Chief Executive Officer and President and shall perform such additional duties
as may otherwise be reasonably assigned to Associate from time to time by Benefitfocus' Board
of Directors.
3.
REPLACEMENT OF EXHIBIT B OF THE EMPLOYMENT AGREEMENT. Exhibit B to the
Employment Agreement is modified as of the Amendment Effective Date by replacing the existing Exhibit B with the
new Exhibit B attached to this Amendment as Exhibit 1.
1
4.
REMAINDER OF EMPLOYMENT AGREEMENT. Except as expressly set forth in this Amendment,
the provisions of the Employment Agreement shall remain in full force and effect, in their entirety, in accordance
with their terms.
5.
MISCELLANEOUS. This Amendment shall be governed, construed, and interpreted in accordance
with the laws of the State of South Carolina, without giving effect to conflicts of laws principles. The parties agree
that this Amendment may only be modified in a signed writing executed by both parties. This Amendment shall be
binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns.
This Amendment may be executed in separate counterparts, each of which is deemed to be an original and all of
which taken together constitute one agreement. Facsimile or PDF reproductions of original signatures will be
deemed binding for the purpose of the execution of this Amendment.
Signed, sealed and delivered in the presence of:
BENEFITFOCUS ASSOCIATE
/s/ Mason R. Holland, Jr. /s/ Raymond A. August
Mason R. Holland Jr. By: Raymond A. August
By:
Executive Chairman
Its:
Date: November 20, 2017 Date: November 20, 2017
2
EXHIBIT B
Benefitfocus.com, Inc.
Compensation Program for Raymond A. August
Exhibit B to Employment Agreement dated June 25, 2014, as amended November 20, 2017, and effective as of
January 1, 2018.
1. Salary: As compensation for services rendered by the Associate, Benefitfocus shall pay an annual salary of
$500,000 per year, payable in accordance with Benefitfocus' customary payroll practices as in effect from
time to time. All compensation paid to Associate shall be subject to withholding for such federal, state and
local taxes as Benefitfocus determines are required to be withheld pursuant to applicable law.
2. Annual Review: Annual salary reviews will occur on or around the annual budget process for Benefitfocus.
3. Annual Bonus Opportunity: Associate is eligible to participate in the Benefitfocus Management Incentive
Bonus Program at the Chief Executive Officer and President level, which is targeted at 100% of Associate's
base salary. The targets for achieving the Bonus will be reviewed and approved annually by the
compensation committee of the board of directors (the "Compensation Committee").
4.
Initial Restricted Stock Unit Award: In accordance with, and subject to Benefitfocus' Amended & Restated
2012 Stock Plan, Associate will receive a one-time grant of Benefitfocus restricted stock units (RSUs) valued
at $1,500,000, measured as of December 31, 2017 using the average closing price over the 20 trading days
immediately preceding such date (or such other method as the Compensation Committee determines
appropriate) and subject to approval by the board of directors. This grant will have a five-year vesting period,
and will be subject to the terms of an RSU award agreement between Associate and Benefitfocus.
5. Annual Equity Awards: For 2018, in accordance with, and subject to the Benefitfocus' Amended & Restated
2012 Stock Plan, Associate will receive a Long Term Incentive in the form of an RSU grant valued at
$2,000,000, as of December 31, 2017 (or as soon as practicable thereafter once performance metrics have
been approved by the Compensation Committee) using the average closing price over the 20 trading days
immediately preceding the date of grant (or such other method as the Compensation Committee determines
appropriate). This award will be granted as follows:
• 50% RSU's with a 4 year vesting. The RSUs shall vest 25% on the one-year anniversary of the date
of grant and then 25% annually thereafter for three years on the anniversary date of the grant; and
• 50% Performance Restricted Stock Units (PRSUs), with attainment and award based on annual
company targets determined by the Compensation Committee and aligned with the strategic
direction of Benefitfocus. The PRSUs shall vest 25% on the one-year anniversary of the date of
grant and then 25% annually for three years until fully vested.
Subsequent grants will be reviewed and approved annually by the Compensation Committee and designed to
incentivize high levels of performance.
6.
[Intentionally Omitted]
7.
[Intentionally Omitted]
8. Title: Chief Executive Officer and President.
9. Normal Hours of Work: Full time executive positions are expected to work the amount of time needed to meet
1
or exceed all performance expectations as assigned by Board of Directors.
10. Benefits: Associate is eligible for all Benefitfocus associate benefit programs including but not limited to
Health Insurance, Life Insurance, Disability Insurance, 401(k) Retirement Program, and more.
11. Annual Leave and Paid Holidays: Associate's annual leave will be accrued at a rate of 20 days per year. At
the 5th year of employment. Associate's annual leave will follow the applicable Benefitfocus schedule, as
outlined in the benefit summary and reviewed prior to Associate's start date.
12. [Intentionally Omitted]
13. Retirement Benefits: The Associate will be eligible to receive Retirement Benefits at the Chief Executive
Officer and President level, should such benefits be available in the future.
14. Severance: In the event Benefitfocus terminates Associate's employment without Cause, as defined herein, at
any time prior to a Change in Control, as defined herein, then upon execution of a general release of claims
satisfactory to Benefitfocus, Benefitfocus will provide Associate with the following severance benefits: (i)
salary continuation for a period of twelve (12) months at Associate's then current rate of base salary; (ii) a
portion of Associate's targeted annual bonus determined in accordance with the applicable paragraph below;
(iii) if Associate is eligible for, elect and remain eligible for COBRA continuation coverage, Benefitfocus will
pay the share of the premium it was paying prior termination during the period Associate is receiving
severance; and (iv) accelerated vesting of that portion of the time-based vesting (but not any unmet
performance-based metrics) of all outstanding equity awards granted pursuant to this Agreement that would
have vested in the twelve (12) months following the date of Associate's termination had his employment
continued, effective as of the date of such termination. Except as may be provided under this Agreement
following termination of Associate's employment, any benefits to which Associate may be entitled pursuant to
Benefitfocus' plans, policies and arrangements referred to herein shall be determined and paid in accordance
with the terms of such plans, policies and arrangements.
In the event Benefitfocus or its acquirer terminates Associate's employment without Cause as defined herein,
at the time of or within twelve (12) months following a Change in Control, as defined herein, then upon
execution of a general release of claims satisfactory to Benefitfocus, Benefitfocus or its acquirer will provide
Associate with the following severance benefits: (i) salary continuation for a period of twelve (12) months at
Associate's then current rate of base salary; (ii) a portion of Associate's targeted annual bonus determined in
accordance with the applicable paragraph below; (iii) if Associate is eligible for, elect and remain eligible for
COBRA continuation coverage, Benefitfocus or its Acquirer will pay the share of the premium it was paying
prior to termination during the period Associate is receiving severance; and (iv) accelerated vesting in full of
the time-based vesting (but not any unmet performance-based metrics) of all outstanding equity awards
granted pursuant to this Agreement, effective as of the date of such termination. Except as may be provided
under this Agreement following termination of Associate's employment, any benefits to which Associate may
be entitled pursuant to Benefitfocus' plans, policies and arrangements referred to herein shall be determined
and paid in accordance with the terms of such plans, policies and arrangements.
2
For purposes of this document, whether before or after a Change in Control, Associate will receive the same
severance benefits as upon a termination without Cause if he notifies Benefitfocus of his decision to terminate his
employment with Benefitfocus within three (3) months of the occurrence of any of the following without his
consent: (i) a decrease to Associate's base salary or targeted annual bonus and approval to an amount less than
the then current amount immediately preceding the decrease, (ii) a change in Associate's position from Chief
Executive Officer and President or a diminution of Associate's duties and responsibilities, or (iii) a change in the
location of Associate's primary workplace of more than 60 miles from the Benefitfocus headquarters as of the
Amendment Effective Date.
If Benefitfocus terminates Associate's employment with or without Cause, after completion of any period (whether
a calendar year or any other period) during which Associate's eligibility for a bonus is to be determined (a "Bonus
Period") but prior to the date when such bonus is to be paid. Associate will be entitled to receive such bonus at
the time it would have been paid. In addition, if Benefitfocus terminates Associate's employment without Cause
prior to the completion of a Bonus Period, Associate will be entitled to receive a prorated portion of such bonus at
the time it would have been paid, based on the portion of the Bonus Period that Associate was employed by
Benefitfocus.
"Cause" shall mean a determination by Benefitfocus' board of directors of any of the following: (i) Associate’s
violation of any applicable material law or regulation respecting the business of Benefitfocus; (ii) Associate's
commission of a felony or a crime involving moral turpitude, (iii) any act of dishonesty, fraud or misrepresentation
in relation to Associate's duties to Benefitfocus, (iv) failure to perform in any material respect Associate's duties
hereunder after twenty (20) days written notice and an opportunity to cure such failure and a reasonable
opportunity to present to Benefitfocus' board of directors Associate's position regarding any dispute relating to the
existence of such failure; (v) Associate's failure to attempt in good faith to implement a clear and reasonable
directive from Benefitfocus' board of directors or to comply with any of Benefitfocus' policies and procedures which
failure is material and occurs after written notice from Benefitfocus' board of directors; (vi) any act of gross
misconduct which is materially and demonstrably injurious to Benefitfocus; or, (vii) Associate's breach of fiduciary
responsibility.
A "Change in Control" shall be deemed to have occurred if any of the following conditions have occurred: (i) the
merger or consolidation of Benefitfocus with another entity, where Benefitfocus is not the surviving entity and
where after the merger or consolidation (A) its stockholders prior to the merger or consolidation hold less than
50% of the voting stock of the surviving entity and (B) its directors prior to the merger or consolidation are less
than a majority of the directors of the surviving entity; (ii) the sale of all or substantially all of Benefitfocus' assets
to a third party where subsequent to the transaction (A) its stockholders hold less than 50% of the stock of said
third party and (B) its directors are less than a majority of the board of directors of said third party; or (iii) a
transaction or series of transactions, including a merger of Benefitfocus with another entity where Benefitfocus is
the surviving entity, whereby (A) 50% or more of the voting stock of Benefitfocus after the transaction is owned
actually or beneficially by parties who held less than 30% of the voting stock, actually or beneficially, prior to the
transaction(s) and (B) its Board of Directors after the transaction(s) or within 60 days thereof is comprised of less
than a majority of Benefitfocus' directors serving prior to the transaction(s).
15. Application of Internal Revenue Code Section 409A: All provisions of this Agreement will be interpreted in a
manner consistent with Section 409A of the Internal Revenue Code and the regulations and other guidance
thereunder and any state law of similar effect (collectively "Section 409A"). Notwithstanding anything to the
contrary set forth herein, any payments and benefits provided under this Exhibit B that constitute "deferred
compensation" within the meaning of Section 409A will not commence in connection with Associate's termination
of employment unless and until Associate has also incurred a "separation from service" (as such term is defined in
3
Treasury Regulation Section 1.409A-l(h), unless Benefitfocus reasonably determines that such amounts may be
provided to Associate without causing Associate to incur the additional 20% tax under Section 409A. The parties
intend that each installment of the severance benefits payments provided for above is a separate "payment" for
purposes of Treasury Regulation Section 1.409A- 2(b)(2)(i). For avoidance of doubt, the parties intend that
payments of the severance benefits satisfy, to the greatest extent possible, the exemptions from the application of
Section 409A provided under Treasury Regulation Sections 1.409A-l(b)(4), 1.409A-l(b)(5), and 1.409A-l(b)(9).
However, if Benefitfocus determines that the severance benefits constitute "deferred compensation" under Section
409A and Associate is, on the termination of service, a "specified employee" of Benefitfocus, as such term is
defined in Section 409A, then, solely to the extent necessary to avoid the incurrence of the adverse personal tax
consequences under Section 409A, the timing of the severance benefit payments will be delayed until the earlier
to occur of: (i) the date that is six months and one day after Associate's separation from service, or (ii) the date of
Associate's death (such applicable date, the "Specified Employee Initial Payment Date"), and Benefitfocus will
(A) pay Associate a lump sum amount equal to the sum of the severance benefits payments that Associate would
otherwise have received through the Specified Employee Initial Payment Date if the commencement of the
payment of the severance benefits had not been so delayed pursuant to this paragraph, and (B) commence
paying the balance of the severance benefits in accordance with the applicable payment schedules set forth in this
Agreement.
4
Benefitfocus, Inc.,
A Delaware corporation
List of subsidiaries
Exhibit 21.1
Benefitfocus.com, Inc.
BenefitStore, Inc.
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following registration statements:
(1) Registration Statement (Form S-3 No. 333-208801) of Benefitfocus, Inc.,
(2) Registration Statement (Form S-8 No. 333-211904) pertaining to the Benefitfocus, Inc.
2016 Employee Stock Purchase Plan,
(3) Registration Statement (Form S-8 No. 333-192278) pertaining to the 2012 Stock Plan,
as amended, and the Amended and Restated 2000 Stock Option Plan of Benefitfocus,
Inc., and
(4) Registration Statement (Form S-8 No. 333-218633) pertaining to the Benefitfocus, Inc.
Amended and Restated 2012 Stock Plan;
of our report dated March 15, 2018, with respect to the consolidated financial statements and
schedule of Benefitfocus, Inc. included in this Annual Report (Form 10-K) for the year ended
December 31, 2017.
/s/ Ernst & Young LLP
Raleigh, North Carolina
March 15, 2018
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Raymond A. August, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Benefitfocus, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 15, 2018
/s/ Raymond A. August
Raymond A. August
President and Chief Executive Officer
(Principal executive officer)
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Jonathon E. Dussault, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Benefitfocus, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 15, 2018
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
(Principal financial and accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Raymond A. August,
President and Chief Executive Officer (principal executive officer) of Benefitfocus, Inc. (the “registrant”), and Jonathon E. Dussault,
Chief Financial Officer (principal financial and accounting officer) of the registrant, each hereby certifies that, to the best of their
knowledge:
1. The registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, to which this Certification is attached as
Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the registrant at the end of
the period covered by the Report and results of operations of the registrant for the periods covered by the Report.
Date: March 15, 2018
/s/ Raymond A. August
Raymond A. August
President and Chief Executive Officer
(Principal executive officer)
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
(Principal financial and accounting officer)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36061
Benefitfocus, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
46-2346314
(I.R.S. Employer
Identification No.)
100 Benefitfocus Way
Charleston, South Carolina 29492
(Address of principal executive offices and zip code)
(843) 849-7476
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 Par Value
Name of each exchange of which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
(Do not check if a smaller
reporting 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 Act). Yes No
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on June 30, 2017 (based on the closing sale
price of $36.35 on that date), was approximately $426,784,296. Common stock held by each officer and director and by each person known to the
registrant who owned 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant’s common stock outstanding as of March 12, 2018 was 31,331,447.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Stockholders currently scheduled to be held on June 1, 2018
are incorporated by reference into Part III hereof.
EXPLANATORY NOTE
Benefitfocus, Inc. is filing this Amendment No. 1 (“Amendment No. 1”) to its Annual Report on Form 10-K
for the year ended December 31, 2017, originally filed with the Securities and Exchange Commission
(“SEC”) on March 15, 2018 (the “Original Filing”), to correct an inadvertent error in the number of large
employer customers served by the Company as of December 31, 2017 and the related compound annual
growth rate. The Original Filing stated that the number of large employer customers served by the
Company as of December 31, 2017 was 915. The correct number, 920, was publicly reported in the
Company’s earnings press release dated March 14, 2018, as furnished to the SEC under cover of a
Current Report on Form 8-K dated that date.
The following items in the Original Filing are being amended solely to correct the number of large
employer customers served by the Company as of December 31, 2017 and the related compound annual
growth rate:
• Part I – Item 1. Business; and
• Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
In accordance with applicable SEC rules, this Amendment No. 1 includes certifications from the
Company’s President and Chief Executive Officer, and its Chief Financial Officer dated as of the date of
this filing. Except as set forth above, the Original Filing has not been amended, updated or otherwise
modified, and does not reflect events occurring after March 15, 2018, the date of the Original Filing, or
modify or update those disclosures that may have been affected by subsequent events. Accordingly, this
Amendment No. 1 should be read in conjunction with the Original Filing and the Company’s filings made
with the SEC subsequent to the filing of the Original Filing.
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Benefitfocus, Inc.
Form 10-K/A
(Amendment No. 1)
For Year Ended December 31, 2017
TABLE OF CONTENTS
PART I
Item 1. Business
PART II
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART IV
Item 15. Exhibits, Financial Statement Schedules
Signatures
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3
22
22
41
41
47
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K 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 Annual Report on Form 10-K that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange
Act”). Such forward-looking statements include any expectation of earnings, revenue or other financial
items; any statements of the plans, strategies and objectives of management for future operations; factors
that may affect our operating results; statements about our ability to establish and maintain intellectual
property rights; statements about our ability to retain and hire necessary associates and appropriately
staff our operations; statements related to future capital expenditures; statements related to future
economic conditions or performance; statements as to industry trends; and other matters that do not
relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-
looking statements are often identified by the use of words such as, but not limited to, “anticipate,”
“believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “will,” “plan,” “project,”
“seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-
looking statements. These statements are based on the beliefs and assumptions of our management
based on information currently available to management. Such forward-looking statements are subject to
risks, uncertainties and other important factors that could cause actual results and the timing of certain
events to differ materially from future results expressed or implied by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not limited to, those discussed
in the section titled “Risk Factors” included in Item 1A of Part I of this Annual Report on Form 10-K, 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.
Item 1. Business.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers,
employers, insurance carriers, and brokers. The Benefitfocus Platform simplifies how organizations and
individuals shop for, enroll in, manage and exchange benefits. Our employer and insurance carrier
customers rely on our platform to manage, scale and exchange benefits data seamlessly. Our web-based
platform has a user-friendly interface designed to enable the insured consumers to access all of their
benefits in one place. Our comprehensive solutions support core benefits plans, including healthcare,
dental, life, and disability insurance, and voluntary benefits offerings such as income protection, digital
health and financial wellness. As the number of employer benefits plans has increased, with each plan
subject to many different business rules and requirements, demand for the Benefitfocus Platform has
grown.
The Benefitfocus Platform enables our customers to simplify the management of complex benefits
processes, from sales through enrollment and implementation to ongoing administration. It provides
consumers with an engaging, highly intuitive, and personalized user interface for selecting and managing
all of their benefits via their desktop browsers or mobile devices. Employers use our solutions to
streamline benefits processes, keep up with complex and changing regulatory requirements, control
costs, and offer a greater variety of plans to attract, retain, and motivate their employees. Insurance
carriers use our solutions to more effectively market offerings, simplify billing, and improve the enrollment
process. We also provide a network of more than 1,500 benefit provider data exchange connections,
which facilitates the otherwise highly fragmented interaction among employees, employers, brokers, and
carriers.
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We serve two separate but related market segments. The employer market consists of employers
offering benefits to their employees. Within this segment, we mainly target large employers with more than
1,000 employees, of which we believe there are over 18,000 in the United States. In our other market
segment, we sell our solutions to insurance carriers, enabling us to expand our overall footprint in the
benefits marketplace by aggregating many key constituents, including consumers, employers, and brokers.
We believe our presence in both the employer and insurance carrier markets gives us a strong position at
the center of the benefits ecosystem. As of December 31, 2017, we served 920 large employer customers,
an increase from 141 in 2010, and 54 carrier customers, an increase from 29 in 2010.
We sell the Benefitfocus Platform on a subscription basis, typically through annual contracts with
our employer customers and multi-year contracts with our insurance carrier customers, with subscription
fees paid monthly, quarterly and annually. The multi-year contracts with our carrier customers are
generally only cancellable by the carrier in an instance of our uncured breach, although some of our
carrier customers are able to terminate their respective contracts without cause or for convenience. Our
software-as-a-service, or SaaS, model provides us significant visibility into our future operating results
through increased revenue predictability, which enhances our ability to manage our business. Our
company was founded in 2000, and we currently employ approximately 1,450 associates, or employees.
Industry Background
The administration and distribution of benefits to employees is a mainstay of the U.S. economy.
Providing these benefits is costly and complex and requires the exchange of information, application of
rules, and transfer of funds among a wide variety of constituents, including consumers, employers,
insurance carriers, brokers, benefits outsourcers, payroll processors, and financial institutions. According
to IBISWorld calculations, in 2017, the market for HR benefits administration in the United States is
expected to grow to over $54 billion. In addition, Gartner estimates that in 2016, the U.S. insurance
industry spent approximately $66 billion on software and related services.1
The variety and complexity of core benefits plans, including healthcare, dental, life, and disability
insurance continues to grow. The Benefitfocus 2017 annual market research report, The State of
Employee Benefits 2018, indicates that a higher proportion of benefits offerings are shifting to high-
deductible health plans coupled with health savings accounts. This added complexity places greater
potential cost burden on employees and creates a greater need for employers to educate employees on
becoming more informed healthcare consumers. To help employees cover added cost burdens,
employers are increasingly offering a wider range of voluntary benefits plans, such as critical illness,
supplemental income, and financial wellness programs. Current point and legacy systems are inadequate
to efficiently manage the complexity, regulation, and the involvement of multiple parties, driving the need
for an enterprise benefits management system to improve operational efficiency along the entire benefits
value chain.
1 Gartner, Forecast: Enterprise IT Spending by Vertical Industry Market, Worldwide, 2015-2021 4Q17 Update, United
States Insurance Market Spending on Software, IT Services, and Internal Services. The Gartner Report
described herein, (the "Gartner Report") represents research opinion or viewpoints published, as part of a
syndicated subscription service, by Gartner, Inc. ("Gartner"), and are not representations of fact. Each Gartner
Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions
expressed in the Gartner Report are subject to change without notice.
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Employer Market
Currently, we believe there are over 18,000 entities that employ more than 1,000 individuals in the
United States. A significant and growing portion of employers’ costs is non-salary benefits, such as health
insurance, that they provide to their employees. With healthcare and other premiums increasing, senior
executives are prioritizing benefits administration in their organizations and searching for ways to contain
costs without sacrificing benefits. In addition, the expense burden continues to shift to employees.
Employees’ contributions to premiums for health insurance have grown from approximately $318 per
employee in 1999 to approximately $1,213 per employee in 2017. Employers recognize the importance of
offering a greater variety of core and voluntary benefits as a means to attract, motivate, and retain
employees. They must maintain relationships with multiple insurance carriers and many other benefits
providers, placing a substantial administrative burden on their organizations.
Employers’ distribution, management, and administration of employee benefits has historically
consisted of error-prone, paper-based processes, and a patchwork of customized software tools, which
are costly to maintain, often lack necessary functionality, and fail to address the increasing complexity of
the benefits marketplace. As benefits offerings become more complex and employees bear more of the
cost of those benefits, HR software solutions that streamline information, simplify choices, and engage
employees are increasingly in demand. Employees desire tailored, dynamic, and interactive
communication of critical benefits information as they become accustomed to receiving personalized
content through various consumer applications on a range of devices.
Legacy HR systems were generally designed as extensions of enterprise resource planning, or
ERP, systems, built for back-office responsibilities like finance and accounting. As a result, these systems
lack functionality and ease-of-use for employees. Many legacy HR systems were not designed to
integrate with the broader benefits ecosystem, including brokers, carriers, and wellness providers. This
results in expensive, error-prone, and frustrating experiences for employers and employees. Benefits
outsourcers have attempted to compensate for the shortcomings of legacy HR systems, but they have
generally lacked adequate technology solutions necessary to keep up with the rapidly evolving benefits
landscape. As a result, employees are often not provided with the appropriate functionality and
information required to select and manage their benefits effectively.
Modern technology, changing communication patterns, and a constantly evolving benefits
ecosystem have changed the employee-employer relationship. HR executives continue to search for
effective strategies to increase efficiency and contain costs, while increasing employee engagement and
satisfaction. Employers are increasingly interested in SaaS solutions that can help capture and analyze
benefits data and ultimately lead to healthier, happier, and more productive employees. In order to
manage the distribution and administration of benefits effectively, employers need an integrated platform,
capable of handling all benefits in one place and providing a highly personalized experience for
employees.
Insurance Carrier Market
The employee benefits market consists of a myriad of insurance carriers and products. According to
the U.S. Bureau of Labor Statistics, the single largest benefit provided to employees in the United States
is healthcare insurance, often encompassing more than 90% of all insurance benefits spending by
employers.
Large, national insurance carriers also offer numerous individual health plans of different types,
including health maintenance organizations, preferred provider organizations, point-of-service plans, and
high deductible health plans, across the 50 states, as well as life and ancillary benefits plans. Each carrier
offers a complex variety of health insurance, life and ancillary benefits plans, with each plan requiring
multiple decisions to address the specific needs of employers and their individual employees. Despite
widespread carrier consolidation, numerous disparate systems remain in place, with many large carriers
operating on multiple IT systems. Carriers often rely on manual processes and siloed software
applications to bridge gaps in legacy administration systems. Even as carriers attempt to modernize and
keep up with evolving industry practices and a changing regulatory landscape, they have difficulty
connecting with the broader healthcare system.
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The effective delivery and management of healthcare benefits depends on the timely, continuous
exchange of accurate data among carriers, their employer customers, and individual members. Legacy
benefits management systems often lack important functionality such as web and mobile self-service
capabilities and real-time data exchange. Critical carrier processes, including member enrollment, billing,
communications, and retail marketing have often been under-optimized or neglected by legacy systems,
and carriers have devoted significant internal resources to cover technology gaps. In addition, healthcare
reform mandates and the rise of exchanges have increased focus on carriers’ retail distribution
capabilities, which require additional investment.
Governmental oversight, punctuated with the Patient Protection and Affordable Care Act, or
PPACA, has led to an increasingly dynamic regulatory framework under which health benefits are
delivered, accessed, and maintained. Despite uncertainty regarding the long-term viability of PPACA, we
expect digital transformation of healthcare benefits to continue in the form of public and private
exchanges – online marketplaces that allow insurance carriers to compete directly for new members. We
expect private exchanges will be less rigid, promoting both health and non-health benefits, with
substantially fewer rules around the types of benefits offered. As insurance carriers continue to bolster
their retail distribution capabilities, we believe they will require consolidation of technology solutions to
improve operational efficiency and attract additional members through private exchanges.
Reportable Segments
Our reportable segments, Employer and Carrier, are based on type of customer. Financial
information for Benefitfocus’ reportable segments is included in Note 14 to our consolidated financial
statements included in this Annual Report on Form 10-K.
The Benefitfocus Solutions
We provide a multi-tenant cloud-based benefits management platform to the employer and carrier
markets. The Benefitfocus Platform simplifies how organizations and individuals shop for, enroll in,
manage, and exchange benefits.
We believe our solutions help employers in the following important ways:
Simplify Benefits Enrollment. Our solutions reduce the complexity of benefits enrollment by
integrating all plan information in one place and presenting it to employees in an organized and easy-to-
understand manner. Employees shop and enroll using a highly intuitive and engaging consumer-oriented
interface.
Transition to Defined Contribution Benefits Funding Model. Our solutions help enable employers’
ongoing shift to defined contribution plans. Defined contribution plans differ from traditional defined
benefit plans as they grant employees a stipend with which to purchase benefits of their choosing.
Defined contribution plans also offer more discretion and options compared to defined benefit plans. Our
products support traditional defined benefit plans, allowing employees to select from a list of benefits
offered by their employer, calculating required member contributions, and recording and transmitting
elections and other important information to payroll. Separately, with respect to defined contribution plans,
our exchange solutions help facilitate an online shopping environment with many benefit options that
allows employees to select personalized benefit offerings to suit their individual needs.
Reduce Cost and Increase ROI. Our solutions automate the benefits management process and
reduce the cost associated with clerical errors and covering ineligible employees and dependents. Our
solutions also include advanced analytics that enable employers and employees to quickly gather, report,
and forecast benefit costs.
Attract, Retain, and Motivate Employees. Our solutions help employers attract, retain, and
motivate top talent by delivering benefits information through a highly intuitive and engaging user
interface. We believe that when employees understand the value of their benefits, they are more likely to
be satisfied with and engaged in their jobs.
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Streamline HR Processes. Our solutions eliminate the time-consuming and labor-intensive, often
paper-based, processes associated with managing employee benefits plans, making HR professionals
more efficient. Employers and HR professionals can efficiently enroll users or update information, and
communicate or make changes to plans in real-time.
Integrate Seamlessly with Related Systems. Our solutions can be easily and securely integrated
with a variety of related systems, including carrier membership and billing, payroll and HR, banking, and
other third-party administration. We provide a network of more than 1,500 benefit provider data exchange
connections. Our open architecture further extends our functionality by allowing third parties to develop
and offer apps and services on our platform.
We believe our solutions help insurance carriers in the following important ways:
Attract and Maintain Membership. Our solutions allow carriers to maximize sales capacity and
efficiency by communicating directly with their employer customers and individual members.
Reduce Administrative Costs. The Benefitfocus Platform allows carriers to consolidate IT
systems, automate and simplify various aspects of the benefits administration process, such as
enrollment, plan changes, eligibility updates, and billing, from one centralized location.
Bolster Retail Distribution Capabilities Through Marketplaces. Our solutions help carriers respond
to an evolving marketplace in which retail distribution capabilities are increasingly important to attracting
and retaining new members. Our platform offers carriers a lower cost direct sales channel to employer
groups and individuals. We offer the ability to sell both healthcare and non-healthcare benefit products in
an online shopping environment that serves as an alternative to government-sponsored public
exchanges.
Facilitate Real-Time Data Exchange. Our solutions simplify interactions and data exchange, and
foster collaboration among carriers and their partners, brokers, employer customers, and individual
members. This allows carriers to rapidly tailor and offer new benefits packages.
Our Growth Strategy
We intend to strengthen our position as a leading provider of cloud-based benefits software
solutions. Key elements of our growth strategy include the following:
Expand our Customer Base. We believe that our current customer base represents a small
fraction of our targeted users that could benefit from our solutions. In order to reach new customers in our
existing markets, we are aggressively investing in our sales and marketing resources and our channel
marketing strategy, including in ways intended to expand existing relationships and foster organic growth
opportunities through brokers.
Deepen our Relationships with our Existing Customer Base. We are deepening our employer
relationships by continuing to provide a unified platform with a growing list of additional solutions to manage
increasingly complex benefits processes and simplify the distribution and administration of employee
benefits. We are expanding our carrier relationships through both the upsell of additional software products
and increased adoption across our carriers’ member populations.
Extend our Suite of Applications and Continue our Technology Leadership. We are extending the
number, range, and functionality of our benefits applications. We have also extended the functionality of
our products with various mobile applications. We intend to continue our collaboration with customers and
partners, so we can respond quickly to evolving market needs with innovative applications and support
our leadership position.
Further Develop our Partner Ecosystem. We have established strong relationships with
organizations such as Mercer, SAP, Allstate Insurance Company, Equifax, and others in a variety of
industries to deliver best-in-class applications to our customers. We plan to continue to invest in our
integration infrastructure to allow third parties and customers to build custom applications on the
Benefitfocus Platform and create deep integrations between their systems and ours.
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Leverage our Corporate Culture. We believe our culture inspires our associates and customers
and supports our growth. We plan to continue to invest in our culture to help attract and retain top design
and engineering professionals who are not only passionate about Benefitfocus and motivated to create
superior software technology, but also passionate about contributing positively to their communities.
Target New Markets. We believe substantial demand for our solutions exists in markets and
geographies beyond our current focus. We intend to leverage opportunities we believe will arise from the
complexities of changing government regulation and increased enrollment impacting both Medicare and
Medicaid. We also plan to grow our sales capability internationally by expanding our direct sales force
and collaborating with strategic partners in new, international locations.
Selectively Pursue Strategic Acquisitions and Investments. We might pursue acquisitions of or
investments in complementary businesses and technologies that are consistent with our overall growth
strategy. We believe that a selective acquisition and investment strategy could enable us to gain new
customers, accelerate our expansion into new markets, and enhance our product capabilities.
The Benefitfocus Portfolio of Products
Our portfolio of products, as summarized below, provides a seamless, integrated experience for the
entire life cycle of benefits enrollment and management for insurance carriers and employers. We also
provide extensive applications to help carriers and employers manage their programs more effectively.
Products and Services for Insurance Carriers
Marketplaces:
Large Employer Marketplace
Mid-Market Marketplace
Small Employer Marketplace
eEnrollment
eBilling
eExchange
eSales
Core & Advanced Analytics
Certified Carrier Program
Integrations
Video
Implementation Services
Benefits Service Center
Products and Services for Employers
Benefitfocus Marketplace
Communication Portal
BenefitStore
Core & Advanced Analytics
Benefits Service Center
Video
ACA Management & Reporting
Billing & Payment
Implementation Services
Integrations
Benefitfocus University
Account Services:
Consumer Directed Healthcare
Accounts
COBRA Administration
Products for Insurance Carriers
Marketplaces are online shopping environments, sometimes referred to as exchanges that
allow customers to select from a variety of benefits plan choices to suit their individual needs.
Marketplaces support the shift toward defined contribution benefits plans, which are increasing
in popularity. Marketplaces provide consumer-centric experiences focused on personalization,
and integrate social tools to help drive informed choices while selecting benefits. They also
include features to track plans and compare pricing and features across multiple benefit plans.
eEnrollment is our flagship product for carriers, providing them with online enrollment for all
types of benefits. We designed eEnrollment to enhance our users’ experience by presenting
information in a user-friendly format and integrating educational videos as well as plan
comparison and decision support tools to help users navigate the enrollment process. In
addition to helping customers find suitable plans, eEnrollment supports complex business
rules, such as eligibility and rating criteria. eEnrollment facilitates the following activities:
Initial Enrollment. Employees and brokers can complete applications and health
statements prior to making elections. Once the selection occurs, eEnrollment
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automatically calculates group numbers, finalizes benefit elections, and sends the data to
the insurance carriers’ membership systems.
Open Enrollment. eEnrollment simplifies open enrollment by providing tools to map
employees from one plan to another, such as workflow, to-do lists, e-mail reminders, and
a wide range of reports.
New Hire Enrollment. New hires can enroll in benefits anytime during their initial
enrollment period. eEnrollment calculates wait periods and effective dates automatically
to ensure compliance with the employers’ business rules.
Life Events. Employees can make changes to their elections for specific reasons,
including a birth, marriage, and military leave. eEnrollment calculates effective dates and
helps employees understand what types of coverage changes are permitted with each
type of life event.
eBilling is an electronic invoice presentment and payment solution, or EIPP. It consolidates
invoices from multiple insurance products so employers and individuals receive one invoice
that can be viewed and paid electronically. eBilling automates the synchronization of billing
and membership data to improve the accuracy of billing processes and provides options to
simplify bill payment, such as scheduled one-time and/or recurring payments.
eExchange is a solution that bridges the communication gap between carrier and employer
systems, allowing a seamless exchange of data between the two. Our customers use
eExchange to integrate data from multiple systems, convert data from one format to another,
and manage the flow of employee data between carriers and employers.
eSales gives carriers and brokers tools to organize and proactively manage accounts, track
leads, generate quotes, and create proposals for multiple products. eSales allows carriers to
define their own market segments and configure them with unique workflows and business
rules. It also enables greater data accuracy by automatically incorporating updated products,
options and pricing for the most current rates and quotes. Carriers purchase eSales to
increase productivity in their sales force.
Core & Advanced Analytics is our data analytics solution for use by carriers and their self-
insured employer customers. Core & Advanced Analytics is a privately-labeled analytics
solution that helps carriers and their self-insured employers identify cost drivers, recognize
trends, and predict future risks and costs. Additional analytical capabilities help create “what-if”
scenarios to model different variables, such as co-pay, deductibles, benefits, inflation, and
member populations.
Certified Carrier Program is our partnership program with large life and ancillary product
providers designed to deliver seamless ancillary, voluntary and life-style benefits to
consumers. The program is a combination of technology solutions, preferred pricing and
distribution opportunities.
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Products for Employers
Benefitfocus Marketplace is a cloud-based benefits management portal that streamlines online
enrollment, employee communication, and benefits administration. It also and creates an
exchange environment for large employers who offer defined contribution plans. In one
cohesive, engaging workflow, Benefitfocus Marketplace presents employees with all of the
plans their employers offer. Employees who need extra assistance can access avatars,
animated videos, and live chat sessions as they explore their benefit options. As employees
shop for the plans that best fit their individual needs, a virtual shopping cart keeps a running
tally of the employers’ defined contribution in addition to the employees’ out-of-pocket costs. If
employees choose to purchase more coverage on their own, they can easily view and pay
their bills in the Benefitfocus Marketplace.
Communication Portal is an employee engagement portal that gives employers the tools to
send personalized, targeted text and email communications to specific employee groups
based on location, job level and eligibility status. Features such as an Intelligent Virtual
Assistant provide employees on-demand support while reducing administration burden for
employers, and Self-Service Total Compensation Reports increase transparency into the full
value of benefit offerings, which can contribute to increased engagement and employee
satisfaction.
BenefitStore is a turnkey solution, enabled by BenefitStore, Inc., a wholly owned subsidiary
insurance agency, that makes available directly to employees a broad array of voluntary and
ancillary benefits through insurance consulting and brokerage services for employer
sponsored and individual products such as transit, supplemental life and disability, among
others, to provide a more comprehensive and customizable benefits package.
Core & Advanced Analytics is our data analytics solution that helps employers make more
informed, data-driven decisions about their benefits offerings. This product aggregates benefit
cost and claims data from relevant sources and allows customers to analyze, forecast, and
monitor costs. Core & Advanced Analytics enables employers and their advisors to identify
cost drivers, recognize trends, and predict future risks and costs. Additional analytical
capabilities create “what-if” scenarios to model different variables, such as co-pays,
deductibles, benefits, inflation, and member populations.
ACA Management & Reporting is our solution that helps employers manage ACA compliance
by consolidating and automating IRS reporting. Additionally, Benefitfocus is an approved
transmitter, allowing us to electronically file required ACA compliance documents with the
Internal Revenue Service on behalf of our customers.
Billing & Payment is a comprehensive, dynamic EIPP application that synchronizes enrollment
and billing information to streamline the monthly billing process, automate adjustments and
increase accuracy of payments. Billing & Payment gives employers the ability to automate or
schedule single-invoice payments to all of their benefit providers. Employers can drill down by
employee to see coverage level and plan, or focus in by vendor, benefit type or internal cost
control center to gain more insight into cost drivers.
Consumer-Directed Healthcare Accounts is our solution designed to provide employers and
their employees with a seamless enrollment and account management experience for their
health savings accounts, or HSAs, or similar medical payment products within Benefitfocus
Marketplace.
COBRA Administration is our solution for employers that simplifies management of COBRA, or
the Consolidated Omnibus Budget Reconciliation Act, benefits. COBRA Administration
automates required communication, enrollment, fulfillment and payment processing within
Benefitfocus Marketplace.
Professional Services and Customer Support
Implementation Services. We provide implementation services to our customers in order to
help ensure seamless deployment and effective utilization of our solutions. Our carrier and
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employer implementation teams and third-party system integrators in our Benefitfocus
Implementation Program follow a five-step approach for each implementation:
Discovery, including project planning and coordination to establish key milestones,
documenting business and technical requirements, establishing a deployment strategy,
and planning operational and market adoption activities.
Configuration and deployment, including configuring products to meet requirements
identified during discovery, and defining needs for data exchange, payroll integration,
and file transfer protocol.
Integration, including connecting the Benefitfocus Platform functionality to a customer’s
currently existing systems, such as carrier membership and billing, payroll and HR
systems, employee communications, intranets, and others.
Testing, including testing of various scenarios and uses cases, inbound and outbound
payroll integration, and regression testing.
Training and technical support, including sessions to learn how to implement and access
our products.
Benefits Service Center. We provide employers with expanded support services where our
benefits specialists help customers’ employees understand benefit offerings, navigate the
enrollment process, and find answers to frequently asked HR questions. Our Benefits Service
Center provides employees with personalized, guided support. Additional services, such as
fulfillment, dependent verification, and HR administration, are available to meet unique
organizational needs.
Video. We create video and animated content that can be licensed within our applications or
independently for distribution via client portals or websites. Benefitfocus provides a
comprehensive video library and also can produce custom videos to meet specific
communication requirements of its carrier and employer customers. Our staff of executive
producers, project managers, writers, graphic designers, editors, and on-camera talent guide
customers through the process from concept development to delivery. Benefitfocus hosts
videos, eliminating the need for additional investments or internal IT resources by our
customers. In addition, we incorporate our customers’ unique branding to provide a seamless
extension of corporate websites and messaging.
Partner Offerings
Integrations. We allow our partners and customers to develop custom apps that integrate
directly with Benefitfocus Marketplace. The open and flexible nature of our software
architecture allows us to build deeper integrations with partner organizations and offer custom
services in response to customer demand. Apps are organized into the following categories:
voluntary benefits, health and wellness, benefits administration, finance, and communication.
Some examples include:
RedBrick Health provides access to customizable health assessments, digital coaching,
tracking and challenges.
LifeLock allows employees to purchase identity theft protection when they are enrolling in
other benefit programs.
SAP SuccessFactors provides employee performance management solutions. We
partnered with SAP to create a full HR and benefits management suite that combines
employee talent, profile, and core HR information to help drive employee onboarding,
promotion, and development. The SAP SuccessFactors suite of products provides an
enterprise-class system of record, as well as powerful analytics and intuitive tools.
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Customers
Our customers include employers of all sizes across a variety of industries and some of the nation’s
largest insurance carriers and aggregators. The following is a list of some of our significant employer and
carrier customers.
Employer Customers
American Eagle Outfitters Inc.
Amerigas Propane, Inc.
Brookdale Senior Living Inc.
California Institute of Technology
Carolinas HealthCare System
Fender Musical Instruments Corporation Wellmark, Inc.
Fiesta Restaurant Group, Inc.
Hard Rock Café International (USA), Inc.
Rush University Medical Center
SAP America Inc.
Carrier Customers
American Family Life Assurance Company of Columbus
BlueChoice HealthPlan of South Carolina, Inc.
Blue Cross of Idaho Health Service, Inc.
Blue Cross and Blue Shield of Kansas City
Blue Cross and Blue Shield of South Carolina, Inc.
During the year ended December 31, 2017, one customer accounted for 12% of total revenue. No
other customer accounted for more than 10% of our total revenue.
Sales and Marketing
We sell our software solutions through our direct sales organization. Our direct sales team
comprises employer-focused and carrier-focused field sales professionals who are organized primarily by
geography and account size.
We generate customer leads, accelerate sales opportunities and build brand awareness through
our marketing programs and strategic relationships. Our marketing programs target HR, benefits, and
finance executives, technology professionals, key brokers, and senior business leaders. Our principal
marketing programs include:
use of our website to provide application and company information, as well as learning
opportunities for potential customers;
territory development representatives who respond to incoming leads and convert them into
new sales opportunities;
participation in, and sponsorship of, user conferences, executive events, trade shows and
industry events, including our annual user and partner conference, One Place;
integrated marketing campaigns, including direct email, online web advertising, blogs,
webinars and industry reports, including State of Employee Benefits; and
public relations, analyst relations and social media initiatives.
We also sell our software solutions through strategic partners including Mercer LLC (“Mercer”) and
SAP SE.
Technology Infrastructure and Operations
As an enterprise cloud software vendor, we have always deployed our solutions using a SaaS
model. Our customers access our software via the web or mobile devices, rather than by installing
software on their premises. Through our multi-tenant platform, our customers access a single instance of
our software with multiple possible configurations enabled by our metadata-driven framework. The multi-
tenant approach provides significant operating leverage and improved efficiency as it helps us to reduce
our fixed cost base and minimize unused capacity on our hardware. In addition, our software architecture
gives us an advantage over vendors of legacy systems, who may be using a less flexible architecture that
would require significant time and expense to update.
We host our applications and serve all of our customers from two redundant data centers in
separate locations. We rely on third-party vendors to operate these data centers, which are designed to
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host mission-critical computer systems and have industry-standard measures in place to minimize service
interruptions. Our technical operations staff manages the technology stacks supporting the Benefitfocus
Platform and uses automated monitoring tools throughout our system to detect unusual events or
malfunctions that could interfere with our customers’ or partners’ use of the Benefitfocus Platform. We
monitor application health by verifying that all applications, interfaces and supporting middleware are
operational. If our monitoring tools detect a problem, our dedicated network operations center staff detect
the issue and respond immediately to diagnose and resolve the problem. We take the security of our data
and our systems very seriously, and we focus on minimizing the risk of vulnerabilities in our system at
every level of software design and system and network administration.
Compliance and Certifications
We obtain third-party examinations of our controls relating to security and data privacy. Certain
examinations are conducted under Statement on Standards for Attestation Engagements, or SSAE,
No. 16 (Reporting on Controls at a Service Organization). In particular, we obtain Service Organization
Controls, or SOC, reports known as SOC 1 Type II and SOC 2 Type II audits that test the design and
operating effectiveness of controls over a period of time. An independent auditor conducts these
examinations annually and addresses, among other areas, our physical and environmental safeguards for
production data centers, data availability and procedures covering integrity, change management, and
logical security.
On an annual basis, we complete an internal audit of compliance against the Payment Card Industry
Data Security Standards, or PCI-DSS, applicable to Level 1 service providers. These standards focus on
application and network security controls for companies that transmit and store credit card data on behalf
of clients. Benefitfocus meets PCI compliance requirements as a Level 1 service provider and submits its
Report on Compliance and Attestation of Compliance documenting this assessment to the four major
credit card brands annually.
In addition to PCI-DDS, Benefitfocus meets all applicable security requirements required by the
National Automated Clearinghouse Association, or NACHA, for third-party service providers, as well as all
requirements for Covered Entities as required by HIPAA. We validate both NACHA and HIPAA
compliance annually through internal audits.
Competition
While we do not believe any single competitor offers similarly expansive software solutions, we face
competition from various sources, many of which have greater resources than us. Competition in our
employer segment includes:
ERP software companies, including Oracle (PeopleSoft), Infor (Lawson) and Workday each
offering a cloud-based benefits administration software solution;
HR outsourcing companies, such as Towers Watson;
payroll service providers, such as ADP who expanded their core payroll services to include
some form of cloud-based benefits administration services; and
various niche software vendors.
Competitors in our carrier segment include:
insurance carriers that have invested in internally developed benefit management solutions;
member services companies, including those providing web-based subscriber enrollment and
claims adjudication services, such as Trizetto (acquired by Cognizant) and DST Health
Solutions; and
various niche software vendors.
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We believe that competition for benefits software and services is based primarily on the following
factors:
capability for customization through configuration, integration, security, scalability, and
reliability of applications;
competitive and understandable pricing;
breadth and depth of application functionality;
size of customer base and level of user adoption;
extensive data exchange network;
cloud-based delivery model;
dynamic communication capabilities with contextual media, animation, and acknowledgement
tools;
ability to integrate with legacy enterprise infrastructures and third-party applications;
domain expertise in benefits and healthcare consumerism;
extensive base of rules and event-driven benefit eligibility and enrollment;
accessible on any browser or mobile device;
modern and adaptive technology platform;
access to third-party apps;
clearly defined implementation timeline;
customer-branding and styling; and
ability to innovate and respond to customer and legislative needs rapidly.
We believe that we compete effectively based upon all of these criteria, and that we are likely to
continue to retain a high percentage of our customers from year to year. Nonetheless, we believe that the
increasing acceptance of automated solutions in the healthcare marketplace and the adoption of more
sophisticated technology and continuing legislative reform will result in increased competition, including
potentially from large software companies with greater resources than ours. Other companies might
develop superior or more economical service offerings that our customers could find more attractive than
our offerings. Moreover, the regulatory landscape might shift in a direction that is more strategically
advantageous to competitors.
Research and Development
Our ability to compete depends, in large part, on our continuous commitment to rapidly introduce
new applications, technologies, features, and functionality. We deliver multiple software releases per
year, updating the Benefitfocus Platform to leverage advances in cloud computing, mobile applications,
and data management. Our research and development team is responsible for the design and
development of our applications. We follow state-of-the-art practices in software development using
modern programming languages, data storage systems, and other tools. We use both commercial and
open source products, following a “best tool for the job” philosophy in product selection. Our software has
a multi-tiered architecture that ensures flexibility to add or modify features quickly in response to changing
market dynamics, customer needs, or regulatory requirements.
Our research and development expenses were $49.5 million, $56.6 million and $52.3 million for the
years December 31, 2017, 2016 and 2015, respectively.
Intellectual Property
We rely on a combination of patent, trade secret, copyright, and trademark laws, license
agreements, confidentiality procedures, confidentiality and nondisclosure agreements, and technical
measures to protect the intellectual property used in our business. We generally enter into confidentiality
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and nondisclosure agreements with our associates, consultants, vendors, and customers. We also seek
to control access to and distribution of our software, documentation, and other proprietary information.
We use numerous trademarks for our products and services, and “Benefitfocus”, “HR InTouch”, “HR
InTouch Marketplace”, “All Your Benefits. One Place.”, “All Your Benefits. In Your Pocket.”, and “Shop.
Enroll. Manage. Exchange.” are registered marks of Benefitfocus in the United States. Through claimed
common law trademark protection, we also protect other Benefitfocus marks which identify our services,
such as Benefitfocus eEnrollment, Benefitfocus eBilling, Benefitfocus eExchange, and Benefitfocus
eSales, and we have reserved numerous domain names, including “benefitfocus.com”. We also have
registered trademarks and pending trademark applications in foreign jurisdictions such as Australia,
Canada, India, Israel, Ireland, New Zealand, South Africa, and the United Kingdom.
We have been granted eight U.S. patents (utility patents) and have two U.S. patent applications (all
for utility patents) pending. Our patents provide protections up to 2034. We also have three Chinese, two
Japanese, Australian, Taiwanese, and Hong Kong, and one Canadian patents and a number of pending
patent applications.
We also rely on certain intellectual property rights that we license from third parties. Although we
believe that alternative technologies are generally available to replace such licenses, these third-party
technologies may not continue to be available to us on commercially reasonable terms.
Although we rely on intellectual property rights, including trade secrets, patents, copyrights, and
trademarks, as well as contractual protections to establish and protect our proprietary rights, we believe
that factors such as the technological and creative skills of our personnel, creation of new modules,
features and functionality, and frequent enhancements to our applications are more essential to
establishing and maintaining our technology leadership position.
The steps we have taken to protect our copyrights, trademarks, and other intellectual property may
not be adequate, and the potential exists that third parties could infringe, misappropriate, or misuse our
intellectual property. If this were to occur, it could harm our reputation and adversely affect our
competitive position or operations. In addition, laws of other jurisdictions may not protect our intellectual
property and proprietary rights from unauthorized use or disclosure in the same manner as the United
States. The risk of unauthorized use of our proprietary and intellectual property rights may increase as
our company expands outside of the United States.
Government Regulation
Introduction
The employee benefits industry is required to comply with extensive and complex U.S. laws and
regulations at the federal and state levels. Although many regulatory and governmental requirements do
not directly apply to our business, our customers are required to comply with a variety of U.S. laws, and
we may be impacted by these laws as a result of our contractual obligations. For many of these laws,
there is little history of regulatory or judicial interpretation upon which to rely.
Requirements of PPACA
Our business could be affected by changes in healthcare spending. PPACA changed how
healthcare services are covered, delivered and reimbursed through expanded coverage of uninsured
individuals, reduced Medicare program spending and insurance market reforms. PPACA, as enacted,
required states to expand Medicaid coverage significantly and establish health insurance exchanges to
facilitate the purchase of health insurance by individuals and small employers and provided subsidies to
states to create non-Medicaid plans for certain low-income residents. Insurers have experienced mixed
results providing services through the exchanges and many have exited this market. Increased volatility
following the repeal of the individual mandate in late 2017 could create more uncertainty.
Although numerous lawsuits challenged the constitutionality of PPACA, the U.S. Supreme Court
upheld the constitutionality of PPACA except for provisions that would have allowed the U.S. Department
of Health and Human Services, or HHS, to penalize states that did not implement the Medicaid expansion
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with the loss of existing federal Medicaid funding. Consequently, a number of states opted out of the
Medicaid expansion. Since that time, several states that initially opted out of the Medicaid expansion
changed their minds and expanded Medicaid after all. While many of the provisions of PPACA will not be
directly applicable to us, PPACA, as currently implemented, might affect the business of many of our
customers. Carriers and large employers might experience changes in the numbers of individuals they
insure as a result of Medicaid expansion and the creation of state and national exchanges, though it is
unclear how many states will decline to implement the Medicaid expansion or adopt state-specific
exchanges.
The long-term viability of PPACA remains in doubt. We expect that the current Congress and White
House will continue to seek ways to modify, repeal, or otherwise invalidate all, or certain provisions of
PPACA. For instance, on January 20, 2017, an executive order was issued which stated that it is the
U.S. federal government’s policy to seek the prompt repeal of PPACA, and directed the heads of all
executive departments and agencies to minimize the economic and regulatory burdens of PPACA to the
maximum extent permitted by law. Also, the December 2017 revisions to the tax code eliminated
PPACA’s individual mandate, which could destabilize the insurance markets. Should Congress or the
courts modify, repeal or otherwise invalidate PPACA or any parts of its provisions, the business of our
customers could be substantially affected.
Requirements Regarding the Confidentiality, Privacy and Security of Personal Information
HIPAA and Other Privacy and Security Requirements. There are numerous U.S. federal and state
laws and regulations related to the privacy and security of personal health information. In particular,
regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, establish privacy and security standards that limit the use and disclosure of protected health
information and require the implementation of administrative, physical and technical safeguards to ensure
the confidentiality, integrity, availability, and privacy of protected health information. Health plans,
healthcare clearinghouses and most providers are considered by the HIPAA regulations to be "Covered
Entities." With respect to our operations as a healthcare clearinghouse, we are directly subject to the
Privacy Rule and the Security Rule. In addition, our carrier customers, or payors, are considered to be
Covered Entities and are required to enter into written agreements with us, known as Business Associate
Agreements, under which we are considered to be a Business Associate and that require us to safeguard
protected health information and restrict how we may use and disclose such information. The Privacy
Rule extensively regulates the use and disclosure of protected health information by Covered Entities and
their Business Associates. For example, the Privacy Rule permits Covered Entities and their Business
Associates to use and disclose protected health information for treatment and to process claims for
payment, but other uses and disclosures, such as marketing communications, require written
authorization from the individual or must meet an exception specified under the Privacy Rule. The Privacy
Rule also provides patients with rights related to understanding and controlling how their health
information is used and disclosed. To the extent permitted by the Privacy Rule and our contracts with our
customers, we may use and disclose protected health information to perform our services and for other
limited purposes, such as creating de-identified information. Determining whether data has been
sufficiently de-identified to comply with the Privacy Rule and our contractual obligations may require
complex factual and statistical analyses and may be subject to interpretation. The Security Rule requires
Covered Entities and their Business Associates to implement and maintain administrative, physical and
technical safeguards to protect the security of protected health information that is electronically
transmitted or electronically stored.
If we are unable to properly protect the privacy and security of health information entrusted to us, we
could be found to have breached our contracts with our customers. Further, if we fail to comply with the
Privacy Rule, Security Rule, or Breach Notification Rule while acting as a Covered Entity or Business
Associate, we could face civil penalties of up to $55,910 per violation and a maximum civil penalty of
$1,677,299 in a calendar year for violations of the same requirement, in addition to criminal penalties.
Recently, the U.S. Department of Health and Human Services Office for Civil Rights, which enforces
HIPAA, appears to have increased its enforcement activities. Additionally, state attorneys general may
bring civil actions seeking either injunctions or damages in response to violations of HIPAA that threaten
the privacy of state residents.
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There are additional privacy and data security legal regimes at the federal and state level. For
example, the Federal Trade Commission, or FTC, regularly brings privacy and data enforcement actions
under Section 5 of the Federal Trade Commission Act, alleging that certain activities constitute unfair or
deceptive trade practices. The states have similar laws that prohibit unfair or deceptive trade practices.
There are also state data security laws and state laws that regulate the use and disclosure of health
information, among others. Further, by regulation, the FTC’s Red Flags Rule requires some financial
institutions and creditors, which may include some of our customers, to implement identity theft
prevention programs to detect, prevent and mitigate identity theft in connection with customer accounts.
We may be required to apply additional resources to our existing processes to assist our affected
customers in complying with this rule.
We have implemented and maintain physical, technical and administrative safeguards, including
written policies and procedures, intended to protect all personal data, including protected health
information, and have processes in place to assist us in complying with all applicable laws and
regulations regarding the protection of this data and properly responding to any data breaches or
incidents.
Data Breach Notification Laws. There are numerous federal and state laws that generally require
notice to affected individuals, regulators, and sometimes the media or credit reporting agencies in the
event of a data breach impacting personal information. For example, at the federal level, the HIPAA
Breach Notification Rule mandates notification of breaches affecting protected health information to
affected individuals and regulators under conditions set forth in the Rule. Covered Entities must report
breaches of unsecured protected health information to affected individuals without unreasonable delay,
but not to exceed 60 days of discovery of the breach by a Covered Entity or its agents. Notification must
also be made to HHS and, in certain circumstances involving large breaches, to the media. Business
Associates must report breaches of unsecured protected health information to Covered Entities within 60
days of discovery of the breach by the Business Associate or its agents. Nearly all states, the District of
Columbia, Guam, Puerto Rico, and the Virgin Islands have enacted data breach notification laws. While
some of these breach notification laws contain an exception for entities subject to HIPAA, other laws do
not, and may impose notification obligations in addition to, or inconsistent with, the HIPAA Breach
Notification Rule when a data breach implicates protected health information.
HIPAA Administrative Simplification
HIPAA also mandated a package of interlocking administrative simplification rules to establish
standards and requirements for the electronic transmission of certain healthcare claims and payment
transactions. These regulations are intended to encourage electronic commerce in the healthcare
industry and apply directly to Covered Entities. Some of our businesses, including our healthcare
clearinghouse operations, are considered Covered Entities under HIPAA and its implementing
regulations.
Transaction Standards. The standard transaction regulations established under HIPAA, or
Transaction Standards, mandate certain format and data content standards for the most common electronic
healthcare transactions, using technical standards promulgated by recognized standards publishing
organizations. These transactions include healthcare claims, enrollment, payment and eligibility. The
Transaction Standards are applicable to that portion of our business involving the processing of healthcare
transactions among payors, providers, patients and other healthcare industry constituents. Failure to comply
with the Transaction Standards may subject us to civil and potentially criminal penalties and breach of
contract claims. The Centers for Medicare and Medicaid Services, or CMS, is responsible for enforcing the
Transaction Standards.
Payors who are unable to exchange data in the required standard formats can achieve Transaction
Standards compliance by contracting with a clearinghouse to translate between standard and non-
standard formats. As a result, use of a clearinghouse has allowed numerous payors to establish
compliance with the Transaction Standards independently and at different times, reducing transition costs
and risks. In addition, the standardization of formats and data standards envisioned by the Transaction
Standards has only partially occurred. However, PPACA requires HHS to establish operating rules to
promote uniformity in the implementation of each standardized electronic transaction. We cannot provide
assurance regarding how the CMS will enforce the Transaction Standards. We have modified our
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systems and processes to implement the Transaction Standards and we continue to work with payors,
healthcare information system vendors and other healthcare constituents to maintain our implementation
of the Transaction Standards.
Health Plan and Other Entity Identifiers. HHS has promulgated regulations implementing the
establishment of a unique health plan identifier, or HPID. Similar to a provider’s national provider
identifier, the HPID provides an identification system for health plans to use for electronic transactions.
HHS has also promulgated regulations implementing another entity identifier, or OEID, that serves as an
identifier for entities that are not health plans, health care providers or individuals. These other entities,
which include third-party administrators, transaction vendors, and clearinghouses, are not required to
obtain an OEID, but they could obtain and use one if they needed to be identified in standardized
transactions. The implementation of the enforcement of the HPID and OEID process has been indefinitely
delayed by HHS, and if implemented its impact on our business is unclear at this time.
Financial Services Related Laws and Rules
Financial services and electronic payment processing services are subject to numerous laws,
regulations and industry standards, some of which might impact our operations and subject us, our
vendors and our customers to liability as a result of the payment distribution and processing solutions we
offer. Although we do not act as a bank, we offer solutions that involve banks, or vendors who contract
with banks and other regulated providers of financial services. As a result, we might be impacted by
banking and financial services industry laws, regulations and industry standards, such as licensing
requirements, solvency standards, requirements to maintain the privacy and security of nonpublic
personal financial information and Federal Deposit Insurance Corporation deposit insurance limits. In
addition, our patient billing and payment distribution and processing solutions might be impacted by
payment card association operating rules, certification requirements and rules governing electronic funds
transfers. If we fail to comply with applicable payment processing rules or requirements, we might be
subject to fines and changes in transaction fees and may lose our ability to process credit and debit card
transactions or facilitate other types of billing and payment solutions. Moreover, payment transactions
processed using the Automated Clearing House Network, or ACH, are subject to network operating rules
promulgated by the National Automated Clearing House Association and to various federal laws
regarding such operations, including laws pertaining to electronic funds transfers, and these rules and
laws might impact our billing and payment solutions. Further, our solutions might impact the ability of our
payor customers to comply with state prompt payment laws. These laws require payors to pay healthcare
claims meeting the statutory or regulatory definition of a “clean claim” within a specified time frame.
Banking Regulation
The Goldman Sachs Group, affiliates of which owned approximately 19.9% of the voting and
economic interest in our business as of December 31, 2017, is regulated as a bank holding company and
a financial holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act.
Due to the size of its voting and economic interest, we are deemed to be controlled by The Goldman
Sachs Group and are therefore considered to be a non-bank “subsidiary” of The Goldman Sachs Group
under the BHC Act. As a result, although we do not engage in banking operations, we are subject to
regulation, supervision, examination and potential enforcement action by the Board of Governors of the
Federal Reserve System, or the Federal Reserve, and to most banking laws, regulations and orders that
apply to The Goldman Sachs Group. In addition, certain restrictions applicable to Goldman Sachs under
the BHC Act apply to the Company as well, and we may be subject to regulatory oversight and
examination because we are a technology service provider to regulated financial institutions. The bank
regulatory framework is intended primarily to protect the safety and soundness of depository institutions,
the federal deposit insurance system, and depositors rather than our stockholders. Because of The
Goldman Sachs Group’s status as a bank holding company and a financial holding company, we have
agreed to certain covenants for the benefit of The Goldman Sachs Group that are intended to facilitate its
compliance with the BHC Act.
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank Act,
was signed into law by President Obama on July 21, 2010, including Title VI known as the “Volcker Rule”.
US financial regulators approved final rules to implement the Volcker Rule in December 2013. The
Volcker Rule, in relevant part, restricts banking entities from proprietary trading (subject to certain
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exemptions) and from acquiring or retaining any equity, partnership or other interests in, or sponsoring, a
private equity fund, subject to satisfying certain conditions, and from engaging in certain transactions with
funds. On February 3, 2017, President Trump signed an executive order entitled “Presidential Executive
Order on Core Principles for Regulating the United States Financial System”. The executive order
required the Secretary of the Treasury to consult with the heads of the member agencies of the Financial
Stability Oversight Council (including the Federal Reserve) and report to the president within 120 days of
the date of the executive order on the extent to which existing laws, regulations, and other policies
promote the core principles outlined in the order. The report was also required to identify any laws,
regulations, and other policies that inhibit financial regulation in a manner consistent with the core
principles. On June 12, 2017, the U.S. Department of the Treasury published a report identifying
regulations inconsistent with the principles articulated in the order. This was the first of a series of reports
and addressed only the depository system. Future reports are expected to address the regulation of
capital markets, the asset management and insurance industries, and nonbank financial services
companies. The extent to which this executive order and the required reports thereunder may ultimately
result in changes to financial services laws, regulations, and policies applicable to us is not currently
known.
Under the current legislation, we will continue to be deemed to be controlled by The Goldman Sachs
Group for purposes of the BHC Act and, therefore, we will continue to be subject to regulation by the
Federal Reserve and to the BHC Act, as well as certain other banking laws, regulations and orders that
apply to The Goldman Sachs Group. We will remain subject to this regulatory regime until The Goldman
Sachs Group is no longer deemed to control us for bank regulatory purposes, which we do not generally
have the ability to control and which will not occur until The Goldman Sachs Group has significantly
reduced its voting and economic interest in us. We cannot predict the ownership level at which the
Federal Reserve would consider us no longer controlled by The Goldman Sachs Group, but it could be
less than 10%.
The Goldman Sachs Group and its subsidiaries, including Benefitfocus, generally may conduct only
activities that are authorized for a bank holding company or a “financial holding company” under the BHC
Act. The scope of services we may provide to our customers is limited under the BHC Act to those which
are (i) financial in nature or incidental to financial activities (including data processing services such as
those that we provide with our software solutions) or (ii) complementary to a financial activity and which
do not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally. We believe that our current and anticipated business activities are permitted under the
BHC Act.
Any failure of The Goldman Sachs Group to maintain its status as a financial holding company could
result in substantial limitations on our activities and our growth. In particular, our permissible activities
could be further restricted to only those that constitute banking or activities closely related to banking. The
Goldman Sachs Group’s loss of its financial holding company status could be caused by several factors,
including any failure by The Goldman Sachs Group’s bank subsidiaries to remain sufficiently capitalized,
by any examination downgrade of one of The Goldman Sachs Group’s bank subsidiaries, or by any
failure of one of The Goldman Sachs Group’s bank subsidiaries to maintain a satisfactory rating under the
Community Reinvestment Act. In addition, The Goldman Sachs Group is required to remain “well
capitalized” and “well managed” to maintain its status as a financial holding company. We have no ability
to prevent such occurrences from happening.
The Federal Reserve has broad enforcement authority over us, including the power to prohibit us
from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an
unsafe or unsound practice in conducting our business. The Federal Reserve may approve, deny or
refuse to act upon applications or notices for The Goldman Sachs Group and its subsidiaries to conduct
new activities, acquire or divest businesses or assets, or reconfigure existing operations. The Federal
Reserve may also impose substantial fines and other penalties for violations of applicable banking laws,
regulations and orders. We do not believe that any of our current or anticipated business activities will
require Federal Reserve approval.
There are limits on the ability of The Goldman Sachs Group’s bank subsidiaries to extend credit to
or conduct other transactions with us. In general, any loans to us from a bank subsidiary of The Goldman
Sachs Group must be on market terms and secured by designated amounts of specified collateral and
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are limited to 10% of the lending bank’s capital stock and surplus. The Dodd-Frank Act places certain
additional restrictions on transactions between us and The Goldman Sachs Group, which we do not
expect to be material to us.
Geographic Areas
We operate solely in the United States. As such, we held substantially all our assets and generated
all our revenue in the United States during the fiscal years ended December 31, 2017, 2016 and 2015.
Corporate Information
We were incorporated in June 2000 as Benefitfocus.com, Inc., a South Carolina corporation. In
September 2013, we reincorporated in Delaware as Benefitfocus, Inc. Our principal executive offices are
located at 100 Benefitfocus Way, Charleston, South Carolina 29492, and our phone number is (843) 849-
7476. Our website address is www.benefitfocus.com. The information on, or that can be accessed
through, our website is not part of this report. We currently employ approximately 1,450 associates.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act,
are available free of charge on our website at www.benefitfocus.com as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and Exchange Commission. Such
reports may also be read and copied at the Securities and Exchange Commission’s Public Reference
Room at 100 F Street NE, Washington, D.C. 20549. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission at (800) SEC-
0330. The Securities and Exchange Commission also maintains a website (www.sec.gov) that includes
our reports, proxy statements and other information.
Executive Officers
The following table sets forth information concerning our executive officers as of March 15, 2018:
Name
Raymond A. August
Mason R. Holland, Jr.
Jonathon E. Dussault
James P. Restivo
Age
Position
56 President and Chief Executive Officer
53 Executive Chairman, Director
44 Chief Financial Officer, Treasurer
58 Chief Technology Officer
Raymond A. August—President and Chief Executive Officer
Raymond August has been our President and Chief Executive Officer since January 2018. Prior to
that, Mr. August served as our Chief Operating Officer since August 2014 and was promoted to the title of
President and Chief Operating Officer in March 2015. Prior to joining Benefitfocus, Mr. August served as
the General Manager of the Computer Sciences Corp. (now DXC Technology Co. (NYSE: DXC)), or
CSC, Financial Services Group since October 2012. Prior to that, from March 2008 to September 2012,
he served as CSC’s President of the Financial Services Group. Since July 2013 he has served as a
member of the Executive Advisory council for Arthur Ventures Private Equity Fund. Mr. August earned a
B.S. in Accounting and Management Science from the University of South Carolina and is a Certified
Public Accountant.
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Mason R. Holland, Jr.—Executive Chairman of the Board
Mason Holland, one of our founders, has been our Executive Chairman and a member of our board
of directors since our founding in June 2000. Mr. Holland is responsible for the coordination of strategic
partnerships with industry leaders and client relations. Mr. Holland founded American Pensions, Inc. in
1988, serving as its Chairman and President from 1988 to 2003. Mr. Holland’s other ventures have
included establishing Holland Properties, LLC, a real estate development firm, in 1989, and acquiring
Eclipse Aerospace, Inc., a jet aircraft manufacturer, in May 2009, for which he served as Chairman and
Chief Executive Officer until its merger with Kestrel Aircraft in April 2015 to form ONE Aviation. Mr.
Holland has served as Chairman of ONE Aviation since its formation. Mr. Holland attended Old Dominion
University in Norfolk, Virginia.
Jonathon E. Dussault—Chief Financial Officer
Jonathon Dussault has been our Chief Financial Officer since August 2017. He also serves as our
Treasurer. Prior to that, since July 2014, Mr. Dussault served as Senior Vice President and Senior
Finance Officer of WEX Health, Inc. (formerly Evolution1, Inc.), a leading provider of health savings
account cloud-based technology and payment solutions for the healthcare industry and a subsidiary of
global payments processing company, WEX Inc. (NYSE: WEX). Prior to that, beginning in April 2003, Mr.
Dussault served in multiple roles at Evolution1, most recently as Chief Financial Officer, from December
2011 until its acquisition by WEX. From April 2003 to July 2010, Mr. Dussault also was Vice President of
Corporate Development at Women’s Health USA, Inc. and, prior to that, was responsible for financial
planning and analysis at Open Solutions, Inc. Mr. Dussault began his career at Arthur Andersen LLP. He
holds a B.S. in accounting from Babson College and earned his CPA certification in Massachusetts.
James P. Restivo—Chief Technology Officer
James Restivo has been our Chief Technology Officer since January 2016. Prior to joining
Benefitfocus, Mr. Restivo served as Vice President, Chief Technology Officer of Dodge Data & Analytics
LLC beginning in February 2015. From December 2012 to September 2014, Mr. Restivo served as Vice
President, Chief Technology Officer of Smarter Workforce at International Business Machines
Corporation, or IBM (NYSE: IBM). Prior to that, beginning in October 2006, Mr. Restivo served as Chief
Technology Officer of Kenexa Corporation where he managed global public Human Capital Management
R&D, SaaS operations and information security before the company was purchased by IBM. Mr. Restivo
received a B.S. in computer science, applied mathematics and statistics from Stony Brook University and
an M.S. from the Massachusetts Institute of Technology in computer science.
As of December 31, 2017, we had approximately 1,450 full-time associates. None of our associates
is represented by a labor union, and we consider our current relations with our associates to be good.
21
PART II
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of
operations together with our consolidated financial statements and the related notes and other financial
information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in
this discussion and analysis or set forth elsewhere in this report including information with respect to our
plans and strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the “Risk Factors” section of this report beginning on page 19 for a
discussion of important factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the following discussion and
analysis.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers,
employers, insurance carriers, and brokers. The Benefitfocus Platform simplifies how organizations and
individuals shop for, enroll in, manage, and exchange benefits. Our employer and insurance carrier
customers rely on our platform to manage, scale and exchange data. Our web-based platform has a user-
friendly interface designed to enable the insured consumers to access all of their benefits in one place.
Our comprehensive solutions support core benefits plans, including healthcare, dental, life, and disability
insurance, and voluntary benefits offerings such as income protection, digital health and financial
wellness. As the number of employer benefits plans has increased, with each plan subject to many
different business rules and requirements, demand for the Benefitfocus Platform has grown.
We serve two separate but related market segments. The employer market which consists of
employers offering benefits to their employees. Within this segment, we mainly target large employers
with more than 1,000 employees, of which we believe there are over 18,000 in the United States. In our
other market segment, we sell our solutions to insurance carriers, enabling us to expand our overall
footprint in the benefits marketplace by aggregating many key constituents, including consumers,
employers, and brokers. Our business model capitalizes on the close relationship between carriers and
their members, and the carriers’ ability to serve as lead generators for potential employer customers.
Carriers pay for services at a rate reflective of the aggregated nature of their customer base on a per
application basis. Carriers can then deploy their applications to employer groups and members. As
employers become direct customers through our employer segment, we provide them our platform
offering that bundles many software applications into a comprehensive benefits solution through
Benefitfocus Marketplace. We believe our presence in both the employer and insurance carrier markets
gives us a strong position at the center of the benefits ecosystem.
We sell the Benefitfocus Platform on a subscription basis, typically through annual contracts with
employer customers and multi-year contracts with our insurance carrier customers, with subscription fees
paid monthly, quarterly and annually. The multi-year contracts with our carrier customers are generally
only cancellable by the carrier in an instance of our uncured breach, although some of our carrier
customers are able to terminate their respective contracts without cause or for convenience. Software
services revenue accounted for approximately 85%, 87%, and 87% of our total revenue during the years
ended December 31, 2017, 2016 and 2015, respectively.
Another component of our revenue is professional services. We derive the majority of our
professional services revenue from the implementation of our customers onto our platform, which typically
includes discovery, configuration and deployment, integration, testing, and training. In general, it takes
from four to six months to implement a new employer customer’s benefits systems and eight to 10 months
to implement a new carrier customer’s benefits systems. We also provide customer support services and
customized media content that supports our customers’ effort to educate and communicate with
consumers. Professional services revenue accounted for approximately 15%, 13%, and 13% of our total
revenue during the years ended December 31, 2017, 2016 and 2015, respectively.
22
Increasing our base of large employer customers is an important source of revenue growth for us.
We actively pursue new employer customers in the U.S. market, and we have increased the number of
large employer customers utilizing our solutions from 141 as of December 31, 2010 to 920 as of
December 31, 2017, a 30.7% compound annual growth rate. We believe that our continued innovation
and new solutions, such as online benefits marketplaces, also known as private exchanges, account
services, enhanced mobile offerings, and more robust data analytics capabilities will help us attract
additional large employer customers and increase our revenue from existing customers.
We believe that there is a substantial market for our services, and we have been investing in growth
over the past six years. In particular, we have continued to invest in technology and services to better
serve our larger employer customers, which we believe are an important source of growth for our
business. We have also substantially increased our marketing and sales efforts and expect those
increased efforts to continue. As we have invested in growth, we have had operating losses in each of the
last seven years, and expect our operating losses to continue for at least the next year. Due to the nature
of our customer relationships, which have been stable in spite of some customer losses over the past
years, and the subscription nature of our financial model, we believe that our current investment in growth
should lead to substantially increased revenue, which will 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.
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current
performance and project our future performance. These metrics help us develop and refine our growth
strategies and make strategic decisions. We discuss revenue, gross margin, and the components of
operating loss, as well as segment revenue and segment gross profit, in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Components of Operating Results”. In
addition, we utilize other key metrics as described below.
Number of Large Employer and Carrier Customers
We believe the number of large employer and carrier customers is a key indicator of our market
penetration, growth, and future revenue. We have aggressively invested in and intend to continue to
invest in our sales function to grow our customer base. We generally define a customer as an entity with
an active software services contract as of the measurement date. The following table sets forth the
number of large employer and carrier customers for the periods indicated:
Number of customers:
Large employer
Carrier
Year Ended December 31,
2017
2016
2015
920
54
833
53
723
54
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us
over time is an important component of our growth strategy and reflects the long-term value of our
customer relationships. We measure our performance on this basis using a metric we refer to as our
software services revenue retention rate. We calculate this metric for a particular period by establishing
the group of our customers that had active contracts for a given period. We then calculate our software
services revenue retention rate by taking the amount of software services revenue we recognized for this
group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the
software services revenue we recognized for the group in the prior period.
For 2017, 2016 and 2015 our software services revenue retention rate exceeded 95%.
23
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest and other expense, taxes, and
depreciation and amortization expense, adjusted to eliminate stock-based compensation and impairment
of goodwill and intangible assets and costs not core to our business. Adjusted EBITDA is not a measure
calculated in accordance with United States generally accepted accounting principles, or GAAP. Please
refer to “Selected Consolidated Financial Data—Adjusted EBITDA” in this report for a discussion of the
limitations of adjusted EBITDA and reconciliation of adjusted EBITDA to net loss, the most comparable
GAAP measurement, respectively, for 2017, 2016 and 2015.
Components of Operating Results
Revenue
We derive the majority of our revenue from software services fees, which consist primarily of
monthly subscription fees paid to us by our employer and carrier customers for access to, and usage of,
our cloud-based benefits software solutions for a specified contract term. We also derive revenue from
professional services fees, which primarily include fees related to the implementation of our customers
onto our platform. Our professional services typically include discovery, configuration and deployment,
integration, testing, and training.
The following table sets forth a breakdown of our revenue between software services and
professional services for the periods indicated (in thousands):
Software services
Professional services
Total revenue
2017
Year Ended December 31,
2016
2015
$
$
218,443 $
38,292
256,735 $
201,797 $
31,538
233,335 $
161,477
23,666
185,143
We generally recognize software services fees monthly based on the number of employees covered
by the relevant benefits plans at contracted rates for a specified period of time, provided that an
enforceable contract has been signed by both parties, access to our software has been granted to the
customer and it is available for their use, the fee for the software services is fixed or determinable, and
collection is reasonably assured.
We defer recognition of our professional services fees paid by customers related to implementation
services that are determined to not have stand-alone value and are sold with our software services, and
recognize them, beginning once the related software services have commenced, ratably over the longer
of the contract term or the estimated expected life of the customer relationship, which was 7 years. We
periodically evaluate the term over which revenue is recognized for professional services to reflect our
experience with customer contract renewals.
As of July 1, 2015, we determined that we had established standalone value for the implementation
services for the Benefitfocus Marketplace solution in the Employer segment as they are now sold
separately from the software services. This was primarily due to the system integrators that have been
trained and certified to perform these implementation services, the successful completion of an
implementation by a trained system integrator, and the sale of several software subscription
arrangements to customers in the Employer segment without the Company’s implementation services.
Accordingly, revenues related to implementation services for the Benefitfocus Marketplace solution in the
Employer segment that are delivered after July 1, 2015 are recognized separately from the revenues
earned from the Employer software subscription services. Revenues related to such implementation
services are recognized at the time that the professional services have been completed and the related
software services have commenced. Prior to July 1, 2015, we did not have standalone value for
implementation services related to the Benefitfocus Marketplace solution as we had historically performed
these services to support our customers’ implementation of this solution. The incremental revenue from
recognition of services upon delivery compared to recognition over the customer relationship period of 7
years was $2.3 million in twelve months ended December 31, 2015.
24
We generally invoice our employer and carrier customers for software services in advance, in
monthly, quarterly or annual installments. We invoice our employer customers for implementation fees at
the inception of the arrangement. We generally invoice our carrier customers for implementation fees at
various contractually defined times throughout the implementation process. Implementation fees that
have been invoiced are initially recorded as deferred revenue until recognized to revenue as described
above.
We earn commissions from brokerage services from our voluntary benefit insurance offerings. We
recognize revenue when these commissions are earned.
We will adopt the new revenue accounting standard on January 1, 2018. The new standard will
significantly affect how we recognize revenue for our products and services. The expected effects of the
new accounting standard are included in Note 2 to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
Overhead Allocation
Expenses associated with our facilities, security, information technology, and depreciation and
amortization, are allocated between cost of revenue and operating expenses based on employee
headcount determined by the nature of work performed.
Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits,
bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing
services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of
revenue include co-location facility costs for our data centers, depreciation expense for computer
equipment directly associated with generating revenue, infrastructure maintenance costs, professional
fees, amortization expenses associated with capitalized software development costs, allocated overhead,
and other direct costs.
We expense our cost of revenue as we incur the costs. However, the related revenue from fees we
receive for our implementation services, performed before a customer is operating on our platform, that is
determined to not have stand-alone value is deferred until the commencement of the monthly subscription
and recognized as revenue ratably over the longer of the related contract term or the estimated expected
life of the customer relationship. For those implementation services that have standalone value, the
related revenue is recognized as revenue upon completion of service. Therefore, the cost incurred in
providing these services is expensed in periods prior to the recognition of the corresponding revenue. Our
cost associated with providing implementation services has been significantly higher as a percentage of
revenue than our cost associated with providing our monthly subscription services due to the labor
associated with implementation.
We plan to continue to expand our capacity to support our growth, which will result in higher cost of
revenue in absolute dollars. However, we expect cost of revenue as a percentage of revenue to decline
and gross margins to increase primarily from the growth of the percentage of our revenue from large
employers and the realization of economies of scale driven by retention of our customer base.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and
administrative expenses. Salaries and personnel-related costs are the most significant component of
each of these expense categories. We expect to continue to hire new associates in these areas in order
to support our anticipated revenue growth; however, we expect to decrease our operating expenses, as a
percentage of revenue, as we achieve economies of scale.
Sales and marketing expense. Sales and marketing expense consists primarily of salaries and
other personnel-related costs, including benefits, bonuses, stock-based compensation, and commissions
for our sales and marketing associates. We record expense for commissions at the time of contract
signing. Additional expenses include advertising, lead generation, promotional event programs, corporate
25
communications, travel, and allocated overhead. For instance, our most significant promotional event is
our annual user and partner conference, One Place, which we have held annually. We expect our sales
and marketing expense to increase, in absolute dollars, in the foreseeable future as we further increase
the number of our sales and marketing professionals and expand our marketing activities in order to
continue to grow our business.
Research and development expense. Research and development expense consists primarily of
salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation
for our research and development associates. Additional expenses include costs related to the
development, quality assurance, and testing of new technology, and enhancement of our existing
platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in
research and development efforts is essential to maintaining our competitive position. We expect our
research and development expense to decrease, as a percentage of revenue, as we achieve economies
of scale.
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 increase in absolute terms as a result
of ongoing public company costs, including those associated with compliance with the Sarbanes-Oxley
Act and other regulations governing public companies, increased costs of directors’ and officers’ liability
insurance, and increased professional services expenses, particularly associated with the implementation
of new accounting standards.
Other Income and Expense
Other income and expense consists primarily of interest income and expense and gain (loss) on
disposal of property and equipment. Interest income represents interest received on our cash and cash
equivalents and marketable securities. Interest expense consists primarily of the interest incurred on
outstanding borrowings under our financing obligations, capital leases and credit facility.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes. We incurred minimal income
tax expense for 2017, 2016, and 2015. Net operating loss carryforwards for federal income tax purposes
were $253.9 million at December 31, 2017. State net operating loss carryforwards were approximately
$221.2 million at December 31, 2017. Federal and state net operating loss carryforwards will expire at
various dates beginning in 2022, if not utilized. Valuation allowances are recorded to reduce deferred tax
assets to the amount we believe is more likely than not to be realized.
On December 22, 2017, the Tax Cuts & Jobs Act (“Tax Reform”) was enacted. Among other things,
we expect that the primary provision of Tax Reform to affect us will be the reduction to the U.S. corporate
income tax rate from 35% to 21%. Accordingly, we revalued our deferred tax assets and liabilities to
reflect the enacted tax rate and adjusted our valuation allowance. As of December 31, 2017, we have
completed our accounting for the income tax effects of Tax Reform except for the impact of state tax
conformity of each change and further evaluation of executive compensation. We are not able to
determine a reasonable estimate for these items and expect to complete our analysis during 2018 as
states make known their conformity with federal tax laws and additional transition guidance is provided
related to executive compensation.
26
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).
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Sales and marketing(1)
Research and development(1)
General and administrative(1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Year Ended December 31,
2017
2016
2015
$
256,735 $
124,156
132,579
233,335 $
120,681
112,654
69,280
49,549
27,268
146,097
(13,518 )
182
(7,450 )
(4,931 )
(140 )
(12,339 )
(25,857 )
15
(25,872 ) $
55,488
56,584
32,750
144,822
(32,168 )
138
(6,826 )
(1,095 )
(90 )
(7,873 )
(40,041 )
17
(40,058 ) $
$
185,143
102,851
82,292
58,589
52,250
25,727
136,566
(54,274 )
188
(7,092 )
(877 )
(4 )
(7,785 )
(62,059 )
25
(62,084 )
(1) Cost of revenue and operating expenses include stock-based compensation expense as follows (in
thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
2017
Year Ended December 31,
2016
2015
2,508 $
4,953
2,990
5,686
2,798 $
3,213
4,532
7,545
1,950
2,861
2,399
3,244
The following table sets forth our consolidated statements of operations data as a percentage of
revenue for each of the periods indicated (as a percentage of revenue).
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
27
Year Ended December 31,
2017
2016
2015
100.0 %
48.4
51.6
100.0 %
51.7
48.3
100.0 %
55.6
44.4
27.0
19.3
10.6
56.9
(5.3 )
0.1
(2.9 )
(1.9 )
(0.1 )
(4.8 )
(10.1 )
-
(10.1 ) %
23.8
24.3
14.0
62.1
(13.8 )
0.1
(2.9 )
(0.5 )
-
(3.4 )
(17.2 )
-
(17.2 ) %
31.6
28.2
13.6
73.8
(29.3 )
0.1
(3.8 )
(0.5 )
-
(4.2 )
(33.5 )
-
(33.5 ) %
Our Segments
The following table sets forth segment results for revenue and gross profit for the periods indicated
(in thousands):
Revenue from external customers by segment:
Employer
Carrier
Total net revenue from external customers
Gross profit by segment
Employer
Carrier
Total gross profit by segment
2017
Year Ended December 31,
2016
2015
$
$
$
$
163,978 $
92,757
256,735 $
68,735 $
63,844
132,579 $
140,522 $
92,813
233,335 $
53,031 $
59,623
112,654 $
94,842
90,301
185,143
33,655
48,637
82,292
Comparison of Years Ended December 31, 2017 and 2016
Revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 218,443
38,292
$ 256,735
(in thousands)
85.1 % $ 201,797
31,538
14.9
100.0 % $ 233,335
86.5 % $ 16,646
6,754
13.5
100.0 % $ 23,400
8.2 %
21.4
10.0 %
Software services
Professional services
Total revenue
Growth in software services revenue was primarily attributable to existing customers adding covered
users to our offerings, or volume increases, and also to existing customers purchasing additional products
as well as to the net addition of new customers, as the number of large employer and carrier customers
increased to 974 as of December 31, 2017 from 886 as of December 31, 2016.
The increase in professional services revenue was in part attributable to the recognition of $2.5
million of implementation services provided to newly activated customers and new products provided to
existing customers, and the remainder from providing consulting services and enhancements to existing
customers.
Segment Revenue
Employer
Carrier
Total revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 163,978
92,757
$ 256,735
(in thousands)
63.9 % $ 140,522
92,813
36.1
100.0 % $ 233,335
60.2 % $ 23,456
(56 )
39.8
100.0 % $ 23,400
16.7 %
(0.1 )
10.0 %
Growth in our employer revenue was primarily attributable to a $17.6 million increase in our
employer software services revenue driven mostly by new customers and volume increases, as well as
additional products sold to existing customers. Additionally, employer professional services revenue
increased $5.8 million due to implementation revenue from new customers and customer consulting to
existing customers.
The slight decrease in carrier revenue was primarily attributable to a $0.9 million increase in
professional services revenue, offset by a decrease of $1.0 million in software services revenue. The
28
professional services revenue increase was primarily driven by additional support and discovery services
to existing customers. Carrier software services revenue decreased as volume decreases from existing
customers exceeded increases in revenue from new customers.
Cost of Revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Cost of revenue
$ 124,156
(in thousands)
48.4 % $ 120,681
51.7 % $
3,475
2.9 %
The increase in cost of revenue in absolute terms was primarily attributable to an increase in
salaries and personnel-related costs to support an increased number of customers and volume, as well
as professional fees associated with third-party deliveries. This increase included a decrease in stock-
based compensation of $0.3 million. Cost of revenue as a percentage of revenue has continued to
decrease as a result of economies of scale as our revenues have grown.
Gross Profit
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Software services
Professional services
Gross profit
$ 134,051
(1,472 )
$ 132,579
(in thousands)
61.4 % $ 122,686
(10,032 )
(3.8 )
51.6 % $ 112,654
60.8 % $ 11,365
8,560
(31.8 )
48.3 % $ 19,925
9.3 %
(85.3 )
17.7 %
The increase in software services gross profit was driven by a $16.6 million, or 8.2%, increase in
software services revenue. This increase was partially offset by a $5.3 million, or 6.7%, increase in
software services cost of revenue. Software services cost of revenue included $1.7 million of stock-based
compensation expense for each of the years ended December 31, 2017 and 2016, and $10.4 million and
$8.9 million of depreciation and amortization for the years ended December 31, 2017 and 2016,
respectively.
The improvement in professional services gross loss was driven by a $6.8 million, or 21.4%,
increase in professional services revenue and a decrease in professional services cost of revenue of $1.8
million. Professional services cost of revenue included $0.8 million and $1.1 million of stock-based
compensation expense for the years ended December 31, 2017 and 2016, respectively. In addition,
professional services cost of revenue included $1.4 million and $1.2 million in depreciation and
amortization for the years ended December 31, 2017 and 2016, respectively.
As discussed in “Components of Operating Results—Cost of Revenue”, we expense our cost of
revenue as we incur the costs. However, recognition of the related revenue from implementation services
performed before a customer is operating on our platform generally is deferred until the commencement
of the monthly subscription. We recognize the revenue ratably over the longer of the related contract term
or the estimated expected life of the customer relationship, which is 7 years. Therefore, we expense the
cost incurred in providing these services prior to the recognition of the corresponding revenue.
29
Segment Gross Profit
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 68,735
63,844
$ 132,579
(in thousands)
41.9 % $ 53,031
68.8
59,623
51.6 % $ 112,654
37.7 % $ 15,704
64.2
4,221
48.3 % $ 19,925
29.6 %
7.1
17.7 %
Employer
Carrier
Gross profit
The increase in employer gross profit was driven by a $23.5 million, or 16.7%, increase in employer
revenue being only partially offset by a $7.8 million, or 8.9%, increase in employer cost of revenue as we
continued to achieve economies of scale. The increase in cost of revenue was primarily attributable to
increased personnel-related costs to support our customer base as well as increased depreciation and
amortization, technology infrastructure costs and security-related costs. Our employer cost of revenue
included $1.9 million and $2.0 million of stock-based compensation expense for the years ended
December 31, 2017 and 2016, respectively. In addition, our employer cost of revenue included $7.3
million and $5.8 million of depreciation and amortization for the years ended December 31, 2017 and
December 31, 2016, respectively.
The increase in carrier gross profit was driven by a decrease in carrier cost of revenue of $4.3
million, or 12.8%, in combination with carrier revenue being essentially flat. The decrease in cost of
revenue was attributable to operational efficiencies achieved in supporting our carrier customers and a
decrease in customer-specific development, as opposed to platform enhancements and development.
Our carrier cost of revenue included $0.6 million and $0.8 million of stock-based compensation expense
for the years ended December 31, 2017 and 2016, respectively. In addition, our carrier cost of revenue
included $4.5 million and $4.2 million in depreciation and amortization for the years ended December 31,
2017 and 2016, respectively.
Operating Expenses
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Sales and marketing
Research and development
General and administrative
$ 69,280
$ 49,549
$ 27,268
(in thousands)
27.0 % $ 55,488
19.3 % $ 56,584
10.6 % $ 32,750
23.8 % $ 13,792
(7,035 )
24.3 % $
(5,482 )
14.0 % $
24.9 %
(12.4 ) %
(16.7 ) %
The increase in sales and marketing expense was attributable to $9.0 million higher salaries and
personnel-related costs as we continued to invest in our direct sales channel. We increased the number
sales associates during 2017, including hiring our Executive Vice-President, Global Sales. This increase
included $1.7 million increase in stock-based compensation. Additionally, travel-related expenses
increased $2.6 million and marketing expense, professional fees, technology infrastructure costs and
other operating costs increased by $1.8 million.
The decrease in research and development expense reflects a $3.5 million decrease in salaries and
personnel-related costs as the result of a decrease in the number of associates engaged in research and
development activities. This decrease includes a $1.5 million decrease in stock-based compensation.
Additionally, costs related to external development and engineering consulting decreased $3.2 million.
The decrease in general and administrative expense was partly attributable to a $1.8 million
decrease in salaries and personnel-related costs, which includes a decrease in stock-based
compensation expense of $1.3 million. Sales tax expense decreased $1.6 million related to resolving
liabilities in certain states. We experienced additional decreases in professional and consulting fees of
$1.0 million attributable to discontinuing the use of certain consultants during 2017 and a decrease in bad
debt expense of $0.6 million.
30
Comparison of Years Ended December 31, 2016 and 2015
Revenue
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 201,797
31,538
$ 233,335
(in thousands)
86.5 % $ 161,477
23,666
13.5
100.0 % $ 185,143
87.2 % $ 40,320
7,872
12.8
100.0 % $ 48,192
25.0 %
33.3
26.0 %
Software services
Professional services
Total revenue
Growth in software services revenue was primarily attributable to existing customers adding covered
users to our offerings, or volume increases, and also to existing customers purchasing additional products
as well as to the net addition of new customers, as the number of large employer and carrier customers
increased to 886 as of December 31, 2016 from 777 as of December 31, 2015.
The increase in professional services revenue was in part attributable to the recognition of $7.5
million of implementation services provided to newly activated customers, new products provided to
existing customers and $4.3 million attributable to the acceleration of the customer relationship period for
certain customers.
Segment Revenue
Employer
Carrier
Total revenue
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 140,522
92,813
$ 233,335
(in thousands)
60.2 % $ 94,842
90,301
39.8
100.0 % $ 185,143
51.2 % $ 45,680
2,512
48.8
100.0 % $ 48,192
48.2 %
2.8
26.0 %
Growth in our employer revenue was primarily attributable to a $42.9 million increase in our
employer software services revenue driven primarily by new customers and volume increases, as well as
additional products sold to existing customers. Additionally, employer professional services revenue
increased $2.7 million, including a $0.7 million increase from services with standalone value.
The increase in carrier revenue in absolute terms was primarily attributable to a $5.1 million
increase in professional services revenue, offset by a decrease of $2.6 million in software services
revenue. The professional services revenue increase was primarily driven by implementations related to
additional products with existing customers and the acceleration of the customer relationship period for
certain customers. Carrier software services revenue decreased as volume decreases from existing
customers exceeded increases in revenue from new customers.
Cost of Revenue
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Cost of revenue
$ 120,681
(in thousands)
51.7 % $ 102,851
55.6 % $ 17,830
17.3 %
The increase in cost of revenue in absolute terms was in part attributable to a $14.4 million increase
in salaries and personnel-related costs to support an increased number of customers and volume, as well
as professional fees associated with third-party deliveries. This increase included an increase in stock-
based compensation of $0.9 million. The remaining increase was attributable to other operating expenses
related to security, technology infrastructure, depreciation and amortization, and facilities costs to support
31
our organization. However, cost of revenue as a percentage of revenue has continued to decrease as a
result of economies of scale as our revenues have grown.
Gross Profit
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Software services
Professional services
Gross profit
$ 122,686
(10,032 )
$ 112,654
(in thousands)
60.8 % $ 102,301
(31.8 )
(20,009 )
48.3 % $ 82,292
63.4 % $ 20,385
(84.5 )
9,977
44.4 % $ 30,362
19.9 %
(49.9 )
36.9 %
The increase in software services gross profit was driven by a $40.3 million, or 25.0%, increase in
software services revenue. This increase was partially offset by a $19.9 million, or 33.7%, increase in
software services cost of revenue. Software services cost of revenue included $1.7 million and $0.9
million of stock-based compensation expense for the years ended December 31, 2016 and 2015,
respectively, and $8.9 million and $7.7 million of depreciation and amortization for the years ended
December 31, 2016 and 2015, respectively.
The improvement in professional services gross loss was driven by a $7.9 million, or 33.3%,
increase in professional services revenue and a decrease in professional services cost of revenue of $2.1
million. Professional services cost of revenue included $1.1 million and $1.0 million of stock-based
compensation expense for the years ended December 31, 2016 and 2015, respectively. In addition,
professional services cost of revenue included $1.2 million and $1.4 million in depreciation and
amortization for the years ended December 31, 2016 and 2015, respectively.
As discussed in “Components of Operating Results—Cost of Revenue”, we expense our cost of
revenue as we incur the costs. However, recognition of the related revenue from implementation services
performed before a customer is operating on our platform is generally deferred until the commencement
of the monthly subscription. Beginning at that time, we recognize the revenue ratably over the longer of
the related contract term or the estimated expected life of the customer relationship, which is 7 years.
Therefore, we expense the cost incurred in providing these services prior to the recognition of the
corresponding revenue.
Segment Gross Profit
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 53,031
59,623
$ 112,654
(in thousands)
37.7 % $ 33,655
64.2
48,637
48.3 % $ 82,292
35.5 % $ 19,376
53.9
10,986
44.4 % $ 30,362
57.6 %
22.6
36.9 %
Employer
Carrier
Gross profit
The increase in employer gross profit was driven by a $45.7 million, or 48.2%, increase in employer
revenue being only partially offset by a $26.3 million, or 43.0%, increase in employer cost of revenue as
we continued to achieve economies of scale. The increase in cost of revenue was primarily attributable
to increased personnel-related costs to support our customer base as well as increased depreciation and
amortization, technology infrastructure costs and security-related costs. Our employer cost of revenue
included $5.8 million and $4.6 million of depreciation and amortization for the years ended December 31,
2016 and December 31, 2015, respectively. In addition, our employer cost of revenue included $2.0
million and $1.0 million of stock-based compensation expense for the years ended December 31, 2016
and 2015, respectively.
32
The increase in carrier gross profit was driven by an increase in carrier revenue of $2.5 million, or
2.8%, in combination with a decrease in carrier cost of revenue of $8.5 million, or 20.3%. The decrease in
cost of revenue was primarily attributable to a decrease in customer-specific development, as opposed to
platform enhancements and development. Our carrier cost of revenue included $4.2 million and $4.5
million in depreciation and amortization for the years ended December 31, 2016 and December 31, 2015,
respectively. In addition, our carrier cost of revenue included $0.8 million and $0.9 million of stock-based
compensation expense for the years ended December 31, 2016 and 2015, respectively.
Operating Expenses
Year Ended December 31,
2016
Percentage of
Revenue
Amount
2015
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Sales and marketing
Research and development
General and administrative
$ 55,488
$ 56,584
$ 32,750
(in thousands)
23.8 % $ 58,589
24.3 % $ 52,250
14.0 % $ 25,727
31.6 % $
28.2 % $
13.9 % $
(3,101 )
4,334
7,023
(5.3 ) %
8.3 %
27.3 %
The decrease in sales and marketing expense was attributable to lower compensation expenses,
including the impact of a significant carrier deal that occurred in the first quarter of 2015 and a large
employer deal that occurred in the third quarter of 2015, as well as the departure of the Chief Commercial
Officer in the fourth quarter of 2015. Additionally, we experienced efficiencies that reduced travel-related
expenses by $0.9 million and experienced a $0.6 million decrease in other operating expenses.
The increase in research and development expense in absolute terms was primarily attributable to a
$4.5 million increase in salaries and personnel-related costs, including an increase in stock-based
compensation of $2.1 million comprised of $0.5 million for the accrual of separation benefits related to the
departure of our former Chief Technology Officer and $1.6 million attributable to equity awards granted to
new and existing research and development associates. These increases were offset by a $2.0 million
increase of personnel-related cost capitalized as part of software development. Additionally, we
experienced a $0.9 million increase in engineering consulting fees for assistance in product development
and a $0.9 million increase in technology infrastructure costs.
The increase in general and administrative expense was primarily attributable to a $5.7 million
increase in salaries and personnel-related costs comprised of a $4.3 million increase in stock-based
compensation expense and a $1.2 million increase due to additional general and administrative
headcount and the accrual of separation benefits related the retirement of our former Chief Financial
Officer. The increase in stock-based compensation is partly attributable to the issuance of stock-based
awards in lieu of cash compensation to certain senior executives and a $3.5 million increase in stock-
based compensation expense due to additional grants. We also experienced a $1.2 million increase in
facilities costs, depreciation expense and technology infrastructure 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.
While our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following
accounting policies are critical to the process of making significant judgments and estimates in the
preparation of our consolidated financial statements.
33
Revenue Recognition and Deferred Revenue
We derive the majority of our revenue from software services fees, which consist primarily of
monthly subscription fees paid by customers for access to and usage of our cloud-based benefits
software solutions for a specified contract term. We also derive revenue from professional services which
primarily include fees related to the integration of customers’ systems with our platform, which typically
includes discovery, configuration, deployment, testing, and training.
We recognize revenue when there is persuasive evidence of an arrangement, the service has been
provided, the fees to be paid by the customer are fixed and determinable and collectability is reasonably
assured. We consider delivery of our cloud-based software services has commenced once access to a
configured and live instance on our platform has been delivered.
Our arrangements generally contain multiple elements comprised of software services and
professional services. We evaluate each element in an arrangement to determine whether it represents a
separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item
has standalone value and delivery of the undelivered element is probable and within our control.
When multiple deliverables included in an arrangement are separable into different units of
accounting, the arrangement consideration is allocated to the identified units of accounting based on their
relative selling price. Multiple deliverable arrangements accounting guidance provides a hierarchy to use
when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence
(“VSOE”) of selling price, based on the price at which the item is regularly sold by the vendor on a
standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence
(“TPE”) of selling price is used to establish the selling price if it exists. VSOE and TPE do not currently
exist for any of our deliverables. Accordingly, for arrangements with multiple deliverables that can be
separated into different units of accounting, the arrangement fee is allocated to the separate units of
accounting based on our best estimate of selling price. The amount of arrangement fee allocated is
limited by contingent revenues, if any.
Effective July 1, 2015, we determined that we had established standalone value for Benefitfocus
Marketplace implementation services in the Employer segment as they are now sold separately from the
software services. This was primarily due to the system integrators that have been trained and certified to
perform these implementation services, the successful completion of an implementation by a trained
system integrator, and the sale of several software subscription arrangements to customers in the
Employer segment without our implementation services. Accordingly, revenues related to implementation
services for the Benefitfocus Marketplace solution in the Employer segment that are delivered after
July 1, 2015 are recognized separately from the revenues earned from the Employer software
subscription services. Revenues related to such implementation services are recognized at the time that
the professional services have been completed and the related software services have commenced. Prior
to July 1, 2015, we did not have standalone value for implementation services related to the Benefitfocus
Marketplace solution as we had historically performed these services to support customers’
implementation of this solution. The incremental revenue from recognition of services upon delivery
compared to recognition over the customer relationship period of 7 years was $2.3 million for the twelve
months ended December 31, 2015.
Certain of our other professional services, including implementation services related to the Carrier
segment, are not sold separately from the software services and there is no alternative use for them. As
such, we have determined that those professional services do not have standalone value. Accordingly,
software services and professional services are combined and recognized as a single unit of accounting.
We generally recognize software services fees monthly based on the number of employees covered by
the relevant benefits plans at contracted rates for a specified period of time, once the criteria for revenue
recognition described above have been satisfied. We recognize revenue on Benefitfocus Marketplace
implementation services in the Employer segment that have standalone value at the time the services
have been completed. We defer recognition of revenue for fees from professional services that do not
have standalone value and begin recognizing such revenue once the services are delivered and the
related software services have commenced, ratably over the longer of the contract term or the estimated
expected life of the customer relationship. Costs incurred by us in connection with providing such
professional services are charged to expense as incurred and are included in “Cost of revenue.”
34
We also earn commissions from brokerage services from our voluntary benefit insurance offerings.
We recognize revenue when these commissions are earned.
We will adopt the new revenue accounting standard on January 1, 2018. The new standard will
significantly affect how we recognize revenue for our products and services. The expected effects of the
new accounting standard are included in Note 2 to our consolidated financial statements appearing
elsewhere in this Annual Report on Form 10-K.
Accounts Receivable and Allowances for Doubtful Accounts and Returns
We state accounts receivable at realizable value, net of an allowance for doubtful accounts and
estimated returns. We maintain the allowance for doubtful accounts for estimated losses expected to
result from the inability of some customers to make payments as they become due. We base our
estimated allowance on our analysis of past due amounts and ongoing credit evaluations. Historically, our
actual collection experience has not varied significantly from our estimates, due primarily to our credit and
collection policies and the financial strength of our customers.
The allowances for returns are accounted for as reductions of revenue and are estimated based on
the Company’s periodic assessment of historical experience and trends. The Company considers factors
such as the time lag since the initiation of revenue recognition, historical reasons for adjustments, new
customer volume, complexity of billing arrangements, timing of software availability, and past due
customer billings.
Stock-Based Compensation
We have issued two types of stock-based awards under our stock plans: stock options and
restricted stock units. Stock-based awards granted to associates, directors, and non-associate third
parties are measured at fair value at each grant date. We recognize stock-based compensation expense,
net of forfeitures, ratably over the requisite service period of the option award. Generally, options vest
25% on the one-year anniversary of the grant date with the balance vesting over the following 36 months.
We previously granted options that vest 100% on the fifth anniversary of the grant date. Restricted stock
unit awards generally vest 25% on each anniversary of the grant date over 4 years.
In 2017, 2016 and 2015, we granted performance restricted stock units that vest upon the
achievement of certain financial performance targets. Compensation expense for performance restricted
stock units, which are accounted for as equity awards, is recognized over the requisite service period
when it is probable that the award will vest. Significant judgment is involved in assessing the probability
of achieving performance measures.
We determined fair value for restricted stock unit awards based on the closing price of our common
stock on the date of grant or, if not a trading day, the trading day following the grant date.
We did not grant any stock options in 2017, 2016 or 2015. As of December 31, 2017, all outstanding
options are fully vested and expensed.
On January 1, 2017, we adopted Financial Accounting Standards Board (“FASB”) Accounting
Standard Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting,” and
elected to account for forfeitures as they occur. Prior to that date, we based our estimate of pre-vesting
forfeitures, or forfeiture rate, on our analysis of historical behavior by stock award holders. We applied the
estimated forfeiture rate to the total estimated fair value of the awards, as derived from the Black-Scholes
model, to compute the stock-based compensation expense, net of pre-vesting forfeitures, to be
recognized in our consolidated statements of operations.
Based upon the closing stock price of $27.00 on December 29, 2017, the last trading day of 2017,
the aggregate intrinsic value of outstanding options to purchase shares of our common stock as of
December 31, 2017 was $4.7 million, all of which was related to vested options. The aggregate intrinsic
value of outstanding restricted stock units as of December 31, 2017 was $52.3 million, of which all were
unvested.
35
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2017, our primary sources of liquidity were our cash and cash equivalents
totaling $55.3 million, $32.0 million in accounts receivables, net of allowance, and unused availability
under a revolving line of credit of $38.8 million, without taking into account the borrowing base limit. The
terms of our revolving line of credit are described in Note 8 of our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
In April 2017, we amended our revolving line of credit agreement. The amendment altered
definitions in the agreement, including Consolidated EBITDA and Liquidity, and changed the Minimum
Liquidity and Minimum Consolidated EBITDA requirements. It also included consents by the lenders to
certain administrative actions by us, including with respect to intellectual property and certain of our bank
accounts. Additionally, the amendment modified the definition of Excluded Assets in the Guarantee and
Collateral Agreement, dated as of February 20, 2015, which was entered into in connection with the
revolving line of credit agreement.
We are bound by customary affirmative and negative covenants in connection with the revolving line
of credit, including financial covenants related to liquidity and EBITDA. In the event of a default, the
lenders may declare all obligations immediately due and stop advancing money or extending credit under
the line of credit. The line of credit is collateralized by substantially all of our tangible and intangible
assets, including intellectual property and the equity of our subsidiaries.
Based on our current level of operations and anticipated growth, we believe our future cash flows
from operating activities and existing cash balances will be sufficient to meet our cash requirements for at
least the next 12 months.
Going forward, we may access capital markets to raise additional equity or debt financing for
various business reasons, including required debt payments and acquisitions. The timing, term, size, and
pricing of any such financing will depend on investor interest and market conditions, and there can be no
assurance that we will be able to obtain any such financing on favorable terms or at all.
Cash Flows
Our cash flows for the years ended December 31, 2017, 2016 and 2015 were as follows:
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net (decrease) increase in cash and cash equivalents
Operating Activities
2017
Year Ended December 31,
2016
(in thousands)
2015
$
$
(5,937 ) $
(6,279 )
10,698
(1,518 ) $
(22,826 ) $
25,516
6,089
8,779 $
(31,545 )
(50,245 )
78,790
(3,000 )
For 2017, our operating activities used $5.9 million of cash, as $39.8 million for non-cash
adjustments were more than offset by our net loss of $25.9 million and $19.8 million of cash used in
changes in working capital. Adjustments for non-cash items primarily consisted of depreciation and
amortization expense of $15.9 million, accrual of interest on financing obligations of $7.5 million, and non-
cash stock compensation expense of $16.1 million. The cash used in changes in working capital primarily
consisted of a decrease in deferred revenue of $17.1 million, a decrease in accounts payable and
accrued expenses not associated with the purchase of property and equipment of $3.0 million, and a
decrease in accrued compensation and benefits of $3.1 million as the result of timing of payments of
accrued amounts. Changes in working capital that provided cash totaled $3.6 million and were primarily
comprised of decreases of accounts receivable and other non-current assets.
36
For 2016, our operating activities used $22.8 million of cash, as $38.8 million for non-cash
adjustments were more than offset by our net loss of $40.0 million and $21.6 million of cash used in
changes in working capital. Adjustments for non-cash items primarily consisted of depreciation and
amortization expense of $13.1 million, accrual of interest on financing obligations of $6.8 million, and non-
cash stock compensation expense of $18.1 million. The cash used in changes in working capital primarily
consisted of a decrease in deferred revenue of $17.7 million, an increase in accounts receivable of $3.9
million, and a decrease in accrued compensation and benefits of $3.3 million as the result of timing of
payments of accrued amounts. Changes in working capital that provided cash totaled $5.2 million and
were primarily comprised of an increase of accrued expenses and other non-current liabilities and a
decrease in prepaid expenses.
For 2015, our operating activities used $31.5 million, as changes in working capital provided $1.3
million cash and adjustments for non-cash items of $29.3 million partially offset a net loss of $62.1 million.
The cash provided by changes in working capital primarily consisted of an increase in accrued
compensation and benefits of $3.3 million, an increase in accrued expenses of $3.0 million, and an
increase in accounts payable of $3.4 million, offset by an increase in accounts receivable of $7.8 million.
The increase in accrued compensation and benefits resulted from an increase in the number of
associates. The increases in accrued expenses and accounts payable are the result of timing of the
receipt of invoices and the timing of payments. The increase in accounts receivable resulted from a few
significant invoices related to new contracts and the normal timing of customer payments.
Investing Activities
For 2017, investing activity used $6.2 million as purchases of property and equipment of $8.2 million
were partially offset by maturity of short-term investments of $2.0 million.
For 2016, investing activities provided $25.5 million as proceeds from the maturity of short-term
investments of $40.2 million were partially offset by purchases of property and equipment of $12.7 million
and investments in marketable securities of $2.0 million.
Net cash used in investing activities totaled $50.2 million for 2015 as net purchases of marketable
securities were $35.5 million and cash purchases of property and equipment were $14.7 million.
Financing Activities
For 2017, net cash provided by financing activities was $10.7 million, as cash from the exercise of
stock options of $3.7 million and net borrowings under the revolving line of credit of $16.0 million were
partially offset by payments on capital lease and financing obligations of $9.0 million. Cash from the
exercise of stock options included $1.8 million related to the exercise of options by our Executive
Chairman that were set to expire in February 2017.
For 2016, net cash provided by financing activities was $6.1 million, as the result of cash from the
exercise of stock options of $6.9 million and net borrowings under the revolving line of credit of $10.0
million, partially offset by payments on capital lease and financing obligations. Cash from the exercise of
stock options included $5.1 million related to the exercise of options by an executive officer that were set
to expire in February 2017.
For 2015, net cash provided by financing activities was $78.8 million, primarily as a result of $74.5
million from the issuance of common stock and a warrant in a private placement to Mercer, and net draws
on the revolving line of credit of $12.6 million offset by payments on financing and capital lease
obligations of $9.9 million.
Operating and Capital Expenditure Requirements
We believe that our existing cash and cash equivalents balances, cash generated from operations,
and our ability to draw on the revolving line of credit will be sufficient to meet our anticipated cash
requirements through at least the next 12 months. Our future capital requirements will depend on many
factors, including our customer growth rate, subscription renewal activity, the timing and extent of
development efforts, the expansion of sales and marketing activities, the introduction of new and
enhanced services offerings, and the continuing market acceptance of our services. We might require
additional capital beyond our currently anticipated amounts. If our available cash and cash equivalents
37
balances are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible
debt securities or enter into an additional credit facility. The sale of equity and convertible debt securities
may result in dilution to our stockholders and those securities may have rights senior to those of our
common shares. If we raise additional funds through the issuance of convertible debt securities, these
securities could contain covenants that would restrict our operations. Additional capital might not be
available on reasonable terms, or at all.
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our outstanding credit facility, non-
cancelable leases for our office space and computer equipment and purchase commitments for our co-
location and other support services. The following table summarizes these contractual obligations at
December 31, 2017. Future events could cause actual payments to differ from these estimates.
Contractual Obligations
Long-term debt--Revolving line of
credit (1)
Operating lease obligations
Capital lease obligations
Financing obligations, build-to-suit
leases
Financing obligations, other
Purchase commitments
Payment due by period
Total
Less than 1
year
1-3 years
3-5 years
(in thousands)
More than 5
years
$
56,246 $
- $
56,246 $
- $
-
14,224
50,953
108,658
1,709
6,570
1,400
5,089
6,359
1,400
5,602
2,564
8,197
1,925
5,970
13,297
309
968
14,107
-
-
8,335
31,697
74,895
-
-
Total
$
238,360 $
19,850 $
81,581 $
22,002 $
114,927
(1) Repayment of the revolving line of credit is due at end of the term in 2020. Early repayment is
allowed. Interest is paid monthly.
Borrowing limit under our revolving line of credit agreement is $95.0 million. The agreement
terminates on February 20, 2020. Borrowing capacity under this agreement is subject to a borrowing
base limit that is a function of our monthly recurring revenue as adjusted to reflect lost customer revenue
during the previous three calendar months. Therefore, credit available under our line of credit may be less
than the $95.0 million borrowing limit. Advances under the revolving line of credit agreement bear interest
at the prime rate as published in the Wall Street Journal plus a margin based on the Company’s liquidity
that ranges between 0.75% and 1.25%. The Company is charged an unused line fee under this
arrangement at a rate based on its liquidity of 0.300% to 0.375% per year. Any outstanding principal is
due at the end of the term. Available credit was $15.7 million as of December 31, 2017.
In December 2016, we entered into a cancellable lease agreement to build additional office space
on our headquarters campus. In March 2018, our landlord extended certain terms of the agreement.
Under this agreement and extension, we may commence construction on or about April 1, 2019 for a
target lease commencement date of July 1, 2020. We can terminate the agreement prior to April 1, 2019
subject to reimbursing the lessor for reasonable pre-agreed out-of-pocket expenses. Annual rent
obligation for the first year is $4.4 million and increases 2% each subsequent year during the 15-year
lease term. We can renew the lease for five, one-year terms. The aggregate minimum lease payments
are approximately $75.8 million and are not reflected in the contractual obligations table above.
Off-Balance Sheet Arrangements
As of December 31, 2017, other than as disclosed in Note 15, we did not have any off-balance
sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, or special purpose entities. We are not the primary
beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly,
we have not consolidated any variable interest entities.
38
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic
606),” which amends the revenue recognition requirements in the FASB Accounting Standards
Codification. Under the new standard, revenue is recognized when a customer obtains control of
promised goods or services and is recognized in an amount that reflects the consideration that the entity
expects to receive in exchange for those goods and services. In addition, the new standard requires
disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts
with customers. The FASB has issued several amendments to the new standard, including clarification
on accounting for licenses of intellectual property and identifying performance obligations.
We will adopt the new standard effective January 1, 2018 using the full retrospective transition
method and recast each prior reporting period presented.
The more significant impacts of the new standard to our consolidated financial statements are
currently expected to be as follows:
We currently recognize revenue from certain professional services in the Carrier segment over
time, which is the customer relationship period. Under the new standard, revenue from certain of
these services will be recognized over the contract term of the associated software services
contract, including any extension periods representing a material right, or in some cases over the
period of delivery of the professional fees, both of which are typically shorter than the customer
relationship period.
We currently recognize insurance broker commission revenue over the policy period. Under the
new standard, the revenue related to broker commissions will be recognized when the orders for
the policies are received and transferred to the insurance carrier. As a result, software services
revenue from these arrangements in the Employer segment will be recognized earlier under the
new standard in comparison to the current guidance.
The new standard provides guidance on accounting for certain revenue-related costs, including
when to capitalize costs associated with obtaining and fulfilling a contract. The majority of these
costs are currently expensed as incurred. Under the new standard, Carrier segment assets
recognized for the costs to obtain a contract, which includes sales commissions, will be amortized
on a systematic basis that is consistent with the transfer of the services to which the assets
relate, considering anticipated renewals when applicable. Carrier segment assets recognized for
costs to fulfill a contract, which include internal costs related to implementing carrier products, will
be amortized on a systematic basis that is consistent with the transfer of the services to which the
asset relates, which is generally expected to be five years. Costs to fulfill contracts in the
Employer segment will be expensed as incurred.
Our historical net cash flows provided by or used in operating, investing, and financing activities will
not be impacted by adoption of the new revenue standard.
In June 2016, the FASB ASU No. 2016-13, “Measurement of Credit Losses on Financial
Instruments.” The purpose of this ASU is to require a financial asset measured at amortized cost basis to
be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt
securities should be recorded through an allowance for credit losses. This ASU is effective for interim and
annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact of
this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)”. The amendments in
this update require lessees, among other things, to recognize lease assets and lease liabilities on the
balance sheet for those leases classified as operating leases under previous authoritative guidance. This
update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 will be
effective for us beginning January 1, 2019, but early adoption is permitted. We are currently evaluating
the impact of this update on our consolidated financial statements.
39
We are evaluating other accounting standards and exposure drafts that have been issued or
proposed by the FASB or other standards setting bodies that do not require adoption until a future date to
determine whether adoption will have a material impact on our consolidated financial statements.
40
Item 15. Exhibits, Financial Statement Schedules.
(b) Exhibits.
The exhibits listed below are filed or incorporated by reference herein.
PART IV
Exhibit Title
Form
File
Exhibit
Filing Date
Incorporated by Reference
(Unless Otherwise Indicated)
Exhibit
Number
2.1
Agreement and Plan of
Merger, dated August 29,
2013, by and among
Benefitfocus.com, Inc.,
Benefitfocus, Inc., and
Benefitfocus Mergeco, Inc.
3.1
Restated Certificate of
Incorporation of Benefitfocus,
Inc.
3.2
Amended and Restated
Bylaws of Benefitfocus, Inc.
4.1
Specimen Certificate for
Common Stock.
4.2
Form of Second Amended and
Restated Investors’ Rights
Agreement, dated, 2013, by
and among Benefitfocus, Inc.
and certain stockholders
named therein.
4.2.1
First Amendment to Second
Amended and Restated
Investors’ Rights Agreement,
dated February 24, 2015, by
and among Benefitfocus, Inc.
and certain stockholders
named therein.
Warrant for the Purchase of
Shares of Common Stock of
Benefitfocus, Inc. issued
February 24, 2015.
Form of Second Amended and
Restated Voting Agreement,
dated, 2013, by and among
Benefitfocus, Inc., and certain
stockholders named therein.
4.3
10.1
10.2
Amended and Restated 2000
Stock Option Plan.#
10.3
Form of Grant Notice and
Stock Option Agreement
under the Amended and
Restated 2000 Stock Option
Plan.#
S-1/A 333-190610
2.1 September 5, 2013
10-Q
—
3.1.3 November 12, 2013
8-K
—
3.2.1 September 19, 2016
S-1/A 333-190610
4.1 September 5, 2013
S-1/A 333-190610
4.3 September 16, 2013
10-K
—
4.3.1
February 27, 2015
10-K
—
4.5
February 27, 2015
S-1/A 333-190610
10.2 September 5, 2013
S-1 333-190610
10.3
August 14, 2013
S-1 333-190610
10.5
August 14, 2013
41
10.4
Form of Grant Notice and
Stock Option Agreement
under the 2012 Stock Plan, as
amended.#
10.5
Form of Management
Incentive Bonus Program.#
10.5.1
Benefitfocus, Inc.
Management Incentive Bonus
Program.#
10.6
Employment Agreement,
dated January 19, 2007, by
and between
Benefitfocus.com, Inc. and
Mason R. Holland, Jr.#
10.7
Employment Agreement,
dated January 19, 2007, by
and between
Benefitfocus.com, Inc. and
Shawn A. Jenkins.#
10.7.1
Employment Agreement,
dated November 20, 2017, by
and between
Benefitfocus.com, Inc. and
Shawn A. Jenkins.#
10.8
Form of Employment
Agreement.#
10.9
Form of Indemnification
Agreement.#
10.10
Lease between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated
as of January 1, 2009, as
amended.
10.10.1
Third Amendment to Lease
between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated
as of December 12, 2016.
Lease between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated
as of May 31, 2005.
10.11
10.11.1
First Amendment to Lease
between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated
as of December 12, 2016.
10.12
Master Business Agreement
between Aetna Life Insurance
Company and
Benefitfocus.com, Inc., dated
as of November 28, 2006.+
S-1 333-190610
10.6
August 14, 2013
S-1 333-190610
10.7
August 14, 2013
DEF 14A
—
—
April 25, 2014
S-1 333-190610
10.8
August 14, 2013
S-1 333-190610
10.9
August 14, 2013
10-K
—
10.7.1
March 15, 2018
S-1 333-190610
10.11
August 14, 2013
S-1 333-190610
10.12
August 14, 2013
S-1 333-190610
10.13
August 14, 2013
8-K
—
10.13.1 December 14, 2016
S-1 333-190610
10.14
August 14, 2013
8-K
—
10.14.1 December 14, 2016
S-1 333-190610
10.15
August 14, 2013
42
10.13
Lease between DIEC II, LLC
and Benefitfocus.com, Inc.,
dated as of December 13,
2013.
10.13.1
Amendment to Lease between
DIEC II, LLC and
Benefitfocus.com, Inc., dated
as of December 12, 2016.
10.14
Benefitfocus, Inc. Amended
and Restated 2012 Stock
Plan.#
10.15
Form of Independent Director
Compensation Agreement.
10.16
Securities Purchase
Agreement, dated as of
February 24, 2015, by and
among Benefitfocus, Inc. and
Mercer LLC.
10.17
Right of First Offer Agreement,
dated as of February 24,
2015, by and among
Benefitfocus, Inc., Mercer
LLC, GS Capital Partners VI
Parallel, L.P., GS Capital
Partners VI GmbH & Co. KG,
GS Capital Partners VI Fund,
L.P., GS Capital Partners VI
Offshore Fund, L.P., Oak
Investment Partners XII,
Limited Partnership and
certain stockholders named
therein.
10.18
Employment Agreement,
dated June 25, 2014, by and
between Benefitfocus.com,
Inc. and Ray August.#
10.18.1
First Amendment to
Employment Agreement,
dated November 20, 2017, by
and between
Benefitfocus.com, Inc. and
Raymond A. August.#
10.19
Senior Secured Credit Facility,
dated as of February 20,
2015, by and among
Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several lenders, Silicon
Valley Bank, as administrative
agent, issuing lender and
swingline lender and
Comerica Bank, as
documentation agent.
10-K
—
10.19
March 21, 2014
8-K
—
10.16.1 December 14, 2016
DEF 14A
—
—
April 25, 2014
8-K
—
10.21
June 23, 2014
10-K
—
10.20
February 27, 2015
10-K
—
10.21
February 27, 2015
8-K
—
10.22
April 8, 2015
10-K
—
10.18.1
March 15, 2018
10-Q
—
10.23
May 6, 2015
43
10.19.1
First Amendment Agreement,
dated as of June 16, 2015, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several banks and other
financial institutions or entities
and Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
10.19.2
Second Amendment
Agreement, dated as of
December 18, 2015, by and
among Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several banks and other
financial institutions or entities
and Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
Third Amendment Agreement,
dated as of March 24, 2016,
by and among Benefitfocus,
Inc., Benefitfocus.com, Inc.,
BenefitStore, Inc., several
banks and other financial
institutions or entities and
Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
10.19.3
10.19.4
Fourth Amendment
10.19.5
Agreement, dated as of
October 28, 2016, by and
among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several
banks and other financial
institutions or entities and
Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.+
Fifth Amendment Agreement,
dated as of December 12,
2016, by and among
Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several
banks and other financial
institutions or entities and
Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
8-K
—
10.25
June 16, 2015
10-K
—
10.23
February 25, 2016
8-K
—
10.26
March 29, 2016
8-K
—
10.29
October 31, 2016
8-K
—
10.32 December 14, 2016
44
10.19.6
10.20
Sixth Amendment Agreement,
dated as of April 26, 2017, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several
banks and other financial
institutions or entities and
Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.+
Guarantee and Collateral
Agreement, dated as of
February 20, 2015, made by
Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., and other grantors, in
favor of Silicon Valley Bank,
as administrative agent.
10.21
Employment Agreement,
dated April 26, 2016, by and
between
Benefitfocus.com, Inc. and
Dennis B. Story.#
10.22
Benefitfocus, Inc. 2016
Employee Stock Purchase
Plan.#
10.23
Waiver to Credit Agreement,
dated as of September 1,
2016, by and among the
Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., the several
banks and other financial
institutions or entities party
thereto and Silicon Valley
Bank, as administration agent
and collateral agent for the
lenders.
10.24
Employment Agreement
effective September 15, 2016,
by and between
Benefitfocus.com, Inc. and
Jeffrey M. Laborde.#
Lease between DIEC II, LLC
and Benefitfocus.com, Inc.,
dated as of December 12,
2016.
10.25
10.26
Employment Agreement,
dated June 30, 2017, by and
between Benefitfocus.com
and Jonathon Dussault.#
21.1
List of Subsidiaries of
Registrant.
10-Q
—
10.20.6
April 28, 2017
10-Q
—
10.24
May 6, 2015
10-Q
—
10.26
May 5, 2016
DEF14A
—
—
April 22, 2016
8-K
—
10.28 September 1, 2016
10-Q
—
10.30
November 4, 2016
8-K
—
10.31 December 14, 2016
10-Q
—
10.29
August 8, 2017
10-K
—
21.1
March 15, 2018
45
23.1
Consent of Ernst & Young
LLP.
31.1
Certification of the President
and Chief Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2
Certification of the Chief
32.1
Financial Officer pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the President
and Chief Executive Officer,
and the Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH XBRL Taxonomy Extension
Schema Document.
10-K
—
—
—
23.1
March 15, 2018
—
Filed herewith
—
—
—
Filed herewith
—
—
—
Filed herewith
10-K
10-K
— 101.INS
March 15, 2018
— 101.SCH
March 15, 2018
101.CAL XBRL Taxonomy Extension
10-K
— 101.CAL
March 15, 2018
Calculation Linkbase
Document.
101.DEF XBRL Taxonomy Extension
10-K
— 101.DEF
March 15, 2018
Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension
Label Linkbase Document.
10-K
— 101.LAB
March 15, 2018
101.PRE XBRL Taxonomy Extension
10-K
— 101.PRE
March 15, 2018
Presentation Linkbase
Document.
___________
# Management contract or compensatory plan.
+ The registrant has received confidential treatment with respect to portions of this exhibit. Those
portions have been omitted from the exhibit and filed separately with the U.S. Securities and
Exchange Commission.
46
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
Benefitfocus, Inc.
Date: March 16, 2018
By: /s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
47
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Raymond A. August, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A of Benefitfocus, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 16, 2018
/s/ Raymond A. August
Raymond A. August
President and Chief Executive Officer
(Principal executive officer)
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Jonathon E. Dussault, certify that:
1.
I have reviewed this Annual Report on Form 10-K/A of Benefitfocus, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: March 16, 2018
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
(Principal financial and accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Raymond A. August,
President and Chief Executive Officer (principal executive officer) of Benefitfocus, Inc. (the “registrant”), and Jonathon E. Dussault,
Chief Financial Officer (principal financial and accounting officer) of the registrant, each hereby certifies that, to the best of their
knowledge:
1. The registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2017, to which this Certification is attached as
Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the registrant at the end of
the period covered by the Report and results of operations of the registrant for the periods covered by the Report.
Date: March 16, 2018
/s/ Raymond A. August
Raymond A. August
President and Chief Executive Officer
(Principal executive officer)
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
(Principal financial and accounting officer)