Benefitfocus
Annual Report 2019

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2019or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission File Number: 001-36061Benefitfocus, Inc.(Exact name of registrant as specified in its charter)Delaware46-2346314(State or other jurisdiction ofincorporation or organization)(I.R.S. EmployerIdentification No.)100 Benefitfocus WayCharleston, 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 classTrading SymbolName of each exchange of which registeredCommon Stock, $0.001 Par ValueBNFTNasdaq Global MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 ofRegulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, oremerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act.:Large accelerated filer ☐Accelerated filer ☒Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any newor 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, 2019 (based on the closing sale price of$27.15 on June 28, the last trading day of the registrant’s most recently completed second fiscal quarter), was approximately $559,783,940. Common stock heldby 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 thatsuch 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 February 28, 2020 was 32,819,478.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Stockholders currently scheduled to be held on May 29, 2020 areincorporated by reference into Part III hereof.Benefitfocus, Inc.Form 10-KFor Year Ended December 31, 2019TABLE OF CONTENTSPART I2Item 1. Business2Item 1A. Risk Factors20Item 1B. Unresolved Staff Comments44Item 2. Properties44Item 3. Legal Proceedings44Item 4. Mine Safety Disclosures44PART II45Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities45Item 6. Selected Financial Data47Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations50Item 7A. Quantitative and Qualitative Disclosures About Risk64Item 8. Financial Statements and Supplementary Data65Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures65Item 9A. Controls and Procedures65Item 9B. Other Information66PART III68Item 10. Directors, Executive Officers and Corporate Governance68Item 11. Executive Compensation68Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters68Item 13. Certain Relationships and Related Transactions, and Director Independence69Item 14. Principal Accounting Fees and Services69PART IV70Item 15. Exhibits, Financial Statement Schedules70Item 16. Form 10-K Summary76Signatures771PART ISPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well asassumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed orimplied by such forward-looking statements. The statements contained in this Annual Report on Form 10-K that are not purely historicalare forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), andSection 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Such forward-looking statements include anyexpectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management forfuture operations; risks associated with acquisitions; factors that may affect our operating results; statements about our ability toestablish and maintain intellectual property rights; statements about our ability to retain and hire necessary associates andappropriately staff our operations; statements related to future capital expenditures; statements related to future economic conditions orperformance; statements as to industry trends; and other matters that do not relate strictly to historical facts or statements ofassumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but notlimited 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 arebased 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 ofcertain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could causeor contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1Aof Part I of this Annual Report on Form 10-K, and the risks discussed in our other SEC filings. Furthermore, such forward-lookingstatements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-lookingstatements 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” meanBenefitfocus, Inc. and its subsidiaries unless the context indicates otherwise.Item 1. Business.OverviewBenefitfocus provides a leading cloud-based benefits management platform for buyers (consumers, employees and employers)and sellers (insurance brokers, carriers and suppliers). The Benefitfocus Platform simplifies how organizations and individuals transactbenefits. Our employer, carrier, broker and supplier customers rely on our platform to manage, scale and exchange benefits dataseamlessly. Our solutions drive value for all participants in our benefits ecosystem.The Benefitfocus Platform has a multi-tenant architecture and has a user-friendly interface designed for consumers to access allof their benefits in one place. Our comprehensive solutions support medical benefit plans and non-medical benefits, such as, dental, life,disability insurance, income protection, digital health and financial wellness. Our platform includes artificial intelligence functionalitydesigned to help consumers identify and evaluate benefit options available to them. As the number of employer benefits plans hasincreased, with each plan subject to many different business rules and requirements, demand for the Benefitfocus Platform is growing.Brokers use our platform to manage employer portfolios. This includes delivering strategic insights that improve their employerclients’ benefit experience and demonstrating greater value through access to a larger set of relevant products for employers, whichshould bring higher broker commissions and profits.Employers use our solutions to streamline benefits processes and control costs, keep up with challenging and ever-changingregulatory requirements, and offer a greater variety of benefit options to attract, retain and motivate employees. The BenefitfocusPlatform enables our employer customers to simplify the management of complex benefits processes, from sales and enrollment toimplementation2and ongoing administration. It provides their employees with an engaging, highly intuitive and personalized user interface for selectingand managing all of their benefits via mobile or desktop device.Insurance carriers and suppliers use our solutions to more effectively market offerings to consumers, simplify billing, and improvethe enrollment process. We also provide a network of approximately 2,200 benefit provider data exchange connections, which facilitatesthe otherwise highly fragmented interaction among employees, employers, brokers and carriers.Since our initial public offering, we have described our target market as comprising two separate but related market segments -employers and insurance carriers. Within the employer market segment, we sell our technology solutions on an annually recurring or multi-year subscription basis to large employers, which we define as those with more than 1,000 employees. Similarly, in our other marketsegment, we sell our solutions on a subscription basis to insurance carriers, enabling us to expand our overall footprint in the benefitsmarketplace by aggregating many key constituents, including consumers, employers, and brokers. We believe our presence in both theemployer and insurance carrier market segments gives us a strong position at the center of the benefits ecosystem.In 2018, we expanded our economic model to include a transaction-oriented buyer solution, known as BenefitsPlace, designed toalign brokers, carriers and suppliers around the needs of employers, employees and consumers. In this model, our seller partners, whichare carriers and suppliers, offer their voluntary and specialty benefit products through a holistic, multidimensional marketplace. Thismarketplace is designed to increase the economic value of the consumer lives on our platform by aligning the product catalog to consumerneeds. In exchange for Benefitfocus delivering consumer access, data-driven analysis and operational efficiencies, seller partners pay us apercentage of the purchases completed on our platform. Carrier agreements have terms of two to four years and are typically cancellableupon breach of contract or insolvency. Supplier contracts have terms of one year or less and are generally cancellable upon breach ofcontract, failure to cure, bankruptcy and termination for convenience.Our hybrid software-as-a-service, or SaaS, and repeatable transaction-based model provides us significant visibility into our futureoperating results, which enhances our ability to manage our business. Our company was founded in 2000, and we currently employapproximately 1,560 associates, or employees.Industry BackgroundThe administration and distribution of benefits to employees is a mainstay of the U.S. economy. Providing these benefits iscostly and complex and requires the exchange of data and information, application of rules, and transfer of funds among a wide varietyof constituents, including consumers, employers, insurance carriers, suppliers, brokers, benefits outsourcers, payroll processors, andfinancial institutions. The size of the HR benefits administration market and the value of benefits transacted are large. According toIBISWorld calculations, the market for HR benefits administration in the United States was $61.9 billion in 2019. Eastbridge ConsultingGroup estimates the U.S. in-force premiums were $44 billion in 2018 for employee-paid life, health and disability products sold at theworksite with premiums paid through payroll.The variety and complexity of medical and non-medical benefits plans continues to grow. The Benefitfocus 2017 annual marketresearch report, The State of Employee Benefits 2018, our most recent edition, indicates that a higher proportion of benefits offeringsare shifting to high-deductible health plans coupled with health savings accounts. This added complexity places greater potential costburden on employees and consumers and creates a greater need for employers to educate their workforces on becoming more informedhealthcare consumers. To help employees cover added cost burdens, employers are increasingly offering a wider range of non-medicalbenefits plans, such as critical illness, supplemental income, and financial wellness programs, as well as traditional insurance offeringslike dental, life and disability. Current point and legacy systems are inadequate to efficiently manage the complexity, regulation, and theinvolvement of multiple parties. They are also incapable or inadequate in enabling the purchase of non-medical benefits. These factorsare driving the need for an enterprise benefits management system and consumer-focused platform to improve operational efficiencyalong the entire benefits value chain.3Employer MarketA significant and growing portion of employers’ costs is non-salary benefits, such as health insurance, that they provide to theiremployees. With healthcare and other premiums increasing, senior executives are prioritizing benefits administration in theirorganizations and searching for ways to contain costs without sacrificing benefits. In fact, according to the U.S. Department of Laborand Bureau of Labor Statistics, healthcare and other employee benefits accounted for 31.3% of all employee labor costs in September2019. In addition, the expense burden continues to shift to employees. Employees’ contributions to premiums for health insurance havegrown from approximately $318 per employee in 1999 to approximately $1,242 per employee in 2019. Employers recognize theimportance of offering a greater variety of non-medical benefits as a means to attract, motivate, and retain employees. They mustmaintain relationships with multiple insurance carriers and many other benefits providers, placing a substantial administrative burden ontheir 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, andfail to address the increasing complexity of the benefits marketplace. As benefits offerings become more complex and employees bearmore of the cost of those benefits, HR software solutions that streamline information, simplify choices, and engage employees areincreasingly in demand. Employees desire tailored, dynamic, and interactive communication of critical benefits information, with easyaccess to purchase benefits, as they become accustomed to receiving personalized content through various consumer applications ona 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. Manylegacy HR systems were not designed to integrate with the broader benefits ecosystem, including brokers, carriers, and wellnessproviders, or have the ability to transact non-medical benefits. This results in expensive, error-prone, and incomplete experiences foremployers and employees. Benefits outsourcers have attempted to compensate for the shortcomings of legacy HR systems, but theyhave 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 benefitseffectively.Modern technology, changing communication patterns, and a constantly evolving benefits ecosystem have impacted theemployee-employer relationship. HR executives continue to search for effective strategies to increase efficiency and contain costs, whileincreasing employee engagement and being an employer of choice. Employers are increasingly interested in SaaS solutions that canhelp capture and analyze benefits data and provide more choice for their employees to improve productivity and satisfaction. In order tomanage the distribution and administration of benefits effectively, employers need an integrated platform, capable of handling all benefitsin one place and providing a highly personalized experience for employees.Insurance Carrier MarketThe employee benefits market consists of myriad medical insurance carriers and products. According to the U.S. Bureau ofLabor Statistics, the single largest benefit provided to employees in the United States is healthcare insurance, often encompassingmore than 90% of all insurance benefits spending by employers.Large, national insurance carriers also offer numerous individual health plans of different types, including health maintenanceorganizations, preferred provider organizations, point-of-service plans, and high deductible health plans, across the 50 states, as well aslife and ancillary benefits plans. Each carrier offers a complex variety of medical insurance and non-medical benefits, encompassing lifeand ancillary plans, with each plan requiring multiple decisions to address the specific needs of employers and their individualemployees. Despite widespread carrier consolidation, numerous disparate systems remain in place, with many large carriers operatingon multiple IT systems. Carriers often rely on manual processes and siloed software applications to bridge gaps in legacy administrationsystems. Even as carriers4attempt to modernize and keep up with evolving industry practices and a changing regulatory landscape, they have difficulty connectingwith the broader healthcare system.The effective delivery and management of employee benefits depends on the timely, continuous exchange of accurate dataamong carriers, their employer customers, broker partners and individual members. Legacy benefits management systems often lackimportant functionality such as web and mobile self-service capabilities and real-time data exchange. Critical carrier processes,including member enrollment, billing and payments, communications, and retail marketing have often been under-optimized or neglectedby legacy systems, and carriers have devoted significant internal resources to cover technology gaps. In addition, healthcare reformmandates 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 increasinglydynamic regulatory framework under which health benefits are delivered, accessed and maintained. Despite efforts to repeal and/orreform part or all of PPACA, we expect digital transformation of healthcare benefits to continue in the form of public and privateexchanges - online marketplaces that allow insurance carriers to compete directly for new members. We expect private exchanges willbe less rigid, promoting both health and non-health benefits, with substantially fewer rules around the types of benefits offered. Asmedical insurance carriers continue to bolster their retail distribution capabilities, we believe they will require consolidation of technologysolutions to improve operational efficiency and attract additional members through private exchanges.The Benefitfocus SolutionsWe provide a multi-tenant cloud-based benefits management platform for consumers, employers, insurance carriers, suppliersand brokers. The Benefitfocus Platform simplifies how organizations and individuals transact benefits.We believe our solutions help employers and clients of brokers in the following important ways:Simplify benefits enrollment. Our solutions reduce the complexity of benefits enrollment by integrating all plan information in oneplace and presenting it to employees in an organized and easy-to-understand manner. Employees shop and enroll using a highlyintuitive and engaging consumer-oriented interface.Purchase non-medical benefits. Our platform includes a holistic, multidimensional marketplace whereby carriers and suppliers sellnon-medical products to consumers.Reduce cost and increase ROI. Our solutions automate the benefits management process and reduce the cost associated withclerical errors and covering ineligible employees and dependents. Our solutions also include advanced analytics that enable employersand 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 deliveringbenefits information through a highly intuitive and engaging user interface. We believe that when employees understand the value of theirbenefits and have easy access to benefits, they are more likely to be satisfied with and engaged in their jobs.Streamline HR processes. Our solutions eliminate the time-consuming and labor-intensive, often paper-based, processesassociated with managing employee benefits plans, making HR professionals more efficient. Employers and HR professionals canefficiently 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 benefitprovider data exchange connections through industry standards interfaces that are configurable to accommodate a variety of needs. Ouropen architecture further extends our functionality by allowing third parties to develop and offer apps and5services on our platform. Our human capital management application programming interface, or API, replaces traditional file-basedsystems with an automated, real-time interface.We believe our solutions help insurance carriers and suppliers in the following important ways:Bolster retail distribution capabilities through marketplaces. Our solutions help carriers and suppliers respond to an evolvingmarketplace in which retail distribution capabilities are increasingly important to attracting and retaining new members. Our platformoffers 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.Attract and maintain membership. Our solutions allow carriers to maximize sales capacity and efficiency by communicatingdirectly with their employer customers and individual members.Reduce administrative costs. The Benefitfocus Platform allows carriers to consolidate IT systems, automate and simplify variousaspects of the benefits administration process, such as enrollment, plan changes, eligibility updates, and billing and payments, fromone centralized location.Facilitate real-time data exchange. Our solutions simplify interactions and data exchange, and foster collaboration amongcarriers, suppliers, brokers, employers, employees and consumers. This allows carriers to rapidly tailor and offer new benefitspackages.Our Growth StrategyWe believe BenefitsPlace can transform how employers, brokers and carriers deliver value for employees and their families. Withmore than 50 industry-leading products offered by the industry’s marquee brands, employers can now seamlessly package a richbenefits offering that addresses health, wealth, property and lifestyle needs.We intend to strengthen our position as a leading cloud-based benefits management platform for buyers and sellers, workingclosely with brokers as partner in the ecosystem. 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 thatcould benefit from our subscription solutions. In order to reach new customers in our existing markets, we are aggressively investing inour sales and marketing resources and our channel marketing strategy, including in ways intended to expand existing relationships andfoster organic growth opportunities through brokers.Further develop our partner ecosystem. We believe we have a large opportunity to efficiently grow our customer base through ourpartners. To increase the number of consumers on our platform, we have established strong relationships with key participants in thebenefits market, including SAP and SuccessFactors. We have also eliminated previous friction and improved our outreach to keyconstituents within the benefits industry, like brokers.Deepen our relationships with our existing customer base. We are deepening our employer relationships by continuing to provide aunified platform with a growing list of additional solutions to manage increasingly complex benefits processes and simplify the distributionand administration of employee benefits. We are expanding our carrier relationships through both the upsell of additional software products,increased adoption across our carriers’ member populations and providing access to our multidimensional marketplace.Extend our suite of applications and continue our technology leadership. We are extending the number, range, and functionalityof our benefits solutions. We have also extended the functionality of our products through mobile solutions. We intend to continue ourcollaboration with customers and partners, so we can respond quickly to evolving market needs with innovative capabilities that supportour leadership position.6Facilitate the purchase of non-medical benefits. We believe we have a significant opportunity to drive higher employer placementof BenefitsPlace products and increase consumer engagement in purchasing BenefitsPlace products throughout an entire calendaryear. We also believe that our current BenefitsPlace portfolio of products will grow in number as we continue to advance ourmultidimensional marketplace.Target new markets. We believe substantial demand for our solutions exists in markets and geographies beyond our currentfocus. We intend to leverage opportunities we believe will arise from the complexities of changing government regulation and increasedenrollment impacting both Medicare and Medicaid.Selectively pursue strategic acquisitions and investments. We might pursue acquisitions of, or investments in, complementarybusinesses and technologies that align with our overall growth strategy. We believe that a selective acquisition and investment strategycould enable us to gain new customers, accelerate our expansion into new markets, and enhance our product capabilities.The Benefitfocus Portfolio of ProductsOur portfolio of products and services is powered by BenefitSAIGE, our real-time, data-driven artificial intelligence, or AI, enginedesigned to engage consumers, employers, brokers and medical carriers on our platform with actions, alerts and offers most importantto them. BenefitSAIGE includes tools for data analytics, user interface modifications and data integrations.BenefitsPlace is our transaction-oriented, marketplace solution, connecting employers, brokers, insurance carriers, suppliersand consumers on a single platform. BenefitsPlace includes access to a variety of leading voluntary benefit products that supportincome protection, digital health, and financial well-being. BenefitsPlace partners provide products that fit into four distinct categories:•Health. Products in the health category improve access to affordable, high-quality care and may act as a supplement to thetraditional employer-funded health and welfare benefits. Partner-provided products in this category include consumer-directedhealthcare accounts, long-term care insurance, prescription drug discount programs, services to help population health andwellness services and enrollment, and guidance services for free state health insurance plans.•Wealth. Products in the wealth category provide options for consumers to protect their income in case of a medical emergency,manage their finances and decrease risk to financial debt. Partner products provided in this category include accident, hospitalindemnity and critical illness insurance, short-term and long-term disability, financial wellness services, student loan services,and retirement and savings accounts such as IRA, 401(k), 529 and personal loan services.•Property. Products in the property category provide options for consumers to protect their assets and insure against liabilitiesassociated with their personal property. Partner products provided in this category include personal property protection products,such as renters and auto insurance.•Lifestyle. Products in the lifestyle category provide options that address the individual needs of consumers to improve the qualityof their day-to-day life. Partner products provided in this category include identity theft protection, virtual college counselingassistance, pet insurance and savings plans, and same-day delivery services for grocery and household items.BenefitsPlace adds value to all participants that participate on the platform.•Insurance carriers and specialty providers join BenefitsPlace as BenefitsPlace sellers. Sellers must meet a standard set ofintegration, quality, security, and financial standards to participate in BenefitsPlace. This ensures products are composed ofmarquee, industry-leading products. Sellers can expand their distribution channels and grow their reach to consumers.•Brokers work with BenefitsPlace advisors to understand the types of products available through the Benefitfocus Marketplace.With the use of data-driven insights, brokers have greater visibility into the status of their customers and participation levels ofBenefitsPlace products, thereby helping activate their customers' benefits strategy.7•Employers can design a strategic benefits portfolio, without the traditional constraints of administration and integrationinefficiencies. BenefitsPlace products include pre-built integrations, seller-provided content and communication materials, anda consistent set of system configurations and settings within Benefitfocus Marketplace.•Consumers gain access to BenefitsPlace products through our carrier and employer subscription-based enrollment products,eEnrollment and Benefitfocus Marketplace. With an insight-driven, guided consumer retail experience that includes decision-support tools, educational information, and mobile access, consumers can select the best products for their individual needsall year long.Products for Insurance CarriersBenefitfocus MarketPlace for Carriers is our single, integrated end-to-end solution for medical carriers that enables them toautomate administration and deliver a seamless benefits experience.•MarketPlace Enroll (formerly eEnrollment) provides a single, privately labeled platform for carriers to automate enrollmentacross all segments of their commercial group business. It includes benefits administration tools for brokers employers,supports complex business rules, such as eligibility and rating criteria and provides operational efficiency by transmittingeligibility and enrollment data to carrier membership systems. MarketPlace Enroll also offers consumers a retail-like benefitenrollment experience with decision support tools, educational videos and content libraries that help consumers makeinformed benefit elections year round.•MarketPlace Bill (formerly eBilling) is an electronic invoice presentment and payment solution, or EIPP, privately labeled forcarriers. It consolidates invoices from multiple insurance products so employers and individuals receive one invoice that canbe viewed and paid electronically. MarketPlace Bill automates the synchronization of billing and membership data to improvethe accuracy of billing processes and provides options to simplify bill payment, such as scheduled one-time and/or recurringpayments.•MarketPlace Exchange (formerly eExchange) is a solution that bridges the integration gap between carrier and employersystems, allowing a seamless exchange of data between the two. Our customers use MarketPlace Exchange to consumeeligibility and enrollment data from multiple, third-party systems, convert data from one format to another, and manage theflow of employee data between carriers and employers.8•MarketPlace Quote (formerly eSales) gives carriers and brokers tools to organize and proactively manage accounts, trackleads, generate quotes, and create proposals for multiple products. MarketPlace Quote allows carriers to define their ownmarket segments and configure them with unique workflows and business rules. It also enables greater data accuracy byautomatically incorporating updated products, options and pricing for the most current rates and quotes. Carriers purchaseMarketPlace Quote to increase productivity in their sales force.Products for EmployersBenefitfocus MarketPlace is our solution for employers that helps them optimize the design of benefits plans, reducehealthcare costs, lessen administrative complexity and empower their employees to make better, more confident benefits decisions.•Benefitfocus MarketPlace is a cloud-based benefits management portal that streamlines online enrollment, employeecommunication, and benefits administration. Benefitfocus Marketplace presents employees with all of the plans theiremployers offer with access to animated videos, educational benefits information and live chat sessions as they explore theirbenefit options. As employees shop for the plans that best fit their individual needs, a virtual shopping cart keeps a runningtally of the employees’ out-of-pocket costs. The Benefitfocus Marketplace is available on a desktop, tablet or mobile phone.•Insights (formerly 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 andallows customers to analyze, forecast, and monitor costs. Insights enables employers and their advisors to identify costdrivers, recognize trends, and predict future risks and costs. Additional analytical capabilities create “what-if” scenarios tomodel 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 andautomating IRS reporting. Additionally, Benefitfocus is an approved transmitter, allowing us to electronically file required ACAcompliance documents with the Internal Revenue Service on behalf of our customers.•MarketPlace Billing & Payments (formerly Consolidated Billing & Payment) is a comprehensive application that synchronizesenrollment and billing information to streamline the monthly billing process, automate adjustments and increase accuracy ofpayments. MarketPlace Billing & Payments gives employers the ability to automate or schedule single-invoice payments toall 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.•COBRA Administration is our solution for employers that simplifies management of COBRA, or the Consolidated OmnibusBudget Reconciliation Act, benefits. COBRA Administration automates required communication, enrollment, fulfillment andpayment processing within Benefitfocus Marketplace.Products for BrokersBrokers use the Benefitfocus Platform to manage the portfolios of their employer clients. This includes delivering strategicinsights that improve their employer clients’ benefit experience and demonstrating greater value through access to a larger set ofrelevant products for employers.•BenefitSAIGE Analytics (formerly Advanced Analytics) aggregates benefit cost and claims data from relevant sources,identifies cost drivers, recognizes trends, and predicts 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. Brokerspurchase BenefitSAIGE Analytics to facilitate the design of better informed, data-driven benefit strategies for their customers.9•BenefitsPlace includes consultative support for brokers through BenefitsPlace advisors. This helps brokers understand thetypes of products available and optimize their customers’ Benefitfocus Marketplace experience. With the use of data-driveninsights, brokers have greater visibility into the status of their customers and participation levels of BenefitsPlace productparticipation, thereby helping activate their customers' benefits strategy.•Premier Broker Program is designed to foster a collaborative, mutually beneficial partnership with the broker community toaccelerate their growth and deliver world-class support to our mutual customers. Premier brokers can take advantage of salesand marketing support, discounts for new clients and exclusive rewards such as:oHigh-touch sales and marketing support with a collaborative team of sales and technology advisors, as well as priorityaccess to marketing materials including Benefitfocus' State of Employee Benefits research, thought leadership contentand product promotions;oOn-demand client success metrics through our One Place 365 Broker Support Portal, an interactive dashboard thatprovides comprehensive insight into implementations, renewals and ongoing projects for all broker clients usingBenefitfocus technology; andoNetworking opportunities and local Benefitfocus Community events. Brokers receive discounted attendance to OnePlace, our annual user conference, and are invited to our platform sellers conference.Professional Services and Customer Support•Implementation Services. We provide implementation services to our customers in order to help ensure seamless deploymentand effective utilization of our solutions. Our carrier and employer implementation teams and third-party system integrators inour Benefitfocus Implementation Program follow an end-to-end approach from project planning to customer training andtechnical support.•Benefits Service Center. We provide employers with expanded support services where our benefits specialists helpcustomers’ employees understand benefit offerings, navigate the enrollment process, and find answers to frequently asked HRquestions. Our Benefits Service Center acts as an extension of our customers’ benefits team and provides employees withpersonalized, guided support. Additional services, such as fulfillment, dependent verification, and HR administration, areavailable to meet unique organizational needs.CustomersOur customers include employers of all sizes across a variety of industries and some of the nation’s largest insurance carriersand aggregators. The following is a list of some of our significant employer and carrier customers.Employer CustomersCarrier CustomersAmerican Eagle Outfitters Inc.American Heritage Life Insurance CompanyAmerigas Propane, Inc.BlueChoice HealthPlan of South Carolina, Inc.Blackbaud, Inc.Blue Cross of Idaho Health Service, Inc.Boston Scientific CorporationBlue Cross and Blue Shield of Kansas CityBrookdale Senior Living Inc.Blue Cross and Blue Shield of South Carolina, Inc.Designer Brands Inc.Wellmark, Inc.Fender Musical Instruments CorporationHard Rock Café International (USA), Inc.Owens CorningPanera Bread CompanyRush University Medical CenterSAP America Inc.University of Alabama - BirminghamUniversity of Texas SystemZions Bancorporation10BenefitsPlace sellers include some the nation’s leading insurance carriers and suppliers to help protect consumers health,wealth and lifestyle. The following is a list of some of our significant carrier and supplier sellers.AetnaGoodRxAflacInfoArmorAllstate BenefitsMetLifeBrightDimeThe HartfordCIGNATransamerica CorporationGenworthNo customer accounted for more than 10% of our total revenue during the year ended December 31, 2019. During the yearsended December 31, 2018 and 2017, one customer accounted for 13% and 11% of total revenue, respectively.Sales and MarketingWe sell our software solutions through our direct sales organization. Our direct sales team comprises employer-focused andcarrier-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 andstrategic relationships. Our marketing programs target HR, benefits, and finance executives, technology professionals, key brokers, andsenior 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;•sales development representatives who respond to incoming leads through digital and advertising programs and convert theminto new sales opportunities;•participation in, and sponsorship of, user conferences, executive events, trade shows and industry events, including ourannual user and partner conference, One Place, our invitation-only event for carrier executives, Carrier Place, and our annualplatform sellers conference, Seller Place;•integrated marketing campaigns, including direct email, online web advertising, blogs, webinars and industry reports thatinclude original thought leadership drawn from our unique set of data; and•public relations, analyst relations and social media initiatives.We also sell our software solutions through strategic partners such as SAP SE.Technology Infrastructure and OperationsAs an enterprise cloud software vendor, we have always deployed our solutions using a SaaS model. Our customers access oursoftware via application integrations, web browsers, and/or mobile devices, rather than by installing software on their premises. Throughour multi-tenant architecture, our customers access a single software instance with multiple possible configurations enabled by ourmetadata-driven framework. The multi-tenant approach provides significant operating economies through aligned, shared computationalservices and processes as it helps us to reduce our fixed cost base and minimize unused capacity on our hardware. In addition, oursoftware architecture gives us an advantage over legacy system vendors, who may be using a less flexible architecture that wouldrequire significant time and labor expense to address varied capability needs.We host our applications and serve our customers from multiple, co-located, private cloud data centers in separate locations.We rely on third-party vendors to operate these data centers, which are designed to host mission-critical computer systems and haveindustry-standard measures in place to minimize service interruptions. Our technical operations staff manages the technology stackssupporting11the Benefitfocus Platform and uses automated monitoring tools throughout our system to detect unusual events or malfunctions thatcould interfere with our customers’ or partners’ use of the Benefitfocus Platform. We monitor application health by verifying that allapplications, interfaces and supporting middleware are operational. If our monitoring detects anomalous situations, our dedicatednetwork operations staff respond immediately to diagnose the situation, communicate status, and resolve the matter. We take thesecurity of our data, systems and operations very seriously, and minimize risk at every level of technology selection through softwarearchitecture, systems administration, and operational controls and procedures.Compliance and CertificationsWe obtain third-party examinations of our controls relating to security. Certain examinations are conducted under Statement onStandards for Attestation Engagements, or SSAE, No. 18 (Reporting on Controls at a Service Organization). In particular, we obtainService Organization Controls, or SOC, reports known as SOC 1 Type II and SOC 2 Type II audits that test the design and operatingeffectiveness of controls over a period of time. An independent auditor conducts these examinations annually and addresses, amongother areas, our physical and environmental safeguards for production data centers, data availability, confidentiality, changemanagement, 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 companiesthat transmit and store credit card data on behalf of clients. Benefitfocus meets PCI compliance requirements as a Level 1 serviceprovider and submits its Report on Compliance and Attestation of Compliance documenting this assessment to the four major creditcard brands annually.In addition to PCI-DDS, Benefitfocus meets all applicable security requirements required by the National AutomatedClearinghouse Association, or NACHA, for third-party service providers, as well as all requirements for Covered Entities as required byHIPAA. We validate controls related to both NACHA and HIPAA compliance annually through internal or SOC audits.CompetitionWhile we do not believe any single competitor offers similarly expansive benefits administration solutions, we face competitionfrom various sources, many of which have greater resources than us. We have historically described our competition in our two marketsegments, carrier and employer. In 2018, we made a strategic shift to include a transaction-based model with the introduction ofBenefitsPlace. We believe that sources of competition are similar to those that we faced prior to the shift, which include:•ERP software companies, including Oracle (PeopleSoft), Infor (Lawson) and Workday each offering a cloud-based benefitsadministration software solution;•HR outsourcing companies, such as Willis Towers Watson;•payroll service providers, such as ADP who expanded their core payroll services to include some form of cloud-based benefitsadministration services; and•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;•brokers and consultants who have influence over benefits offerings; and•various niche software vendors.We believe that competition for benefits administration solutions is based primarily on the following factors:•capability for customization through configuration, integration, security, scalability, and reliability of applications;•competitive and understandable pricing;12•breadth and depth of application functionality;•access to broad offering of non-medical benefits;•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;•clearly defined implementation timeline;•customer-branding and styling;•data exchange standardization; 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 highpercentage of our customers from year to year. Nonetheless, we believe that the increasing acceptance of automated solutions in thehealthcare marketplace and the adoption of more sophisticated technology and continuing legislative reform will result in increasedcompetition, including potentially from large software companies with greater resources than ours. Other companies might developsuperior or more economical service offerings that our customers could find more attractive than our offerings. Moreover, the regulatorylandscape might shift in a direction that is more strategically advantageous to competitors.Research and DevelopmentOur 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 leverageadvances in cloud computing, mobile applications, and data management. Our research and development team is responsible for thedesign and development of our applications. We follow state-of-the-art practices in software development using modern programminglanguages, data storage systems, and other tools. We use both commercial and open source products, following a “best tool for thejob” philosophy in product selection. Our software has a multi-tiered architecture that ensures flexibility to add or modify features quicklyin response to changing market dynamics, customer needs, or regulatory requirements.Our research and development expenses were $54.7 million, $47.9 million and $49.5 million for the years December 31, 2019,2018 and 2017, respectively.Intellectual PropertyWe 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. Wegenerally enter into confidentiality and nondisclosure agreements with our associates, consultants, vendors, and customers. We alsoseek 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”, “BenefitSaige”, “Benefitfocus BenefitsPlace”,“One Place”, “All Your Benefits. One Place.”, and “All Your Benefits. In Your13Pocket.” are registered marks of Benefitfocus in the United States. Through claimed common law trademark protection, we also protectother 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 registeredtrademarks 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, andone Canadian patents.We also rely on certain intellectual property rights that we license from third parties. Although we believe that alternativetechnologies are generally available to replace such licenses, these third-party technologies may not continue to be available to us oncommercially reasonable terms.Although we rely on intellectual property rights, including trade secrets, patents, copyrights, and trademarks, as well ascontractual protections to establish and protect our proprietary rights, we believe that factors such as the technological and creativeskills of our personnel, creation of new modules, features and functionality, and frequent enhancements to our applications are moreessential 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 thepotential exists that third parties could infringe, misappropriate, or misuse our intellectual property. If this were to occur, it could harmour reputation and adversely affect our competitive position or operations. In addition, laws of other jurisdictions may not protect ourintellectual property and proprietary rights from unauthorized use or disclosure in the same manner as the United States. The risk ofunauthorized use of our proprietary and intellectual property rights may increase as our company expands outside of the United States.Government RegulationIntroductionThe employee benefits industry is required to comply with extensive and complex U.S. laws and regulations at the federal andstate levels. Although many regulatory and governmental requirements do not directly apply to our business, our customers are requiredto 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 ofthese laws, there is little history of regulatory or judicial interpretation upon which to rely.Requirements of PPACAOur business could be affected by changes in healthcare spending. PPACA and subsequent laws and regulations regarding themarket for healthcare services have changed how healthcare services are covered, delivered, and reimbursed. PPACA, as enacted,expanded coverage of uninsured individuals by requiring states to expand Medicaid coverage significantly and to establish healthinsurance exchanges to facilitate the purchase of health insurance policies by individuals and small employers. The law also providedsubsidies to states to create non-Medicaid plans for certain low-income residents. The requirement for states to expand Medicaid wassubsequently repealed, and insurers have experienced mixed results providing services through the exchanges, leading many to exitthis market. Increased volatility following the repeal of the individual mandate has led to additional uncertainty in the insurance market.A significant goal of PPACA and subsequent reform efforts has been to move away from fee for service payments and towardcapitated payments to make providers more accountable for the cost and quality of care provided. While many of the provisions ofPPACA 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 andthe creation of state and national exchanges, though it is unclear how many states will decline to implement the Medicaid expansion oradopt state-specific exchanges.14Following the creation of the Medicare Shared Savings Program, Medicare and many commercial third party payors beganimplementing accountable care models in which groups of providers known as Accountable Care Organizations ("ACO") assume someamount of risk for the cost of care provided to groups of individuals. Also, CMS continues to test demonstration programs to bundleacute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care. Thesereimbursement methodologies and similar programs are likely to continue and expand, both in public and commercial health plans, andwill likely impact the business of our customers.As has been the case since 2010, the long-term viability of PPACA remains in doubt, and we expect that the current Congressand 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, President Trump issued an executive order stating that the U.S. federal government’s policy is to seek the promptrepeal of PPACA, and directing the heads of all executive departments and agencies to minimize the economic and regulatory burdensof PPACA to the maximum extent permitted by law. Also, the December 2017 revisions to the tax code eliminated PPACA’s individualmandate, which could serve as a basis for continued challenges to the constitutionality of the law and cause further disruption to theinsurance markets. Should Congress or the courts modify, repeal, or otherwise invalidate PPACA or any parts of its provisions, thebusiness of our customers could be substantially affected.Requirements Regarding the Confidentiality, Privacy and Security of Personal InformationHIPAA and Other Privacy and Security Requirements. Numerous U.S. federal and state laws and regulations apply to the privacyand security of personal health information. In particular, regulations promulgated pursuant to the Health Insurance Portability andAccountability Act of 1996, or HIPAA, establish privacy and security standards that limit the use and disclosure of protected healthinformation 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 healthcare providers areconsidered "Covered Entities" subject to HIPAA.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 agreementswith us, known as Business Associate Agreements, under which we are considered to be a Business Associate and that require us tosafeguard protected health information and restrict how we may use and disclose such information. The Privacy Rule extensivelyregulates the use and disclosure of protected health information by Covered Entities and their Business Associates. For example, thePrivacy Rule permits Covered Entities and their Business Associates to use and disclose protected health information for treatment andto process claims for payment, but other uses and disclosures, such as marketing communications, require written authorization fromthe individual or must meet an exception specified under the Privacy Rule. The Privacy Rule also provides patients with rights related tounderstanding and controlling how their health information is used and disclosed. To the extent permitted by the Privacy Rule and ourcontracts with our customers, we may use and disclose protected health information to perform our services and for other limitedpurposes, such as creating de-identified information. Determining whether data has been sufficiently de-identified to comply with thePrivacy 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 andtechnical 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 havebreached our contracts with our customers. Further, if we fail to comply with the Privacy Rule, Security Rule, or Breach Notification Rulewhile acting as a Covered Entity or Business Associate, we could face civil penalties of up to $58,490 per violation and a maximum civilpenalty of $1,754,698 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 enforcementactivities. Additionally, state attorneys general may bring civil actions seeking either injunctions or damages in response to violations ofHIPAA that threaten the privacy of state residents.There are additional privacy and data security legal regimes at the federal and state level. For example, the Federal TradeCommission, or FTC, regularly brings privacy and data enforcement actions15under Section 5 of the Federal Trade Commission Act, alleging that certain activities constitute unfair or deceptive trade practices. Thestates have similar laws that prohibit unfair or deceptive trade practices. There are also state data security laws and state laws thatregulate the use and disclosure of health information, among others. Further, by regulation, the FTC’s Red Flags Rule requires somefinancial 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 ourexisting 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 withall 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. Forexample, at the federal level, the HIPAA Breach Notification Rule mandates notification of breaches affecting protected healthinformation to affected individuals and regulators under conditions set forth in the Rule. Covered Entities must report breaches ofunsecured protected health information to affected individuals without unreasonable delay, but not to exceed 60 days of discovery of thebreach 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 daysof discovery of the breach by the Business Associate or its agents. All states, the District of Columbia, Guam, Puerto Rico, and theVirgin Islands have enacted data breach notification laws. While some of these breach notification laws contain an exception for entitiessubject to HIPAA, other laws do not, and may impose notification obligations in addition to, or inconsistent with, the HIPAA BreachNotification Rule when a data breach implicates protected health information.HIPAA Administrative SimplificationHIPAA also mandated a package of interlocking administrative simplification rules to establish standards and requirements forthe electronic transmission of certain healthcare claims and payment transactions. These regulations are intended to encourageelectronic commerce in the healthcare industry and apply directly to Covered Entities. Some of our businesses, including our healthcareclearinghouse operations, are considered Covered Entities under HIPAA and its implementing regulations.Transaction Standards. The standard transaction regulations established under HIPAA, or Transaction Standards, mandatecertain format and data content standards for the most common electronic healthcare transactions, using technical standardspromulgated by recognized standards publishing organizations. These transactions include healthcare claims, enrollment, payment andeligibility. The Transaction Standards are applicable to that portion of our business involving the processing of healthcare transactionsamong payors, providers, patients and other healthcare industry constituents. Failure to comply with the Transaction Standards maysubject us to civil and potentially criminal penalties and breach of contract claims. The Centers for Medicare and Medicaid Services, orCMS, is responsible for enforcing the Transaction Standards.Payors who are unable to exchange data in the required standard formats can achieve Transaction Standards compliance bycontracting with a clearinghouse to translate between standard and non-standard formats. As a result, use of a clearinghouse hasallowed numerous payors to establish compliance with the Transaction Standards independently and at different times, reducingtransition costs and risks. In addition, the standardization of formats and data standards envisioned by the Transaction Standards hasonly partially occurred. However, PPACA requires HHS to establish operating rules to promote uniformity in the implementation of eachstandardized electronic transaction. We cannot provide assurance regarding how the CMS will enforce the Transaction Standards. Wehave modified our systems and processes to implement the Transaction Standards and we continue to work with payors, healthcareinformation system vendors and other healthcare constituents to maintain our implementation of the Transaction Standards.16Health Plan and Other Entity Identifiers. HHS has promulgated regulations implementing the establishment of a unique healthplan identifier, or HPID. Similar to a provider’s national provider identifier, the HPID provides an identification system for health plans touse for electronic transactions. HHS has also promulgated regulations implementing another entity identifier, or OEID, that serves as anidentifier for entities that are not health plans, health care providers or individuals. These other entities, which include third-partyadministrators, transaction vendors, and clearinghouses, are not required to obtain an OEID, but they could obtain and use one if theyneeded to be identified in standardized transactions. The implementation of the enforcement of the HPID and OEID process has beenindefinitely delayed by HHS, and if implemented its impact on our business is unclear at this time.Financial Services Related Laws and RulesFinancial services and electronic payment processing services are subject to numerous laws, regulations and industrystandards, some of which might impact our operations and subject us, our vendors and our customers to liability as a result of thepayment distribution and processing solutions we offer. Although we do not act as a bank, we offer solutions that involve banks, orvendors who contract with banks and other regulated providers of financial services. As a result, we might be impacted by banking andfinancial services industry laws, regulations and industry standards, such as licensing requirements, solvency standards, requirementsto maintain the privacy and security of nonpublic personal financial information and Federal Deposit Insurance Corporation depositinsurance limits. In addition, our patient billing and payment distribution and processing solutions might be impacted by payment cardassociation operating rules, certification requirements and rules governing electronic funds transfers. If we fail to comply with applicablepayment processing rules or requirements, we might be subject to fines and changes in transaction fees and may lose our ability toprocess credit and debit card transactions or facilitate other types of billing and payment solutions. Moreover, payment transactionsprocessed using the Automated Clearing House Network, or ACH, are subject to network operating rules promulgated by the NationalAutomated Clearing House Association and to various federal laws regarding such operations, including laws pertaining to electronicfunds transfers, and these rules and laws might impact our billing and payment solutions. Further, our solutions might impact the abilityof our payor customers to comply with state prompt payment laws. These laws require payors to pay healthcare claims meeting thestatutory or regulatory definition of a “clean claim” within a specified time frame.Corporate InformationWe were incorporated in June 2000 as Benefitfocus.com, Inc., a South Carolina corporation. In September 2013, wereincorporated in Delaware as Benefitfocus, Inc. Our principal executive offices are located at 100 Benefitfocus Way, Charleston, SouthCarolina 29492, and our phone number is (843) 849-7476. Our website address is www.benefitfocus.com. The information on, or that canbe accessed through, our website is not part of this report. As of December 31, 2019, we employed approximately 1,560 associates.None of our associates is represented by a labor union, and we consider our current relations with our associates to be good.Available InformationOur annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website atwww.benefitfocus.com as soon as reasonably practicable after electronically filing or furnishing such material to the Securities andExchange Commission. The Securities and Exchange Commission maintains a website (www.sec.gov) that includes our reports, proxystatements and other information.17Executive OfficersThe following table sets forth information concerning our executive officers as of March 4, 2020:NameAgePositionRaymond A. August58President and Chief Executive Officer, DirectorMason R. Holland, Jr.55Executive Chairman, DirectorStephen M. Swad58Chief Financial Officer, TreasurerJames P. Restivo59Chief Technology OfficerAnnmarie Fini48Executive Vice President of Customer SuccessRaymond A. August-President, Chief Executive Officer and DirectorRaymond August has been our President and Chief Executive Officer since January 2018 and a director since April 2018. Priorto that, Mr. August served as our Chief Operating Officer since August 2014 and was promoted to the title of President and ChiefOperating Officer in March 2015. Prior to joining Benefitfocus, Mr. August served as the General Manager of the Financial ServicesGroup of Computer Sciences Corp. (now DXC Technology Co. (NYSE: DXC)), or CSC, since October 2012. From March 2008 toSeptember 2012, he served as President of CSC Financial Services Group. Since July 2013 he has served as a member of theExecutive Advisory council for Arthur Ventures Private Equity Fund. Mr. August earned a B.S. in Accounting and Management Sciencefrom the University of South Carolina.Mason R. Holland, Jr.-Executive Chairman of the BoardMason Holland, one of our founders, has been our Executive Chairman and a member of the board of directors since our foundingin 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 also hasestablished and operated a number of other business entities throughout his 30 plus year career, including a real estate developmentfirm established in 1989 and still operational and a jet aircraft manufacturer for which he served as lead investor, chief executive officerand board chairman from 2009 to 2014. Mr. Holland attended Old Dominion University in Norfolk, Virginia.Stephen M. Swad-Chief Financial OfficerStephen Swad has been our Chief Financial Officer since July 2019. He also serves as our Treasurer. Prior to that Mr. Swadserved on our board of directors since December 2013. From January 2016 until July 2019, Mr. Swad served as Chief Financial Officer ofVox Media, Inc. From February 2012 until April 2015, Mr. Swad served as the President, Chief Executive Officer, and a director ofRosetta Stone Inc. (NYSE: RST), a publicly held language-learning software company. He was previously its Chief Financial Officerbeginning in November 2010. Prior to joining Rosetta Stone, Mr. Swad served as the Executive Vice President and Chief FinancialOfficer of Comverse Technology, Inc., beginning in May 2009. Prior to that, he served as Executive Vice President and Chief FinancialOfficer of Federal National Mortgage Association (Fannie Mae) (NASDAQ: FNMA) from May 2007 until August 2008. He has also heldvarious senior financial management positions with public companies, including AOL Inc. (now a part of Oath Inc.) and Time Warner Inc.(NYSE: TWX) and its subsidiaries. Mr. Swad, a former partner of KPMG LLP, has also served as a Deputy Chief Accountant at theSEC. He served on the board of Eloqua, Inc. from August 2011 until February 2013, including between August 2012 and February 2013,during which time it was a publicly held company. Mr. Swad holds a B.A. in business administration from the University of Michigan.James P. Restivo-Chief Technology OfficerJames Restivo has been our Chief Technology Officer since January 2016. Prior to joining Benefitfocus, Mr. Restivo served asVice President, Chief Technology Officer of Dodge Data & Analytics LLC beginning in January 2015. From December 2012 to September2014, Mr. Restivo served as Vice President, Chief Technology Officer of Smarter Workforce at International Business Machines18Corporation, or IBM (NYSE: IBM). Prior to that, beginning in October 2006, Mr. Restivo served as Chief Technology Officer of KenexaCorporation where he managed global public Human Capital Management R&D, SaaS operations and information security before thecompany was purchased by IBM. Mr. Restivo received a B.S. in computer science, applied mathematics and statistics from StonyBrook University and an M.S. from the Massachusetts Institute of Technology in computer science and electrical engineering.Annmarie Fini-Executive Vice President of Customer SuccessAnnmarie Fini has been our Executive Vice President of Customer Success since January 2020, Ms. Fini joined Benefitfocus in2000 as one of the first employees in Client Services. She advanced through several leadership positions since that time, includingsenior vice president of platform strategy, senior vice president of product strategy and senior vice president of employer group. Sheserves on the Coast Area Board of Directors of Junior Achievement of Greater South Carolina. Ms. Fini holds a Bachelor of Arts in publicpolicy from Trinity College in Hartford, Connecticut and is a Certified Group Benefits Associate.19Item 1A. RISK FACTORS.Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertaintiesdescribed below, together with all of the other information in this Annual Report on Form 10-K, including the consolidated financialstatements and the related notes, before deciding to invest in shares of our common stock. If any of the following risks were tomaterialize, our business, financial condition, results of operations, and future growth prospects could be materially and adverselyaffected. In that event, the market price of our common stock could decline and you could lose part or all of your investment in ourcommon stock.Risks Related to Our BusinessWe have had a history of losses, and we might not be able to achieve or sustain profitability.We have had a history of net losses, including of $45.5 million, $52.6 million, and $50.3 million, for the years ended December 31,2019, 2018, and 2017, respectively. We cannot predict if we will achieve sustained profitability in the near future or at all. We expect tomake 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 would not incur as a private company. These expenditures make it harder for us to achieve andmaintain future profitability. Our recent growth in revenue and net benefit eligible lives might not be sustainable, and we might notachieve 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 mayincur 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 commonstock 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 asindicative of our future performance. Moreover, our stock price might be based on expectations of future performance that are unrealisticor that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the priceof our common stock could decline substantially. For example, on August 4, 2017, the first trading day after we publicly announced ouroperating results for the second quarter ended June 30, 2017, our stock price dropped $7.10 per share, or approximately 20.5%, to$27.50. Additionally, our stock traded at a multi-year low in February 2020 of $11.52 per share.Our operating results have varied in the past. In addition to other risk factors listed in this section, some of the important factorsthat may cause fluctuations in our quarterly operating results include:•the extent to which our products and services achieve or maintain market acceptance, including through brokers;•our ability to hire and retain qualified personnel, including the rate of expansion of our sales force;•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 timelybasis;•new competitors and the introduction of enhanced products and services from competitors;•the financial condition of our current and potential customers;20•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;•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 parton expectations regarding future revenue. Accordingly, unexpected revenue shortfalls might decrease our gross margins and couldcause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of our common stock could fallsubstantially, either suddenly or over time.Because we recognize revenue and expense relating to monthly subscriptions and professional services over varying periods,downturns or upturns in sales are not immediately reflected in full in our operating results.As a SaaS company, under ASC 606, we recognize our subscription revenue monthly for the term of our contracts and thereforea shortfall in demand for our software solutions and professional services or a decline in new or renewed contracts in any one quartermight not significantly reduce our revenue for that quarter, but could negatively affect our revenue in future quarters. Accordingly, theeffect of significant downturns in new or renewed sales of our products and services might not be reflected in full in our results ofoperations until future periods.Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period,because revenue from new customers has to be recognized over the applicable term of the contracts.We depend on our senior management team, and the loss of one or more key associates or an inability to attract and retainhighly 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 onour 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 ourexecutive management team resulting from the hiring or departure of executives, which could disrupt our business. For example: in2019, our Executive Vice President of Global Sales resigned to take a similar position at a different company and our former ChiefFinancial Officer resigned for personal reasons. The loss of one or more of our executive officers or key associates could have a seriousadverse effect on our business.To continue to execute our growth strategy, we also must attract and retain highly skilled personnel. Competition is intense forsalespeople and for engineers with high levels of experience in designing and developing software and Internet-related services. Wemight not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. We have from time totime in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilledpersonnel with appropriate qualifications. The pool of qualified personnel with SaaS experience and/or experience working with thebenefits market is limited overall and specifically in Charleston, South Carolina, where our principal office is located. In addition, many ofthe companies with which we compete for experienced personnel have greater resources than we have and are located in geographicareas, 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 oftenconsider the value of the equity awards they are to receive in connection21with their employment. Volatility in the price of our stock might, therefore, adversely affect our ability to attract or retain highly skilledpersonnel. Furthermore, the requirement to expense certain stock awards might discourage us from granting the size or type of stockawards that job candidates require to join our company. If we fail to attract new personnel or fail to retain and motivate our currentpersonnel, our business and future growth prospects could be severely harmed.We operate in a highly competitive industry, and if we are not able to compete effectively, our business and operating resultswill be harmed.The benefits management software market is highly competitive and is likely to attract increased competition, which could makeit 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 ofthese entities is increasing as a result of continued consolidation in both the IT and healthcare industries. We expect large integratedsoftware companies to become more active in our market, both through acquisitions and internal investment. In addition, insurancecarriers may seek to bring certain of their benefits software solutions in-house, whether through acquisitions or internal investment. Forexample, Aetna, a customer of ours, owns bswift, a provider of insurance exchange technology solutions and benefits administrationtechnology solutions and services. If Aetna were to decide to use bswift’s solution in place of any portion of the solutions we currentlyprovide to them, then our business and operating results could be materially and adversely affected. As costs fall and technologyimproves, 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 greaterresources than we do. As a result, our competitors might be able to respond more quickly and effectively than we can to new orchanging opportunities, technologies, standards, or customer requirements. In addition, current and potential competitors haveestablished, and might in the future establish, cooperative relationships with vendors of complementary products, technologies, orservices to increase the availability of their products in the marketplace. Accordingly, new competitors or alliances might emerge thathave greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greaterfinancial resources, and larger sales forces than we have, which could put us at a competitive disadvantage. Further, in light of theseadvantages, even if our products and services are more effective than those of our competitors, current or potential customers mightaccept competitive offerings in lieu of purchasing our offerings. Increased competition is likely to result in pricing pressures, which couldnegatively 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 informationsystems in place with potential customers in our target market. These existing enterprise vendors might promise products or servicesthat offer ease of integration with existing systems and which leverage existing vendor relationships. In addition, large insurance carriersoften 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 thanwe 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 achieveand sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on the willingness ofemployers, carriers, consumers and brokers to increase their use of benefits management software. Many employers and carriers haveinvested substantial personnel and financial resources to integrate internally developed solutions or traditional enterprise software intotheir businesses for benefits management, and therefore might be reluctant or unwilling to migrate to our cloud-based solutions,including BenefitsPlace. Furthermore, some businesses might be reluctant to use cloud-based solutions because they have concernsabout the security of their data and the reliability of the technology delivery model associated with these solutions. If employers,carriers, consumers and brokers do not perceive the benefits of our solutions, then our market might not22develop at all, or it might develop more slowly than we expect, either of which could significantly adversely affect our operating results. Inaddition, we might make errors in predicting and reacting to relevant business trends, which could harm our business. If any of theserisks 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 expectedrevenue and profit.We derive most of our revenue growth from subscription offerings and, specifically, SaaS offerings. This business model dependsheavily on achieving economies of scale because the initial upfront investment is costly and the associated revenue is recognized on aratable basis. If we fail to achieve appropriate economies of scale or if we fail to manage or anticipate the evolution and demand of theSaaS 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, insurancecarriers, and brokers and provide high quality support services, we might not remain competitive, and our revenue andoperating results could suffer.Our success depends in part on providing products and services that consumers, employers, insurance carriers, and brokers willuse to manage benefits. We must continue to invest significant resources in research and development in order to enhance our existingproducts and services and introduce new high quality products and services that customers will want. If we are unable to predict userpreferences 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 timedwith market opportunity, or are not effectively brought to market. As technology continues to develop, our competitors might be able tooffer results that are, or that are perceived to be, substantially similar to or better than those generated by us. This would force us tocompete 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 delayor prevent our development, introduction, or implementation of new solutions and enhancements. The introduction of new solutions bycompetitors, the emergence of new industry standards, or the development of entirely new technologies to replace existing offeringscould 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 therenewal of existing customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our abilityto sell additional products and services to existing customers would suffer and our reputation with existing or potential customers wouldbe 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 to three years for employers and three to fiveyears for carriers. While our employer contracts generally automatically renew, our carrier customers have no obligation to renew theircontracts 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, althoughgenerally our carrier contracts are only cancellable by the carrier in an instance of our uncured breach. As a result, our ability to growdepends in part on the continuance and renewal of our carrier contracts. We may not be able to accurately predict future trends incustomer renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including23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 ourservices, renew on less favorable terms, or do not purchase additional functionality or products, our revenue may grow more slowly thanexpected 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 thesecustomers would reduce our revenue and net income.Our ten largest customers by revenue accounted for approximately 37%, 42% and 42% of our consolidated revenue in each of2019, 2018 and 2017, respectively. No customer accounted for more than 10% of our revenue in 2019. One customer accounted forapproximately 13% and 11% of our revenue in 2018 and 2017, respectively. If any of our large customers or strategic partners decidesnot to renew its contracts with us, or to renew on less favorable terms, our business, revenue, reputation, and our ability to obtain newcustomers could be materially and adversely affected.Economic or geopolitical uncertainties or downturns in the general economy or the industries in which our customers operatecould disproportionately affect the demand for our solutions and negatively impact our results of operations.General worldwide economic and geopolitical conditions have experienced significant downturns in the past, and market volatilityand uncertainty remain widespread, including as a result of the coronavirus and the 2020 presidential election. All of this makes itextremely difficult for our customers and us to accurately forecast and plan future business activities. In addition, these conditions couldcause our customers or prospective customers to decrease headcount, benefits, or HR budgets, which could decrease corporatespending 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 tosufficient credit or obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and adverselyaffect our revenue. If that were to occur, our financial results could be harmed. Further, challenging economic conditions might impair theability of our customers to pay for the products and services they already have purchased from us and, as a result, our write-offs ofaccounts receivable could increase. We cannot predict the timing, strength, or duration of any economic slowdown or recovery. If thecondition of the general economy or markets in which we operate worsens, our business could be harmed.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 customersand to manage our existing customer base. Identifying and recruiting qualified personnel and training them in the use of our softwarerequires significant time, expense, and attention. It can take six months or longer before a new sales representative is fully trained andproductive. Our business may be adversely affected if our efforts to expand, train and retrain our direct sales force do not generate acorresponding increase in revenue. For example, reductions of our salesforce in 2016 and 2018 negatively impacted sales, and as aresult, revenue going forward. In particular, if we are unable to hire, develop and retrain sufficient numbers of productive direct salespersonnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, sales of ourproducts and services will suffer and our growth will be impeded.24Our growth depends in part on the success of our strategic relationships with third parties, including brokers.In order to grow our business, we anticipate that we will continue to depend on our relationships with third parties includingresellers such as Mercer Health and Benefits LLC, or Mercer, and SAP SE, and other referral sources such as brokers, consultants,specialty benefits providers, insurance carriers, technology and content providers, and third-party system integrators. Identifyingpartners, negotiating and documenting relationships with them, and developing referral sources requires significant time and resources.In the first quarter of 2019, Mercer sold all of its Benefitfocus stock and we amended our commercial relationship with Mercer to betteralign with our strategic priorities and current trends in the marketplace. Our revised commercial agreement with them led to a reductionin our revenue from the relationship in 2019 and we believe this trend will continue in 2020. Our competitors might be effective inproviding incentives to third parties to favor their products or services or to prevent or reduce subscriptions to our products and services.Acquisitions of our partners by our competitors could result in a decrease in the number of our current and potential customers, as ourpartners may no longer facilitate the adoption of our applications by potential customers. If we are unsuccessful in establishing ormaintaining our relationships with third parties, our ability to compete in the marketplace or to grow our revenue could be impaired andour operating results may suffer. Even if we are successful, we cannot assure you that these relationships will result in increasedcustomer 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 towhich our employer and carrier customers subscribe or their employees purchase 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 benefitsand the number of products or services subscribed to by our customers or purchased by their employees. Many factors may lead to adecrease in the number of individuals covered by our customers and the number of products or services subscribed to by ourcustomers, 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 customersdecreases for any reason, our revenue will likely decrease.Failure to manage our continued growth effectively could increase our expenses, decrease our revenue, and prevent us fromimplementing our business strategy.We have been experiencing continued growth, which could put a strain on our business. To manage this and our anticipatedfuture growth effectively, we must continue to maintain and enhance our IT infrastructure, financial and accounting systems, andcontrols. We also must attract, train, and retain a significant number of qualified sales and marketing personnel, customer supportpersonnel, professional services personnel, software engineers, technical personnel, and management personnel. Failure to effectivelymanage our growth could lead us to over-invest or under-invest in development and operations, result in weaknesses in ourinfrastructure, systems, or controls, give rise to operational mistakes, losses, loss of productivity or business opportunities, and resultin loss of employees and reduced productivity of remaining employees. Our growth could require significant capital expenditures andmight divert financial resources from other projects such as the development of new products and services. If our management is unableto effectively manage our growth, our expenses might increase more than expected, our revenue could decline or might grow moreslowly than expected, and we might be unable to implement our business strategy. The quality of our products and services mightsuffer, which could negatively affect our reputation and harm our ability to retain and attract customers.25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 widespreadacceptance of our existing solutions and is an important element in attracting new customers. Furthermore, we believe that theimportance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will dependlargely on the effectiveness of our marketing efforts and on our ability to provide reliable and useful services at competitive prices. Ourefforts to build, maintain and market changes to our brand nationally have involved significant expenses. Brand promotion activities maynot 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 mayfail 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.We might not be able to utilize a significant portion of our net operating loss or other tax credit carryforwards, which couldadversely affect our profitability.As of December 31, 2019, we had federal and state net operating loss carryforwards due to prior period losses, which if notutilized will expire during 2020 through 2038. We also have South Carolina jobs tax credit and headquarters tax credit carryforwards,some of which have expired unutilized. The tax credit carryforwards that expire unused are unavailable to offset future income taxliabilities, 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 operatingloss 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 increasetheir ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similarrules might apply under state tax laws. Future issuances of our stock could cause an “ownership change”. It is possible that anownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards orother 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 andother proprietary rights.Our success depends in part on our ability to enforce our intellectual property and other proprietary rights. We rely on acombination of trademark, trade secret, copyright, patent, and unfair competition laws, as well as license and access agreements andother contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect ourintellectual property and proprietary information by requiring employees and consultants to enter into confidentiality, noncompetition, andassignment of inventions agreements. Our attempts to protect our intellectual property might be challenged by others or invalidatedthrough administrative process or litigation. While we have a number of patents granted in the United States and other jurisdictionsincluding China, Japan, Australia, Taiwan, Hong Kong and Canada, we might not be able to obtain meaningful patent protection for oursoftware. In addition, if any patents are issued in the future, they might not provide us with any competitive advantages, or might besuccessfully challenged by third parties. Agreement terms that address non-competition are difficult to enforce in many jurisdictions andmight not be enforceable in certain cases. To the extent that our intellectual property and other proprietary rights are not adequatelyprotected, third parties might gain access to our proprietary information, develop and market products or services similar to ours, or usetrademarks similar to ours, each of which could materially harm our business. Existing U.S. federal and state intellectual property lawsoffer only limited protection. Moreover, the laws of other countries in which we might in the future conduct operations or contract forservices might afford little or no effective protection of our intellectual property. The failure to adequately protect our intellectual propertyand other proprietary rights could materially harm our business.26In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of theintellectual 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 materialadverse effect on our business, operating results or financial condition.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 copyrightsand by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We have received in thepast, and might receive in the future, communications from third parties claiming that we have infringed the intellectual property rights ofothers. Our technologies might not be able to withstand any third-party claims or rights against their use. Any intellectual propertyclaims, with or without merit, could be time-consuming and expensive to resolve, divert management attention from executing ourbusiness plan, and require us to pay monetary damages or enter into royalty or licensing agreements. In addition, many of our contractscontain warranties with respect to intellectual property rights, and most require us to indemnify our clients for third-party intellectualproperty 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 moneyor obtain a license to continue to use the software or information that is the subject of the claim, or otherwise restrict or prohibit our useof it. We might not be able to obtain a license on commercially reasonable terms, if at all, from third parties asserting an infringementclaim; 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 touse 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.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 suchas 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 availableon terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, therebyreducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, which couldreduce the trading price of our stock.Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value, and adversely affect ouroperating 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 complementarycompanies, services, and technologies in the future. For example, in February 2019, we acquired certain assets of Connecture, Inc. Wespent considerable time, effort, and money pursuing this acquisition, our first in years, and need now to continue to successfullyintegrate 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;27•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 theacquired 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 necessaryor valuable activities.Future sales to customers outside the United States or with international operations might expose us to risks inherent ininternational 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 resourcesand management attention and will subject us to regulatory, economic, and political risks that are different from those in the UnitedStates. Because of our limited experience with international operations, our international expansion efforts might not be successful increating demand for our products and services outside of the United States or in effectively selling our solutions in the internationalmarkets 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 statements and actions by the current U.S.presidential administration 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 andassociated expenses;•data privacy and security laws, such as the European General Data Protection Regulation and data localization laws thatrequire data to 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 inenforcing 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;•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 currenciesmight impact our operating results when translated into U.S. dollars.Changes in and interpretations of accounting principles and their implementation could have an adverse impact on ourreported financial results.We prepare our financial statements in accordance with GAAP. These rules are subject to interpretation by the SEC and variousbodies formed to interpret and create appropriate accounting principles. Changes in these rules or their interpretation could have anegative impact on our reported financial results and may retroactively affect previously reported transactions. For example, in February2016, FASB issued an accounting standards update on leases, requiring lessees, among other things, to recognize lease assets andlease liabilities on the balance sheet for those leases classified as operating28leases under previous authoritative guidance. This update, which was effective for us beginning January 1, 2019, also introduces newdisclosure requirements for leasing arrangements. The effects of the new accounting standard are described in Note 2 to ourconsolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.Implementation of these new standards, and any future accounting pronouncements, implementation guidelines, orinterpretations, 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 have expended and might in the future expendconsiderable effort and resources implementing accounting updates, which in and of itself could have negative impact on our results ofoperations.If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for past sales andour future sales may decrease.We might lose sales or incur significant expenses if states successfully impose broader guidelines on state sales and usetaxes. A successful assertion by one or more states requiring us to collect sales or other taxes on the licensing of our software or saleof our services could result in substantial tax liabilities for past transactions and otherwise harm our business. In addition, each statehas different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretationsthat change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes ina particular state, voluntarily engage state tax authorities in order to determine how to comply with their rules and regulations. Wecannot assure you that we will not be subject to sales and use taxes or related penalties for past sales in states where we currentlybelieve no such taxes are required.Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicablesales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to ourservices, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include substantialinterest and penalty charges. Our customer contracts typically provide that our customers must pay all applicable sales and similartaxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse responsibility for interest or penaltiesassociated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and if ourclients 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 customersand might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes areimposed.Risks Related to Our Products and Services OfferingsThe breach or failure of our security measures, unauthorized access to or disclosure of customers’ or consumers’ data, ordisruption of our products or services caused by security breaches or other incidents may result in our products and servicesbeing perceived as unsecure, cause customers and consumers to curtail or stop using our products and services, and cause usto incur significant liabilities.Our products and services involve the storage and transmission of customers’ and consumers’ confidential information, whichmay include sensitive individually identifiable information that is subject to stringent legal, regulatory, or contractual obligations. Becauseof the sensitivity of this information, our privacy and security measures related to our products and service offerings, including thesecurity features of our software, are very important. Although we have privacy and security measures in place designed to protectcustomers’ and consumers’ data and our systems, techniques used to obtain unauthorized access or to sabotage systems and datachange frequently and often are not recognized until launched against a target. It is also possible that, due to the surreptitious nature ofcertain data29breaches and other incidents, they may remain undetected for an extended period, which may exacerbate harm to the company. Wecannot ensure that our measures will not be breached or otherwise fail to protect confidential information or prevent disruption of ourproducts and services, including as a result of inadvertent disclosures through technological or human error (including employee orservice provider error), malfeasance, hacking, ransomware, social engineering (including phishing schemes), computer viruses, malware,or otherwise. Unauthorized individuals may acquire or obtain unauthorized access to our customers’ or consumers’ confidentialinformation (including medical, financial or other personal information). Data breaches, failures of our privacy or security measures,inadvertent disclosures, disruptions of our products and services, and other incidents could result in serious harm to our reputation, ourbusiness could suffer, and we could incur serious liability and other expenses related to litigation (including damages associated withbreach-of-contract claims and consumer litigation), penalties for violation of applicable laws or regulations, costly litigation or governmentinvestigations, and remediation and remediation efforts to prevent future occurrences.We rely on various parties (including as users of our products, services, and systems), such as employers’ HR departments,carriers, service providers, and consumers themselves for key services and activities that impact the security of our products, services,and systems and the privacy and security of data and information accessible within them, such as data hosting and administration ofenrollment, consumer status changes, claims, and billing. These individuals and organizations may, for example, experience databreaches or cause unauthorized access to or disclosure of information. Our customers may authorize or enable third parties to accesstheir information and data that is stored on our systems. Because we do not determine such access, we cannot ensure the completesecurity, confidentiality, integrity, or availability of such data in our systems.Privacy and security incidents are not uncommon in our industry due to the nature of our industry’s services, the high volume ofsensitive information involved, and the desirability of that information to bad actors. Incidents involving phishing, hacking, andmisdirected communications containing sensitive information can and do occur. Customers and end-users of our industry’s productsand services are also the source of privacy and security incidents, sometimes due to failures to adhere to appropriate privacy and datasecurity practices. For example, employers sometimes fail to terminate the account credentials of former employees or permit currentemployees to share account credentials.Like others in our industry, we experience cyber-attacks and other attempts to disrupt or gain unauthorized access to oursystems on a regular basis. When we become aware of privacy or security incidents, we work diligently to address them, including byworking to terminate unauthorized or inappropriate access and implementing additional measures, training, and providing guidance tocustomers and end users in order to avoid the reoccurrence and future incidents. Although to date privacy and security incidents havenot been material, they could expose us to significant expense, legal liability, and harm to our reputation, which might result in loss ofbusiness.30Our failure or failure by our customers to obtain proper permissions and waivers might result in claims against us or may limitor 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 ofinformation 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 or consumers do not obtain necessary permissionsand waivers, then our use and disclosure of information that we receive from them or on their behalf might be limited or prohibited bystate or federal privacy laws or other laws. This could impair our functions, processes and databases that reflect, contain, or are basedupon 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 disclosureof information by reason of lack of valid notices, agreements, permissions or waivers. These claims or liabilities could subject us tounexpected 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, ordivert 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 mightencounter technical obstacles, and it is possible that we discover problems that prevent our proprietary applications from operatingproperly. If they do not function reliably or fail to achieve customer expectations in terms of performance, customers could assert liabilityclaims against us and/or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract ormaintain customers.Moreover, benefits management software as complex as ours has in the past contained, and may in the future contain, ordevelop, 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 whichis outside of our control. Defects or errors might arise in our existing or new software or service processes. Because changes inemployer, carrier, and legal requirements and practices relating to benefits are frequent, we are continuously discovering defects anderrors in our software and service processes compared against these requirements and practices. Undiscovered vulnerabilities couldexpose our software to unscrupulous third parties who develop and deploy software programs that could attack our software or result inunauthorized access to, acquisition of, or disclosure of customer data. Defects and errors and any failure by us to identify and addressthem 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 errorsin our product or service processes might discourage existing or potential customers from purchasing services from us. Correction ofdefects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors or in responding toresulting 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 greatersensitivity to service errors and security vulnerabilities than customers of software products in general. We market and sell servicesthat, among other things, provide information to assist care providers in tracking and treating ill patients. Any operational delay in orfailure of our software service processes might result in the disruption of patient care and could cause harm to our business andoperating results.Our customers might assert claims against us in the future alleging that they suffered damages due to a defect, error, or otherfailure of our product or service processes. A product liability claim or errors or omissions claim could subject us to significant legaldefense costs and adverse publicity regardless of the merits or eventual outcome of such a claim.31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 tointerruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) power lossand telecommunications failures, (ii) fire, flood, hurricane, and other natural disasters, (iii) software and hardware errors, failures orcrashes in our own systems or in other systems, (iv) computer viruses, denial-of-service attacks, hacking and similar disruptiveproblems in our own systems and in other systems, and (v) civil unrest, war, and/or terrorism. We have implemented various measuresto protect against interruptions of customers’ access to our platform. If customers’ access is interrupted because of problems in theoperation of our facilities, we could be exposed to significant claims by customers, particularly if the access interruption is associatedwith problems in the timely delivery of funds due to customers or medical information relevant to patient care. Our plans for disasterrecovery and business continuity rely on third-party providers of related services. If those vendors fail us at a time when our systems arenot operating correctly, we could incur a loss of revenue and liability for failure to fulfill our obligations. Any significant instances ofsystem downtime could negatively affect our reputation and ability to retain customers and sell our services, which would adverselyimpact our revenue.In addition, retention and availability of patient care and physician reimbursement data are subject to federal and state lawsgoverning record retention, accuracy, and access. Some laws impose obligations on our customers and on us to produce information forthird parties and to amend or expunge data at their direction. Our failure to meet these obligations might result in liability, which couldincrease 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 servicesprovided by these third parties or our own systems could expose us to litigation and negatively impact our relationships withcustomers, adversely affecting our brand and our business.We serve our customers primarily from two data centers, one located in Raleigh, North Carolina and the other located inCharlotte, North Carolina, and to a lesser extent from a data center in Georgia associated with the acquisition of Connecture assetscompleted in February 2019. We also added a data center in Ashburn, Virginia in October 2019. While we control and have access toour servers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew theiragreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commerciallyreasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructureto new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so. Problemsfaced by our third-party data center locations, with the telecommunications network providers with whom we or they contract, or with thesystems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect theexperience of our customers. Our third-party data centers operators could decide to close their facilities without adequate notice. Inaddition, any financial difficulties, such as bankruptcy faced by our third-party data centers operators or any of the service providers withwhom 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 theInternet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidthcapacity, 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 totime. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of systemunavailability, which could negatively32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 thishardware and software might not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any ofthis 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 andinformation services they provide. Interruptions in our network access and services might in connection with third-party technology andinformation services reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscription services, subjectus to potential liability, or adversely affect our renewal rates. Although we maintain insurance for our business, the coverage under ourpolicies might not be adequate to compensate us for all losses that may occur. In addition, we might not be able to continue to obtainadequate 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 intellectualproperty rights.Some of our products and solutions use or incorporate software that is subject to one or more open source licenses. Opensource software is typically freely accessible, usable, and modifiable. Certain open source software licenses require a user who intendsto distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to theuser’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of theopen 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 onour ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continueoffering our products or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or to releaseour proprietary software code under the terms of an open source license, any of which could harm our business. Further, given thenature of open source software, it may be more likely that third parties might assert copyright and other intellectual propertyinfringement 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 ensurethat 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 whenwe 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 forour products and solutions without our knowledge, we could, under33certain circumstances, be required to disclose the source code to our products and solutions. This could harm our intellectual propertyposition and our business, results of operations, and financial condition.Risks Related to RegulationGovernment regulation of the areas in which we operate creates risks and challenges with respect to our compliance effortsand our business strategies.The employee benefits industry is highly regulated and is subject to changing political, legislative, regulatory, and otherinfluences. Efforts at regulatory reform are ongoing and may impact the regulatory environment in our industry. Existing and new lawsand regulations affecting the employee benefits industry could create unexpected liabilities for us, cause us to incur additional costsand restrict our operations. These laws and regulations are complex and their application to specific services and relationships are notclear. In particular, many existing laws and regulations affecting employee benefits, when enacted, did not anticipate the services thatwe provide, and these laws and regulations might be applied to our services in ways that we do not anticipate. Our failure to accuratelyanticipate 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:•Healthcare Market Reforms. Healthcare services and benefits are delivered and reimbursed under an increasinglyintricate, and frequently uncertain, statutory and regulatory framework. Ongoing efforts to repeal and/or reform part or all ofthe Patient Protection and Affordable Care Act of 2010 (“PPACA”), new payment models for certain federal health careprograms, and efforts to slow the growth in healthcare spending and to alter the regulatory landscape have createduncertainty in the healthcare industry broadly. Although many of these laws and regulations do not directly apply to us,they may affect the business of many of our customers. For instance, carriers and large employers might experiencechanges in the numbers of individuals they insure as a result of the elimination of the penalty associated with PPACA’sindividual mandate, possible repeal of guaranteed issue, and flux in the state and national exchanges under PPACA.Although we are unable to predict with any reasonable certainty or otherwise quantify the likely impact of PPACA repealefforts and other deregulatory initiatives on our business model, financial condition, and operations, as well as changes inthe business of our customers and the number of individuals they insure, may negatively impact our business.•False Claims Act and Related Laws. Federal and state laws prohibit the submission of false information and the failure todisclose certain information in connection with claims for reimbursement from state and federal healthcare programs. Inaddition, federal and state laws prohibit self-referrals and kickbacks in association with the provision of healthcareservices. 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 not generally subject to these laws and regulations, any contract we have with agovernment entity requires us to comply with these laws and regulations. Any failure of our services to comply with theselaws and regulations could result in substantial liability, including but not limited to criminal liability, could adversely affectdemand for our services, and could force us to expend significant capital, research and development, and other resourcesto address the failure. Any determination by a court or regulatory agency that our services with government clients violatethese laws and regulations could subject us to civil or criminal penalties, invalidate all or portions of some of ourgovernment client contracts, require us to change or terminate some portions of our business, require us to refundportions of our services fees, cause us to be disqualified from serving not only government clients but also all clients doingbusiness with government payers, and have an adverse effect on our business.•HIPAA and Other Privacy and Security Requirements. Numerous federal and state laws and regulations govern the privacyand security of personal health information. In particular,34regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, asamended, 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 mostproviders are “Covered Entities” subject to HIPAA. With respect to our operations as a healthcare clearinghouse, we aredirectly subject to the privacy regulations established under HIPAA, or the Privacy Rule, and the security regulationsestablished under HIPAA, or the Security Rule, and the data security breach notification regulations established underHIPAA, or the Breach Notification Rule. In addition, our carrier customers, or payors, are considered Covered Entities andare required to enter into written agreements with us, known as Business Associate Agreements, under which we areconsidered to be a “Business Associate” and that require us to safeguard protected health information and restrict how wemay use and disclose such information. Both Covered Entities and Business Associates are subject to direct oversightand audit by the Department of Health and Human Services.Violations of HIPAA could result in civil fines of up to $58,490 per violation and a maximum civil penalty of $1,754,698 in acalendar year for violations of the same requirement, as well as criminal penalties. The U.S. Department of Health andHuman Services’ Office for Civil Rights (“OCR”), which enforces HIPAA, appears to have increased its enforcementactivities. OCR also operates a formal HIPAA audit program. The audits are intended to assess compliance with HIPAA byboth 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.Additionally, state attorneys general may bring civil actions seeking either injunctions or damages in response toviolations of HIPAA that threaten the privacy of state residents.We may 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 orhow those changes could affect our business or the costs associated with compliance. Noncompliance may result inlitigation, civil penalties, fines and/or settlements.Some payors and clearinghouses interpret HIPAA transaction requirements differently than we do. Where payors orclearinghouses require conformity with their interpretations as a condition of a successful transaction, we seek to complywith their interpretations.In addition to the Privacy Rule and Security Rule, most states have enacted patient confidentiality laws that protectagainst the disclosure of confidential medical and/or health information, and many states have adopted or are consideringfurther legislation in this area, including privacy safeguards, security standards, and data security breach notificationrequirements. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federalrequirements, and we are required to comply with them. Failure by us to comply with any state standards regardingpatient privacy may subject us to penalties, including civil monetary penalties and, in some circumstances, criminalpenalties. Such failure may injure our reputation and adversely affect our ability to retain customers and attract newcustomers.•Personal Privacy and Consumer Protection. Numerous federal and state laws and regulations govern the collection,retention, use, and disclosure of personal information. In addition to HIPAA, we are subject to various laws, rules andregulations related to privacy and information security, including those promulgated under the Gramm-Leach-Bliley Actand various state laws regulating the use and security of personal information. Those laws, rules, and regulations includerequirements such as reasonable and appropriate safeguards to protect personal information or providing appropriatenotice to consumers about how their personal information will be used or disclosed. In addition, state legislatures havebeen actively enacting new laws addressing data security, security breach notification, and privacy, including35the California Consumer Privacy Act of 2018. These areas may present implementation challenges, could be anenforcement priority for the state regulators, and could generate increased lawsuits by consumers and other individuals.Our management believes that we are currently operating in compliance with these regulations. However, continuedcompliance 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 andtechnology costs for us.•Medicare and Medicaid Regulatory Requirements. We have contracts with insurance carriers who offer MedicareManaged Care (also known as Medicare Advantage or Medicare Part C) and Medicaid Managed Care benefits plans. Wealso 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, thefederal agency that provides oversight of the Medicare and Medicaid programs. The Medicaid Managed Care plans areregulated 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 forceus to change the way we do business or otherwise restrict our ability to provide services to such plans. Moreover, theregulatory environment with respect to these programs is increasingly complex.•Financial Services-Related Laws and Rules. Financial services and electronic payment processing services are subject tonumerous laws, regulations and industry standards, some of which might impact our operations and subject us, ourvendors, and our customers to liability as a result of the payment distribution and processing solutions we offer. Althoughwe do not act as a bank, we offer solutions that involve banks, or vendors who contract with banks and other regulatedproviders 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 theprivacy and security of nonpublic personal financial information, and Federal Deposit Insurance Corporation depositinsurance limits. In addition, our patient billing and payment distribution and processing solutions might be impacted bypayment card association operating rules, certification requirements, and rules governing electronic funds transfers. If wefail to comply with applicable payment processing rules or requirements, we might be subject to fines and changes intransaction fees and may lose our ability to process credit and debit card transactions or facilitate other types of billingand payment solutions. Moreover, payment transactions processed using the Automated Clearing House are subject tonetwork operating rules promulgated by the National Automated Clearing House Association and to various federal lawsregarding such operations, including laws pertaining to electronic funds transfers, and these rules and laws might impactour billing and payment solutions. Further, our solutions might impact the ability of our payor customers to comply withstate prompt payment laws. These laws require payors to pay healthcare claims meeting the statutory or regulatorydefinition 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 adoptregulations regarding brokerage activities. Our business's regulatory oversight generally also includes activity governingthe 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 thejurisdictions in which we operate depends on our compliance with the rules and regulations promulgated from time to timeby the regulatory authorities in each of these jurisdictions.•ERISA. The Employee Retirement Income Security Act of 1974, as amended, or ERISA, regulates how employeebenefits are provided to or through certain types of employer-sponsored health benefits plans. ERISA is a set of laws andregulations that is subject to36periodic interpretation by the U.S. Department of Labor as well as the federal courts. In some circumstances, and undercertain customer contracts, we might be deemed to have assumed duties that make us an ERISA fiduciary, and thus berequired to carry out our operations in a manner that complies with ERISA in all material respects. We believe that ourcurrent operations do not render us subject to ERISA fiduciary obligations, and therefore that we are in materialcompliance with ERISA and that any such compliance does not currently have a material adverse effect on ouroperations. However, there can be no assurance that continuing ERISA compliance efforts or any future changes toERISA will not have a material adverse effect on us.•Third-Party Administrator Laws. Numerous states in which we do business have adopted regulations governing entitiesengaged in third-party administrator, or TPA, activities. TPA regulations typically impose requirements regardingenrollment into benefits plans, claims processing and payments, and the handling of customer funds. Although we do notbelieve we are currently acting as a TPA, changes in state regulations could result in us being obligated to comply withsuch regulations, which might require us to obtain licenses to provide TPA services in such states.Potential regulatory requirements placed on our software, services, and content could impose increased costs on us, delay orprevent 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 ofways. As these requirements proliferate, we must change or adapt our products and services to comply. Changing regulatoryrequirements might render our services obsolete or might block us from accomplishing our work or from developing new services. Thismight in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introductionof new product or service types more costly or more time-consuming than we currently anticipate. It might even prevent introduction byus 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 benefitsplatforms or clearinghouses. In addition, federal regulations have been changed to permit such subsidy from additional sources subjectto certain limitations. To the extent that we do not qualify or participate in such subsidy programs, demand for our services might bereduced, which may decrease our revenue. In addition, prior proposals, including from leading Democratic candidates running forpresident in the 2020 elections, regarding healthcare reform have included the concept of creation of a single payor for healthcareinsurance. This kind of consolidation of critical benefits activity could negatively impact the demand for our services.Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our associates withrespect to third parties.Among other things, certain services offered by us involve collecting payment information from individuals, and this frequentlyincludes check and credit card information. Even though we do not handle direct payments, our services also involve the use anddisclosure of personal and business information that could be used to impersonate third parties, commit identity theft, or otherwise gainaccess to their data or funds. If any of our associates take, convert, or misuse such funds, documents, or data, we could be liable fordamages, and our business reputation could be damaged or destroyed. Moreover, if we fail to adequately prevent third parties fromaccessing personal and/or business information and using that information to commit identity theft, we might face legal liabilities andother losses than can have a negative impact on our business.37Risks Related to Our IndebtednessWe recently incurred substantial indebtedness that may decrease our business flexibility, access to capital and/or increase ourborrowing costs, and we may still incur substantially more debt, which may adversely affect our operations and financialresults.In December 2018, we issued $240.0 million aggregate principal of 1.25% convertible senior notes (the “Notes”) dueDecember 15, 2023, unless earlier repurchased by us or converted by the holder pursuant to their terms. The Notes may limit our abilityto borrow additional funds for working capital, capital expenditures, acquisitions or other general business purposes; limit our ability touse our cash flow or obtain additional financing for future working capital, capital expenditures, acquisitions or other general businesspurposes; require us to use a substantial portion of our cash flow from operations to make debt service payments; limit our flexibility toplan for or react to, changes in our business and industry; place us at a competitive disadvantage compared to our less leveragedcompetitors; and increase our vulnerability to the impact of adverse economic and industry conditions. Further, the indenture governingthe Notes does not restrict our ability to incur additional indebtedness and we and our subsidiaries may incur substantial additionalindebtedness in the future, subject to the restrictions contained in any future debt instruments existing at the time, some of which maybe secured indebtedness.Servicing our debt requires a significant amount of cash, and we might not have or be able to obtain sufficient cash to pay oursubstantial debt.As of December 31, 2019, we had $240.0 million aggregate principal of Notes outstanding. We also had the ability to borrow anaggregate of $88.5 million under our current credit facility, all of which would be secured debt. Our ability to make scheduled paymentsof the principal of, to pay interest on or to refinance our indebtedness, depends on our future performance, which is subject to economic,financial, competitive and other factors beyond our control. Our business might not continue to generate cash flow from operations in thefuture sufficient to service our debt timely. In addition, our ability to repurchase or to pay cash upon conversion of the Notes may belimited by law, regulatory authority or agreements governing our future indebtedness. If we are unable to generate sufficient cash toservice our debt, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additionalequity capital on terms that may be onerous or highly dilutive. In addition, our ability to refinance our indebtedness will depend on thecapital markets and our financial condition at such time. We might not be able to engage in any of these activities or engage in theseactivities on desirable terms, which could result in a default and acceleration of our debt obligations.The conditional conversion feature of the Notes, if triggered, and any required repurchase of the Notes may adversely affect ourfinancial condition and operating results.In the event any conditional conversion feature of the Notes is triggered, holders of the Notes will be entitled to convert the Notesat any time during specified periods at their option. In addition, holders of the Notes have the right to require us to repurchase theirNotes upon the occurrence of a fundamental change. If one or more holders elect to convert their Notes (and unless we elect to satisfyour conversion obligation by delivering solely shares of our common stock, other than paying cash in lieu of delivering any fractionalshare), or if we are required to repurchase the Notes due to a fundamental change, we would be required to settle a portion or all of ourconversion obligation through the payment of cash or repurchase the Notes with cash, both of which could adversely affect our liquidity.In addition, even if holders do not elect to convert their Notes upon a conditional conversion feature being triggered, we could be requiredunder applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-termliability, which would result in a material reduction of our net working capital.38The Notes are effectively subordinated to our secured debt and any liabilities of our subsidiaries.The Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to theNotes; equal in right of payment to any of our liabilities that are not so subordinated; effectively junior in right of payment to any of oursenior, secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to allindebtedness and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy, liquidation, reorganizationor other winding up, our assets that secure debt ranking senior or equal in right of payment to the Notes will be available to payobligations on the Notes only after the senior, secured debt has been repaid in full from these assets. There might not be sufficientassets remaining to pay amounts due on any or all of the Notes then outstanding. The indenture governing the Notes does not prohibitus from incurring additional senior debt or secured debt, nor does it prohibit any of our subsidiaries from incurring additional liabilities. Allour indebtedness, including the Notes, must be repaid before our stockholders would receive anything in a liquidation.If we fail to meet our current credit facility’s financial covenants, our business and financial condition could be adverselyaffected.Our current credit facility contains financial covenants. If at any point we fail to comply with the financial covenants, thelenders can demand immediate repayment of our outstanding balance and deny future borrowings under the credit facility. This couldhave a negative impact on our liquidity, thereby reducing the availability of cash flow for other purposes and adversely affecting ourbusiness.We may still incur substantially more debt or take other actions that would diminish our ability to make payments on the Noteswhen due.We and our subsidiaries may incur substantial additional debt in the future, some of which may be secured debt. We are notrestricted under the terms of the indenture governing the Notes from incurring additional debt, securing existing or future debt,recapitalizing our debt or taking a number of other actions that could have the effect of diminishing our ability to make payments on theNotes when due. Furthermore, the indenture prohibits us from engaging in certain mergers or acquisitions unless, among other things,the surviving entity assumes our obligations under the Notes and the indenture. These and other provisions in the indenture could deteror prevent a third party from acquiring us even when the acquisition may be favorable to holders of the Notes.The conversion of the Notes will dilute the ownership interest of existing stockholders, including holders who had previouslyconverted their Notes, or may otherwise depress the price of our common stock.The conversion of some or all of the Notes will dilute the ownership interests of existing stockholders to the extent we delivershares of our common stock upon conversion of the Notes. The Notes may become in the future convertible at the option of the holdersof the Notes prior to December 15, 2023 under certain circumstances as provided in the indenture governing the Notes. Any sales in thepublic market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock.In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes couldbe used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price ofour common stock.The capped call transactions we entered into in connection with the issuance of the Notes might not turn out to be effective inreducing dilution, and might adversely affect the value of our common stock.In connection with the Notes, we paid approximately $33.0 million to enter into capped call transactions with certainpurchasers or their affiliates (the “Option Counterparties”). The capped call transactions are expected generally to reduce the potentialdilution upon conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount ofconverted Notes,39as the case may be, with such reduction and/or offset subject to a cap. If our stock price is less than $53.17 upon conversion of theNotes, the capped calls will have no effect and we will get no benefit from the cash we paid to enter into the capped calls. Furthermore,if our stock is above $89.98 per share upon conversion of the Notes, the capped calls will not completely eliminate the dilution from Noteconversion.In connection with establishing their initial hedges of the capped call transactions, the Option Counterparties entered intovarious derivative transactions with respect to our common stock. This activity could have increased (or reduced the size of anydecrease in) the market price of our common stock or the Notes at that time.In addition, the Option Counterparties may modify their hedge positions by entering into or unwinding derivatives with respectto our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions priorto the maturity of the Notes (and are likely to do so during any observation period related to a conversion of Notes or following anyrepurchase of Notes by us on any fundamental change repurchase date or otherwise). This activity could also cause or avoid anincrease or decrease in the price of our common stock or the Notes.The potential effect, if any, of these transactions and activities on the price of our common stock or the Notes will depend inpart on the market conditions and cannot be ascertained at this time. Any of these activities could adversely affect the value of ourcommon stock.The accounting method for convertible debt securities that may be settled in cash, such as the Notes, could have a materialeffect on our reported financial results.In May 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. APB 14-1, Accounting for ConvertibleDebt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently beencodified as ASC 470-20, Debt with Conversion and Other Options. Under ASC 470-20, an entity must separately account for the liabilityand equity components of the convertible debt instruments (such as the Notes) that may be settled entirely or partially in cash uponconversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Notes isthat the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidatedbalance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debtcomponent of the Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periodspresented as a result of the amortization of the discounted carrying value of the Notes to their face amount over the term of the Notes.We will report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’samortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financialresults, the trading price of our common stock and the trading price of the Notes.In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may be settled entirely or partlyin cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion ofthe Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Notesexceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accountedfor as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess inshares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stockmethod. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Notes, then ourdiluted earnings per share would be adversely affected.40Risks Related to Ownership of Our Common StockOur stock price may be volatile or may decline regardless of our operating performance, and you may not be able to resellyour 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 notbe able to sell your common stock at or above the price at which you purchase it. From our IPO in September 2013 through February28, 2020, the per share trading price of our common stock has been as high as $77.00 and as low as $11.52. It might continue tofluctuate 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;•any major change in our management;•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;•threatened or actual litigation;•publication of research reports or news stories about us, our competitors, or our industry, or positive or negativerecommendations 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 extremeprice and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.Additionally, securities class action litigation has often been instituted against companies following periods of volatility in the overallmarket and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divertour management’s attention and resources, and harm our business, operating results, and financial condition.Our stock price could decline due to the large number of outstanding shares of our common stock and those underlying theNotes eligible for future sale.Sales of a substantial number of shares of our common stock in the public market or the market perception that such sales andissuances may occur could reduce the market price of our common stock and impair our ability to raise capital through the sale ofadditional common stock or equity-linked securities at a time and price that we deem appropriate.As of December 31, 2019, we had an aggregate of 32,788,980 shares of common stock outstanding. As of December 31, 2019,there also were outstanding options and restricted stock units to purchase 2,177,032 shares of our common stock that, if exercised orvested, as applicable, will result in these additional shares becoming available for sale, subject in some cases to Rule 144. We havealso registered an aggregate of 11,084,766 shares of our common stock that we may issue or sell under our stock plans. These sharescan be freely sold in the public market upon issuance, unless they are held by “affiliates”, as that term is defined in Rule 144 of theSecurities Act. In addition, a substantial number of shares of our common stock is reserved for issuance upon conversion of the Notes.If a large number of these shares are sold in the public market, the sales could reduce the trading price of our common stock.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 tobusiness challenges or opportunities, including the need to develop new41products and services or enhance our existing services, enhance our operating infrastructure, and acquire complementary businessesand technologies. Accordingly, we might need to engage in equity or additional debt financings to secure additional funds. If we raiseadditional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significantdilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of ourcommon stock. Any additional debt financing secured by us could involve restrictive covenants relating to our capital-raising activitiesand other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue businessopportunities, including potential acquisitions. In addition, we might not be able to obtain additional financing on terms favorable to us, ifat all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue tosupport our business growth and to respond to business challenges could be significantly limited.We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on yourinvestment 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 theforeseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receiveany dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock willdepend upon future appreciation in its value, if any. There is no guarantee that shares of our common stock will appreciate in value oreven maintain the price at which our stockholders purchased their shares.Our business is subject to changing regulations regarding corporate governance, disclosure controls, internal control overfinancial 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 ExchangeAct, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act, and the rules and regulations of our stockexchange. The requirements of these rules and regulations increase our legal, accounting, and financial compliance costs, make someactivities 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 internalcontrol over financial reporting. Commencing with our fiscal year ending December 31, 2014, we performed system and processevaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internalcontrol over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. We also are required to disclose changes madeto our internal controls and procedures on a quarterly basis. Our ongoing compliance with Section 404 of the Sarbanes-Oxley Act willrequire that we incur substantial accounting expense and expend significant management efforts.In addition, as of December 31, 2018, we no longer qualified as an “emerging growth company” as defined in the Jumpstart OurBusiness Startups Act of 2012, or the JOBS Act. Accordingly, our independent registered public accounting firm is required to formallyattest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act in our AnnualReports on Form 10-K. We are also required to include additional information regarding executive compensation and include anonbinding advisory vote on executive compensation in our proxy statements. These additional reporting requirements, among others,may increase our legal and financial compliance costs and might cause management and other personnel to divert attention fromoperational and other business matters to devote substantial time to public company reporting requirements. In addition, if we are notable to comply with changing legal requirements that apply to us in a timely manner, the market price of our stock could decline and wecould be subject to sanctions or42investigations by the stock exchange on which our common stock is listed, the SEC, or other regulatory authorities, which wouldrequire additional financial and management resources.Failure to develop and maintain adequate financial controls could cause us to have material weaknesses, which couldadversely 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 forleasing transactions which resulted in the identification of a material error in the accounting for our headquarters lease executed in May2005. We might in the future discover other material weaknesses that require remediation. In addition, an internal control system, nomatter how well-designed, cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all controlissues and instances of fraud will be detected. If we are not able to comply with the requirements of Section 404 of the Sarbanes-OxleyAct in a timely manner, or if we are unable to maintain proper and effective internal controls, we might not be able to produce timely andaccurate financial statements. If that were to happen, the market price of our stock could decline and we could be subject to sanctionsor 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, couldharm our operating results or cause us to fail to meet our reporting obligations. Any failure to implement and maintain effective internalcontrols also could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal controlover financial reporting that we are required to include in our periodic reports filed with the SEC under Section 404 of the Sarbanes-OxleyAct. Ineffective disclosure controls and procedures or internal control over financial reporting could also cause investors to loseconfidence in our reported financial and other information, which would likely have a negative effect on the trading price of our commonstock. 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 tocomplete. Such changes may not be effective, however, in maintaining the adequacy of our internal controls, and any failure to maintainthat adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costsand could materially impair our ability to operate our business. In the event that we are not able to demonstrate compliance with Section404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate, or that we are unable toproduce timely or accurate financial statements, investors may lose confidence in our operating results and our stock price coulddecline.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 priceof 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 receivea premium for your shares of our common stock. These provisions might also prevent or frustrate attempts by our stockholders toreplace 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;•the inability of stockholders to cumulate votes at any election of directors;43•the classification of our board of directors into three classes with only one class, representing approximately one-third ofour 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 stockholderapproval. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engagingin a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the lastthree years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person becamean 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 thefuture for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood thatyou 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 unfavorableresearch 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 industryanalysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who coverus downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. If one or more ofthese 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.Item 1B. Unresolved Staff Comments.None.Item 2. Properties.As of December 31, 2019, we occupied approximately 289,000 square feet on the Daniel Island Executive Center campus inCharleston, South Carolina. This office space is leased under leases expiring in 2031. As of December 31, 2019, we also leasedfacilities in Greenville, South Carolina; New York City, New York; Tulsa, Oklahoma; Salt Lake City, Utah; and Brookfield, Wisconsin.We believe that our current and planned facilities are sufficient for our needs. We may add other facilities or expand existingfacilities as we expand our associate base and geographic markets in the future, and we believe that suitable additional space will beavailable 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 threatenedlitigation or regulatory proceeding against us that could have a material adverse effect on our business, operating results, financialcondition or cash flows.Item 4. Mine Safety Disclosures.Not applicable.44PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market Information for Common StockOur common stock has been listed on the Nasdaq Global Market under the symbol “BNFT” since September 18, 2013. Prior tothat date, there was no public trading market for our common stock.As of December 31, 2019, we had 39 holders of record of our common stock. The actual number of stockholders is greater thanthis number of record holders and includes stockholders who are beneficial owners, but whose shares are held in street name bybrokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust byother entities.Stock Performance GraphThe following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or incorporated by reference into any ofour other filings under the Exchange Act or the Securities Act of 1933, as amended, except to the extent we specifically incorporate itby 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 1500Application Software Index. The chart assumes $100 was invested at the close of market on December 31, 2014, in the common stockof 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.BasePeriodCompany / Index12/31/201412/31/201512/31/201612/31/201712/31/201812/31/2019Benefitfocus, Inc.$100.00$110.81$90.44$82.22$139.22$66.81S&P 500 Index$100.00$99.27$108.74$129.86$121.76$156.92S&P 1500 ApplicationSoftware Index$100.00$119.75$129.13$186.16$224.73$306.1145Equity Compensation PlansThe information required by Item 5 of Form 10-K regarding equity compensation plans is incorporated herein by reference to PartIII “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.46Item 6. Selected Financial Data.CONSOLIDATED SELECTED FINANCIAL DATAThe following selected consolidated financial data for the years December 31, 2019, 2018, 2017, 2016 and 2015 and the selectedconsolidated balance sheet data as of December 31, 2019, 2018, 2017, 2016, and 2015 are derived from our audited consolidatedfinancial statements. As noted below and discussed elsewhere in this filing, we adopted Topic 606 in 2018 with an effective date ofJanuary 1, 2016. Our historical results are not necessarily indicative of the results to be expected in the future. The selectedconsolidated financial data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results ofOperations”, our consolidated financial statements, related notes, and other financial information included elsewhere in this AnnualReport on Form 10-K.Consolidated Statement of Operations DataYear Ended December 31,2019201820172016*2015(in thousands, except share and per share data)Revenue$295,686$258,721$236,842$236,523$185,143Cost of revenue(1)144,090129,277127,382123,308102,851Gross profit151,596129,444109,460113,21582,292Operating expenses:Sales and marketing(1)76,04978,17970,58356,31158,589Research and development(1)54,72447,90249,54956,61052,250General and administrative(1)45,32943,06227,26832,75025,727Total operating expenses176,102169,143147,400145,671136,566Loss from operations(24,506)(39,699)(37,940)(32,456)(54,274)Total other expense, net(20,982)(12,900)(12,339)(7,873)(7,785)Loss before income taxes(45,488)(52,599)(50,279)(40,329)(63,059)Income tax expense2728151725Net loss$(45,515)$(52,627)$(50,294)$(40,346)$(62,084)Net loss per common share--basic and diluted$(1.40)$(1.66)$(1.62)$(1.36)$(2.19)Weighted-average common sharesoutstanding--basic and diluted32,539,74831,756,41531,052,37829,589,85728,344,680Other Financial DataAdjusted EBITDA(2)$19,030$10,340$(4,979)$(1,385)$(32,160)(1)Cost of revenue and operating expenses include stock-based compensation expense as follows:Year Ended December 31,2019201820172016*2015(in thousands)Cost of revenue$3,569$5,164$2,508$2,799$1,950Sales and marketing3,7996,7644,9533,2122,861Research and development3,2655,5102,9904,5332,399General and administrative8,93911,4305,6867,5443,244(2)We define adjusted EBITDA as net loss before net interest and other expense, taxes, and depreciation and amortizationexpense, adjusted to eliminate stock-based compensation expense and expense related to the impairment of goodwill andintangible assets, transaction costs expensed, and costs not core to our business. See “Adjusted EBITDA” below for moreinformation and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculatedand presented in accordance with GAAP.47Consolidated Balance Sheet DataAs of December 31,2019201820172016*2015(in thousands)Cash and cash equivalents$130,976$190,928$55,335$56,853$48,074Marketable securities---2,00740,448Accounts receivable, net33,75421,07730,09132,96629,698Total assets331,683313,939192,003216,555182,119Deferred revenue, total38,50845,86355,02756,94993,529Total liabilities357,327324,149200,722194,832200,128Common stock3332313029Additional paid-in capital426,025403,631532,496332,254310,304Total stockholders' equity (deficit)(25,644)(10,210)(8,719)21,723(18,009)*The summary consolidated financial data for the years ended December 31, 2019, 2018, 2017, and 2016 and as of December 31,2019, 2018, 2017, and 2016 reflects the adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contractswith Customers ("Topic 606"). The summary consolidated financial data for the years ended December 31, 2015 and as ofDecember 31, 2015 does not reflect the adoption of Topic 606.Adjusted EBITDAWithin this Annual Report on Form 10-K we use adjusted EBITDA to provide investors with additional information regarding ourfinancial results. Adjusted EBITDA is a non-GAAP financial measure. We have provided below a reconciliation of this measure to themost 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 managementand 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 incalculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, webelieve 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 foranalysis 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 tobe replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for suchreplacements 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 measuredifferently, which reduces their usefulness as comparative measures.48Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financialperformance measures, including various cash flow metrics, gross profit, net loss and our other GAAP financial results. The followingtable presents a reconciliation of adjusted EBITDA to net loss for each of the periods indicated:Year Ended December 31,2019201820172016*2015(in thousands)Reconciliation from Net Loss to Adjusted EBITDA:Net loss$(45,515)$(52,627)$(50,294)$(40,346)$(62,084)Depreciation15,28811,72112,3919,9598,791Amortization of software development costs5,1303,9443,2572,8572,587Amortization of acquired intangible assets1,933150258257286Interest income(2,613)(250)(182)(138)(188)Interest expense23,5245,6854,9311,095877Interest expense on building lease financingobligations (prior to adoption of ASC 842)-7,4717,4506,8267,092Income tax expense2728151725Stock-based compensation expense19,57228,86816,13718,08810,454Transaction costs expensed1,035507--560Costs not core to our business6494,8431,058--Total net adjustments$64,545$62,967$45,315$38,961$30,484Adjusted EBITDA$19,030$10,340$(4,979)$(1,385)$(31,600)*The summary consolidated financial data for the years ended December 31, 2019, 2018, 2017, and 2016 and as of December 31,2019, 2018, 2017, and 2016 reflects the adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contractswith Customers ("Topic 606"). The summary consolidated financial data for the years ended December 31, 2015 and as ofDecember 31, 2015 does not reflect the adoption of Topic 606.49Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYou should read the following discussion and analysis of our financial condition and results of operations together with ourconsolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report onForm 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report including informationwith respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Youshould review the “Risk Factors” section of this report beginning on page 19 for a discussion of important factors that could causeactual results to differ materially from the results described in or implied by the forward-looking statements contained in the followingdiscussion and analysis.OverviewBenefitfocus provides a leading cloud-based benefits management platform for buyers (consumers, employees and employers)and sellers (insurance brokers, carriers and suppliers). The Benefitfocus Platform simplifies how organizations and individuals transactbenefits. Our employer, carrier, broker and supplier customers rely on our platform to manage, scale and exchange benefits dataseamlessly. Our solutions drive value for all participants in our benefits ecosystem.The Benefitfocus platform has a multi-tenant architecture and a user-friendly interface designed for consumers to access all oftheir benefits in one place. Our comprehensive solutions support medical benefit plans and non-medical benefits, such as, dental, life,disability insurance, income protection, digital health and financial wellness. Our platform includes artificial intelligence functionalitydesigned to help consumers identify and evaluate benefit options offered by their employer. As the number of employer benefits planshas increased, with each plan subject to many different business rules and requirements, demand for the Benefitfocus Platform isgrowing.In 2018, we expanded our economic model to include a transaction-oriented, buyer solution, known as BenefitsPlace, designed toalign brokers, carriers and suppliers around the needs of employers, employees and consumers. In this model, our seller partners offertheir voluntary and specialty benefit products through a holistic, multidimensional marketplace. This marketplace is designed to increasethe economic value of the consumer lives on our platform by aligning the product catalog to consumer needs. In exchange for Benefitfocusdelivering consumer access, data-driven analysis and operational efficiencies, seller partners pay us a percentage of the purchasescompleted on our platform. Carrier agreements have terms of two to four years and are typically cancellable upon breach of contract orinsolvency. Supplier contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to cure,bankruptcy and termination for convenience.We classify our revenue into three streams - subscription, platform, and professional services revenue. Subscription and platformrevenue are combined and reported as software services revenue. As a result of adding BenefitsPlace to our economic model in 2018, wenow manage platform revenue as a separate stream. Accordingly, platform revenue is reported separately for the current and historicalperiods.Subscription revenue primarily consists of monthly subscription fees paid to us by our employer and insurance carrier customers foraccess to, and usage of, cloud-based benefits software solutions for a specified contract term. Subscription fees are generally chargedbased on the number of employees or subscribers with access to the solution. Subscription revenue accounted for approximately 66%,69%, and 72% of our total revenue during the years ended December 31, 2019, 2018 and 2017, respectively.Platform revenue includes BenefitsPlace transactional revenue, which is generated from the value of the policies or productsenrolled in through our marketplace. BenefitsPlace carrier revenue is generally recognized over the policy period of the enrolled products. Inarrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue frominsurance broker commissions and BenefitsPlace supplier transactions is generally recognized at the time when open enrollment iscomplete and the orders for policies are transferred to the supplier. Platform revenue accounted for approximately 11%, 9%, and 6% of ourtotal revenue during the years ended December 31, 2019, 2018 and 2017, respectively.50Our professional services revenue stream is largely derived from the implementation of our customers onto our platform, whichtypically includes discovery, configuration and deployment, integration, testing, and training. We also provide customer support servicesand customized media content that supports our customers’ effort to educate and communicate with consumers. Professional servicesrevenue accounted for approximately 23%, 22%, and 22% of our total revenue during the years ended December 31, 2019, 2018 and 2017,respectively.Expanding our customer base is a key element of our growth strategy. We believe that our continued innovation and newsolutions, such as BenefitsPlace, which extend the functionality of our mobile offerings, provide more robust data analytics capabilitiesand enhance our ability to quickly respond to evolving market needs with innovative capabilities will help us attract additional net benefiteligible lives to our platform through new employer customers, partners and brokers and increase our revenue from existing customersand relationships.We believe that there is a substantial market for our services, and we have been investing in growth over the past several years.In particular, we have continued to invest in technology and services to better serve our larger employer customers, which we believe arean important source of growth for our business. We have also substantially increased our marketing and sales efforts and expect thoseincreased efforts to continue. As we have invested in growth, we have had operating losses in each of the last nine years, and expectour operating losses to continue for at least the next year. Due to the nature of our customer relationships, which have been stable inspite of some customer losses over the past years, and our hybrid subscription and transaction-based financial model, we believe thatour current investment in growth should lead to substantially increased revenue, which may allow us to achieve profitability in therelatively 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 MetricsWe regularly monitor a number of financial and operating metrics in order to measure our current performance and project ourfuture performance. These metrics help us develop and refine our growth strategies and make strategic decisions. We discuss revenue,gross margin, and the components of operating loss in “Management’s Discussion and Analysis of Financial Condition and Results ofOperations-Components of Operating Results”. In addition, we utilize other key metrics as described below.Net Benefit Eligible LivesWe are focused on driving revenue growth from adding lives to our platform and driving incremental transaction revenue. Webelieve the number of net benefit eligible lives is a key indicator of our market penetration, growth and future revenue. We believe netbenefit eligible lives is highly correlated to our subscription revenue and is the foundation of our platform revenue opportunity. During thethird quarter of 2019, we added independent contractor lives, plus their estimated dependents, to our platform, for the first time. Webelieve these lives will drive incremental transaction revenue through the ability to participate in BenefitsPlace. Accordingly, because wesigned our first contract with a “gig economy” company, Shipt, Inc., which has a large workforce of freelancers, we have included thesein our definition of net benefit eligible lives. We define a net benefit eligible life a person with access to a benefits enrollment subscriptionunder standard contracting or a freelancer with access to benefits enrollment, plus their estimated dependents, as of the measurementdate. This definition excludes lives from other subscription-related contracts.As of December 31,201920182017(in millions)Net benefit eligible lives17.313.311.2In February 2019, we acquired certain operating assets and liabilities, intellectual property and intangible assets of Connecture,Inc. This transaction added 2.0 million net benefit eligible lives to our platform. The details of this transaction are described in moredetail in Note 3 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.51Software Services Revenue Retention RateWe believe that our ability to retain our customers and expand the revenue they generate for us over time is an importantcomponent of our growth strategy and reflects the long-term value of our customer relationships. We measure our performance on thisbasis using a metric we refer to as our software services revenue retention rate. We calculate this metric for a particular period byestablishing the group of our customers that had active contracts for a given period. We then calculate our software services revenueretention rate by taking the amount of software services revenue we recognized for this group in the subsequent comparable period (forwhich we are reporting the rate) and dividing it by the software services revenue we recognized for the group in the prior period.Our software services revenue retention rate, which represents combined subscription and platform revenue, exceeded 95% forthe years ended December 31, 2019, 2018 and 2017.Adjusted EBITDAAdjusted EBITDA represents our earnings before net interest and other expense, taxes, and depreciation and amortizationexpense, adjusted to eliminate stock-based compensation and impairment of goodwill and intangible assets, transaction andacquisition-related costs expensed, and costs not core to our business. Adjusted EBITDA is not a measure calculated in accordancewith United States generally accepted accounting principles, or GAAP. Please refer to “Selected Consolidated Financial Data-AdjustedEBITDA” in this report for a discussion of the limitations of adjusted EBITDA and reconciliation of adjusted EBITDA to net loss, the mostcomparable GAAP measurement, respectively, for 2019, 2018 and 2017.Components of Operating ResultsRevenueWe derive the majority of our revenue from monthly subscription fees paid to us by our employer and carrier customers foraccess to, and usage of, our cloud-based benefits software solutions for a specified contract term. We derive platform revenue from bothinsurance broker commissions from the sale of voluntary and ancillary benefits policies to employees of our customers and fromtransaction revenue from life and ancillary insurance carriers and specialty providers. We also derive revenue from professional servicesfees, which primarily include fees related to the implementation of our customers onto our platform. Our professional services typicallyinclude discovery, configuration and deployment, integration, testing, and training.The following table sets forth a breakdown of our revenue by stream for the periods indicated (in thousands):Year Ended December 31,201920182017Subscription$195,091$179,410$169,593Platform33,65422,93815,298Total software services$228,745$202,348$184,891Professional services66,94156,37351,951Total revenue$295,686$258,721$236,842We recognize revenue when control of these services is transferred to customers, in an amount that reflects the considerationwe expect to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted togovernmental authorities are excluded from revenues.We determine revenue recognition through the following steps:•Identification of each contract with a customer;•Identification of the performance obligations in the contract;•Determination of the transaction price;•Allocation of the transaction price to the performance obligations in the contract; and•Recognition of revenue when, or as, performance obligations are satisfied.52Software Services RevenueSoftware services revenue consists of subscription and platform revenue.Subscription RevenueSubscription revenue primarily consists of monthly subscription fees paid to us by our customers for access to, and usage of,cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees orsubscribers with access to the solution.Subscription revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscriptionservices are made available to the customer. Our subscription service contracts are generally three years.Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.Platform RevenuePlatform revenue is generated from the value of the policies or products enrolled in through our marketplace. Platform revenuefrom carriers is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies toemployees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions andBenefitsPlace supplier transactions is recognized at the point when the orders for the policies are received and transferred to theinsurance carrier or supplier, and is reduced by estimates for risk from premium collection, policy cancellation and termination.Professional Services RevenueProfessional services revenue primarily consists of fees related to the implementation of software products purchased bycustomers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees fromconsulting services, support services and training are also included in professional services revenue.We determined that implementation services for certain of our insurance carrier customers significantly modify or customize thesoftware solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementationservices with these insurance carrier customers are generally recognized over the contract term of the associated software servicescontract, including any extension periods representing a material right. We utilize estimates of hours as a measure of progress todetermine revenue for certain types of arrangements.Revenue from implementation services with employer customers is generally recognized as those services are performed.Revenue from support and training fees is recognized over the service contract period.Contracts with Multiple Performance ObligationsCertain of our contracts with customers contain multiple performance obligations. For these contracts, the individual performanceobligations are accounted for separately if they are distinct. The transaction price is allocated to the separate performance obligationsbased on their relative standalone selling prices. We determine the standalone selling prices based on their overall pricing objectives,taking into consideration market conditions and other factors, including the value of their contracts, the software services sold, customersize and complexity, and the number and types of users within the contracts.Overhead AllocationExpenses associated with our facilities, security, information technology, and depreciation and amortization, are allocatedbetween cost of revenue and operating expenses based on employee headcount determined by the nature of work performed.Cost of RevenueCost of revenue primarily consists of salaries and other personnel-related costs, including benefits, bonuses, and stock-basedcompensation, for employees, whom we refer to as associates, providing53services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of revenue include co-locationfacility costs for our data centers, depreciation expense for computer equipment directly associated with generating revenue,infrastructure maintenance costs, professional fees, amortization expenses associated with acquired intangibles and capitalizedsoftware development costs, allocated overhead, and other direct costs.We expense cost of revenue associated with fulfilling performance obligations as we incur the costs. Costs that relate directly toa customer contract that are not related to satisfying a performance obligation are capitalized and amortized to cost of revenue expenseover the estimate period of benefit of the contract asset, which is generally five years.Subscription and platform revenue are both generated from our platform and result from the same set of assets and activities. Assuch, we are not able to meaningfully separate and assign costs of revenue to subscription and platform revenue separately.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 ofthe percentage of our revenue from large employers and the realization of economies of scale driven by retention of our customer base.However, this trend may vary on a quarterly basis.Operating ExpensesOperating 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 continueto hire new associates in these areas in order to support our anticipated revenue growth; however, we expect to decrease our operatingexpenses, as a percentage of revenue, if and 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. Costs to obtain acontract that are incremental, such as sales commissions, are capitalized and amortized to expense over the estimated period ofbenefit of the asset, which is generally four to five years. Additional expenses include advertising, lead generation, promotional eventprograms, corporate communications, travel, and allocated overhead. For instance, our most significant promotional event is One Place,which we hold annually. We expect our sales and marketing expense to increase, in absolute dollars, in the foreseeable future as wefurther 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. Additionalexpenses include costs related to the development, quality assurance, and testing of new technology, and enhancement of our existingplatform technology, consulting, travel, and allocated overhead. We believe continuing to invest in research and development efforts isessential to maintaining our competitive position.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, informationsystems, legal, and human resource associates. Additional expenses include consulting and professional fees, insurance and othercorporate expenses, and travel. We expect our general and administrative expenses to increase in absolute terms as a result of ongoingpublic company costs, including those associated with compliance with the Sarbanes-Oxley Act and other regulations governing publiccompanies, increased costs of directors’ and officers’ liability insurance, and increased professional services expenses, particularlyassociated with the adoption of new accounting standards and integration of acquired businesses.Other Income and ExpenseOther income and expense consists primarily of interest income and expense and gain (loss) on disposal of property andequipment. Interest income represents interest received on our cash and cash54equivalents. Interest expense consists primarily of the interest incurred on outstanding convertible debt and borrowings under our leasearrangements and credit facility.Income Tax ExpenseIncome tax expense consists of U.S. federal and state income taxes. We incurred minimal income tax expense for 2019, 2018,and 2017. Net operating loss carryforwards for federal income tax purposes were approximately $327.4 million at December 31, 2019.State net operating loss carryforwards were approximately $325.1 million at December 31, 2019. Federal and state net operating losscarryforwards will expire at various dates beginning in 2020, if not utilized. Valuation allowances are recorded to reduce deferred taxassets to the amount we believe is more likely than not to be realized.Adoption of Leases Accounting StandardWe adopted the new accounting standard for Leases, Topic 842, on January 1, 2019. We applied the modified transition methodat the beginning of adoption. Accordingly we did not adjust prior period financial statements, and recognized a cumulative-effectadjustment to the opening balance of accumulated deficit in 2019.The adoption of Topic 842 require lessees, among other things, to recognize lease assets and lease liabilities on the balancesheet for those leases classified as operating leases under previous authoritative guidance. We describe the effects of adoption of Topic842 in more detail in Note 2 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.Results of OperationsConsolidated Statements of Operations DataThe following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands).Year Ended December 31,201920182017Revenue$295,686$258,721$236,842Cost of revenue(1)144,090129,277127,382Gross profit151,596129,444109,460Operating expenses:Sales and marketing(1)76,04978,17970,583Research and development(1)54,72447,90249,549General and administrative(1)45,32943,06227,268Total operating expenses176,102169,143147,400Loss from operations(24,506)(39,699)(37,940)Other income (expense):Interest income2,613250182Interest expense(23,524)(5,685)(4,931)Interest expense on building lease financing obligations (prior toadoption of ASC 842)-(7,471)(7,450)Other expense(71)6(140)Total other expense, net(20,982)(12,900)(12,339)Loss before income taxes(45,488)(52,599)(50,279)Income tax expense272815Net loss$(45,515)$(52,627)$(50,294)(1)Cost of revenue and operating expenses include stock-based compensation expense as follows (in thousands):55Year Ended December 31,201920182017Cost of revenue$3,569$5,164$2,508Sales and marketing3,7996,7644,953Research and development3,2655,5102,990General and administrative8,93911,4305,686The following table sets forth our consolidated statements of operations data as a percentage of revenue for each of the periodsindicated (as a percentage of revenue).Year Ended December 31,201920182017Revenue100.0%100.0%100.0%Cost of revenue48.750.053.8Gross profit51.350.046.2Operating expenses:Sales and marketing25.730.229.8Research and development18.518.520.9General and administrative15.316.611.5Total operating expenses59.665.462.2Loss from operations(8.3)(15.3)(16.0)Other income (expense):Interest income0.90.10.1Interest expense(8.0)(2.2)(2.1)Interest expense on building lease financing obligations (prior to adoption ofASC 842)-(2.9)(3.1)Other expense--(0.1)Total other expense, net(7.1)(5.0)(5.2)Loss before income taxes(15.4)(20.3)(21.2)Income tax expense---Net loss(15.4)%(20.3)%(21.2)%Comparison of Years Ended December 31, 2019 and 2018RevenueYear Ended December 31,20192018Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Subscription$195,09166.0%$179,41069.3%$15,6818.7%Platform33,65411.422,9388.910,71646.7Total software services$228,74577.4%$202,34878.2%$26,39713.0%Professional services66,94122.656,37321.810,56818.7Total revenue$295,686100.0%$258,721100.0%$36,96514.3%Subscription revenue includes $11.1 million of revenue associated with assets acquired from Connecture in February 2019.Additionally, subscription revenue increased $9.5 million from the net addition of new customers, contractual price increases, andvolume increases. These increases were offset by a $6.0 million decrease in subscription revenue from the renegotiation of a customercontract and decreases from customers that terminated products and services. Additionally, sales allowance decreased resulting in anincrease in subscription revenue of $1.0 million.56Platform revenue increased from growth in premiums and new products from BenefitsPlace which resulted in an increase of $7.3million in BenefitsPlace carrier revenue and an increase of $3.4 million in revenue from broker and supplier commissions. As discussedabove in “Components of Operating Results - Revenue”, platform revenue from carriers is recognized over the policy period andcommissions revenue is recognized at a point in time.The increase in professional services revenue was primarily attributable to an increase of $12.5 million from work performedrelated to the customer contracts acquired from Connecture in February 2019 and a $1.3 million increase in customer support from newand existing customers. These increases were offset by a net decrease of $3.7 million from professional services work for customers in2018 that did not recur in 2019. Professional services revenue increased as a percentage of total revenue in the current year comparedto the prior year primarily as result of revenue from the Connecture acquisition. We expect this trend to end after the first quarter of 2020when comparable periods will include the results of the Connecture operations for the full period.Cost of RevenueYear Ended December 31,20192018Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Cost of revenue$144,09048.7%$129,27750.0%$14,81311.5%The increase in cost of revenue in absolute terms was primarily attributable to an increase in salaries and other personnel-related costs of $8.0 million and increased depreciation expense of $4.1 million. The increase in salaries and personnel-related costs isprimarily attributable to the workforce acquired from Connecture in February 2019 partially offset by decreases related to our coststructure in place prior to the acquisition. The increase in depreciation and amortization expense is attributable to the amortization ofacquired intangibles from the Connecture acquisition as well as higher depreciation expense related to an increase in capitalizedsoftware development costs and the impact of the adoption of the new lease accounting standard at the beginning of 2019. Cost ofrevenue decreased as a percentage of revenue as we continued to achieve economies of scale. Cost of revenue included $3.6 millionand $5.2 million of stock-based compensation expense for the years ended December 31, 2019 and 2018, respectively, and $16.0million and $11.9 million of depreciation and amortization for the years ended December 30, 2019 and 2018, respectively.Gross ProfitYear Ended December 31,20192018Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Software services$157,22168.7%$136,34467.4%$20,87715.3%Professional services(5,625)(8.4)(6,900)(12.2)1,275(18.5)Gross profit$151,59651.3%$129,44450.0%$22,15217.1%The increase in software services gross profit was driven by a $26.4 million, or 13.0%, increase in revenue partially offset by a$5.5 million, or 8.4%, increase in software services cost of revenue. Software services cost of revenue included $2.1 million and $3.0million of stock-based compensation expense for the years ended December 31, 2019 and 2018, respectively, and $12.8 million and$10.0 million of depreciation and amortization for the years ended December 31, 2019 and 2018, respectively. As discussed above, weare not able to meaningfully separate and assign costs of revenues to subscription and platform revenue separately.The improvement in professional services gross loss was driven by a $10.6 million, or 18.7%, increase in professional servicesrevenue. This increase was partially offset by an increase in professional services cost of revenue of $9.3 million. Professional servicescost of revenue included $1.5 million and $2.2 million of stock-based compensation expense for the years ended December 31, 2019and 2018, respectively. In addition, professional services cost of revenue included $3.2 million and $1.9 million in depreciation andamortization for the years ended December 31, 2019 and 2018, respectively.57Operating ExpensesYear Ended December 31,20192018Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Sales and marketing$76,04925.7%$78,17930.2%$(2,130)(2.7)%Research and development$54,72418.5%$47,90218.5%$6,82214.2%General and administrative$45,32915.3%$43,06216.6%$2,2675.3%The decrease in sales and marketing expense in absolute terms was primarily attributable to a decrease of $3.9 million insalaries and personnel-related costs and a decrease in travel-related costs of $0.3 million, partially offset by an increase of $1.4 millionincrease in the cost of marketing events that occurred during 2019 and IT-related costs. Salaries and personnel-related costs decreasedprimarily due to a decrease in number of sales associates that occurred starting in the second half of 2018. As a result we experiencedlower salary expense and sales bonuses, as well as lower stock-based compensation. Stock-based compensation decreased primarilyas a result of the forfeiture of stock awards related to the departure of employees who separated from the Company during the year.These decreases in salaries were partially offset by a decrease in the amount of commission expense capitalized in 2019 compared to2018. As discussed above in “Components of Operating Results-Operating Expenses”, certain sales commissions are capitalized andamortized over a period generally equal to four to five years.The increase in research and development expense is primarily attributable to costs related to the workforce acquired fromConnecture in February 2019. Additionally, depreciation and amortization and IT-related costs increased by $2.0 million. Theseincreases were partially offset by an increase of $2.4 million in the amount of personnel-related costs capitalized for softwaredevelopment.The increase in general and administrative expense was primarily attributable to a net increase of $2.6 million in salary andpersonnel-related costs primarily as increases from investing in our business operations function were partly offset by a decrease instock-based compensation of $2.5 million. Additionally, depreciation and amortization, IT-related expense, contract labor, travel-relatedand other operating expenses increased $2.3 million and insurance expense increased $0.2 million in connection with the acquisition ofassets from Connecture. These increases were partially offset by a decrease in professional and consulting costs of $2.8 million asimplementation costs of the new lease accounting standard incurred in 2019 were more than offset by a decrease in professional feesassociated with the adoption of the leasing and revenue accounting standards and internal control testing incurred during 2018.Stock-based CompensationCost of revenue and operating expenses include an aggregate of $19.6 million and $28.9 million of stock-based compensation forthe years ended December 31, 2019 and 2018, respectively, representing a decrease of $9.3 million, or a 32.2% decrease. Thedecrease is primarily attributable to expense from performance-based awards as the achievement of performance measures was lowerfor awards granted in 2019 compared to 2018. Additionally, expense decreased from the forfeitures of awards from employees whoseparated from the Company.Comparison of Years Ended December 31, 2018 and 2017RevenueYear Ended December 31,20182017Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Subscription$179,41069.3%$169,59371.6%$9,8175.8%Platform22,9388.915,2986.57,64049.9Total software services$202,34878.2%$184,89178.1%$17,4579.4%Professional services56,37321.851,95121.94,4228.5Total revenue$258,721100.0%$236,842100.0%$21,8799.2%58Growth in subscription revenue was primarily attributable to an increase of $9.2 million as a result of increases in net benefiteligible lives at existing customers (which we call volume increases), and also to existing customers purchasing additional products, aswell as to the net addition of new customers. Subscription revenue included an increase of $1.1 million related to a change in estimatedrevenue from an employer customer contract.Platform revenue increased from growth in premiums and new products from BenefitsPlace which resulted in an increase of $4.4million in BenefitsPlace carrier revenue and an increase of $3.2 million in revenue from broker and supplier commissions. As discussedabove in “Components of Operating Results - Revenue”, platform revenue from carriers is recognized over the policy period andcommissions revenue is recognized at a point in time.The increase in professional services revenue was attributable to an increase in support revenue from newly activated customersof $2.2 million, an increase in customer-specific enhancements of $2.2 million, and an increase in implementation revenue of $1.9million. These increases were partially offset by a reduction in non-recurring consulting revenue of $1.7 million.Cost of RevenueYear Ended December 31,20182017Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Cost of revenue$129,27750.0%$127,38253.8%$1,8951.5%The increase in cost of revenue in absolute terms was primarily attributable to an increase in salaries and personnel-relatedcosts to support an increased number of customers and volume, as well as professional fees associated with third-party deliveries. Thisincrease included an increase in stock-based compensation of $2.7 million. Cost of revenue as a percentage of revenue has continuedto decrease as a result of economies of scale as our revenues have grown.Gross ProfitYear Ended December 31,20182017Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Software services$136,34467.4%$121,87965.9%$14,46511.9%Professional services(6,900)(12.2)(12,419)(23.9)5,519(44.4)Gross profit$129,44450.0%$109,46046.2%$19,98418.3%The increase in software services gross profit was driven by a $17.5 million, or 9.4%, increase in revenue partially offset by a$3.0 million, or 4.7%, increase in software services cost of revenue. Software services cost of revenue included $3.0 million and $1.3million of stock-based compensation expense for the years ended December 31, 2019 and 2018, respectively, and $10.0 million and$9.6 million of depreciation and amortization for the years ended December 31, 2019 and 2018, respectively. As discussed above, weare not able to meaningfully separate and assign costs of revenue to subscription and platform revenue separately.The improvement in professional services gross loss was driven by a $4.4 million, or 8.5%, increase in professional servicesrevenue and a decrease in professional services cost of revenue of $1.1 million. Professional services cost of revenue included $2.2million and $1.2 million of stock-based compensation expense for the years ended December 31, 2019 and 2018, respectively. Inaddition, professional services cost of revenue included $1.9 million and $2.2 million in depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively.59Operating ExpensesYear Ended December 31,20182017Percentage ofPercentage ofPeriod-to-Period ChangeAmountRevenueAmountRevenueAmountPercentage(in thousands)Sales and marketing$78,17930.2%$70,58329.8%$7,59610.8%Research and development$47,90218.5%$49,54920.9%$(1,647)(3.3)%General and administrative$43,06216.6%$27,26811.5%$15,79457.9%The increase in sales and marketing expense was primarily attributable to a $7.4 million increase in salaries and personnel-related costs due to hires of sales and marketing associates and higher variable compensation. As discussed above in “Components ofOperating Results-Operating Expenses”, certain sales commissions are capitalized and amortized over a period generally equal to fourto five years.The decrease in research and development expense reflects continued cost efficiencies during 2018 as contracted services andprofessional fees decreased by $2.0 million. An additional decrease of $1.3 million is attributable to an increase in the amount ofsoftware development costs capitalized. These decreases were partially offset by an increase in salaries and personnel-related costs of$1.8 million primarily attributable to an increase in stock-based compensation.The increase in general and administrative expense included an increase in salary and personnel-related costs of $8.9 million,including an increase in stock-based compensation of $5.8 million. The remaining increase was primarily attributable to professionalfees incurred in connection with implementing new accounting standards and costs associated with preparing for our first year ofSarbanes-Oxley 404(b) audit requirements, as well as transaction costs expensed, primarily in connection with a secondary stockoffering during the second quarter of 2018.Stock-based CompensationCost of revenue and operating expenses include an aggregate of $28.9 million and $16.1 million of stock-based compensation forthe years ended December 31, 2018 and 2017, respectively, representing an increase of $12.8 million, or a 79.5% increase. Theincrease is primarily attributable to expense from performance-based awards granted in 2018 that are expected to vest.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of our financial condition and results of operations is based on our consolidatedfinancial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statementsrequires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingentassets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. Inaccordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe reasonableunder 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 appearingelsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of makingsignificant judgments and estimates in the preparation of our consolidated financial statements.Revenue Recognition and Deferred RevenueWe derive our revenue primarily from fees for subscription services and professional services sold to employers and insurancecarriers as well as platform revenue derived from the value of products sold on our platform. Revenues are recognized when control ofthese services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange forthose services. We also generate transactional revenue from the value of the policies or products enrolled through our marketplace.We determine revenue recognition through the following steps:60•Identification of each contract with a customer;•Identification of the performance obligations in the contract;•Determination of the transaction price;•Allocation of the transaction price to the performance obligations in the contract; and•Recognition of revenue when, or as, performance obligations are satisfied.The following are some significant judgments estimates involved in the recognition of revenue:•Determination of standalone selling prices based on our overall pricing objectives, taking into consideration marketconditions and other factors, including the value of our contracts, the software services sold, customer size andcomplexity, and the number and types of users under the contracts;•Allocation of transaction price to the separate performance obligations based on their relative standalone sellingprices;•Estimation of hours or lives as a measure of progress; and•Reduction of revenue for risks from collectability, policy cancellation and termination.Convertible Senior NotesTo record their initial value in 2018, we calculated the fair value of the liability portion of the convertible senior notes using animplied interest rate. The rate was estimated based on market data available for publicly traded, senior unsecured corporate bondsissued by companies in the same industry and with similar maturity, assuming no conversion option. Assumptions used in the estimaterepresent what market participants would use in pricing the equity component, including market interest rates, credit standing, and yieldcurves.Accounts Receivable and Allowances for Doubtful Accounts and ReturnsWe state accounts receivable at realizable value, net of an allowance for doubtful accounts and estimated returns. We maintainthe allowance for doubtful accounts for estimated losses expected to result from the inability of some customers to make payments asthey 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 andthe financial strength of our customers.The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodicassessment of historical experience and trends. The Company considers factors such as the time lag since the initiation of revenuerecognition, historical reasons for adjustments, new customer volume, complexity of billing arrangements, timing of software availability,and past due customer billings.Stock-Based CompensationWe currently issue restricted stock units under our stock plans. 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 offorfeitures, ratably over the requisite service period of the option award. Restricted stock unit awards generally vest 25% on eachanniversary of the grant date over 4 years, however we have granted awards that vest immediately as well as awards that vest annuallyover 3 years and 5 years.As part of our management incentive program, we granted performance restricted stock units, which have vesting terms that aredependent 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.Based upon the closing stock price of $21.94 on December 31, 2019, the aggregate intrinsic value of outstanding options topurchase shares of our common stock as of December 31, 2019 was61$2.4 million, all of which was related to vested options. The aggregate intrinsic value of outstanding restricted stock units that areexpected to vest as of December 31, 2019 was $33.9 million, of which all were unvested.Liquidity and Capital ResourcesSources of LiquidityAs of December 31, 2019, our primary sources of liquidity were our cash and cash equivalents totaling $131.0 million, $33.8million in accounts receivables, net of allowance, and unused availability under our revolving line of credit then in effect of $88.5 million,without taking into account the borrowing base limit. The terms of that revolving line of credit are described in Note 9 of our consolidatedfinancial statements included elsewhere in this Annual Report on Form 10-K.The revolving line of credit agreement expired on February 20, 2020. On March 3, 2020, we entered into a new revolving line ofcredit agreement with Silicon Valley Bank. The new agreement has a term of three years and a borrowing limit of $50.0 million with theability to increase it to up to $100.0 million. The terms of the agreement are described in Item 9B. “Other Information.” in this AnnualReport on Form 10-K.In December 2018, we issued $240.0 million aggregate principal amount of 1.25% convertible senior notes due December 15,2023, unless earlier purchased by us or converted by the holder pursuant to their terms. Interest is payable semiannually in arrears onJune 15 and December 15 of each year. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our commonstock or a combination, at our election. The convertible senior notes have an initial conversion rate of 18.8076 shares of common stockper $1,000 principal amount. This represents an initial effective conversion price of approximately $53.17 per share of common stock,with an aggregate of 4,513,824 shares issuable upon conversion. The terms of the convertible senior notes are described in Note 8 ofour consolidated financial statements included elsewhere in this Annual Report on Form 10-K.In connection with our credit facility in effect at December 31, 2019, we executed a loan and security agreement with a syndicateof lenders led by Silicon Valley Bank for a senior revolving credit agreement in February 2015. We are bound by customary affirmativeand negative covenants in connection with that revolving line of credit, including financial covenants related to liquidity and EBITDA. Inthe event of a default, the lenders may declare all obligations immediately due and stop advancing money or extending credit under thatline of credit. That line of credit is collateralized by substantially all of our tangible and intangible assets, including intellectual propertyand the equity of our subsidiaries. As of December 31, 2019, other than unused line fees which have all been paid, there was nooutstanding indebtedness under that line of credit, which subsequently expired on February 20, 2020.Our cash flows from operations has improved in recent years and turned positive for the year ended December 31, 2018.However, for the year ended December 31, 2019, cash flows from operations declined due to timing in changes in working capital, adecrease in the balance of deferred revenue and the impact of acquired deferred revenue which yields revenue with no cash inflows. Weexpect to return to a trend of improving cash flows from operations in at least the near term as we continue to manage our costs.Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities andexisting 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, includingrequired debt payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest andmarket conditions, and there can be no assurance that we will be able to obtain any such financing on favorable terms or at all.62Operating and Capital Expenditure RequirementsWe believe that our existing cash and cash equivalents balances, cash generated from operations will be sufficient to meet ouranticipated 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 salesand 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 areinsufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities or enter into an additionalcredit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may haverights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, thesesecurities could contain covenants that would restrict our operations. Additional capital might not be available on reasonable terms, or atall.Contractual Obligations and CommitmentsOur principal commitments consist of obligations under our credit facility in effect at December 31, 2019, non-cancelable leasesfor our office space and computer equipment and purchase commitments for our co-location and other support services. The followingtable summarizes these contractual obligations at December 31, 2019. Future events could cause actual payments to differ from theseestimates.Payment due by periodContractual ObligationsTotalLess than 1year1-3 years3-5 yearsMore than 5years(in thousands)Long-term debt--Convertible senior notes$240,000$-$-$240,000$-Long-term debt--Revolving line ofcredit (1)-----Operating lease obligations2,279445776573485Financing lease obligations153,84713,47425,16023,24991,964Financing obligations, other2,0891,32969367-Purchase commitments2,0671,370697--Total$400,282$16,618$27,326$263,889$92,449(1)Repayment of the revolving line of credit is due at end of the term in February 2020. Early repayment is allowed. Interest is paidmonthly.In December 2018, we issued $240.0 million of convertible senior notes that pay interest at 1.25% and mature December 2023.The terms of the notes are disclosed in more detail in Note 2 of our consolidated financial statements included elsewhere in this AnnualReport on Form 10-K.Borrowing limit under our revolving line of credit agreement in effect of December 31, 2019 is $95.0 million. Borrowing capacityunder that agreement is subject to a borrowing base limit that is a function of our monthly recurring revenue as adjusted to reflect lostcustomer revenue during the previous three calendar months. Therefore, credit available under that line of credit may be less than the$95.0 million borrowing limit. Advances under that line of credit bear interest at the prime rate as published in the Wall Street Journalplus a margin based on the Company’s liquidity that ranges between 0.75% and 1.25%. The Company is charged an unused line feeunder 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 theterm. Available credit was $88.5 million as of December 31, 2019. The revolving line of credit agreement expired on February 20, 2020.On March 3, 2020, we entered into a new revolving line of credit agreement with Silicon Valley Bank. The agreement has a termof three years and a borrowing limit of $50.0 million with the ability to increase it to up to $100.0 million. The terms of the agreement aredescribed in Item 9B. “Other Information.” in this Annual Report on Form 10-K.63In March 2019, we terminated our cancellable lease agreement from 2016 to build additional office space on our headquarterscampus.Off-Balance Sheet ArrangementsAs of December 31, 2019, other than as disclosed in Note 8 and 17, we did not have any off-balance sheet arrangements, asdefined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of unconsolidated subsidiaries, structured finance, or specialpurpose 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.Recent Accounting PronouncementsIn June 2016, the FASB ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” The purpose of this ASUis to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Creditlosses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. This ASU is effective forinterim and annual reporting periods beginning after December 15, 2019. We expect our net accounts receivable to be impacted by theadoption of this guidance but we have not completed quantifying its impact on our financial statements.We are evaluating other accounting standards and exposure drafts that have been issued or proposed by the FASB or otherstandards setting bodies that do not require adoption until a future date to determine whether adoption will have a material impact on ourconsolidated 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 afinancial 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 ortrading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.Interest Rate RiskWe are exposed to market risk related to changes in interest rates. Borrowings under the revolving line of credit agreement ineffect at December 31, 2019, which was entered into in February 2015 and subsequently amended, bear interest at rates that arevariable. Increases in the Prime Rate would increase the interest rate on borrowings under that revolving line of credit. The revolving lineof credit agreement expired on February 20, 2020.On March 3, 2020, we entered into a new revolving line of credit agreement. Borrowings under the new agreement bear interest atrates that are variable. Increases in the Prime Rate or federal funds rate will increase the interest rate on borrowings under the newagreement. The terms of the new agreement are described in Item 9B. “Other Information” included in this Annual Report on Form 10-K.Changes in interest rates may also impact gains or losses from the conversion of our outstanding convertible senior notes. InDecember 2018, we issued $240.0 million in aggregate principal amount of our 1.25% convertible senior notes due 2023, or the Notes.Upon certain events and/or if certain conditions are met, the Notes can be redeemed into cash, or converted into cash, shares orcombination of cash and shares. Upon conversion or redemption, we are required to record a gain or loss for the difference between thefair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the debt to be extinguished dependson our then-current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is higher or lower than theimplied interest rate of the Notes, we will record a gain or loss in our consolidated statement of operations during the period in which theNotes are converted. The implicit interest rate for the notes is 7.30%. An incremental borrowing rate that is a hypothetical 100 basispoints lower than the implicit interest rate upon conversion of $240.0 million aggregate principal amount of the Notes would result in aloss of approximately $2.4 million.64Interest Rate SensitivityWe are subject to interest rate risk in connection with borrowings under the revolving line of credit agreement, which are subjectto a variable interest rate. As of December 31, 2019 , there were no amounts due under the agreement. Any debt we incur in the futuremay also bear interest at variable rates.Inflation RiskWe do not believe that inflation has had a material effect on our business, financial condition, or results of operations. Wecontinue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and costreductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher coststhrough 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 pageF-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 ProceduresUnder the supervision and with the participation of our management, including our President and Chief Executive Officer and ourChief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls andprocedures, 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 andprocedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired controlobjectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints andthat 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 ofDecember 31, 2019 our disclosure controls and procedures are designed to, and are effective to, provide assurance at a reasonable levelthat 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 andcommunicated 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, 2019.Management’s Annual Report on Internal Control Over Financial ReportingOur management, including our President and Chief Executive Officer and our Chief Financial Officer, is responsible forestablishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal controlover 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 and65dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance withauthorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection ofunauthorized 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 ourChief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,2019, based on the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) (2013 Framework). Based on this evaluation under the 2013 Framework, our President and Chief Executive Officerand our Chief Financial Officer have concluded that our internal control over financial reporting was effective as of December 31, 2019.Changes in Internal Control Over Financial ReportingNo 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 FirmOur independent registered public accounting firm, Ernst & Young, LLP, has issued an attestation report on the effectiveness ofour internal controls over financial reporting as of December 31, 2019, which appears on page F-3 of this Report.Item 9B. Other Information.On March 3, 2020, the Company and its subsidiaries entered into a Senior Secured Revolving Credit Facility (the “CreditAgreement”) with Silicon Valley Bank, as administrative agent, issuing lender and swingline lender (“SVB”), and the lenders from time totime party thereto. The Credit Agreement replaces the previous credit facility, dated February 20, 2015 (as amended from time to time,the “Previous Credit Facility”), by and among the Company, certain subsidiaries of the Company, several lenders, SVB, asadministrative agent, issuing lender and swingline lender, and Comerica Bank, as documentation agent, which expired by its terms onFebruary 20, 2020. Other than unused line fees, which have all been paid, there was no outstanding indebtedness under the PreviousCredit Facility when it expired. All capitalized terms used in this Item 9B and not otherwise defined in this Annual Report on Form 10-Kshall have the meanings set forth in the Credit Agreement.The Credit Agreement, among other things, provides for a senior revolving credit line (the “Senior Revolver”) with SVB as the initiallender. The three-year Senior Revolver has a borrowing limit of $50 million, with an option for the Company to increase it to up to $100million. Interest is payable monthly. Advances under the Senior Revolver bear interest at (a) the higher of (i) the prime rate as publishedin the Wall Street Journal or (ii) the federal funds effective rate plus 0.50%, plus (b) an applicable margin ranging from (0.50%) to 0,50%based on the Company’s Average Daily Usage (“ADU”) of the credit facility in the preceding month. The Company also is charged foramounts unused under this arrangement at a rate ranging from 0.00% to 0.40% based on the Company’s ADU in the preceding month.Any outstanding principal is due at the end of the term.The obligations of the Company and its subsidiaries under the Credit Agreement are secured by a first priority lien (subject tocertain permitted liens) in substantially all of their respective personal property assets pursuant to the terms of a Guarantee andCollateral Agreement, dated March 3, 2020 (the “Guarantee and Collateral Agreement”) and the other security documents.The Credit Agreement contains customary representations and warranties and restrictive covenants. In addition, the Companyand its subsidiaries are required to maintain a Consolidated Adjusted Quick Ratio (“AQR”) of (i) Consolidated Quick Assets to (ii)Consolidated Current Liabilities minus the current portion of Deferred Revenue of at least 1.25 to 1.00 as of the last day of any fiscalquarter, and, if the AQR is less than 2.00 to 1.00, a Minimum Consolidated EBITDA of at least $1.00 for66any such fiscal quarter calculated on a trailing 12 month basis. The Company has also agreed to fiscal year dollar limits on theconsolidated capital expenditures of the Company and its subsidiaries.The Credit Agreement contains customary events of default, including payment and covenant defaults (subject to grace and cureperiods), breaches of representations and warranties, defaults under certain other indebtedness, change of control, insolvency events,and the occurrence of a material adverse effect. If an event of default occurs, SVB would be entitled to take various actions, includingthe acceleration of amounts due under the Credit Facility and all actions permitted to be taken by a secured creditor.The description of the Credit Agreement and the Guarantee and Collateral Agreement is qualified in its entirety by reference tothe full and complete terms of such agreements, which will be filed as exhibits to the Company’s Form 10-Q for the quarter endingMarch 31, 2020.67PART IIIItem 10. Directors, Executive Officers and Corporate Governance.Information required by this Item concerning our directors is incorporated by reference from the sections captioned “Election ofDirectors” and “Corporate Governance Matters” contained in our proxy statement related to the 2020 Annual Meeting of Stockholderscurrently scheduled to be held on May 29, 2020 which we intend to file with the Securities and Exchange Commission within 120 daysof the end of our 2019 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, Dennerline and Napier areindependent within the meaning of the Nasdaq Stock Market listing rules and meet the additional test for independence for auditcommittee members imposed by Securities and Exchange Commission regulation and the Nasdaq Stock Market listing rules. Ourboard 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 wellas a code of conduct specifically for our principal executive officer and senior financial officers. Each of these policies is posted on ourwebsite, 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 onForm 10-K.Item 11. Executive Compensation.The information required by this Item is incorporated by reference to the information under the sections captioned “ExecutiveCompensation,” “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, 2019 with respect to our equity compensation plans:Plan CategoryNumber of securitiesto be issued uponexercise ofoutstanding options,warrants and rightsWeighted-averageexercise price ofoutstanding options,warrants and rightsNumber of securitiesremaining available forfuture issuance underequity compensationplansEquity compensation plansapproved by security holders2016 Employee Stock Purchase Plan-$-111,705Second Amended and Restated 2012 StockPlan2,133,240$0.873,189,756Amended and Restated 2000 Stock OptionPlan43,762$5.38-Total2,177,002$0.963,301,461Our equity compensation plans consist of the Benefitfocus, Inc. 2016 Employee Stock Purchase Plan, Second Amended andRestated 2012 Stock Plan, and the Amended and Restated 2000 Stock Option Plan, which were approved by our stockholders. We donot have any equity compensation plans or arrangements that have not been approved by our stockholders.The other information required by this Item is incorporated by reference to the information under the section captioned “SecurityOwnership of Certain Beneficial Owners and Management” contained in the proxy statement.68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 “CertainRelationships 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 “AuditCommittee Report” in the proxy statement.69PART IVItem 15. Exhibits, Financial Statement Schedules.(a) 1. Financial Statements.The following statements are filed as part of this Annual Report on Form 10-K:AUDITED CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2019 and 2018F-4Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December31, 2019, 2018 and 2017F-5Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years EndedDecember 31, 2019, 2018 and 2017F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017F-7Notes to Consolidated Financial StatementsF-82. Financial Statement Schedules.Schedule II-Valuation and Qualifying AccountsF-35Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or isshown in the financial statements or notes thereto.(b) Exhibits.Incorporated by Reference(Unless Otherwise Indicated)ExhibitNumberExhibit TitleFormFileExhibitFiling Date3.1Restated Certificate of Incorporation ofBenefitfocus, Inc.10-Q-3.1.3November 12, 20133.2Amended and Restated Bylaws ofBenefitfocus, Inc.8-K-3.2.1September 19, 20164.1Specimen Certificate for Common Stock.S-1/A333-1906104.1September 5, 20134.2Form of Second Amended and RestatedInvestors’ Rights Agreement, dated, 2013,by and among Benefitfocus, Inc. andcertain stockholders named therein.S-1/A333-1906104.3September 16, 20134.2.1First Amendment to Second Amended andRestated Investors’ Rights Agreement,dated February 24, 2015, by and amongBenefitfocus, Inc. and certain stockholdersnamed therein.10-K-4.3.1February 27, 2015704.3Indenture of Benefitfocus, Inc. and U.S.National Bank, as Trustee, dated as ofDecember 27, 2018.8-K-4.1December 28, 20184.4Form of 1.25% Convertible Senior Notesdue 2023 (included in Exhibit 4.3).8-K-4.1December 28, 20184.5Description of Securities---Filed herewith10.1Amended and Restated 2000 Stock OptionPlan.#S-1333-19061010.3August 14, 201310.2Form of Grant Notice and Stock OptionAgreement under the Amended andRestated 2000 Stock Option Plan.#S-1333-19061010.5August 14, 201310.3Benefitfocus, Inc. Amended and Restated2012 Stock Plan.#DEF 14A--April 25, 201410.3.1Form of Grant Notice and Stock OptionAgreement under the 2012 Stock Plan, asamended.#S-1333-19061010.6August 14, 201310.4Form of Management Incentive BonusProgram.#S-1333-19061010.7August 14, 201310.4.1Benefitfocus, Inc. Management IncentiveBonus Program.#DEF 14A--April 25, 201410.5Employment Agreement, dated January 19,2007, by and between Benefitfocus.com,Inc. and Mason R. Holland, Jr.#S-1333-19061010.8August 14, 201310.6Form of Employment Agreement.#S-1333-19061010.11August 14, 201310.7Form of Indemnification Agreement.#S-1333-19061010.12August 14, 201310.8Lease between Daniel Island ExecutiveCenter, LLC and Benefitfocus.com, Inc.,dated as of January 1, 2009, as amended.S-1333-19061010.13August 14, 201310.8.1Third Amendment to Lease between DanielIsland Executive Center, LLC andBenefitfocus.com, Inc., dated as ofDecember 12, 2016.8-K-10.13.1December 14, 201610.9Lease between Daniel Island ExecutiveCenter, LLC and Benefitfocus.com, Inc.,dated as of May 31, 2005.S-1333-19061010.14August 14, 201310.9.1First Amendment to Lease between DanielIsland Executive Center, LLC andBenefitfocus.com, Inc., dated as ofDecember 12, 2016.8-K-10.14.1December 14, 20167110.10Master Business Agreement betweenAetna Life Insurance Company andBenefitfocus.com, Inc., dated as ofNovember 28, 2006.+S-1333-19061010.15August 14, 201310.11Lease between DIEC II, LLC andBenefitfocus.com, Inc., dated as ofDecember 13, 2013.10-K-10.19March 21, 201410.11.1Amendment to Lease between DIEC II, LLCand Benefitfocus.com, Inc., dated as ofDecember 12, 2016.8-K-10.16.1December 14, 201610.12Form of Independent DirectorCompensation Agreement.8-K-10.21June 23, 201410.13Securities Purchase Agreement, dated asof February 24, 2015, by and amongBenefitfocus, Inc. and Mercer LLC.10-K-10.20February 27, 201510.14Right of First Offer Agreement, dated as ofFebruary 24, 2015, by and amongBenefitfocus, Inc., Mercer LLC, GS CapitalPartners VI Parallel, L.P., GS CapitalPartners VI GmbH & Co. KG, GS CapitalPartners VI Fund, L.P., GS Capital PartnersVI Offshore Fund, L.P., Oak InvestmentPartners XII, Limited Partnership andcertain stockholders named therein.10-K-10.21February 27, 201510.15Employment Agreement, dated June 25,2014, by and between Benefitfocus.com,Inc. and Ray August.#8-K-10.22April 8, 201510.15.1First Amendment to EmploymentAgreement, dated November 20, 2017, byand between Benefitfocus.com, Inc. andRaymond A. August.#10-K-10.18.1March 15, 20187210.15.2Second Amendment to EmploymentAgreement, dated April 1, 2019, by andbetween Benefitfocus.com, Inc. andRaymond A. August.#10-Q-10.17.2August 7, 201910.16Senior Secured Credit Facility, dated as ofFebruary 20, 2015, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.,Benefit Informatics, Inc., BenefitStore, Inc.,several lenders, Silicon Valley Bank, asadministrative agent, issuing lender andswingline lender and Comerica Bank, asdocumentation agent.10-Q-10.23May 6, 201510.16.1First Amendment Agreement, dated as ofJune 16, 2015, by and among Benefitfocus,Inc., Benefitfocus.com, Inc., BenefitInformatics, Inc., BenefitStore, Inc., severalbanks and other financial institutions orentities and Silicon Valley Bank, asadministrative agent and collateral agent forlenders.8-K-10.25June 16, 201510.16.2Second Amendment Agreement, dated asof December 18, 2015, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.,Benefit Informatics, Inc., BenefitStore, Inc.,several banks and other financialinstitutions or entities and Silicon ValleyBank, as administrative agent and collateralagent for lenders.10-K-10.23February 25, 201610.16.3Third Amendment Agreement, dated as ofMarch 24, 2016, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.,BenefitStore, Inc., several banks and otherfinancial institutions or entities and SiliconValley Bank, as administrative agent andcollateral agent for lenders.8-K-10.26March 29, 201610.16.4Fourth Amendment Agreement, dated as ofOctober 28, 2016, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.and BenefitStore, Inc., several banks andother financial institutions or entities andSilicon Valley Bank, as administrativeagent and collateral agent for lenders.+8-K-10.29October 31, 20167310.16.5Fifth Amendment Agreement, dated as ofDecember 12, 2016, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.and BenefitStore, Inc., several banks andother financial institutions or entities andSilicon Valley Bank, as administrativeagent and collateral agent for lenders.8-K-10.32December 14, 201610.16.6Sixth Amendment Agreement, dated as ofApril 26, 2017, by and among Benefitfocus,Inc., Benefitfocus.com, Inc. andBenefitStore, Inc., several banks and otherfinancial institutions or entities and SiliconValley Bank, as administrative agent andcollateral agent for lenders.+10-Q-10.20.6April 28, 201710.16.7Seventh Amendment Agreement, dated asof March 29, 2018, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.and BenefitStore, Inc., several banks andother financial institutions or entities andSilicon Valley Bank, as administrativeagent and collateral agent for lenders.+8-K-10.19.7April 2, 201810.16.8Eighth Amendment Agreement, dated as ofDecember 19, 2018, by and amongBenefitfocus, Inc., Benefitfocus.com, Inc.and BenefitStore, Inc., several banks andother financial institutions or entities andSilicon Valley Bank, as administrativeagent and collateral agent for lenders.+10-K-10.18.8February 26, 201910.17Guarantee and Collateral Agreement, datedas of February 20, 2015, made byBenefitfocus, Inc., Benefitfocus.com, Inc.,Benefit Informatics, Inc., BenefitStore, Inc.,and other grantors, in favor of Silicon ValleyBank, as administrative agent.10-Q-10.24May 6, 201510.18Benefitfocus, Inc. 2016 Employee StockPurchase Plan.#DEF14A--April 22, 20167410.19Waiver to Credit Agreement, dated as ofSeptember 1, 2016, by and among theBenefitfocus, Inc., Benefitfocus.com, Inc.and BenefitStore, Inc., the several banksand other financial institutions or entitiesparty thereto and Silicon Valley Bank, asadministration agent and collateral agent forthe lenders.8-K-10.28September 1, 201610.20Lease between DIEC II, LLC andBenefitfocus.com, Inc., dated as ofDecember 12, 2016.8-K-10.31December 14, 201610.21Employment Agreement, dated June 30,2017, by and between Benefitfocus.comand Jonathon Dussault.#10-Q-10.29August 8, 201710.22Form of Call Option Transaction Notice.8-K-10.1December 28, 201810.23Employment Agreement, dated June 30,2017, by and between Benefitfocus.comand James Restivo.#10-K-10.25February 26, 201910.24Benefitfocus, Inc. Second Amended andRestated Stock Plan.#8-K--10.4.1June 4, 201910.25Employment Agreement, dated July 2,2019, by and between Benefitfocus.comand Stephen M. Swad.#10-Q-10.26November 7, 201921.1List of Subsidiaries of Registrant.---Filed herewith23.1Consent of Ernst & Young LLP.---Filed herewith31.1Certification of the President and ChiefExecutive Officer pursuant to Section 302of the Sarbanes-Oxley Act of 2002.---Filed herewith31.2Certification of the Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.---Filed herewith32.1Certification of the President and ChiefExecutive Officer, and the Chief FinancialOfficer pursuant to Section 906 of theSarbanes-Oxley Act of 2002.---Filed herewith101.INSXBRL Instance Document.---Filed herewith101.SCHXBRL Taxonomy Extension SchemaDocument.---Filed herewith101.CALXBRL Taxonomy Extension CalculationLinkbase Document.---Filed herewith75101.DEFXBRL Taxonomy Extension DefinitionLinkbase Document.---Filed herewith101.LABXBRL Taxonomy Extension Label LinkbaseDocument.---Filed herewith101.PREXBRL Taxonomy Extension PresentationLinkbase Document.---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 theexhibit and filed separately with the SEC.Item 16. Form 10-K Summary.None.76SIGNATURESPursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto duly authorized.Benefitfocus, Inc.Date: March 4, 2020By:/s/ Stephen M. SwadStephen M. SwadChief Financial OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated.SignatureCapacityDate/s/ Mason R. Holland, Jr.Chairman of the Board of DirectorsMarch 4, 2020Mason R. Holland, Jr./s/ Raymond A. AugustPresident and Chief Executive OfficerMarch 4, 2020Raymond A. August(principal executive officer)/s/ Stephen M. SwadChief Financial Officer (principalMarch 4, 2020Stephen M. Swadfinancial and accounting officer)/s/ Douglas A. DennerlineDirectorMarch 4, 2020Douglas A. Dennerline/s/ A. Lanham NapierDirectorMarch 4, 2020A. Lanham Napier/s/ Francis J. Pelzer VDirectorMarch 4, 2020Francis J. Pelzer V/s/ Ana M. WhiteDirectorMarch 4, 2020Ana M. White77BENEFITFOCUS, INC.INDEX TO CONSOLIDATED FINANCIAL STATEMENTSAUDITED CONSOLIDATED FINANCIAL STATEMENTSReports of Independent Registered Public Accounting FirmF-2Consolidated Balance Sheets as of December 31, 2019 and 2018F-4Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2019, 2018 and2017F-5Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2019, 2018and 2017F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017F-7Notes to Consolidated Financial StatementsF-8CONSOLIDATED FINANCIAL STATEMENT SCHEDULESchedule II-Valuation and Qualifying AccountsF-35F-1Report of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Benefitfocus, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Benefitfocus, Inc. (the Company) as of December 31, 2019 and2018, the related consolidated statements of operations and comprehensive loss, changes in stockholders' equity (deficit) and cashflows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedulelisted in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidatedfinancial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, andthe results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity withU.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and ourreport dated March 4, 2020 expressed an unqualified opinion thereon.Adoption of ASU No. 2016-02As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019 dueto the adoption of Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), and the related amendments.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on theCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to beindependent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations ofthe 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 auditto obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due toerror or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidenceregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles usedand significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believethat our audits provide a reasonable basis for our opinion./s/ Ernst & Young LLPWe have served as the Company’s auditor since 2008.Raleigh, North CarolinaMarch 4, 2020F-2Report of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Benefitfocus, Inc.Opinion on Internal Control Over Financial ReportingWe have audited Benefitfocus, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013Framework) (the COSO criteria). In our opinion, Benefitfocus, Inc. (the Company) maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2019, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),the consolidated balance sheets of Benefitfocus, Inc. as of December 31, 2019 and 2018, the related consolidated statements ofoperations and comprehensive loss, changes in stockholders' equity (deficit) and cash flows for each of the three years in the periodended December 31, 2019, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2) and our reportdated March 4, 2020 expressed an unqualified opinion thereon.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal ControlOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based onour audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing suchother procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effecton the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ Ernst & Young LLPRaleigh, North CarolinaMarch 4, 2020F-3BENEFITFOCUS, INC.CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)As of December 31,20192018AssetsCurrent assets:Cash and cash equivalents$130,976$190,928Accounts receivable, net33,75421,077Contract, prepaid and other current assets21,52316,667Total current assets186,253228,672Property and equipment, net28,66969,965Financing lease right-of-use assets78,520-Operating lease right-of-use assets1,715-Intangible assets, net12,667-Goodwill12,8571,634Deferred contract costs and other non-current assets11,00213,668Total assets$331,683$313,939Liabilities and stockholders' deficitCurrent liabilities:Accounts payable$9,563$8,687Accrued expenses10,52611,461Accrued compensation and benefits15,24617,269Deferred revenue, current portion33,42936,540Lease liabilities and financing obligations, current portion6,8714,486Total current liabilities75,63578,443Deferred revenue, net of current portion5,0799,323Convertible senior notes187,949176,692Lease liabilities and financing obligations, net of current portion88,57257,116Other non-current liabilities922,575Total liabilities357,327324,149Commitments and contingenciesStockholders' deficit:Preferred stock, par value $0.001, 5,000,000 shares authorized,no shares issued and outstanding at December 31, 2019 and 2018--Common stock, par value $0.001, 50,000,000 shares authorized,32,788,980 and 32,017,773 shares issued and outstandingat December 31, 2019 and 2018, respectively3332Additional paid-in capital426,025403,631Accumulated deficit(451,702)(413,873)Total stockholders' deficit(25,644)(10,210)Total liabilities and stockholders' deficit$331,683$313,939The accompanying notes are an integral part of the Consolidated Financial Statements.F-4BENEFITFOCUS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS(in thousands, except share and per share data)Year Ended December 31,201920182017Revenue$295,686$258,721$236,842Cost of revenue144,090129,277127,382Gross profit151,596129,444109,460Operating expenses:Sales and marketing76,04978,17970,583Research and development54,72447,90249,549General and administrative45,32943,06227,268Total operating expenses176,102169,143147,400Loss from operations(24,506)(39,699)(37,940)Other income (expense):Interest income2,613250182Interest expense(23,524)(5,685)(4,931)Interest expense on building lease financing obligations (prior toadoption of ASC 842)-(7,471)(7,450)Other (expense) income(71)6(140)Total other expense, net(20,982)(12,900)(12,339)Loss before income taxes(45,488)(52,599)(50,279)Income tax expense272815Net loss$(45,515)$(52,627)$(50,294)Comprehensive loss$(45,515)$(52,627)$(50,294)Net loss per common share:Basic and diluted$(1.40)$(1.66)$(1.62)Weighted-average common shares outstanding:Basic and diluted32,539,74831,756,41531,052,378The accompanying notes are an integral part of the Consolidated Financial Statements.F-5BENEFITFOCUS, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)(in thousands, except share and per share data)Common Stock,AdditionalTotal$0.001 Par ValuePaid-inAccumulatedStockholders'SharesPar ValueCapitalDeficitEquity (Deficit)Balance, December 31, 201630,429,014$30$332,254$(310,561)$21,723Cumulative effect adjustment fromadoption of new accounting standard--391(391)-Exercise of stock options463,87013,457$-3,458Issuance of common stock uponvesting of restricted stock units406,936----Issuance of common stock underEmployee Stock Purchase Plan,or ESPP8,169-257-257Stock-based compensation expense--16,137-16,137Net loss---(50,294)(50,294)Balance, December 31, 201731,307,989$31$352,496$(361,246)$(8,719)Exercise of stock options29,908-186-186Issuance of common stock uponvesting of restricted stock units663,4191(1)--Issuance of common stock under ESPP16,457-526-526Purchase of convertible note capped call hedge--(33,024)-(33,024)Equity component of convertible notes--56,950-56,950Stock-based compensation expense--26,498-26,498Net loss---(52,627)(52,627)Balance, December 31, 201832,017,773$32$403,631$(413,873)$(10,210)Cumulative effect adjustment fromadoption of new accounting standard---7,6867,686Exercise of stock options24,800-134-134Issuance of common stock uponvesting of restricted stock units732,7381(1)--Issuance of common stock under ESPP13,669-319-319Stock-based compensation expense--21,942-21,942Net loss---(45,515)(45,515)Balance, December 31, 201932,788,980$33$426,025$(451,702)$(25,644)The accompanying notes are an integral part of the Consolidated Financial Statements.F-6BENEFITFOCUS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)Year Ended December 31,201920182017Cash flows from operating activitiesNet loss$(45,515)$(52,627)$(50,294)Adjustments to reconcile net loss to net cash and cash equivalentsused in operating activities:Depreciation and amortization22,35115,81515,906Stock-based compensation expense19,57228,86816,137Accretion of interest on convertible senior notes11,256--Interest accrual on finance lease liabilities33--Interest accrual on financing obligations (prior to adoption of ASC 842)-7,5217,500Rent payments in excess of expense(16)--Loss on disposal or impairment of property and equipment97157Provision for doubtful accounts11136475Changes in operating assets and liabilities:Accounts receivable, net(11,875)8,6502,800Accrued interest on short-term investments--7Contract, prepaid and other current assets(3,642)(570)4,519Deferred costs and other non-current assets2,8933,1375,538Accounts payable and accrued expenses4266,566(3,015)Accrued compensation and benefits161649(3,097)Deferred revenue(14,047)(9,165)(1,922)Other non-current liabilities(92)(234)(248)Net cash and cash equivalents (used in) provided by operating activities(18,375)8,981(5,937)Cash flows from investing activitiesBusiness combination, net of cash acquired(20,914)--Proceeds from short-term investments held to maturity--2,000Purchases of property and equipment(13,248)(8,290)(8,279)Net cash and cash equivalents used in investing activities(34,162)(8,290)(6,279)Cash flows from financing activitiesDraws on revolving line of credit-115,000105,000Payments on revolving line of credit-(171,246)(89,000)Proceeds from issuance of convertible notes-240,000-Payments of debt issuance costs(357)(6,000)-Purchase of convertible note capped call hedge-(33,024)-Proceeds from exercises of stock options and ESPP4537123,715Payments on capital lease and financing obligations(1,627)(10,540)(9,017)Payments of principal on finance lease liabilities(5,884)--Net cash and cash equivalents (used in) provided by financing activities(7,415)134,90210,698Net (decrease) increase in cash and cash equivalents(59,952)135,593(1,518)Cash and cash equivalents, beginning of year190,92855,33556,853Cash and cash equivalents, end of year$130,976$190,928$55,335Supplemental disclosure of non-cash investing and financing activitiesProperty and equipment purchases in accountspayable and accrued expenses$154$244$389Property and equipment purchased with financingand capital lease obligations (prior to adoption of ASC 842)$-$4,810$-Post contract support purchased with financing obligations$1,287$790$-Debt issuance costs included in accounts payable and accrued expenses$-$358$-Supplemental disclosure of cash flow informationIncome taxes paid$28$28$14Interest paid$12,374$11,884$10,911The accompanying notes are an integral part of the Consolidated Financial StatementsF-7BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)1. Organization and Description of BusinessBenefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers,insurance carriers, suppliers and brokers that is designed to simplify how organizations and individuals transact benefits. The financialstatements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. andBenefitStore, Inc.2. Summary of Significant Accounting PoliciesPrinciples of ConsolidationThese 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. Allintercompany accounts and transactions have been eliminated in consolidation. The Company is not the primary beneficiary of, nordoes it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variableinterest entity.Use of EstimatesThe preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions thataffect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include allowances fordoubtful accounts and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and therelated amortization, incremental borrowing rate used in lease accounting, the determination of the useful lives of assets, and theimpairment assessment of acquired intangibles and goodwill as well as the estimates disclosed in association with revenue recognition.Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments.These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as onvarious other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.Revenue and Deferred RevenueThe Company derives its revenue primarily from fees for subscription services and professional services sold to employers andinsurance carriers as well as platform revenue derived from the value of products sold on our platform. Revenue is recognized whencontrol of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled toin exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities areexcluded from revenue.The Company determines revenue recognition through the following steps:•Identification of each contract with a customer;•Identification of the performance obligations in the contract;•Determination of the transaction price;•Allocation of the transaction price to the performance obligations in the contract; and•Recognition of revenue when, or as, performance obligations are satisfied.Software Services RevenueSoftware services revenue consists of subscription revenue and platform revenue.F-8BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)Subscription RevenueSubscription revenue primarily consists of monthly subscription fees paid to the Company by its employer and insurance carriercustomers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generallycharged based on the number of employees or subscribers with access to the solution.Subscription services revenue is generally recognized on a ratable basis over the contract term beginning on the date thesubscription services are made available to the customer. The Company’s subscription service contracts are generally three years.Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.Platform RevenuePlatform revenue is generated from the value of policies or products enrolled in through the Company’s marketplace. Platformrevenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where the Company sellspolicies to employees of its customers as the broker, it earns broker commissions. Revenue from insurance broker commissions andsupplier transactions is recognized at a point in time when the orders for the policies are received and transferred to the insurancecarrier or supplier, and is reduced by estimates for risks from collectability, policy cancellation and termination.Professional Services RevenueProfessional services revenue primarily consists of fees related to the implementation of software products purchased bycustomers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees fromconsulting services and support services are also included in professional services revenue.The Company determined that implementation services for certain of its insurance carrier customers significantly modify orcustomize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from suchimplementation services with these insurance carrier customers are generally recognized over the contract term of the associatedsubscription services contract, including any extension periods representing a material right. In certain arrangements, the Companyutilizes estimates of hours as a measure of progress to determine revenue.Revenue from implementation services with employer customers is generally recognized as those services are performed.Revenue from support and training fees is recognized over the service period.Contracts with Multiple Performance ObligationsCertain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individualperformance obligations are accounted for separately if they are distinct. The Company allocates the transaction price to the separateperformance obligations based on their relative standalone selling prices. The Company determines the standalone selling prices basedon its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, thesubscription services sold, customer size and complexity, and the number and types of users under the contracts.Contract CostsThe Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as salescommissions. Payments of sales commissions generally include multiple payments. The Company capitalizes only those paymentsmade within an insignificant time from the contract inception, typically three months or less. Subsequent payments are expensed asincurred. The capitalized costs are amortized to sales and marketing expense over the estimated period of benefit of the asset, which isF-9F-9BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)generally four to five years. The Company expenses the costs to obtain a contract when the amortization period is less than one year.Deferred costs related to obtaining contracts is included in deferred contract costs and other non-current assets.The Company capitalizes contract fulfillment costs directly associated with customer contracts that are not related to satisfyingperformance obligations. The costs are amortized to cost of revenue expense over the estimated period of benefit, which is generally fiveyears. Deferred fulfillment costs are included in deferred contract costs and other non-current assets.The following tables present information about deferred contract costs:As of December 31,Balance of deferred contract costs20192018Costs to obtain contracts$6,676$7,506Costs to fulfill contracts$3,112$5,235Year ended December 31,Amortization of deferred contract costs201920182017Costs to obtain contracts included in sales andmarketing expense$3,662$4,217$4,488Costs to fulfill contracts included in cost of revenue$2,790$3,480$3,525Cost of RevenueCost of revenue primarily consists of employee compensation, professional services, data center co-location costs, networkingexpenses, depreciation expense for computer equipment directly associated with generating revenue, amortization expense forcapitalized 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 revenuebased on headcount.Cash and Cash EquivalentsCash and cash equivalents consist of bank checking accounts and money market accounts. The Company considers all highlyliquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.Concentrations of Credit RiskThe Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents andaccounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be ofhigh credit quality. The bank deposits of the Company might, at times, exceed federally insured limits and are generally uninsured anduncollateralized. The Company has not experienced any losses on cash and cash equivalents to date.To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowancefor doubtful accounts. Accounts receivable are unsecured and derived from revenue earned from customers located in the United States.One customer represented approximately 13% and 11% of total revenue for the year ended December 31, 2018 and 2017, respectively.No customer exceeded 10% of total revenue for the year ended December 31, 2019. As of December 31, 2019, one customerrepresented approximately 11% of total accounts receivable. No customer exceeded 10% of accounts receivable as of December 31,2018.F-10BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)Accounts Receivable and Allowance for Doubtful Accounts and ReturnsAccounts receivable are stated at realizable value, net of allowances for doubtful accounts and returns. The Company utilizes theallowance method to provide for doubtful accounts based on management’s evaluation of the collectability of amounts due, and otherrelevant factors. Bad debt expense is recorded in general and administrative expense in the consolidated statements of operations andcomprehensive loss. The Company’s estimate is based on historical collection experience and a review of the current status ofaccounts receivable. Historically, actual write-offs for uncollectible accounts have not significantly differed from the Company’sestimates. The Company removes recorded receivables and the associated allowances when they are deemed permanentlyuncollectible. However, higher than expected bad debts may result in future write-offs that are greater than the Company’s estimates.The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodicassessment of historical experience and trends. The Company considers factors such as historical reasons for adjustments, serviceand delivery issues or delays, and past due customer billings.The following table presents the balances of the allowances:As of December 31,Balance of allowances20192018Allowance for doubtful accounts$155$392Allowance for returns$2,760$3,191Property and Equipment and Capitalized Software Development CostsProperty and equipment, including capitalized software development costs, are stated at cost less accumulated depreciation andamortization. Expenditures for major additions and improvements are capitalized. Depreciation and amortization are recognized over theestimated useful lives of the related assets using the straight-line method.The estimated useful lives for significant property and equipment categories are generally as follows:Buildings, leased (prior to adoption of ASC 842)30 yearsDeveloped software3 yearsComputers and related equipment3-5 yearsPurchased software and licenses1-7 yearsLeasehold improvementsLesser of estimated useful life of asset or lease termFurniture and fixtures7 yearsOther equipment5-12 yearsVehicles5 yearsUseful lives of significant assets are periodically reviewed and adjusted prospectively to reflect the Company’s current estimatesof 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 preliminaryproject activities and post-implementation activities are expensed as incurred. Internal and external costs incurred during the applicationdevelopment stage, including upgrades and enhancements representing modifications that will result in significant additionalfunctionality, are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as partof property and equipment and are amortized on a straight-line basis over the software’sF-11BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)estimated useful life which is three years. The Company evaluates these assets for impairment whenever events or changes incircumstances occur that could impact the recoverability of these assets.Identifiable Intangible AssetsIdentifiable intangible assets with finite lives are recorded at their fair values at the date of acquisition and are amortized on astraight-line basis over their respective estimated useful lives, which is the period over which the asset is expected to contribute directlyor indirectly to future cash flows.Impairment of Long-Lived Assets and GoodwillThe Company reviews long-lived assets and definite-lived intangible assets for impairment whenever events or changes incircumstances indicate the carrying amount of an asset might not be recoverable. Recoverability of the long-lived asset is measured bya comparison of the carrying amount of the asset or asset group to future undiscounted net cash flows expected to be generated. Ifsuch assets are not recoverable, the impairment to be recognized, if any, is measured as the amount by which the carrying amount ofthe assets exceeds the estimated fair value (discounted cash flow) of the assets or asset group. Assets held for sale are reported at thelower 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 thefair value of assets acquired, net of liabilities assumed. Goodwill is not amortized; rather, goodwill is tested for impairment at thereporting unit level as of October 31 of each year, or more frequently if an event occurs or circumstances change that would more likelythan 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 reportingunit is less than its carrying value before testing goodwill for impairment for each reporting unit. The reporting units are determined bythe components of the Company’s operating segments that constitute a business for which both (1) discrete financial information isavailable and (2) segment management regularly reviews the operating results of that component. If it is more likely than not that the fairvalue of a reporting unit is less than its carrying value, the Company performs the impairment test by applying a fair-value-based test.The Company compares the fair value of a reporting unit to its carrying value. If the carrying value of the net assets assigned to thereporting unit exceeds the fair value of our reporting unit, an impairment loss is recorded equal to the difference.The Company has one reporting unit. To determine the fair value of the Company’s reporting unit, the Company has used itsmarket capitalization. The Company may also determine fair value using discounted cash flow analysis, which requires significantassumptions and estimates about future operations. Significant judgments inherent in this analysis include the determination of anappropriate discount rate, estimated terminal value and the amount and timing of expected future cash flows.Debt Issuance CostsDebt issuance costs related to the convertible senior note financing have been recorded as a reduction of the carrying amount ofthe debt and are amortized to interest expense using the effective interest method.Debt issuance costs related to the revolving line of credit have been recorded in other non-current assets and are amortized tointerest expense over the remaining life of the agreement.Leases (after adoption of ASC 842)The Company periodically enters into finance leases for property and equipment. The leasing arrangements for the Company’soffice space at its headquarters campus are classified as finance leases. The Company also leases office space under operatingleases.F-12BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)The Company determines if an arrangement is a lease at inception. Right of use, or ROU, assets represent the Company’s rightto use an underlying asset for the lease term. Lease liabilities represent an obligation to make lease payments arising from the lease.Leases with a term of 12 months or less are not included in the recognized ROU assets and lease liabilities for all classes of assets.ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease paymentsover the lease term. Because the Company’s operating leases do not provide an implicit interest rate, the Company uses itsincremental borrowing rate based on information available at commencement date to determine the present value of lease payments.The ROU asset also consists of any prepaid lease payments, lease incentives, or initial direct costs. The lease terms used to calculatethe ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that theCompany will exercise that option.Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while theexpense for finance leases is recognized as depreciation expense and interest expense. The Company has lease agreements whichrequire payments for lease and non-lease components (e.g. common area maintenance and equipment maintenance) that areaccounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of thelease, such as maintenance costs based on future obligations, are not included in the ROU assets or liabilities. These are expensed asincurred and recorded as variable lease expense.Financing ObligationsFinancing obligations include liabilities for the purchase of software licenses.Prior to the adoption of ASC 842, in its build-to-suit lease arrangements where the Company is involved in the construction of itsbuildings, the Company is deemed the owner for accounting purposes during the construction period. The Company records an asset forthe amount of the total project costs in Property and Equipment, net and the related financing obligation in Lease Liabilities andFinancing obligations on the Consolidated Balance Sheet. Once construction is complete, the Company determines if the assetqualifies for sale-leaseback accounting treatment. If the arrangement does not qualify for sale-lease back treatment, the Companycontinues to reduce the obligation over the lease term as payments are made and depreciates the asset over its useful life. TheCompany does not report rent expense for the portion of the rent payment determined to be related to the assets that it owns foraccounting purposes. Rather, this portion of the rent payment under the lease is recognized as a reduction of the financing obligationand as interest expense.AdvertisingThe Company expenses advertising costs as they are incurred. Direct advertising costs for the years ended December 31, 2019,2018 and 2017 were $332, $391 and $168, respectively.Comprehensive LossThe Company’s net loss equals comprehensive loss for all periods presented.Stock-Based Employee CompensationStock-based employee compensation is measured based on the grant-date fair value of the awards and recognized in theConsolidated Statements of Operations and Comprehensive Loss over the period during which the award holder is required to performservices in exchange for the award, which is the vesting period. Compensation expense is recognized over the vesting period of theapplicable award using the straight-line method. Compensation expense related to performance-based restricted stock units, which areaccounted for as equity awards, is recognized when it is probable that the performance measure will be met. Compensation costsrelated to restricted stock units (“RSUs”) is based on the market price on the grant date. The Company uses the Black-Scholes optionpricing model for estimating the fair value of stock options. The use of the option valuation model requires the input of subjectiveF-13BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)assumptions, including the expected life of the option and the expected stock price volatility. The Company recognizes the effect offorfeitures as they occur. The recognition of stock-based compensation expense associated with performance-based restricted stockunits 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 arepermitted 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 changein accounting policy has been recorded as a $391 cumulative effect adjustment to its accumulated deficit as of January 1, 2017.Income TaxesThe Company uses the asset and liability method for income tax accounting. This method requires the recognition of deferredtax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and taxbasis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measuredusing the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected tobe realized or settled. Valuation allowances are recorded to reduce deferred tax assets to the amount the Company believes is morelikely than not to be realized. The tax benefits of uncertain tax positions are recognized only when the Company believes it is morelikely than not that the tax position will be upheld on examination by the taxing authorities based on the merits of the position. TheCompany recognizes interest and penalties, if any, related to unrecognized income tax benefits in income tax expense. Income taxeffects related to settlements of share-based payment awards are reported in earnings as an increase or decrease to income taxexpense (benefit), net. Additionally, income tax-related cash flows resulting from share-based payments are reported as operatingactivities in the statement of cash flows.Basic and Diluted Net Loss per Common ShareBasic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to commonstockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share iscomputed by giving effect to all potential shares of common stock, including outstanding stock options, outstanding warrants, commonstock related to unvested restricted stock units and convertible senior notes to the extent dilutive, and common stock issuable pursuantto the ESPP. Basic and diluted net loss per share was the same for each period presented, as the inclusion of all potential commonshares outstanding would have been anti-dilutive.Recently Adopted Accounting StandardsLeasesOn January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” codified asASC 842. The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on thebalance sheet for those leases classified as operating leases under previous authoritative guidance. ASC 842 introduces new disclosurerequirements for leasing arrangements. The Company adopted this update using the modified retrospective transition method at thebeginning of the period of adoption. Accordingly, the Company did not adjust prior period financial statements, and recognized acumulative-effect adjustment to the opening balance of accumulated deficit in 2019 in the amount of $7,686. The Company utilized thefollowing additional significant policy elections:•Elected the package of three transition practical expedients to not reassess:owhether any expired or existing contracts are or contain a lease;F-14BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)othe classification of any expired or existing leases; andothe treatment of initial direct costs.•Adopted a policy to not separate lease and associated nonlease components for all classes of assets. The Companyapplied this policy to all existing leases on transition as well as new leases going forward.•Adopted a policy to not include leases with a term of 12 months or less in the recognized ROU assets and leaseliabilities for all classes of assets.The adoption of this standard had a significant impact on the Company’s consolidated financial statements as follows:•Net assets of $21,019 and related financing obligations and other noncurrent liabilities of $34,909 for existing build-to-suit lease arrangements were derecognized. These leases were transitioned to the new standard based on an analysisof the lease balances as of the transition date as if they had been leases under ASC 840. Based on this analysis, theland component of these leases was combined with the remainder of the lease obligations. Historically, theseobligations were accounted for separately and recognized as part of facilities expense and allocated to cost of revenueand operating expenses. Amounts recognized included $56,422 of net ROU assets, $2,848 of net leaseholdimprovements, and $63,952 of total finance lease liabilities. The net cumulative adjustment to accumulated deficit toderecognize and transition these leases was $7,686.•Finance lease liabilities and ROU assets of $3,589 were recorded related to payment obligations for nonleasecomponents (e.g. common area maintenance and equipment maintenance) associated with existing capital leases.•Operating lease liabilities and ROU assets of $1,169 were recorded related to existing operating lease obligations.Accounting Standards Not Yet AdoptedIn August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to theDisclosure Requirements for Fair Value Measurement.” The ASU modifies the disclosure requirements required for fair valuemeasurements. This ASU is effective for the Company for the interim and annual reporting periods starting January 1, 2020. Earlyadoption is permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of CreditLosses on Financial Instruments.” The purpose of this ASU is to require a financial asset measured at amortized cost basis to bepresented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recordedthrough an allowance for credit losses. This ASU is effective for interim and annual reporting periods starting January 1, 2020. TheCompany expects its net accounts receivable balance to be affected by the adoption of this guidance but has not completed itsquantifying of the impact on its consolidated financial statements.3. Business CombinationOn February 25, 2019, the Company purchased certain operating assets and liabilities, intellectual property and intangibleassets, including the workforce in place, of the commercial business of Connecture, Inc., for $20,914 ($24,000 before working capitaladjustments). This acquisition added technology to potentially strengthen the Company’s platform, expand its customer reach, andenhance the value the Company delivers to its carrier customers.The following table summarizes the fair value of the consideration paid and the amounts of the assets acquired and liabilitiesassumed recognized at the acquisition date:F-15BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)Consideration TransferredCash$19,914Contingent consideration arrangement1,000Fair value of total consideration transferred$20,914Recognized Amounts of Identifiable Assets Acquired and LiabilitiesAssumedAccounts receivable, net$912Contract, prepaid and other current assets611Property and equipment, net198Operating lease right-of-use assets1,107Intangible assets, net14,600Deferred contract costs and other non-current assets250Accrued expenses(2)Accrued compensation and benefits(186)Deferred revenue, current portion(6,692)Operating lease ROU liabilities, current portion(84)Operating lease ROU liabilities, net of current portion(1,023)Total identifiable net assets9,691Goodwill11,223Total identifiable net assets and goodwill$20,914The goodwill of $11,223 arising from the acquisition consists largely of the value of the acquired organized workforce as well aseconomies of scale. The Company expects all of the goodwill recognized to be deductible for income tax purposes after satisfyingperformance obligations for certain customers.The identifiable intangible assets acquired have a weighted average amortization period of 6.5 years and include developedtechnology, customer relationships, and trade name. The Company did not acquire any contingent liabilities as part of the transaction.The cash transferred includes $1,000 in contingent consideration placed into a third-party escrow. These escrowed funds were tobe released to Connecture as required contractual consents to the assignment of service arrangements are obtained from specifiedcustomers. The undiscounted consideration distributable to Connecture under this arrangement ranges from $0 to $1,000. As customerconsents are obtained, the amount of the undiscounted consideration associated with the customer is transferred to Connecture. Forany specified service contracts that, at the end of one year, are continuing to be honored by the customer, whether or not affirmativeconsent has been received from such customer, the related escrowed funds will be distributed to Connecture. If during the first year afterthe closing date of the acquisition, a customer refuses to consent to the assignment of the contract, or fails to deliver consent andstops performing under the contract or otherwise terminates the contract, the portion of the escrow related to that customer contract willthen be distributable back to the Company. The Company expected all of the contingent consideration would be distributed toConnecture within one year of acquisition. Therefore, the full $1,000 undiscounted escrow balance is included in the fair value of theconsideration transferred for the acquisition. As of December 31, 2019, all of these escrow funds had been released to Connecture.The fair value of the assets and liabilities assumed is provisional pending finalization of the Company’s review of supportingrecords for these assets and liabilities.The Company incurred $450 in costs related to completing the acquisition, all of which were recognized in general andadministrative expense during the year ended December 31, 2019.F-16BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)Revenue recognized by the Company related to the operations of the acquired business were $23,855 for the year endedDecember 31, 2019. During the third quarter of 2019, the Company had integrated the acquired assets and workforce into its operations,which decreased the Company’s ability to identify incremental costs associated with the acquired business. Identifiable expensesassociated with the acquired business were $20,219 for the year ended December 31, 2019.Coincident with the acquisition, the Company entered into two additional agreements with Connecture each of which areaccounted for separately at contracted prices as described below:•Transition Services Agreement where each party provides certain transition services to the other for a 12-month period tofacilitate an orderly transition the acquired business. During the year ended December 31, 2019, the Company recognizedoperating expense of $559 related to this agreement.•An agreement for the Company to provide interim services to Connecture as a subcontractor under a master servicesagreement maintained by Connecture that includes service commitments related to both the acquired business andConnecture’s retained business while the parties work together with the customer to legally separate the contract. During theyear ended December 31, 2019, the Company recognized revenue of $979 related to this agreement.Supplemental pro forma revenue and earnings information are not presented because historical records for the acquired businessare not available. Therefore, determining the amount of revenue and earnings of the combined entity as though the business combinationhad occurred as of the beginning of the comparable periods would require significant estimates of amounts that the Company cannotindependently substantiate. The Company estimates that the difference between pro forma information compared to reported resultswould not be significant.4. Net Loss Per Common ShareDiluted loss per common share is the same as basic loss per common share for all periods presented because the effects ofpotentially dilutive items were anti-dilutive given the Company’s net loss. The following common share equivalent securities have beenexcluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive for the periodspresented:Year Ended December 31,Anti-Dilutive Common Share Equivalents201920182017Restricted stock units1,970,5552,174,2501,937,014Stock options206,447233,247263,155Convertible senior notes4,513,8244,513,824-Employee Stock Purchase Plan--7,039Total anti-dilutive common share equivalents6,690,8266,921,3212,207,208Basic and diluted net loss per common share is calculated as follows:Year Ended December 31,201920182017Numerator:Net loss$(45,515)$(52,627)$(50,294)Net loss attributable to common stockholders$(45,515)$(52,627)$(50,294)Denominator:Weighted-average common shares outstanding, basic anddiluted32,539,74831,756,41531,052,378Net loss per common share, basic and diluted$(1.40)$(1.66)$(1.62)F-17BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)5. Fair Value MeasurementThe carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, net accountsreceivable, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to theirshort-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 arecurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initialmeasurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservableinputs 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 ownassumptions.Assets and Liabilities Measured at Fair Value on a Recurring BasisThe Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determinethe 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 recurringbasis using the above categories, as of December 31, 2019 and 2018.December 31, 2019DescriptionLevel 1Level 2Level 3TotalCash Equivalents:Money market mutual funds (1)$124,503$-$-$124,503Total assets$124,503$-$-$124,503December 31, 2018DescriptionLevel 1Level 2Level 3TotalCash Equivalents:Money market mutual funds (1)$182,748$-$-$182,748Total assets$182,748$-$-$182,748(1)Money market mutual funds are classified as cash equivalents in the Company’s consolidated balance sheets. As short-term,highly liquid investments readily convertible to known amounts of cash, with remaining maturities of three months or less at thetime of purchase, the Company’s cash equivalent money market funds have carrying values that approximate fair value.F-18BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)6. Property and EquipmentProperty and equipment consists of the following as of December 31:20192018Buildings, leased (prior to adoption of ASC 842)$-$48,558Developed software46,49736,713Computers and related equipment31,73038,183Purchased software and licenses30,50730,702Leasehold improvements7,5654,633Furniture and fixtures6,9956,773Other equipment2,2662,313Vehicles146146Total property and equipment, at cost125,706168,021Accumulated depreciation and amortization(97,037)(98,056)Property and equipment, net$28,669$69,965The following table presents depreciation and amortization expense for the year ended December 31:Depreciation and amortization expense201920182017Depreciation and amortization expense related toproperty and equipment$11,819$15,665$15,648Amortization expense related to financing ROU assets8,599--Total depreciation and amortization expense$20,418$15,665$15,648Prior to the adoption of ASC 842, amortization of assets under capital leases is included in depreciation and amortizationexpense related to property and equipment. The following table presents information about fixed assets under capital leasearrangements prior to the adoption of ASC 842:As of December 31,Fixed assets acquired under capital lease arrangements2018Property and equipment$31,148Accumulated depreciation$6,216The following tables present supplementary information about capitalized software development costs:Year ended December 31,Capitalized software development costs201920182017Capitalized$9,784$6,090$4,482Amortization expense$5,130$3,944$3,257As of December 31,Capitalized software development costs20192018Net book value$14,459$9,8067. Goodwill and Intangible AssetsThe follow tables present the changes in goodwill and the gross carrying amounts of the components of goodwill as of December31:20192018Goodwill on January 1$1,634$1,634Additions from business combination11,223-Impairment--Goodwill on December 31$12,857$1,634F-19BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)Gross carrying amounts20192018Goodwill$14,527$3,304Accumulated impairment loss(1,670)(1,670)Information regarding the Company’s acquisition-related intangible assets is as follows:As of December 31, 2019GrossCarryingAmountAccumulatedAmortizationNet CarryingAmountWeighted-AverageRemainingUseful Life(in years)Trademarks$840$(313)$5276.2Developed technology7,900(1,119)6,7815.2Customer agreements8,160(2,801)5,3596.2Non-compete agreements126(126)--Total$17,026$(4,359)$12,6675.8As of December 31, 2018GrossCarryingAmountAccumulatedAmortizationNet CarryingAmountWeighted-AverageRemainingUseful Life(in years)Trademarks$240$(240)$--Customer agreements2,060(2,060)--Non-compete agreements126(126)--Total$2,426$(2,426)$--Amortization and impairment of acquisition-related intangible assets is as follows:Year ended December 31,Amortization of acquisition-related intangible assets201920182017Amortization expense$1,933$150$258Impairment$-$-$-8. Convertible Senior NotesIn December 2018, the Company issued $240,000 aggregate principal amount of 1.25% convertible senior notes (“Notes”) dueDecember 15, 2023, unless earlier repurchased by the Company or converted by the holder pursuant to their terms. Interest is payablesemiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2019.The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. TheNotes are unsecured and rank: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in rightof payment to the Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectivelyjunior in right of payment to any of the Company’s senior, secured indebtedness to the extent of the value of the assets securing suchindebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or acombination of cash and shares of common stock, at the Company’s election.The Notes have an initial conversion rate of 18.8076 shares of common stock per $1 principal amount of Notes. This representsan initial effective conversion price of approximately $53.17 per shareF-20BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)of common stock and 4,513,824 shares issuable upon conversion. Throughout the term of the Notes, the conversion rate may beadjusted upon the occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued andunpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to bepaid by cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock paid ordelivered, as the case may be, to the holder upon conversion of Notes.Prior to the close of business on September 14, 2023, the Notes will be convertible at the option of holders during certainperiods, only upon satisfaction of certain conditions set forth below. On or after September 15, 2023, until the close of business on thesecond scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at theconversion price at any time regardless of whether the conditions set forth below have been met.Holders may convert all or a portion of their Notes prior to the close of business on September 14, 2023, in multiples of $1principal amount, only under the following circumstances:•during any calendar quarter commencing after the calendar quarter ending on March 31, 2019 (and only during suchcalendar quarter), if the last reported sales price of the common stock for at least 20 trading days (whether or notconsecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of theimmediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicabletrading day;•during the five business day period after any five consecutive trading day period, or the Notes measurement period, inwhich the “trading price” (as defined in the Indenture) per $1 principal amount of notes for each trading day of the Notesmeasurement period was less than 98% of the product of the last reported sale price of the Company’s common stockand the conversion rate on each such trading day;•if the Company calls any or all of the Notes for redemption, at any time prior to the close of business on September14, 2023; or•upon the occurrence of specified corporate events.As of December 31, 2019, the Notes are not yet convertible.Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the sameindustry and with similar maturity, the Company estimated the implied market interest rate of its Notes to be approximately 7.30%,assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liabilitycomponent of the Notes, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observableinputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $181,500upon issuance, calculated as the present value of future contractual payments based on the $240,000 aggregate principal amount. Theexcess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expenseover the term of the Notes. The $58,500 difference between the gross proceeds received from issuance of the Notes of $240,000 and theestimated fair value of the liability component represents the equity component of the Notes and was recorded in additional paid-incapital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred tothe liability and equity components in proportion to the allocation of proceeds. Transaction costs attributable to the liability component,totaling $4,808, are being amortized to expense over the term of the Notes, and transaction costs attributable to the equity component,totaling $1,550, and were included with the equity component in shareholders’ equity.The Notes consist of the following as of December 31:F-21BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)20192018Liability Component:Principal$240,000$240,000Less: debt discount, net of amortization(52,051)(63,308)Net carrying amount$187,949$176,692Equity component (a)56,95056,950(a)Recorded in the consolidated balance sheet within additional paid-in capital, net of $1,550 transaction costs in equity.The following table sets forth total interest expense recognized related to the Notes:Year Ended December 31,201920181.25% coupon$3,000$42Amortization of debt discount and transaction costs11,256-$14,256$42As of December 31, 2019, the fair value of the Notes, which was determined based on inputs that are observable in the market orthat could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market (Level2), and carrying value of debt instruments (carrying value excludes the equity component of the Company’s convertible notes classifiedin equity) were as follows:December 31, 2019December 31, 2018Fair ValueCarryingValueFair ValueCarryingValueConvertible senior notes$207,600$187,949$254,400$176,692In connection with the issuance of the Notes, the Company entered into capped call transactions with certain counterpartiesaffiliated with the initial purchasers and others. The capped call transactions are expected to reduce potential dilution of earnings pershare upon conversion of the Notes. Under the capped call transactions, the Company purchased capped call options that in theaggregate relate to the total number of shares of the Company’s common stock underlying the Notes, with an initial strike price ofapproximately $53.17 per share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilutionadjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $89.98.The cost of the purchased capped calls of $33,024 was recorded to stockholders’ deficit and will not be re-measured. The capped callwill not be re-measured provided it continues to meet the conditions for equity classification.Based on the closing price of our common stock of $21.94 on December 31, 2019, the if-converted value of the Notes was lessthan their respective principal amounts.9. Revolving Line of CreditIn February 2015, the Company executed a loan and security agreement with a syndicate of lenders led by Silicon Valley Bankfor a senior revolving credit agreement (“Senior Revolver”) to replace its then current revolving line of credit. Debt issuance fees of $591were 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 theSenior Revolver is subject to a borrowing base limit that is a function of the Company’s monthly recurring revenue as adjusted to reflectlost customer revenue during the previous three calendar months. Therefore, credit available under the Senior Revolver may be less thanthe borrowing limit. Interest is payable monthly. Advances under the Senior Revolver bear interest at the prime rate as published in theWall Street Journal plus a margin based on the Company’s liquidity, which originally ranged between 1.0% and 1.5%. The Company ischarged an unused line fee under this arrangement at a rate based on its liquidity, which was originally 0.300% to 0.375% per year. Anyoutstanding principal is due at the end of the term.F-22BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)In 2016, the Company amended its Senior Revolver agreement. The amendments, among other things, increased the borrowingcapacity to $95,000, extended the termination date of the facility to February 20, 2020, added Goldman Sachs Lending Partners LLC tothe lending syndicate and revised certain covenants including those related to accounts receivable, Minimum Consolidated EBITDArequirements, Indebtedness, permitted Indebtedness and certain capital expenditure limits. Additionally, the amendments altereddefinitions in the Senior Revolver agreement, including Alternate Base Rate, Applicable Margin, Consolidated EBITDA, Liquidity andCommitment Fee Rate. As a result of certain of these definitional changes, the Alternate Base Rate was modified to be the prime rateas published in the Wall Street Journal plus a margin based on our liquidity that ranges between 0.75% and 1.25%. The amendmentsfurther waived any default that may have occurred as a result of certain Indebtedness previously incurred by the Company and thedisclosure to the lenders of registered Intellectual Property. In connection with the amendments, debt issuance fees of $379 werecapitalized in the Company’s balance sheet and are being amortized over the remaining life of the Senior Revolver.The Company further amended its Senior Revolver agreement in April 2017 to adjust terms in the agreement to accommodatechanges in its business.In March 2018, the Company amended its Senior Revolver to modify certain terms and requirements to account for theCompany’s adoption of Topic 606. The Company amended its Senior Revolver again in December 2018. The amendment altereddefinitions and amended sections of the agreement to allow for transactions required to administer the convertible senior note financing.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 obligationsimmediately due and stop advancing money or extending credit under the line of credit. The line of credit is collateralized bysubstantially all of the Company’s tangible and intangible assets, including intellectual property and the equity of subsidiaries.During the years ended December 31, 2018 and 2017, the Company borrowed an aggregate of $115,000 and $105,000,respectively, under the Senior Revolver for general operating purposes and repaid an aggregate of $171,246 and $89,000, respectively.No amounts were borrowed or repaid during the year ended December 31, 2019. As of December 31, 2019, there were no amountsoutstanding under the Senior Revolver and the amount available to borrow was $88,541.10. Commitments and ContingenciesTotal net cash flows were not impacted by adoption of ASC 842; however, classification of some transactions moved betweenoperating and financing activities. Supplemental cash flow information related to the Company’s operating and finance leases was asfollows:Cash Paid for Amounts Included in the Measurement of Lease LiabilitiesYear EndedDecember 31, 2019Financing cash flows from finance leases$5,884Operating cash flows from finance leases$8,527Operating cash flows from operating leases$599ROU Assets Obtained in Exchange for New Lease ObligationsFinance lease liabilities$4,248Operating lease liabilities$1,107As of December 31, 2019, the Company had no additional significant operating or finance leases that had not yet commenced.Operating LeasesThe Company leases office facilities under various non-cancelable operating lease agreements with original lease periodsexpiring between 2020 and 2027. Some of the leases provide for renewal terms at the Company’s option. Certain future minimum leasepayments due under these operating leaseF-23BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)agreements contain free rent periods or escalating rent payment provisions. These leases generally do not contain purchase options.Lease expense is recognized on a straight-line basis over the lease term as an operating expense.The components of operating lease expense were as follows:Year EndedDecember 31, 2019Fixed operating lease expense$705Short-term lease expense33Variable operating lease expense145Total operating lease expense883Sublease income(28)Total operating lease cost$855The following table presents the lease balances within the Consolidated Balance Sheet, weighted average remaining lease term,and weighted average discount rates related to the Company’s operating leases:Lease Assets and LiabilitiesClassificationAs ofDecember 31,2019AssetsOperating lease ROU asset - BuildingsOperating lease right-of-use assets$1,715LiabilitiesOperating lease ROU liabilities, current portionLease liabilities, current$343Operating lease ROU liabilities, net of current portionLease liabilities, non-current1,568Total operating lease liabilities$1,911Weighted average remaining lease term (in years)5.86Weighted average discount rate5.96%The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2019:OperatingLeasesYear Ending December 31,2020$4452021385202239120233982024175Thereafter485Total minimum lease payments2,279Less: imputed interest(368)Total operating lease liabilities$1,911Finance LeasesThe Company leases three buildings on its Charleston, South Carolina campus. Under ASC 840, one leasing arrangement wasaccounted for as a capital lease while the remaining two lease agreements were accounted for as build-to-suit, failed sale-leasebackarrangements. Accordingly, the Company recognized liabilities for the lease payments related to these two buildings, which wererecorded as financing obligations. Pursuant to ASC 842, the assets and related financing obligations for the existing build-to-suit leasearrangements were derecognized with a cumulative adjustment of $7,686 toF-24BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)accumulated deficit. These leases were transitioned to the new standard based on an analysis of the lease balances as of the transitiondate as if they had been a lease under ASC 840. Based on this analysis, the land components of these leases were combined with theremainder of the lease obligation whereas this obligation was previously accounted for separately and recognized as part of facilityexpense. To calculate the present value of lease payments, the Company used an incremental borrowing rate based on third-partyvaluation results as of December 2016. All three leasing arrangements are classified as finance leases under ASC 842.As a result of the adoption of ASC 842, operating expenses increased as depreciation expense related to the buildingsincreased due to shortening the period of depreciation from the estimated life of the asset to the expected term of the lease.Additionally, interest expense decreased as a result of a discount rate that is lower than the rate required for build-to-suit accounting.Additional information regarding these three leases is incorporated in the following disclosures.The Company has entered into various purchase agreements to obtain property and equipment for operations that are accountedfor as finance leases. These arrangements have original terms ranging from 3 to 5 years with interest rates ranging from 5.25% to14.09%. The leases are secured by the underlying leased property and equipment.The components of finance lease expense were as follows:Year EndedDecember 31, 2019Amortization of ROU assets$8,599Interest on lease liabilities8,535Variable finance lease expense53Total finance lease expense$17,187The following table presents the lease balances within the Consolidated Balance Sheet, weighted average remaining lease term,and weighted average discount rates related to the Company’s finance leases:Lease Assets and LiabilitiesClassificationAs ofDecember 31,2019AssetsFinance lease ROU assetFinance lease right-of-use assets, net$87,067Finance lease ROU accumulated amortizationFinance lease right-of-use assets, net(8,547)Finance lease ROU assets, net$78,520LiabilitiesFinance lease ROU liabilities, current portionLease liabilities, current$5,315Finance lease ROU liabilities, net of current portionLease liabilities, non-current86,284Total finance lease liabilities$91,599Weighted average remaining lease term (in years)11.34Weighted average discount rate9.26%F-25BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)The following table presents the maturity of the Company’s finance lease liabilities as of December 31, 2019:FinanceLeasesYear Ending December 31,2020$13,474202112,942202212,218202311,553202411,696Thereafter91,964Total minimum lease payments153,847Less: imputed interest(62,248)Total finance lease liabilities$91,599Financing ObligationsFinancing obligations were $1,933 and $37,544, as of December 31, 2019 and 2018, respectively, and consist primarily ofobligations for software support for 2019 and, prior to the adoption of ASC 842, build-to-suit lease arrangements for 2018.Contractual CommitmentsIn March 2019, the Company terminated its cancellable lease agreement to build additional office space on its headquarterscampus.The Company also has $2,067 of non-cancellable contractual commitments as of December 31, 2019 related to the purchase ofsoftware and maintenance. These commitments are not accrued in the consolidated balance sheet of the Company.Legal ContingenciesThe Company may become a party to a variety of legal proceedings that arise in the normal course of business. While theresults 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 ofoperations or cash flows.11. Stock-Based CompensationEmployee Stock-based Compensation PlanThe Company maintains the Amended and Restated 2000 Stock Option Plan (the “2000 Plan”) and the Second Amended andRestated 2012 Stock Plan, (the “2012 Plan”), pursuant to which the Company has reserved 5,366,758 shares of its common stock forissuance to its employees, directors and non-employee third parties. The 2012 Plan, effective on January 31, 2012, serves as thesuccessor to the 2000 Plan and permits the granting of incentive stock options, non-statutory stock options, stock bonuses, stockpurchase rights, stock appreciation rights, and restricted stock units and awards. No new awards can be issued under the 2000 Planafter the effective date of the 2012 Plan. Outstanding awards under the 2000 Plan continue to be subject to the terms and conditions ofthe 2000 Plan. Shares available for grant under the 2000 Plan, which were reserved but not issued or subject to outstanding awardsunder the 2000 Plan as of the effective date, were added to the reserves of the 2012 Plan. As of December 31, 2019, the Company had3,189,756 shares allocated to the 2012 Plan, but not yet issued.F-26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 (“RSUs”). Thefollowing table sets forth the number of awards outstanding for each award type is as follows:Outstanding at December 31,Award type201920182017Restricted stock units1,970,5552,174,2501,937,014Stock options206,447233,247263,155The grant date value of RSUs 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. Stock options are granted at exercise prices not less than the estimated fair market valueof the Company’s common stock at the date of grant. Generally, the Company issues previously unissued shares for the exercise ofstock options or exchange of RSUs; however, previously acquired shares may be reissued to satisfy future issuances. The standardvesting period for RSU and option awards is over four years however vesting periods range from one to five years. Some RSUs vestimmediately upon grant. The options expire 10 years from the grant date. Compensation expense for the fair value of the stock-basedawards at their grant date is recognized ratably over the vesting period.Compensation expense related to stock-based awards is included in the following line items in the accompanying consolidatedstatements of operations and comprehensive loss for the years ended December 31:201920182017Cost of revenue$3,569$5,164$2,508Sales and marketing3,7996,7644,953Research and development3,2655,5102,990General and administrative8,93911,4305,686$19,572$28,868$16,137The total compensation cost related to non-vested awards not yet recognized as of December 31, 2019 was $31,629 and will berecognized over a weighted-average period of approximately 2.65 years.Restricted Stock UnitsDuring 2019, the Company granted RSUs under the 2012 Plan. Restricted stock units granted to employees vest in equal annualinstallments over terms that range from immediate vesting at grant to 4 years. The fair value of the stock at the time of grant isamortized based on a straight-line basis over the vesting period.The summary of unvested restricted stock units is as follows:Restrictedstock unitsWeightedaveragegrant datefair valueUnvested at December 31, 20182,174,250$31.61Granted1,237,61639.42Forfeited(708,573)31.18Vested(732,738)30.98Unvested at December 31, 20191,970,555$34.82As of December 31, 2019, the number and intrinsic value of restricted stock units expected to vest was 1,545,370 and $33,905,respectively. The aggregate fair value of restricted stock units vested during the years ended December 31, 2019, 2018 and 2017 was$32,065, $18,623 and $12,137, respectively.F-27BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)Included in the grants of 2019 restricted stock units are performance restricted stock units for which vesting is contingent uponmeeting various financial targets to support growth initiatives. The Company granted 544,809 performance restricted stock units toofficers and certain employees with an aggregate grant-date fair value of $23,088. The actual number of shares issued upon vestingcould range from 0% to 100%. As of December 31, 2019, there were 775,039 performance restricted stock units outstanding with aweighted average grant-date fair value of $39.25 per unit, of which 349,854 units with a weighted average grant-date fair value of $33.56per unit were expected to vest.Stock OptionsThe following is a summary of the option activity for the year ended December 31, 2019:NumberofOptionsWeighted-AverageExercisePriceWeighted-AverageRemainingContractualTerm(in years)AggregateIntrinsicValueOutstanding balance at December 31, 2018233,247$9.60Granted--Exercised(24,800)5.39Forfeited or expired(2,000)10.30Outstanding balance at December 31, 2019206,447$10.102.4$2,444Exercisable at December 31, 2019206,447$10.102.4$2,444Vested and expected to vest at December 31, 2019206,447$10.102.4$2,444The aggregate intrinsic value of employee options exercised during the years ended December 31, 2019, 2018, and 2017 was$958, $915 and $10,829, respectively.No stock options were granted during the years ended December 31, 2019, 2018 and 2017.12. Stockholders’ DeficitPreferred stockThe Company has 5,000,000 shares of preferred stock authorized all of which is undesignated.Common StockThe holders of common stock are entitled to one vote for each share. The voting, dividend and liquidation rights of the holders ofcommon 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 Companyhas reserved 111,705 shares of its common stock for purchase by its employees who meet certain criteria. Under the ESPP, eligibleemployees may purchase the Company’s common stock through accumulated payroll deductions. Options to purchase shares aregranted 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 commonstock at the purchase date. No participant may purchase more than $12 worth of the Company’s common stock in a six-month offeringperiod.F-28BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)At December 31, 2019, the Company had reserved a total of 5,478,463 of its authorized 50,000,000 shares of common stock forfuture issuance as follows:Outstanding stock options206,447Restricted stock units1,970,555Available for future issuance under stock award plans3,189,756Available for future issuance under ESPP111,705Total common shares reserved for future issuance5,478,463The Company’s Board of Directors approved a stock repurchase program for the potential repurchase of up to $20,000 of itsoutstanding common stock. Under the stock repurchase program, the Company is authorized to purchase shares of its common stockthrough various means, including open market or privately negotiated transactions. The program has no time limit and may besuspended for periods or discontinued at any time by the Board of Directors. Repurchases under the program will be funded by theCompany’s existing cash and cash equivalents or future cash flow. Any shares acquired will be available for general corporate purposes.13. RevenueDisaggregation of RevenueThe following tables provide information about disaggregation of revenue by service line:Year ended December 31201920182017Service line:Subscription$195,091$179,410$169,593Platform33,65422,93815,298Total software services$228,745$202,348$184,891Professional services66,94156,37351,951Total$295,686$258,721$236,842Historically, subscription and platform revenue were combined and reported as software services revenue. The Company nowmanages platform revenue as a separate stream. Accordingly, subscription and platform revenue are presented separately for the yearended December 31, 2019 and the historical comparable periods.Contract BalancesThe following table provides information about contract assets and contract liabilities from contracts with customers:Balance at Beginningof PeriodBalance at End ofPeriodAs of December 31, 2019Contract assets$12,798$16,685Contract liabilities:Deferred revenue$45,863$38,508As of December 31, 2018Contract assets$11,522$12,798Contract liabilities:Deferred revenue$55,027$45,863The Company recognizes payments from customers based on contractual billing schedules. Accounts receivable are recordedwhen the right to consideration becomes unconditional. ContractF-29BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)assets include amounts related to the Company’s contractual right to consideration for completed performance objectives not yetinvoiced. Contract liabilities include payments received in advance of performance under the contract and are recognized as revenuewhen earned under the contract. The Company had no asset impairment charges related to contract assets during the years endedDecember 31, 2019 and 2018.Contract assets are largely comprised of unbilled software services revenue from insurance broker commissions. Theperformance obligation for this revenue is satisfied when the order is received. Amounts are recorded as accounts receivable when theright to consideration becomes unconditional which generally occurs over the period of the underlying insurance policy. Payments frominsurance broker commissions are typically received monthly in arrears.There were no significant changes in the contract assets outside of standard revenue and billing activity.Revenue recognized during the years ended December 31, 2019 and 2018 that was included in the deferred revenue balance atthe beginning of the periods was $32,256 and $33,421, respectively.The Company added deferred revenue of $6,692 as a result of a business combination during the year ended December 31,2019.The Company recorded favorable transaction price adjustments to software services revenue from performance obligationssatisfied or partially satisfied in previous periods of $2,914 and $1,161 during the years ended December 31, 2019 and 2018,respectively.Performance ObligationsAs of December 31, 2019, the aggregate amount of the Company’s performance obligations that are unsatisfied or partiallyunsatisfied were approximately $215,000, of which a majority are expected to be satisfied within the next three years. The Companyexcludes from its population of performance obligations contracts with original durations of one year or less, contract renewal periodsthat renew automatically, and amounts of variable consideration that are allocated to wholly unsatisfied distinct service that forms part ofa single performance obligation and meets certain variable allocation criteria.14. Employee Benefit PlanThe 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 uponattainment 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 31,2019, 2018 and 2017, the Company matched 50% of the employees’ contribution, with the match limited to 3% of qualifyingcompensation. Employee vesting in matching company contributions occurs at a rate of 20% per year after one year of service. Duringthe years ended December 31, 2019, 2018, and 2017, employer matching contributions were $3,370, $3,162 and $3,020, respectively.15. Income TaxesThe Company files income tax returns in the U.S. for federal and various state jurisdictions. The Company is subject to U.S.federal income tax examination for calendar tax years 2015 through 2018 as well as state income tax examinations for various yearsdepending on statutes of limitations of those jurisdictions.F-30BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)The following summarizes the components of income tax expense for the years ended December 31:Current:201920182017Federal$-$-$-State and local272815Total current expense$27$28$15Deferred:Federal$-$-$-State and local---Total deferred taxes$-$-$-Reconciliation between the effect of applying the federal statutory rate and the effective income tax rate used to calculate theCompany’s income tax provision is as follows for the years ended December 31:201920182017Federal statutory rate21.0%21.0%34.0%Effect of:State income taxes, net of federal benefit8.2%10.3%6.6%Change in state tax rates2.9%1.7%0.4%Change in federal tax rates0.0%0.0%(67.8%)Change in valuation allowance(33.7%)(29.4%)24.3%State tax credits1.4%0.3%0.4%Stock-based compensation2.5%(2.2%)3.8%Section 162(m)(1.2%)(0.8%)(1.2%)Other permanent items(1.1%)(0.9%)(0.5%)Income tax provision effective rate0.0%0.0%0.0%The significant components of the Company’s deferred tax asset and liability were as follows as of December 31,20192018Deferred tax assets relating to:Net operating loss carryforwards$95,084$82,057Deferred revenue7,3043,150Commissions and incentive accrual895678Deferred rent57433State tax credits8,5907,936Stock-based compensation4,0954,595Finance lease right-of-use liabilities24,930-Property and equipment and intangible liabilities-1,138Interest limitation1,804968Total gross deferred tax assets142,759100,955Deferred tax liabilitiesCompensation and other accruals$(712)$(2,366)Finance lease right-of-use assets(22,848)-Property and equipment and intangible assets(3,025)-Convertible debt(13,657)(16,281)Total gross deferred tax liabilities(40,242)(18,647)Deferred tax assets less liabilities102,51782,308Less: valuation allowance(102,517)(82,308)Net deferred tax asset (liability)$-$-As of December 31, 2019 and 2018, the Company’s gross deferred tax was reduced by a valuation allowance of $102,517 and$82,308, respectively.F-31BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)The valuation allowance increased by $20,209 and decreased by $6,785 during the years ended December 31, 2019 and 2018,respectively. The valuation allowance increased in 2019 resulted primarily from changes in the deferred tax assets related to the netoperating loss carryforwards and deferred revenue. The decrease in the valuation allowance in 2018 resulted primarily from establishingdeferred tax liabilities related to tax method changes and convertible debt issuance partially offset by changes in the deferred tax assetsrelated to the net operating loss carryforwards.Net operating loss carryforwards for federal income tax purposes were approximately $327,415 and $287,686 at December 31,2019 and 2018, respectively. State net operating loss carryforwards were $325,106 and $285,377 at December 31, 2019 and 2018,respectively. The federal and state net operating loss carryforwards will expire at various dates during 2020 through 2038, 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 $11,309 and $10,483 were available at December 31,2019 and 2018, respectively. Headquarters credits are expected to be used to offset future state income tax license fees. The creditsexpire in various amounts during 2020 through 2034.The Company follows FASB ASC 740-10 for accounting for unrecognized tax benefits. As of December 31, 2019, the Companyhad 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 December31:201920182017Balance at beginning of year$437$437$437Additions based on tax positions related to thecurrent year---Additions for tax positions in prior years---Reductions for tax positions of prior years---Reductions for tax positions due to lapseof statute---Settlements---Balance at end of year$437$437$437At December 31, 2019 and 2018, none of the $437 liabilities for unrecognized tax benefits could impact the Company’s effectivetax rate, if recognized. The Company does not expect the unrecognized tax benefits to change within the next twelve months.16. Segments and Geographic InformationOperating segments are defined as components of an enterprise for which discrete financial information is available that isevaluated regularly by the chief operating decision maker (“CODM”) for purposes of allocating resources and evaluating financialperformance. 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.During the first quarter of 2019, the Company concluded that the composition of its operating segments changed as a result ofchanges in the structure of its internal organization. As a result of these changes, the Company views its operations and manages itsbusiness as one operating segment. Segment information matches the consolidated financial information for the current periods andprior periods reported.Substantially all assets were held and all revenue was generated in the United States during the years ended December 31,2019, 2018 and 2017.F-32BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)17. Related PartiesRelated Party Leasing ArrangementsThe Company leases its office space at its Charleston, South Carolina headquarters campus under the terms of three non-cancellable leases from entities affiliated with an executive who is also a Company director and significant stockholder. The Company’sheadquarter campus building leases are accounted for as financing lease right-of-use assets and lease liabilities on the ConsolidatedBalance Sheets. The three lease agreements have 15-year terms ending on December 31, 2031, with Company options to renew for fiveadditional years. The arrangements provide for 3.0% fixed annual rent increases.Payments related to these agreements were $10,884, $10,659, and $10,328 for the years ended December 31, 2019, 2018 and2017, respectively. Amounts due to the related parties were recorded as $791 and $833 in accrued expenses in the accompanyingconsolidated balance sheets as of December 31, 2019 and 2018, respectively, and were recorded in “Accrued expenses.”In March 2019, the Company terminated its cancellable lease agreement to construct additional office space under its December12, 2016 lease.Other Related Party ExpensesThe Company utilizes the services of various companies that are owned and controlled by an executive who is also a Companydirector and significant stockholder. The companies provide construction project management services, private air transportation andother services. Expenses related to these companies were $256, $107, and $20 for the years ended December 31, 2019, 2018 and2017, respectively. No amounts were due to the related parties as of December 31, 2019 and 2018.During 2018, the Company entered into an agreement to purchase software and services from a company affiliated with aCompany director. Payments related to this agreement were $108 and $35 for the year ended December 31, 2019 and 2018,respectively. No amounts were due to this company as of December 31, 2019. Amounts due to this company were $35 as of December31, 2018.18. Selected Quarterly Financial Data (unaudited)The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the eightquarters in the years ended December 31, 2019 and 2018.Quarter EndedDecember 31,September 30,June 30,March 31,December 31,September 30,June 30,March 31,20192019201920192018201820182018Consolidated Statements ofOperations Data:Revenue$87,143$71,665$68,579$68,299$74,771$61,006$60,581$62,363Gross profit44,29536,07735,77735,44739,35829,26629,86030,960Total operating expenses42,64643,38745,56444,50548,99537,60040,91541,633Operating income (loss)1,649(7,310)(9,787)(9,058)(9,637)(8,334)(11,055)(10,673)Net loss$(3,794)$(12,577)$(14,935)$(14,209)$(12,966)$(11,598)$(14,261)$(13,802)Net loss per common share(a)$(0.12)$(0.38)$(0.46)$(0.44)$(0.41)$(0.36)$(0.45)$(0.44)Weighted-average commonshares outstanding--basicand diluted32,774,92432,073,72332,613,71832,056,93431,988,03331,883,02931,806,97231,333,348(a)Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of the per-shareamounts 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 consolidatedfinancial statements included in this report and include all adjustments, consisting only of normal recurring adjustments, that weconsider necessary for a fair presentation ofF-33BENEFITFOCUS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(thousands, except share and per share data)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.19. Subsequent EventsStock-Based CompensationDuring January and February 2020, the Company granted 36,772 restricted stock units to employees with an aggregate grantdate fair value of $733. These restricted stock units generally vest in equal annual installments generally over 3 and 4 years from thegrant date. The Company amortizes the fair value of the stock subject to the restricted stock units at the time of grant on a straight-linebasis over the period of vesting.During January and February 2020, stock option exercises and vesting of restricted stock units resulted in the issuance of 30,498shares of common stock.Revolving Line of CreditOn February 20, 2020, the Company’s Senior Revolver expired. Other than unused line fees, which have all been paid, there wasno outstanding indebtedness under the Senior Revolver when it expired.On March 3, 2020, the Company entered into a new credit facility and revolving line of credit agreement with Silicon Valley Bank.The three-year agreement has a borrowing limit of $50,000, with the ability for the Company to increase it to up to $100,000. Interest ispayable monthly. Advances under the agreement bear interest at (a) the higher of (i) the prime rate as published in the Wall StreetJournal or (ii) the federal funds effective rate plus 0.50%, plus (b) an applicable margin ranging from (0.50%) to 0.50% based on theCompany’s Average Daily Usage (“ADU”) of the credit facility in the preceding month. The Company also is charged for amounts unusedunder this arrangement at a rate ranging from 0.00% to 0.40% based on the Company’s ADU in the preceding month. Any outstandingprincipal is due at the end of the term.The obligations of the Company under the new credit facility are secured by a first priority lien (subject to certain permitted liens)in substantially all of their respective personal property assets pursuant to the terms of a Guarantee and Collateral Agreement, datedMarch 3, 2020 and the other security documents.The new credit facility contains customary representations and warranties and restrictive covenants. In addition, the Companyare required to maintain a Consolidated Adjusted Quick Ratio (“AQR”) of (i) Consolidated Quick Assets to (ii) Consolidated CurrentLiabilities minus the current portion of Deferred Revenue of at least 1.25 to 1.00 as of the last day of any fiscal quarter, and, if the AQRis less than 2.00 to 1.00, a Minimum Consolidated EBITDA of at least $1.00 for any such fiscal quarter calculated on a trailing 12 monthbasis. The Company has also agreed to fiscal year dollar limits on its capital expenditures.The new credit facility contains customary events of default, including payment and covenant defaults (subject to grace and cureperiods), breaches of representations and warranties, defaults under certain other indebtedness, change of control, insolvency events,and the occurrence of a material adverse effect. If an event of default occurs, the lender would be entitled to take various actions,including the acceleration of amounts due under the credit facility and all actions permitted to be taken by a secured creditor.F-34Schedule II-Valuation and Qualifying Accounts (in thousands)Balance atBeginningof PeriodAdditionsCharged ToExpenseAdditionsChargedAgainstRevenueDeductionsBalanceat End ofPeriodAllowance for doubtful accounts and returns:Year Ended December 31, 2019$3,584$111$3,761$(4,541)$2,915Year Ended December 31, 2018$3,531$138$4,813$(4,898)$3,584Year Ended December 31, 2017$4,595$75$5,593$(6,732)$3,531Balance atBeginningof PeriodAdditionsCharged ToCosts andExpenses (1)DeductionsBalanceat End ofPeriodDeferred tax asset valuation allowance:Year Ended December 31, 2019 (2)$82,308$22,446$(2,237)$102,517Year Ended December 31, 2018 (3)$89,093$15,444$(22,229)$82,308Year Ended December 31, 2017 (4)(5)$81,261$41,904$(34,072)$89,093(1)Increase in valuation allowance is related to the generation of net operating losses and other deferred tax assets.(2)Decrease in valuation allowance is related to adoption of ASU 2016-02.(3)Decrease in valuation on allowances is related to adjustments to deferred revenue and convertible debt issuance.(4)Increase in valuation allowance is related to adoption of ASU 2016-09.(5)Decrease in valuation on allowances is related to the change in the enacted tax rate.F-35Exhibit 4.5DESCRIPTION OF THE REGISTRANT’S SECURITIESREGISTERED PURSUANT TO SECTION 12 OF THESECURITIES EXCHANGE ACT OF 1934Our authorized capital stock consists of 50,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares ofundesignated preferred stock, par value $0.001 per share. The following description summarizes the material terms of our capital stock.Because it is only a summary, it does not contain all the information that may be important to you. For a complete description of ourcapital stock, you should refer to our restated certificate of incorporation, or our “restated certificate”, and our amended and restatedbylaws, or our “restated bylaws”, which are included as exhibits to this Annual Report on Form 10-K, and to the provisions of applicableDelaware law.Common StockAs of December 31, 2019, there were 32,788,980 shares of our common stock outstanding and held by approximately 39 stockholdersof record. Holders of our common stock are entitled to the following rights.•Dividend Rights. Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holdersof outstanding shares of our common stock are entitled to receive dividends out of funds legally available at the times and inthe amounts that our board of directors may determine. All dividends are non-cumulative.•Voting Rights. The holders of our common stock are entitled to one vote for each share of common stock held on all matterssubmitted to a vote of the stockholders, including the election of directors. Our restated certificate and restated bylaws do notprovide for cumulative voting rights.•No Preemptive or Similar Rights. The holders of our common stock have no preemptive, conversion, or subscription rights,and there are no redemption or sinking fund provisions applicable to our common stock.•Right to Receive Liquidation Distributions. Upon our liquidation, dissolution or winding-up, the assets legally available fordistribution to our stockholders would be distributable ratably among the holders of our common stock and any participatingpreferred stock outstanding at that time after payment of liquidation preferences, if any, on any outstanding shares of preferredstock and payment of other claims of creditors.•Fully Paid and Non-Assessable. All of the outstanding shares of our common stock are, and the shares of our common stockthat may be issued pursuant to an offering under this registration statement will be, fully paid and non-assessable.•Potential Adverse Effect of Future Preferred Stock. The rights, preferences and privileges of the holders of common stock aresubject to, and might be adversely affected by, the rights of the holders of shares of any series of our preferred stock that wemay designate and issue in the future.Preferred StockOur board of directors is authorized, subject to limitations prescribed by Delaware law, to issue up to 5,000,000 shares of preferredstock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix thedesignation, powers, preferences and rights of the shares of each series and any of its qualifications, limitations or restrictions, in eachcase without further action by our stockholders. Our board can also increase or decrease the number of shares of any series ofpreferred stock, but not below the number of shares of that series then outstanding unless approved by the affirmative vote of the holdersof a majority of our capital stock entitled to vote, or such other vote as may be required by the certificate of designation establishing theseries. Our board may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the votingpower or other rights of the holders of our common stock. The issuance of preferred stock, while providing flexibility in connection withpossible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring, or preventing achange in our control or the removal of management and might adversely affect the market price of our common stock and the votingand other rights of the holders of our common stock. As of December 31, 2019, no shares of our preferred stock were outstanding.Stock Awards Available For IssuanceAs of December 31, 2019, we had options and restricted stock units outstanding with respect to 2,177,002 shares of common stock,including restricted stock units with time-based vesting criteria and performance-based vesting criteria.As of December 31, 2019, total stock awards, including restricted stock units and performance restricted stock units, to exchange orpurchase a total of 3,301,461, shares of common stock remain available for future issuance under our stock plans.Registration RightsAs of December 31, 2019, stockholders holding approximately 3,189,756 shares of our common stock had the right, subject to variousconditions and limitations, to include their shares in registration statements relating to our securities. In connection with our IPO, weentered into a Second Amended and Restated Investors’ Rights Agreement, or the “Investor Rights Agreement”, with the Holders (asdefined therein), which we subsequently amended in February 2015.Pursuant to the Investor Rights Agreement, as amended, certain Holders have the right, subject to various conditions and limitations, toinclude their shares in registration statements relating to our securities. The holders of at least 66 2/3% of the then outstanding sharessubject to these registration rights have the right to demand that we register such shares under the Securities Act of 1933, as amended,or the “Securities Act”, with respect to shares having an aggregate offering price of at least $5,000,000, and subject to other limitations.In addition, these holders are entitled to piggyback registration rights with respect to the registration under the Securities Act of sharesof common stock. In the event that we propose to register any shares of common stock under the Securities Act either for our accountor for the account of other security holders, the holders of shares having piggyback registration rights are entitled to receive notice ofsuch registration and to include shares in any such registration, subject to limitations. Further, at any time after we become eligible tofile a registration statement on Form S-3, the holders of at least 5% of the shares subject to these registration rights may require us tofile registration statements under the Securities Act on Form S-3 with respect to shares of common stock having an aggregate offeringprice, net of selling expenses, of at least $5,000,000. To the extent that we qualify as a well-known seasoned issuer at the time arequisite number of holders demand the registration of shares subject to these registration rights, we will file an automatic shelfregistration statement covering the shares for which registration is demanded if so requested by the holders of such shares. Theseregistration rights are subject to conditions and limitations, among them the right of theunderwriters of an offering to limit the number of shares of common stock held by such security holders to be included in suchregistration. We are generally required to bear all of the expenses of such registrations, including reasonable fees of a single counselacting on behalf of all selling Holders, except underwriting discounts, selling commissions and stock transfer taxes applicable to thesale.Convertible NotesIn December 2018, we issued $240.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due in 2023, or the“Notes”. The Notes are senior unsecured obligations of our Company.In connection with the issuance of the Notes, we entered into an indenture, dated December 27, 2018, or the “Indenture”, with U.S.Bank National Association, as trustee. The Indenture includes customary covenants and sets forth certain events of default after whichthe Notes may be declared immediately due and payable and sets forth certain types of bankruptcy or insolvency events of defaultinvolving our Company after which the Notes become automatically due and payable. The Indenture does not restrict our ability to incuradditional indebtedness.The Notes will mature on December 15, 2023, unless earlier converted, redeemed or repurchased in accordance with their terms. TheNotes will bear interest from December 27, 2018 at a rate of 1.25% per year payable semi-annually in arrears on June 15 and December15 of each year, beginning on June 15, 2019. The Notes will be convertible at the option of the holders at any time prior to the close ofbusiness on September 14, 2023, only under the following circumstances:•during any calendar quarter commencing after the calendar quarter ending on March 31, 2019 (and only during such calendarquarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during aperiod of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendarquarter is greater than or equal to 130% of the conversion price on each applicable trading day;•during the five business day period after any five consecutive trading day period, or the “Measurement Period”, in which theTrading Price (as defined in the Indenture) per $1,000 principal amount of Notes for each trading day of the MeasurementPeriod was less than 98% of the product of the last reported sale price of our common stock and the conversion rate in effecton each such trading day;•if we call any or all of the Notes for redemption, at any time prior to the close of business on September 14, 2023; or•upon the occurrence of specified corporate events.On or after September 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturitydate, holders may convert all or any portion of their Notes, in multiples of $1,000 principal amount, at the option of the holder regardlessof the foregoing circumstances.Upon conversion, we may satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of our commonstock or a combination of cash and shares of our common stock, at our election, in the manner and subject to the terms and conditionsprovided in the Indenture. The initial conversion rate for the Notes will be 18.8076 shares of our common stock per $1,000 principalamount of Notes, which is equivalent to an initial conversion price of approximately $53.17 per share of our common stock. Theconversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture.We may not redeem the Notes prior to December 20, 2021. We may redeem for cash all or any portion of the Notes, at our option, on orafter December 20, 2021, if the last reported sale price of our common stock has been at least 130% of the conversion price then ineffect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last tradingday of suchperiod) ending on, and including, the trading day immediately preceding the date on which we provides notice of redemption at aredemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, butexcluding, the redemption date. No sinking fund is provided for the Notes.If we undergo a Fundamental Change (as defined in the Indenture), subject to certain conditions, holders may require us to repurchasefor cash all or any portion of their Notes in principal amounts of $1,000 or an integral multiple thereof, at a fundamental changerepurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, butexcluding, the fundamental change repurchase date.In connection with the offering of the Notes, we entered into privately negotiated capped call transactions with certain counterpartiesaffiliated with the initial purchasers and others. The capped call transactions are expected generally to reduce the potential dilution toour common stock upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of theprincipal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap based on the cap price.The cap price of the capped call transactions is initially $89.98 per share and is subject to certain adjustments under the terms of thecapped call transactions.CERTAIN PROVISIONS OF DELAWARE LAW,OUR RESTATED CERTIFICATE AND RESTATED BYLAWSThe provisions of Delaware law, our restated certificate, and our restated bylaws may have the effect of delaying, deferring, ordiscouraging another person from acquiring control of our Company.Delaware Law. We are governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of threeyears after the date of the transaction in which the person became an interested stockholder unless:•prior to such time, the board of directors approved either the business combination or the transaction which resulted in thestockholder becoming an interested stockholder;•upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interestedstockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced,excluding shares owned by persons who are directors and also officers and by specified employee stock plans; or•at or subsequent to the date of the transaction, the business combination is approved by the board of directors andauthorized at an annual or special meeting of stockholders by the affirmative vote of at least 66 2/3% of the outstanding votingstock which is not owned by the interested stockholder.A “business combination” includes mergers, asset sales or other transactions resulting in a financial benefit to the stockholder. Ingeneral, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years did own, 15% ormore of the corporation’s outstanding voting stock. These provisions may have the effect of delaying, deferring, or preventing a change inour control. Because the Goldman Funds beneficially held more than 15% of our shares at the time we became subject to Delawarelaw, our restated certificate exempts the Goldman Funds and their affiliates from being an “interested stockholder” within the meaning ofSection 203.Restated Certificate and Restated Bylaw Provisions. Various provisions of our restated certificate and restated bylaws could deterhostile takeovers or delay or prevent changes in control of our management team, including the following:•Board of Directors Vacancies. Our restated certificate and restated bylaws authorize only our board or the stockholders at aduly called meeting for that purpose to fill vacant directorships. In addition, the number of directors constituting our board ispermitted to be set only by a resolution adopted by a majority of our board. These provisions would prevent a stockholder fromincreasing the size of our board and then gaining control of our board by filling the resulting vacancies with its own nominees.•Classified Board. Our restated bylaws provide that our board is classified into three classes of directors. This could delay asuccessful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter apotential offeror.•Stockholder Action; Special Meeting of Stockholders. Under our restated bylaws, our stockholders may no longer take actionby written consent, and may only take action at annual or special meetings of our stockholders. Our restated bylaws furtherprovide that special meetings of our stockholders may be called only by a majority of our board, the chairman of our board, bysuch other person the board expressly authorizes to call a special meeting, or by stockholders representing at least 35% ofthe votes entitled to be cast on any issue proposed to be considered at such special meeting.•Advance Notice Requirements for Stockholder Proposals and Director Nominations. Our restated bylaws provide advancenotice procedures for stockholders seeking to bring business before our annual meeting of stockholders, or to nominatecandidates for election as directors at our annual meeting of stockholders. To be timely, a stockholder’s notice must bedelivered to, or mailed and received at, our principal executive offices not less than 90 days nor more than 120 days prior tothe first anniversary of the date of our notice of annual meeting provided with respect to the previous year’s annual meeting ofstockholders; provided, that if no annual meeting of stockholders was held in the previous year or the date of the annualmeeting of stockholders has been changed to be more than 30 calendar days earlier or 60 days later than such anniversary,notice by the stockholder, to be timely, must be received not earlier than the 120th day nor later to the 90th day prior to thedate of such annual meeting or, if later, the 10th day following the date we publicly disclose the date of the annual meeting.Our restated bylaws also specify certain requirements regarding the form and content of a stockholder’s notice. Theseprovisions might preclude our stockholders from bringing matters before our annual meeting of stockholders or from makingnominations for directors at our annual meeting of stockholders.•Issuance of Undesignated Preferred Stock. Our board of directors has the authority, without further action by ourstockholders, to issue up to 5,000,000 shares of undesignated preferred stock with rights and preferences, including votingrights, designated from time to time by our board. Our board may utilize these shares for a variety of corporate purposes,including future public offerings to raise additional capital, corporate acquisitions and employee benefits plans. The existenceof authorized but unissued shares of preferred stock would enable our board to render more difficult or to discourage anattempt to obtain control of us by means of a merger, tender offer, proxy contest or other means. If we issue such shareswithout stockholder approval and in violation of limitations imposed by any stock exchange on which our stock may then betrading, our stock could be delisted.Transfer Agent and RegistrarThe transfer agent and registrar for our common stock is Broadridge Corporate Issuer Solutions, Inc.Stock Exchange ListingOur common stock is listed on the Nasdaq Global Market under the symbol “BNFT”.Exhibit 21.1Benefitfocus, Inc.,A Delaware corporationList of subsidiaries•Benefitfocus.com, Inc.•BenefitStore, Inc.EXHIBIT 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in the following registration statements:(1)Registration Statement (Form S-8 No. 333-211904) pertaining to the Benefitfocus, Inc. 2016 Employee StockPurchase Plan,(2)Registration Statement (Form S-8 No. 333-192278) pertaining to the 2012 Stock Plan, as amended, and theAmended and Restated 2000 Stock Option Plan of Benefitfocus, Inc.,(3)Registration Statement (Form S-8 No. 333-218633) pertaining to the Benefitfocus, Inc. Amended and Restated2012 Stock Plan, and(4)Registration Statement (Form S-8 No. 333-233088) pertaining to the Benefitfocus, Inc. Second Amended andRestated 2012 Stock Plan;of our reports dated March 4, 2020, with respect to the consolidated financial statements and schedule of Benefitfocus,Inc. and the effectiveness of internal control over financial reporting of Benefitfocus, Inc. included in this Annual Report(Form 10-K) of Benefitfocus, Inc. for the year ended December 31, 2019./s/ Ernst & Young LLPRaleigh, North CarolinaMarch 4, 2020Exhibit 31.1CERTIFICATION PURSUANT TOSECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 (asdefined 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.Date: March 4, 2020/s/ Raymond A. AugustRaymond A. AugustPresident and Chief Executive Officer(Principal executive officer)Exhibit 31.2CERTIFICATION PURSUANT TOSECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Stephen M. Swad, 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 tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects 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 (asdefined 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 oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably 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 internalcontrol over financial reporting.Date: March 4, 2020/s/ Stephen M. SwadStephen M. SwadChief Financial Officer(Principal financial and accounting officer)Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Raymond A. August, President andChief Executive Officer (principal executive officer) of Benefitfocus, Inc. (the “registrant”), and Stephen M. Swad, Chief Financial Officer (principalfinancial 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, 2019, 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; and2.The information contained in the Report fairly presents, in all material respects, the financial condition of the registrant at the end of theperiod covered by the Report and results of operations of the registrant for the periods covered by the Report.Date: March 4, 2020/s/ Raymond A. AugustRaymond A. AugustPresident and Chief Executive Officer(Principal executive officer)/s/ Stephen M. SwadStephen M. SwadChief Financial Officer(Principal financial and accounting officer)

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