BENEFITFOCUS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition
and results of operations together with our consolidated financial statements
and the related notes and other financial information included elsewhere in this
Annual Report on Form 10-K. Some of the information contained in this discussion
and analysis or set forth elsewhere in this report including information with
respect to our plans and strategy for our business, includes forward-looking
statements that involve risks and uncertainties. You should review the "Risk
Factors" section of this report beginning on page 24 for a discussion of
important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in
the following discussion and analysis.
Overview
Benefitfocus provides industry-leading, cloud-based benefits management technology solutions for employers and health plans. TheBenefitfocus enrollment platform simplifies how organizations procure benefits and connect to the necessary benefits products and services that improve the lives of their employees and the American workforce. Our core technology solutions facilitate employee benefits administration and enrollment; our solutions enable working Americans and their families to select and engage in the right benefits products and services for themselves; and our data advantage deliver insights to employers, health plans and their advisors to help control healthcare spending and reduce unnecessary expenses. The Benefitfocus Platform has a multi-tenant architecture and a user-friendly interface designed for employees to access all of 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 functionality designed to help consumers identify and evaluate benefit options available to them. As the number of employer benefits plans has increased, with each plan subject to many different business rules and requirements, demand for the Benefitfocus Platform is growing. Our economic model includes a transaction-oriented solution, now known as our Benefit Catalog, that aligns brokers, carriers and suppliers around the needs of employers and employees. In this model, Benefit Catalog sellers, who are carriers and suppliers, offer their voluntary and specialty benefit products in a "marketplace" alongside the benefits enrollment platform. This marketplace is designed to increase the economic value of the employee and consumer lives on our platform by aligning Benefit Catalog products to consumer needs. In exchange forBenefitfocus delivering employee/consumer access, data-driven analysis and operational efficiencies, seller partners pay us a percentage of the purchases completed on our platform. Carrier agreements have terms of two to four years and are typically cancellable upon breach of contract or insolvency. Supplier contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to cure, bankruptcy and termination for convenience.
We classify our revenue into three streams - subscription, platform, and professional services revenue. Subscription and platform revenue are combined and reported as software services revenue.
Subscription revenue primarily consists of monthly subscription fees paid to us by our employer and insurance carrier customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Subscription fees are generally charged based on the number of employees or subscribers with access to the solution. Subscription revenue accounted for approximately 67%, 66%, and 69% of our total revenue during the years endedDecember 31, 2020 , 2019 and 2018, respectively. Platform revenue includes Benefit Catalog transactional revenue, which is generated from the value of the policies or products enrolled in through our marketplace. Benefit Catalog revenue from insured products is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog supplier transactions is generally recognized at the time when open enrollment is complete and the orders for policies are transferred to the supplier. Platform revenue accounted for approximately 13%, 11%, and 9% of our total revenue during the years endedDecember 31, 2020 , 2019 and 2018, respectively. 54 -------------------------------------------------------------------------------- Our professional services revenue stream is largely derived from the implementation of our customers onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and training. We also provide customer support services and customized media content that supports our customers' effort to educate and communicate with consumers. Professional services revenue accounted for approximately 20%, 23%, and 22% of our total revenue during the years endedDecember 31, 2020 , 2019 and 2018, respectively. Expanding our customer base is a key element of our growth strategy. We believe that our continued innovation and new solutions, such as Benefit Catalog, which extend to the functionality of our mobile offerings, provide more robust data analytics capabilities and enhance our ability to quickly respond to evolving market needs, we believe these innovative capabilities will help us attract additional lives to our platform through new employer customers, partners and brokers and increase our revenue from existing customers and 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 are an important source of growth for our business. As we have invested in growth, we have had operating losses in each of the last ten years. Although our operating results have improved, we could incur operating losses in future periods. Due to the nature of our customer relationships, which have been stable in spite of some customer losses over the past years, and our hybrid subscription and transaction-based financial model, we believe that our current investment in growth should lead to increased revenue in the long-term, which may allow us to achieve profitability in the relatively near future. Of course, our ability to achieve profitability will continue to be subject to many factors beyond our control. OnMarch 11, 2020 , theWorld Health Organization classified the COVID-19 outbreak as a pandemic. We continue to actively monitor COVID-19 and its potential impact on our operations and financial results. In response to the pandemic, we implemented cost management actions in the second quarter of 2020 to maintain our financial health and liquidity through these economic uncertain times. These include actions to reduce our workforce by approximately 17%, renegotiating vendor service contracts and reducing discretionary expenditures such as travel and professional services. These actions also include investing in accelerating automation efforts to gain efficiencies. During the initial peak of the COVID-19 pandemic during the second quarter of 2020, we experienced delays in completing selling as HR professionals shifted their focus away procuring technology solutions. We believe the financial impacts from COVID-19 are temporary in nature and do not significantly affect our business model and growth strategy. Therefore, we did not consider the COVID-19 pandemic to have been a triggering event to accelerate our annual impairments tests. We evaluated our goodwill and indefinite-lived intangible assets and determined there were no interim triggering events as it was not more likely than not that the fair value of our reporting units would be less than their respective carrying amounts. Additionally, we evaluated our long-lived assets, including our property, plant and equipment, lease right-of-use assets and other intangible assets, noting no indicators of impairment. The impact that COVID-19 will have on our consolidated financial statements beyond 2020 remains uncertain and ultimately will be dictated by the length and severity of the pandemic, as well as the economic recovery and federal, state and local government actions taken in response. We will continue to evaluate the nature and extent of these potential impacts to our business and consolidated financial statements.
While the ultimate impact of the pandemic on our business and financial results remains uncertain, our business has been impacted by the following:
• New sales. We have experienced longer sales cycles and a slowdown in
new sales activity which negatively impact professional services
revenue and platform revenue from new business.
• Unemployment. The increase in unemployment caused by the pandemic has
negatively impacted platform revenue by decreasing the rate at which
our Benefits Catalog voluntary benefits offerings are purchased. Our
subscription revenue has been impacted to a lesser extent in 2020
depending on the level of contractual minimums in our contracts and a
delay
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in when unemployed workers leave our platform. In addition,
unemployment has caused a decrease in net benefit eligible lives on
our platform in the near term.
• Participation in Voluntary Benefits. Participation of lives on our
platform in purchasing voluntary benefits did not grow compared to the
previous year as a result of the economic impacts of thepandemic on
income levels across the country.
As a result of the nature of our customer relationships, the stability of our
subscription revenue, the cost restructuring actions taken in the second quarter
of 2020 and our ongoing investments in automation, we believe we will be able to
increase cash flows from operations and achieve profitability in the relatively
near future. Of course, our ability to achieve profitability will continue to be
subject to many risks and factors beyond our control, such as the COVID-19
pandemic.
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current performance and project our future performance. These metrics help us develop and refine our growth strategies and make strategic decisions. We discuss revenue, gross margin, and the components of operating loss in "Management's Discussion and Analysis of Financial Condition and Results of Operations-Components of Operating Results". In addition, we utilize other key metrics as described below.
Net Benefit Eligible Lives
Part of our growth strategy is to expand our customer base. This includes
driving revenue growth from adding lives to our platform and driving incremental
transaction revenue. We believe the number of net benefit eligible lives is a
key indicator of our market penetration, growth and future revenue opportunity.
We believe net benefit eligible lives is the foundation of our platform revenue
opportunity. We define a net benefit eligible life as a person with access to a
benefits enrollment subscription under standard contracting or a freelancer with
access to benefits enrollment, plus their estimated dependents, as of the
measurement date. This definition excludes lives from other subscription-related
contracts.
We expect the number net benefit eligible lives will decrease during 2021. We
expect that some health plan customers will renew their agreements in 2021 at
lower minimum counts as the result of higher unemployment rates decreasing the
number covered employees. Additionally, we expect the number of net benefit
eligible lives to be negatively impacted by the termination of a contract with
an entity with a substantial number of freelancers.
As of December 31,
2020 2019 2018
(in millions)
Net benefit eligible lives 18.3 17.3 13.3
In 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 more detail in Note 3 of our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they
generate for us over time is an important component of our growth strategy and
reflects the long-term value of our customer relationships. We measure our
performance on this basis using a metric we refer to as our software services
revenue retention rate. We calculate this metric for a particular period by
establishing the group of our customers that had active contracts for a given
period. We then calculate our software services revenue retention rate by taking
the amount of software services revenue we recognized for this group in the
subsequent comparable period (for which we are reporting the rate) and dividing
it by the software services revenue we recognized for the group in the prior
period.
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-------------------------------------------------------------------------------- Our software services revenue retention rate was greater than 90% for year endedDecember 31, 2020 compared to being greater than 95% for the years endedDecember 31, 2019 and 2018. The reduction in the rate was primarily the result of the impact on 2020 revenue from the renegotiation of a customer contract. Excluding this customer, our software revenue retention rate exceeded 95% for all periods. We expect our software revenue retention rate will continue to be negatively impacted for the remainder of 2021 by the effects of this customer contract negotiation along with the potential impacts of unemployment as a result of COVID-19 pandemic.
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest and other expense, taxes, and depreciation and amortization expense, adjusted to eliminate stock-based compensation, restructuring costs, impairment of goodwill, intangible assets, and long-lived assets, gain or loss on extinguishment of debt, transaction and acquisition-related costs expensed, and costs not core to our business. Adjusted EBITDA is not a measure calculated in accordance withUnited States generally accepted accounting principles, or GAAP.
During 2020, we revised our definition of adjusted EBITDA to also exclude restructuring costs, impairment of long-lived assets, and gain or loss of extinguishment of debt. The revisions to these definitions had no impact on our reported adjusted EBITDA for periods prior to 2020. Please note that other companies might define their non-GAAP financial measures differently than we do.
We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results. Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized might have to be replaced in the future,
and adjusted EBITDA does not reflect cash capital expenditure
requirements for such replacements or for new capital expenditure
requirements;
• adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• adjusted EBITDA does not reflect the potentially dilutive impact of
stock-based compensation;
• adjusted EBITDA does not reflect interest, tax or dividend payments that
would reduce the cash available to us; and
• other companies, including companies in our industry, might calculate
adjusted EBITDA or similarly titled measures differently, which reduces
their usefulness as comparative measures.
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Because of these and other limitations, you should consider adjusted EBITDA
alongside other GAAP-based financial performance measures, including various
cash flow metrics, gross profit, net loss and our other GAAP financial results.
The following table presents a reconciliation of adjusted EBITDA to net loss for
each of the periods indicated:
Year Ended December 31,
2020 2019 2018
(in thousands)
Reconciliation from Net Income (Loss)
to Adjusted EBITDA:
Net income (loss) $ (24,297 ) $ (45,515 ) $ (52,627 )
Depreciation 15,285 15,288 11,721
Amortization of software development
costs 7,455 5,130 3,944
Amortization of acquired intangible
assets 2,274 1,933 150
Interest income (632 ) (2,613 ) (250 )
Interest expense 23,071 23,524 13,156
Income tax expense 22 27 28
Stock-based compensation expense 14,537 19,572 28,868
Transaction and acquisition-related costs expensed 450 1,035 507 Restructuring costs 5,616 - - Impairment of long-lived assets 916 - - Gain on repurchase of convertible senior notes (1,138 ) - - Costs not core to our business 457 649 4,843 Total net adjustments$ 68,313 $ 64,545$ 62,967 Adjusted EBITDA$ 44,016 $ 19,030$ 10,340
Components of Operating Results
Revenue
We derive the majority of our revenue from monthly subscription fees paid to us by our employer and health plan customers for access to, and usage of, our cloud-based benefits software solutions for a specified contract term. We derive platform revenue from both insurance broker commissions from the sale of voluntary and ancillary benefits policies to employees of our customers and from transaction revenue from life and ancillary insurance carriers and specialty providers. We also derive revenue from professional services fees, which primarily include fees related to the implementation of our customers onto our platform. Our professional services typically include discovery, configuration and deployment, integration, testing, and training.
The following table sets forth a breakdown of our revenue by stream for the periods indicated (in thousands):
Year Ended December 31,
2020 2019 2018
Subscription $ 179,743 $ 195,091 $ 179,410
Platform 35,101 33,654 22,938
Total software services $ 214,844 $ 228,745 $ 202,348
Professional services 53,297 66,941 56,373
Total revenue $ 268,141 $ 295,686 $ 258,721
We recognize revenue when control of these services is transferred to customers
in an amount that reflects the consideration we expect to be entitled to in
exchange for those services. Taxes collected from customers relating to services
and remitted to governmental authorities are excluded from revenues.
We determine revenue recognition through the following steps:
• 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.
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--------------------------------------------------------------------------------Software Services Revenue
Software services revenue consists of subscription and platform revenue.
Subscription Revenue
Subscription revenue primarily consists of monthly subscription fees paid to us by our customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.
Subscription revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. Our subscription service contracts are generally three years.
Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.
Platform Revenue
Platform revenue is generated from the value of the policies or products enrolled in through our marketplace. Platform revenue from carriers is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog supplier transactions is recognized at the point when the orders for the policies are received and transferred to the insurance carrier or supplier, and is reduced by constraints for variable consideration associated with collectability, policy cancellation and termination risks.
Professional Services Revenue
Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services, 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 the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these insurance carrier customers are generally recognized over the contract term of the associated software services contract, including any extension periods representing a material right. We utilize estimates of hours as a measure of progress to determine 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 Obligations
Certain of our contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The transaction price is allocated to the separate performance obligations based on their relative standalone selling prices. We determine the standalone selling prices based on their overall pricing objectives, taking into consideration market conditions and other factors, including the value of their contracts, the software services sold, customer size and complexity, and the number and types of users within the contracts. Overhead Allocation Expenses associated with our facilities, security, information technology, and depreciation and amortization, are allocated between cost of revenue and operating expenses based on employee headcount determined by the nature of work performed. Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing
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services to our customers and supporting our SaaS platform infrastructure.
Additional expenses in cost of revenue include co-location facility costs for
our data centers, depreciation expense for computer equipment directly
associated with generating revenue, infrastructure maintenance costs,
professional fees, amortization expenses associated with acquired intangibles
and capitalized software 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 to a customer contract that are
not related to satisfying a performance obligation are capitalized and amortized
to cost of revenue over the estimated period of benefit of the contract asset,
which is generally five years.
Subscription and platform revenue are both generated from our platform and
result from the same set of assets and activities. As such, we are not able to
meaningfully separate and assign costs of revenue to subscription and platform
revenue separately.
We expect cost of revenue as a percentage of revenue to decline and gross margins to increase as we realize the full impact of our restructuring activities and increased automation. However, this trend may vary on a quarterly basis.
Operating Expenses Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Salaries and personnel-related costs are the most significant component of each of these expense categories. We expect to decrease our operating expenses, as a percentage of revenue, if and as we achieve economies of scale and as a result of restructuring actions taken inApril 2020 . Sales and marketing expense. Sales and marketing expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, stock-based compensation, and commissions for our sales and marketing associates. Costs to obtain a contract that are incremental, such as sales commissions, are capitalized and amortized to expense over the estimated period of benefit of the asset, which is generally four to five years. Additional expenses include advertising, lead generation, promotional event programs, corporate communications, travel, and allocated overhead. For instance, our most significant promotional event isOne Place , which we hold annually. We expect our sales and marketing expense to remain flat, in absolute dollars, in the near term as we achieve the savings expected from the restructuring actions taken inApril 2020 . Research and development expense. Research and development expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for our research and development associates. Additional expenses include costs related to the development, quality assurance, and testing of new technology, and enhancement of our existing platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in research and development efforts is essential to maintaining our competitive position. General and administrative expense. General and administrative expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for administrative, finance and accounting, information systems, legal, and human resource associates. Additional expenses include consulting and professional fees, insurance and other corporate expenses, and travel. We expect our general and administrative expenses to decrease in absolute terms as a result of the restructuring actions taken inApril 2020 , which included reducing headcount, renegotiating vendor service contracts, restricting travel, and reducing discretionary expenditures such as for consultants. Restructuring costs. Restructuring costs are comprised of one-time severance charges, continuation of health benefits and outplacement services. As discussed above in "Overview", in the quarter endedJune 30, 2020 , we reduced our work force by approximately 17%. Other Income and Expense
Other income and expense consists primarily of interest income and expense, gain on repurchase of senior convertible notes and gain (loss) on disposal of property and equipment. Interest income
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represents interest received on our cash and cash equivalents. Interest expense
consists primarily of the interest incurred on outstanding convertible debt and
borrowings under our lease arrangements and credit facility. During the third
quarter of 2020, we repurchased outstanding senior convertible notes which
resulted in a gain.
Income Tax Expense
Income tax expense consists ofU.S. federal and state income taxes. We incurred minimal income tax expense for 2020, 2019, and 2018. Net operating loss carryforwards for federal income tax purposes were approximately$326.9 million atDecember 31, 2020 . State net operating loss carryforwards were approximately$294.4 million atDecember 31, 2020 . Federal and state net operating loss carryforwards will expire at various dates beginning in 2021, if not utilized. Valuation allowances are recorded to reduce deferred tax assets to the amount we believe is more likely than not to be realized. OnMarch 27, 2020 , the "Coronavirus Aid, Relief and Economic Security (CARES) Act" was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Except for utilizing the deferment of employer social security payments, we do not expect the CARES Act to have a material impact on our financial results. We continue to examine the impacts the CARES Act may have on our business.
Adoption of Leases Accounting Standard
We adopted the new accounting standard for Leases, Topic 842, onJanuary 1, 2019 . We applied the modified transition method at the beginning of adoption. Accordingly, we did not adjust prior period financial statements, and recognized a cumulative-effect adjustment to the opening balance of accumulated deficit in 2019. The adoption of Topic 842 requires lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. We describe the effects of adoption of Topic 842 in more detail in Note 2 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 61
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Results of Operations
Consolidated Statements of Operations Data
The following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands).
Year Ended December 31,
2020 2019 2018
Revenue $ 268,141 $ 295,686 $ 258,721
Cost of revenue(1) 129,388 144,090 129,277
Gross profit 138,753 151,596 129,444
Operating expenses:
Sales and marketing(1) 52,210 76,049 78,179
Research and development(1) 46,175 54,724 47,902
General and administrative(1) 37,720 45,329 43,062
Restructuring costs(1) 5,616 - -
Total operating expenses 141,721 176,102 169,143
Loss from operations (2,968 ) (24,506 ) (39,699 )
Other income (expense):
Interest income 632 2,613 250
Interest expense (23,071 ) (23,524 ) (13,156 )
Gain on repurchase of convertible senior notes 1,138 - -
Other expense (6 ) (71 ) 6
Total other expense, net (21,307 ) (20,982 ) (12,900 )
Loss before income taxes (24,275 ) (45,488 ) (52,599 )
Income tax expense 22 27 28
Net loss $ (24,297 ) $ (45,515 ) $ (52,627 ) (1) Cost of revenue and operating expenses include stock-based compensation
expense as follows (in thousands):
Year Ended December 31,
2020 2019 2018
Cost of revenue $ 3,703 $ 3,569 $ 5,164
Sales and marketing 3,081 3,799 6,764Research and development 2,555 3,265 5,510 General and administrative 5,198 8,939 11,430 Restructuring costs
- - -
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The following table sets forth our consolidated statements of operations data as
a percentage of revenue for each of the periods indicated (as a percentage of
revenue).
Year Ended December 31,
2020 2019 2018
Revenue 100.0 % 100.0 % 100.0 %
Cost of revenue 48.3 48.7 50.0
Gross profit 51.7 51.3 50.0
Operating expenses:
Sales and marketing 19.5 25.7 30.2
Research and development 17.2 18.5 18.5
General and administrative 14.1 15.3 16.6
Restructuring costs 2.1 - -
Total operating expenses 52.9 59.6 65.4
Loss from operations (1.1 ) (8.3 ) (15.3 )
Other income (expense):
Interest income 0.2 0.9 0.1
Interest expense (8.6 ) (8.0 ) (5.1 )
Gain on repurchase of convertible senior notes 0.4 - -
Other expense - - -
Total other expense, net (7.9 ) (7.1 ) (5.0 )
Loss before income taxes (9.1 ) (15.4 ) (20.3 )
Income tax expense - - -
Net loss (9.1 ) % (15.4 ) % (20.3 ) %
Comparison of Years Ended
Revenue
Year Ended December 31,
2020 2019
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Subscription $ 179,743 67.0 % $ 195,091 66.0 % $ (15,348 ) (7.9 ) %
Platform 35,101 13.1 33,654 11.4 1,447 4.3
Total software services $ 214,844 80.1 % $ 228,745 77.4 % $ (13,901 ) (6.1 ) %
Professional services 53,297 19.9 66,941 22.6 (13,644 ) (20.4 )
Total revenue $ 268,141 100.0 % $ 295,686 100.0 % $ (27,545 ) (9.3 ) %
Subscription revenue decreased primarily due to a $14.5 million negative impact
from the renegotiation of a customer contract and a $13.6 million negative
impact from customers that terminated products and services. These decreases
were partially offset by $13.5 million increases in revenue from the addition of
new customers, contractual price increases and volume increases. An increase in
specific reserves contributed to an additional decrease in subscription revenue
of $1.9 million .
Platform revenue increased from growth in premiums and new products from Benefit
Catalog, primarily from insurance carriers. As discussed above in "Components of
Operating Results - Revenue", we recognize platform revenue from carriers over
the policy period and we recognize commissions revenue at a point in time.
The decrease in professional services revenue was primarily attributable to a
decrease in implementation revenue, customer-specific development, and the
result of terminated services. The decreases were partially offset by increases
from new and existing customers.
We expect total revenue to continue to be less in 2021 compared to 2020
primarily due to the impacts of the COVID-19 pandemic, including a slowed sales
cycle in 2020 and the effects of higher unemployment. As previously discussed,
we experienced longer sales cycles in 2020 and a slowdown in new sales activity
which will negatively impact subscription and platform revenue in future
periods. Additionally, we expect revenue from health plan customers to decline
in 2021 as some customers might renew their agreements with a lower minimum
number of covered employees because of an increase in
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--------------------------------------------------------------------------------unemployment. We also expect professional services revenue to decrease as we focus on profitability by managing away from unprofitable work.
Cost of Revenue
Year Ended December 31,
2020 2019
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Cost of revenue $ 129,388 48.3 % $ 144,090 48.7 % $ (14,702 ) (10.2 ) %
The decrease in cost of revenue was attributable to decreases in salaries and
other personnel-related costs of $6.6 million , costs related to external
development, engineering consulting, and customer support of $7.3 million , and
travel-related expenses of $1.3 million . These decreases result from our actions
taken during the year in response to the COVID-19 pandemic to maintain financial
health and liquidity discussed above in "Overview". These decreases were
partially offset by increased depreciation expense of $2.7 million attributable
to an increase in capitalized software development costs. Cost of revenue
included $3.7 million and $3.6 million of stock-based compensation expense for
years ended December 31, 2020 and 2019, respectively, and $18.8 million and
$16.0 million of depreciation and amortization for the years ended December 31,
2020 and 2019, respectively.
Gross Profit
Year Ended December 31,
2020 2019
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Software services $ 138,393 64.4 % $ 157,221 68.7 % $ (18,828 ) (12.0 ) %
Professional services 360 0.7 (5,625 ) (8.4 ) 5,985 (106.4 )
Gross profit $ 138,753 51.7 % $ 151,596 51.3 % $ (12,843 ) (8.5 ) %
The decrease in software services gross profit was driven by a $13.9 million , or
6%, decrease in software services revenue and an increase in software services
cost of revenue of $4.9 million from increases in salary and personnel-related
costs and depreciation expense. The increase in software services costs of
revenue was primarily attributable to increased investment to support our
ongoing customers and primarily driven by increases in salary and
personnel-related costs and external development and engineering consulting of
$5.1 million and depreciation and amortization expense of $2.3 million related
to capitalized software development costs. The increase in software services
cost of revenue included $2.1 million of stock-based compensation expense for
each of the years ended December 31, 2020 and 2019, respectively, and $15.5
million and $12.8 million of depreciation and amortization for the years ended
December 31, 2020 and 2019, respectively.
Professional services gross profit increased $6.0 million as professional
services revenue decreased by $13.6 million and cost of revenue decreased by
$19.6 million . The decrease in professional services cost of revenue is
primarily attributable to decreases in salary and personnel-related costs due to
headcount reductions that took place during the year, as well as decreased
utilization of contract labor. Additionally, salaries and personnel-related
costs were impacted by an increase in the deferral of fulfillment costs from
carrier implementation projects and a decrease in amortization of capitalized
fulfillment costs as older projects became fully amortized. Professional
services cost of revenue included $1.6 million and $1.5 million of stock-based
compensation expense for the years ended December 31, 2020 and 2019,
respectively. In addition, professional services cost of revenue included $3.3
million and $3.2 million of depreciation and amortization for the years ended
December 31, 2020 and 2019, respectively.
We expect the trend of positive professional services margin to continue on an
annual basis as a result of investing in accelerating automation and shifting to
higher margin professional services work.
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Operating Expenses
Year Ended December 31,
2020 2019
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Sales and marketing $ 52,210 19.5 % $ 76,049 25.7 %
17.2 54,724 18.5 (8,549 ) (15.6 )
General and administrative 37,720 14.1 45,329 15.3 (7,609 ) (16.8 )
Restructuring costs 5,616 2.1 - 0.0 5,616 100.0
The decrease in sales and marketing expense was primarily attributable to a
$16.8 million decrease in salaries and personnel-related costs, a $3.4 million
decrease in travel-related costs, and a $3.2 million decrease in the cost of
marketing events. These decreases result from our actions taken during the
second quarter of 2020 in response to the COVID-19 pandemic to maintain
financial health and liquidity as discussed above in "Overview". The decrease in
salaries and personnel-related costs was driven by decreased headcount as well
as lower commissions and bonuses earned caused by delays and longer sales cycle
time for new sales activity as a result of the COVID-19 pandemic. The decrease
in travel-related costs was driven by travel restrictions imposed in response to
the pandemic. The cost of marketing events decreased in part as a result of
moving our events, including our user conference, OnePlace, to a digital
platform in response to the COVID-19 pandemic which resulted in lower costs in
the current period compared to the prior period.
The decrease in research and development expense is primarily attributable to a
decrease in personnel-related costs and external development and engineering
consulting of $8.3 million . Additionally, a decrease of $0.5 million in
travel-related costs was primarily attributable to travel restrictions imposed
in response to the COVID-19 pandemic.
The decrease in general and administrative expense was primarily attributable to
a $5.2 million decrease in salaries and personnel-related costs as well as a
decrease of $2.7 million in professional fees, travel-related costs and contract
labor. These decreases result from our actions taken during the second quarter
of 2020 in response to the COVID-19 pandemic to maintain financial health and
liquidity discussed as above in "Overview".
As discussed above in "Overview", in the quarter ended June 30, 2020 , we reduced
our work force by approximately 17%. Restructuring costs recognized as a result
of this action was $5.6 million and consisted of $5.3 million of salaries and
personnel-related expense related to severance payments. The remaining amount is
attributable to professional fees for outplacement services and legal fees.
Stock-based Compensation
Cost of revenue and operating expenses include an aggregate of$14.5 million and$19.6 million of stock-based compensation for the years endedDecember 31, 2020 and 2019, respectively, representing a decrease of$5.0 million . The decrease is primarily attributable to the benefit from cancellations of RSUs during 2020 from associates that left the Company and a decrease in the aggregate fair value of RSUs granted during the year. 65 --------------------------------------------------------------------------------
Comparison of Years Ended
Revenue
Year Ended December 31,
2019 2018
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Subscription $ 195,091 66.0 % $ 179,410 69.3 % $ 15,681 8.7 %
Platform 33,654 11.4 22,938 8.9 10,716 46.7
Total software services $ 228,745 77.4 % $ 202,348 78.2 % $ 26,397 13.0 %
Professional services 66,941 22.6 56,373 21.8 10,568 18.7
Total revenue $ 295,686 100.0 % $ 258,721 100.0 % $ 36,965 14.3 %
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, and volume increases. These increases were offset by a $6.0 million
decrease in subscription revenue from the renegotiation of a customer contract
and decreases from customers that terminated products and services.
Additionally, sales allowance decreased resulting in an increase in subscription
revenue of $1.0 million .
Platform revenue increased from growth in premiums and new products from Benefit
Catalog which resulted in an increase of $7.3 million in Benefit Catalog carrier
revenue and an increase of $3.4 million in revenue from broker and supplier
commissions. As discussed above in "Components of Operating Results - Revenue",
platform revenue from carriers is recognized over the policy period and
commissions 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 performed related to the customer contracts
acquired from Connecture in February 2019 and a $1.3 million increase in
customer support from new and existing customers. These increases were offset by
a net decrease of $3.7 million from professional services work for customers in
2018 that did not recur in 2019. Professional services revenue increased as a
percentage of total revenue in the current year compared to the prior year
primarily as result of revenue from the Connecture acquisition. We expect this
trend to end after the first quarter of 2020 when comparable periods will
include the results of the Connecture operations for the full period.
Cost of Revenue
Year Ended December 31,
2019 2018
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Cost of revenue $ 144,090 48.7 % $ 129,277 50.0 % $ 14,813 11.5 %
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 is primarily attributable to the workforce acquired from
Connecture in February 2019 partially offset by decreases related to our cost
structure in place prior to the acquisition. The increase in depreciation and
amortization expense is attributable to the amortization of acquired intangibles
from the Connecture acquisition as well as higher depreciation expense related
to an increase in capitalized software development costs and the impact of the
adoption of the new lease accounting standard at the beginning of 2019. Cost of
revenue decreased as a percentage of revenue as we continued to achieve
economies of scale. Cost of revenue included $3.6 million and $5.2 million of
stock-based compensation expense for the years ended December 31, 2019 and 2018,
respectively, and $16.0 million and $11.9 million of depreciation and
amortization for the years ended December 30, 2019 and 2018, respectively.
66
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Gross Profit
Year Ended December 31,
2019 2018
Percentage of Percentage of Period-to-Period Change
Amount Revenue Amount Revenue Amount Percentage
(in thousands)
Software services $ 157,221 68.7 % $ 136,344 67.4 % $ 20,877 15.3 %
Professional services (5,625 ) (8.4 ) (6,900 )
(12.2 ) 1,275 (18.5 ) Gross profit$ 151,596 51.3 %$ 129,444 50.0 %$ 22,152 17.1 % 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$3.0 million of stock-based compensation expense for the years endedDecember 31, 2019 and 2018, respectively, and$12.8 million and$10.0 million of depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively. As discussed above, we are 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 services revenue. This increase was partially offset by an increase in professional services cost of revenue of$9.3 million . Professional services cost of revenue included$1.5 million and$2.2 million of stock-based compensation expense for the years endedDecember 31, 2019 and 2018, respectively. In addition, professional services cost of revenue included$3.2 million and$1.9 million in depreciation and amortization for the years endedDecember 31, 2019 and 2018, respectively. Operating Expenses Year Ended December 31, 2019 2018 Percentage of Percentage of Period-to-Period Change Amount Revenue Amount Revenue Amount Percentage (in thousands) Sales and marketing$ 76,049 25.7 %$ 78,179 30.2 %$ (2,130 ) (2.7 ) % Research and development 54,724 18.5 47,902 18.5 6,822 14.2 General and administrative 45,329 15.3 43,062 16.6 2,267 5.3 Restructuring costs - 0.0 - 0.0 - 0.0 The decrease in sales and marketing expense in absolute terms was primarily attributable to a decrease of$3.9 million in salaries and personnel-related costs and a decrease in travel-related costs of$0.3 million , partially offset by an increase of$1.4 million increase in the cost of marketing events that occurred during 2019 and IT-related costs. Salaries and personnel-related costs decreased primarily due to a decrease in number of sales associates that occurred starting in the second half of 2018. As a result we experienced lower salary expense and sales bonuses, as well as lower stock-based compensation. Stock-based compensation decreased primarily as 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 to 2018. As discussed above in "Components of Operating Results-Operating Expenses", certain sales commissions are capitalized and amortized 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 inFebruary 2019 . Additionally, depreciation and amortization and IT-related costs increased by$2.0 million . These increases were partially offset by an increase of$2.4 million in the amount of personnel-related costs capitalized for software development. The increase in general and administrative expense was primarily attributable to a net increase of$2.6 million in salary and personnel-related costs primarily as increases from investing in our business operations function were partly offset by a decrease in stock-based compensation of$2.5 million . Additionally, depreciation and amortization, IT-related expense, contract labor, travel-related and other operating expenses increased$2.3 million and insurance expense increased$0.2 million in connection with the acquisition of assets fromConnecture . These increases were partially offset by a decrease in professional and consulting costs of$2.8 million as implementation costs of the new lease accounting 67
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standard incurred in 2019 were more than offset by a decrease in professional fees associated with the adoption of the leasing and revenue accounting standards and internal control testing incurred during 2018.
Stock-based Compensation
Cost of revenue and operating expenses include an aggregate of$19.6 million and$28.9 million of stock-based compensation for the years endedDecember 31, 2019 and 2018, respectively, representing a decrease of$9.3 million , or a 32.2% decrease. The decrease is primarily attributable to expense from performance-based awards as the achievement of performance measures was lower for awards granted in 2019 compared to 2018. Additionally, expense decreased from the forfeitures of awards from employees who separated from the Company.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances. Actual results might differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
Revenue Recognition - Estimation of Platform Revenue from Insurance Broker Commissions
Our platform revenue from insurance broker commissions and Benefit Catalog supplier transactions is recognized at the point when the orders for the policies are received and transferred to the insurance carrier or supplier. The transaction price is reduced by constraints for variable consideration associated with collectability, policy cancellation and termination risks. We estimate variable consideration primarily using the expected value method based on both historical and current estimates. We then use judgment to develop constraints on the estimated variable consideration included in the transaction price to account for risks in collectability, policy cancellation and termination. Changes in those estimates can have a material effect on the amount of revenue recognized in a period. During 2020, the constraint rate decreased by approximately 1%, or less than 0.2 percentage points, during the year. An increase in the constraint rate of one percentage point, would negatively impact revenue recognized in 2020 by approximately$0.1 million .
Liquidity and Capital Resources
Sources of Liquidity
As ofDecember 31, 2020 , our primary sources of liquidity were our cash and cash equivalents totaling$90.7 million ,$95.1 million in marketable securities,$22.2 million in accounts receivables, net of allowance, and unused availability under our revolving line of credit of$50.0 million . We entered into a new revolving line of credit agreement withSilicon Valley Bank onMarch 3, 2020 . This agreement replaces our previous agreement withSilicon Valley Bank , which expired onFebruary 20, 2020 . The new three-year agreement has a borrowing limit of$50 million , with the ability for us to increase it up to$100 million . We are bound by customary representations and warranties and restrictive covenants in connection with the revolving line of credit, including financial covenants related to quick ratio and EBITDA. In the event of a default, the lenders may declare all obligations immediately due and stop advancing money or extending credit under the line of credit. The line of credit is collateralized by substantially all of our personal property assets, including intellectual property and the equity of our 68 -------------------------------------------------------------------------------- subsidiaries. The terms of our revolving line of credit are described in Note 11 of the unaudited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. InJune 2020 , we issued 1,777,778 shares of Series A Preferred Stock (the "Preferred Stock") at a purchase price of$45 per share, resulting in total gross proceeds of approximately$80 million . The Preferred Stock ranks senior to our common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Each share of the Preferred Stock has an initial stated value of$45 per share. Holders of shares of the Preferred Stock are entitled a dividend equal to 8.00% per annum (the "Regular Dividends"), payable quarterly, beginning onJune 30, 2020 . The Regular Dividends are payable in cash or in kind, at our option. In the event a Regular Dividend is paid in kind, the stated value of each share of the Preferred Stock will be increased by an amount equal to the accrued Regular Dividend not paid in cash. As ofDecember 31, 2020 , we had paid all of the Preferred Stock dividends in cash. Holders of the Preferred Stock are also entitled to participate in and receive any dividends declared or paid on the common stock on an as-converted basis, and no dividends may be paid to holders of the common stock unless full participating dividends are concurrently paid to the holders of the Preferred Stock. Each holder of the Preferred Stock has the right, at its option, to convert its shares of the Preferred Stock, in whole or in part, into fully paid and non-assessable shares of the common stock, at any time and from time to time. The number of shares of the common stock into which a share of the Preferred Stock will convert at any time is equal to the quotient obtained by dividing its stated value then in effect plus any accumulated and unpaid Regular Dividends by its conversion price of$15.00 . The conversion price is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events. At closing, before payment of any dividends in kind, the 1,777,778 shares of the Preferred Stock were convertible into 5,333,334 shares of common stock. We may, at our option, redeem the outstanding shares of the Preferred Stock following the fourth anniversary of issuance. Redemption by us is subject to certain liquidity conditions, as well conditions connected with the trading price of its common stock. The terms of the Preferred Stock are described in Note 13 of our unaudited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. InDecember 2018 , we issued$240 million aggregate principal amount of 1.25% convertible senior notes (the "Notes") dueDecember 15, 2023 , unless earlier purchased by us or converted by the holder pursuant to their terms. Interest is payable semiannually in arrears onJune 15 andDecember 15 of each year. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination, at our election. The Notes have an initial conversion rate of 18.8076 shares of common stock per$1,000 principal amount. This represents an initial effective conversion price of approximately$53.17 per share of common stock. In connection with the issuance of the Notes, we entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the Notes. Under the capped call transactions, we purchased capped call options that in the aggregate relate to the total number of shares of our common stock underlying the Notes, with an initial strike price of approximately$53.17 per share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately$89.98 . The terms of the Notes are described further in Note 10 of our unaudited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. During the third quarter of 2020, we repurchased Notes with an aggregate principal amount of$18.8 million for an aggregate of$14.6 million in cash. As of the end of the third quarter of 2020, the remaining outstanding Notes were convertible into 4,161,182 shares of common stock. In connection with the purchase of the Notes, we terminated a portion of the capped call transactions which resulted in an immaterial amount of payments to us in cash and shares of our common stock. Our cash flows from operations has improved in recent years and turned positive for the years endedDecember 31, 2020 and 2018. However, for the year endedDecember 31, 2019 , cash flows from operations were negative due to timing in changes in working capital, a decrease in the balance of deferred revenue and the impact of acquired deferred revenue which yields revenue with no cash inflows. We expect the trend of positive cash flows from operations in at least the near term as we continue to manage our costs. 69 -------------------------------------------------------------------------------- Based on our current level of operations and anticipated growth, we believe our future cash flows from operating activities and existing cash balances will be sufficient to meet our cash requirements for at least the next 12 months. Going forward, we may access capital markets to raise additional equity or debt financing for various business reasons, including required debt payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing on favorable terms or at all.
Operating and Capital Expenditure Requirements and Contractual Obligations
We believe that our existing cash and cash equivalents and marketable securities balances and cash generated from operations will be sufficient to meet our anticipated cash requirements through at least the next 12 months.
Our short-term material cash requirements as ofDecember 31, 2020 are primarily comprised of lease obligations, dividends on our Preferred Stock, interest on our convertible senior notes, and payments to vendors related to our technology infrastructure. These obligations will be funded from cash from operations and our balances of current assets. Our long-term material cash requirements as ofDecember 31, 2020 include lease obligations, repayment of our convertible senior notes, if not converted, and dividends on our Preferred Stock, if not converted or paid in kind. Our long-term obligations will be funded from cash from operations, balances of current assets, and if necessary, borrowing under our revolving line of credit or future credit arrangements, the sale of debt securities, or sale of equity. In addition, we are reassessing our need for office space and have listed certain of our facilities for sublease, including our headquarters campus inCharleston, South Carolina and our office inTulsa, Oklahoma . SinceMarch 2020 , most of our associates have worked remotely during the COVID-19 pandemic. While our facilities have remained open and accessible, they have been underutilized sinceMarch 2020 . Many associates have expressed interest in a remote or flexible work situation after the risk of infection from COVID-19 diminishes. The timing, amount of space to ultimately be sublet, expected amount of sublease income, and amount of impairment loss we might recognize in connection with a sublease, if any, is uncertain. Any amounts received under subleases would offset our lease payments and reduce our cash requirements associated with our lease obligations. The details of the arrangements that give rise to these short- and long-term cash requirements are described in more detail in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our future capital requirements will depend on many factors, including our customer growth rate, subscription renewal activity, the timing and extent of development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced services offerings, and the continuing market acceptance of our services. We might require additional capital beyond our currently anticipated amounts. If our available cash and cash equivalents balances are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible debt securities or enter into an additional credit facility. The sale of equity and convertible debt securities may result in dilution to our stockholders and those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of convertible debt securities, these securities could contain covenants that would restrict our operations. Additional capital might not be available on reasonable terms, or at all.
Recent Accounting Pronouncements
InAugust 2020 , the FASB issued No. ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40)". The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It is effective for interim and annual reporting periods beginningJanuary 1, 2022 . Early adoption is permitted afterJanuary 1, 2021 . This update permits the use of either the modified retrospective or fully retrospective method of 70
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transition. We are currently evaluating the timing and impact of the adoption of ASU 2020-06 on our consolidated financial statements, but we anticipate that it will result in a reduction in non-cash interest expense related to the Notes. InDecember 2019 , the FASB issued ASU No. 2019-12 "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". This ASU is intended to simplify various aspects related to accounting for income taxes, eliminates certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, simplifies when companies recognize deferred taxes in an interim period, and clarifies certain aspects of the current guidance to promote consistent application. This ASU is effective for interim and annual reporting periods startingJanuary 1, 2021 . We are currently evaluating the potential effects of this guidance on our consolidated financial statements. We are evaluating other accounting standards and exposure drafts that have been issued or proposed by the FASB or other standards setting bodies that do not require adoption until a future date to determine whether adoption will have a material impact on our consolidated financial statements.
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