Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August ~~4, 2020,~~2, 2021, there were approximately ~~32,260,650~~33,346,288 shares of the registrant’s common stock outstanding.

	As of June 30, 2020			As of December 31, 2019			As of June 30, 2021			As of December 31, 2020
Assets
Current assets:
Cash and cash equivalents	$	183,496		$	130,976		$	98,062		$	90,706
Marketable securities								95,107			95,085
Accounts receivable, net		29,872			33,754			20,886			22,240
Contract, prepaid and other current assets		17,851			21,523			18,838			21,354
Total current assets		231,219			186,253			232,893			229,385
Property and equipment, net		31,430			28,669			27,001			29,701
Financing lease right-of-use assets		73,372			78,520			60,291			68,670
Operating lease right-of-use assets		1,529			1,715			986			1,107
Intangible assets, net		11,530			12,667			9,257			10,393
Goodwill		12,857			12,857			12,857			12,857
Deferred contract costs and other non-current assets		10,263			11,002			9,011			10,259
Total assets	$	372,200		$	331,683		$	352,296		$	362,372
Liabilities and stockholders' deficit
Liabilities, redeemable preferred stock and stockholders' deficit
Current liabilities:
Accounts payable	$	6,648		$	9,563		$	3,639		$	2,160
Accrued expenses		6,526			10,526			8,177			6,262
Accrued compensation and benefits		11,107			15,246			14,223			19,129
Deferred revenue, current portion		31,020			33,429			28,202			27,782
Lease liabilities and financing obligations, current portion		6,536			6,871			7,104			5,959
Total current liabilities		61,837			75,635			61,345			61,292
Deferred revenue, net of current portion		4,638			5,079			3,387			4,422
Convertible senior notes		193,843			187,949			190,089			184,308
Lease liabilities and financing obligations, net current portion		82,294			88,572			78,344			79,282
Other non-current liabilities		2,000			92			2,629			2,470
Total liabilities		344,612			357,327			335,794			331,774
Commitments and contingencies
Redeemable preferred stock:
Series A preferred stock, par value $0.001, 5,000,000 shares authorized, 1,777,778 and 0 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively, liquidation preference $45 per share as of June 30, 2020		79,193			–
Series A preferred stock, par value $0.001, 5,000,000 shares authorized, 1,777,778 and 1,777,778 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively, liquidation preference $45 per share as of June 30, 2021 and December 31, 2020, respectively								79,193			79,193
Stockholders' deficit:
Common stock, par value $0.001, 50,000,000 shares authorized, 32,175,444 and 32,788,980 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively		32			33
Common stock, par value $0.001, 95,000,000 and 50,000,000 shares authorized, 33,234,786 and 32,327,439 issued and outstanding at June 30, 2021 and December 31, 2020, respectively								33			32
Additional paid-in capital		423,122			426,025			430,451			427,431
Accumulated deficit		(474,759	)		(451,702	)		(493,175	)		(476,058	)
Total stockholders' deficit		(51,605	)		(25,644	)		(62,691	)		(48,595	)
Total liabilities and stockholders' deficit	$	372,200		$	331,683
Total liabilities, redeemable preferred stock and stockholders' deficit							$	352,296		$	362,372

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2021			2020			2021			2020
Revenue	$	62,174		$	68,579		$	128,328		$	136,878		$	60,904		$	62,174		$	125,967		$	128,328
Cost of revenue		30,397			32,802			64,309			65,654			28,030			30,397			56,623			64,309
Gross profit		31,777			35,777			64,019			71,224			32,874			31,777			69,344			64,019
Operating expenses:
Sales and marketing		11,828			19,318			27,458			38,937			10,921			11,828			21,812			27,458
Research and development		11,045			14,461			22,813			27,551			11,103			11,045			21,935			22,813
General and administrative		9,381			11,785			19,896			23,581			17,574			9,381			27,436			19,896
Restructuring costs		5,616			–			5,616			–			2,727			5,616			4,127			5,616
Total operating expenses		37,870			45,564			75,783			90,069			42,325			37,870			75,310			75,783
Loss from operations		(6,093	)		(9,787	)		(11,764	)		(18,845	)		(9,451	)		(6,093	)		(5,966	)		(11,764	)
Other income (expense):
Interest income		97			762			523			1,422			54			97			111			523
Interest expense		(5,862	)		(5,837	)		(11,753	)		(11,651	)		(5,646	)		(5,862	)		(11,201	)		(11,753	)
Other income (expense)		2			(73	)		7			(64	)
Other income														64			2			22			7
Total other expense, net		(5,763	)		(5,148	)		(11,223	)		(10,293	)		(5,528	)		(5,763	)		(11,068	)		(11,223	)
Loss before income taxes		(11,856	)		(14,935	)		(22,987	)		(29,138	)		(14,979	)		(11,856	)		(17,034	)		(22,987	)
Income tax expense		6			3			11			9			41			6			83			11
Net loss		(11,862	)		(14,938	)		(22,998	)		(29,147	)		(15,020	)		(11,862	)		(17,117	)		(22,998	)
Preferred dividends		(462	)		–			(462	)		–			(1,600	)		(462	)		(3,200	)		(462	)
Net loss available to common stockholders	$	(12,324	)	$	(14,938	)	$	(23,460	)	$	(29,147	)	$	(16,620	)	$	(12,324	)	$	(20,317	)	$	(23,460	)
Comprehensive loss	$	(12,324	)	$	(14,938	)	$	(23,460	)	$	(29,147	)	$	(15,020	)	$	(11,862	)	$	(17,117	)	$	(22,998	)
Net loss per common share:
Basic and diluted	$	(0.38	)	$	(0.46	)	$	(0.73	)	$	(0.90	)	$	(0.50	)	$	(0.38	)	$	(0.62	)	$	(0.73	)
Weighted-average common shares outstanding:
Basic and diluted		32,058,387			32,613,718			32,348,673			32,336,864			33,080,257			32,058,387			32,787,162			32,348,673

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

																Common Stock,						Additional						Total
																$0.001 Par Value						Paid-in			Accumulated			Stockholders'
																Shares			Par Value			Capital			Deficit			Deficit
Balance, December 31, 2020																	32,327,439		$	32		$	427,431		$	(476,058	)	$	(48,595	)
Exercise of stock options																	15,000			1			154			0			155
Issuance of common stock upon vesting of restricted stock units																	173,731			0			0			0			0
Stock-based compensation expense																	0			0			1,523			0			1,523
Preferred dividends																	0			0			(1,600	)		0			(1,600	)
Net loss																	0			0			0			(2,097	)		(2,097	)
Balance, March 31, 2021																	32,516,170		$	33		$	427,508		$	(478,155	)	$	(50,614	)
Exercise of stock options																	9,250			0			102			0			102
Issuance of common stock upon vesting of restricted stock units																	704,543			0			0			0			0
Issuance of common stock under Employee Stock Purchase Plan, or ESPP																	4,823			0			65			0			65
Stock-based compensation expense																	0			0			4,376			0			4,376
Preferred dividends																	0			0			(1,600	)		0			(1,600	)
Net loss																	0						0			(15,020	)		(15,020	)
Balance, June 30, 2021																	33,234,786		$	33		$	430,451		$	(493,175	)	$	(62,691	)

	Common Stock,						Additional						Total			Common Stock,						Additional						Total
	$0.001 Par Value						Paid-in			Accumulated			Stockholders'			$0.001 Par Value						Paid-in			Accumulated			Stockholders'
	Shares			Par Value			Capital			Deficit			Deficit			Shares			Par Value			Capital			Deficit			Deficit
Balance, December 31, 2019		32,788,980		$	33		$	426,025		$	(451,702	)	$	(25,644	)		32,788,980		$	33		$	426,025		$	(451,702	)	$	(25,644	)
Cumulative effect adjustment from adoption of credit standard		–			–			–			(59	)		(59	)		0			0			0			(59	)		(59	)
Exercise of stock options		13,584			–			73			–			73			13,584			0			73			0			73
Issuance of common stock upon vesting of restricted stock units		43,315			–			–			–			–			43,315			0			0			0			0
Stock-based compensation expense		–			–			3,677			–			3,677			0			0			3,677			0			3,677
Common stock repurchased		(1,070,665	)		(1	)		(9,382	)		–			(9,383	)		(1,070,665	)		(1	)		(9,382	)		0			(9,383	)
Net loss		–			–			–			(11,136	)		(11,136	)		0			0			0			(11,136	)		(11,136	)
Balance, March 31, 2020		31,775,214		$	32		$	420,393		$	(462,897	)	$	(42,472	)		31,775,214		$	32		$	420,393		$	(462,897	)	$	(42,472	)
Exercise of stock options		10,685			–			69			–			69			10,685			0			69			0			69
Issuance of common stock upon vesting of restricted stock units		416,848			–			–			–			–			416,848			0			0			0			0
Issuance of common stock under Employee Stock Purchase Plan, or ESPP		8,205			–			83			–			83
Issuance of common stock under ESPP																	8,205			0			83			0			83
Stock-based compensation expense		–			–			3,323			–			3,323			0			0			3,323			0			3,323
Common stock repurchased		(35,508	)		–			(284	)		–			(284	)		(35,508	)		0			(284	)		0			(284	)
Preferred dividends		–			–			(462	)		–			(462	)		0			0			(462	)		0			(462	)
Net loss		–						–			(11,862	)		(11,862	)		0			0			0			(11,862	)		(11,862	)
Balance, June 30, 2020		32,175,444		$	32		$	423,122		$	(474,759	)	$	(51,605	)		32,175,444		$	32		$	423,122		$	(474,759	)	$	(51,605	)


	Common Stock,						Additional						Total
	$0.001 Par Value						Paid-in			Accumulated			Stockholders'
	Shares			Par Value			Capital			Deficit			Deficit
Balance, December 31, 2018		32,017,773		$	32		$	403,631		$	(413,873	)	$	(10,210	)
Cumulative effect adjustment from adoption of lease standard		–			–			–			7,687			7,687
Exercise of stock options		18,600			–			89			–			89
Issuance of common stock upon vesting of restricted stock units		34,255			–			–			–			–
Stock-based compensation expense		–			–			6,253			–			6,253
Net loss		–			–			–			(14,209	)		(14,209	)
Balance, March 31, 2019		32,070,628		$	32		$	409,973		$	(420,395	)	$	(10,390	)
Exercise of stock options		6,200			–			45			–			45
Issuance of common stock upon vesting of restricted stock units		565,878			1			–			–			1
Stock-based compensation expense		–			–			6,203			–			6,203
Net loss		–			–			–			(14,938	)		(14,938	)
Balance, June 30, 2019		32,642,706		$	33		$	416,221		$	(435,333	)	$	(19,079	)

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

	Six Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2021			2020
Cash flows from operating activities
Net loss	$	(22,998	)	$	(29,147	)	$	(17,117	)	$	(22,998	)
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
Depreciation and amortization		12,105			10,949			12,525			12,105
Stock-based compensation expense		7,000			10,086			5,899			7,000
Accretion of interest on convertible senior notes		5,894			5,541			5,780			5,894
Interest accrual on finance lease liabilities		44			–			3,244			44
Rent expense (less than) in excess of payments		(16	)		3
Rent expense less than payments								(27	)		(16	)
Non-cash interest income on short-term investments								506			0
Impairment or loss on disposal of right-of-use assets and property and equipment								4,048			0
Provision for doubtful accounts		111			265			0			111
Changes in operating assets and liabilities:
Accounts receivable, net		3,711			(10,671	)		1,354			3,711
Accrued interest on short-term investments								(101	)		0
Contract, prepaid and other current assets		3,672			(476	)		2,410			3,672
Deferred costs and other non-current assets		740			2,851			1,249			740
Accounts payable and accrued expenses		(7,318	)		(4,085	)		3,520			(7,318	)
Accrued compensation and benefits		(4,139	)		273			(4,907	)		(4,139	)
Deferred revenue		(2,850	)		(6,004	)		(615	)		(2,850	)
Other non-current liabilities		1,910			(46	)		159			1,910
Net cash and cash equivalents used in operating activities		(2,134	)		(20,461	)
Net cash and cash equivalents provided by (used in) operating activities								17,927			(2,134	)
Cash flows from investing activities
Business combination, net of cash acquired		–			(20,914	)
Purchases of short-term investments held to maturity								(48,427	)		0
Proceeds from short-term investments held to maturity								48,000			0
Purchases of property and equipment		(7,075	)		(7,401	)		(4,483	)		(7,075	)
Net cash and cash equivalents used in investing activities		(7,075	)		(28,315	)		(4,910	)		(7,075	)
Cash flows from financing activities
Draws on revolving line of credit		10,000			–			0			10,000
Payments on revolving line of credit		(10,000	)		–			0			(10,000	)
Payments of debt issuance costs		(154	)		(357	)		0			(154	)
Proceeds from issuance of preferred stock, net of issuance costs		79,840			–			0			79,840
Payments of preferred dividends		(462	)		–			(3,200	)		(462	)
Repurchase of common stock		(9,667	)		–			0			(9,667	)
Proceeds from exercises of stock options and ESPP		225			134			322			225
Payments on financing obligations		(416	)		(841	)		(224	)		(416	)
Payments of principal on finance lease liabilities		(7,637	)		(2,699	)		(2,559	)		(7,637	)
Net cash and cash equivalents provided by (used in) financing activities		61,729			(3,763	)
Net increase (decrease) in cash and cash equivalents		52,520			(52,539	)
Net cash and cash equivalents (used in) provided by financing activities								(5,661	)		61,729
Net increase in cash and cash equivalents								7,356			52,520
Cash and cash equivalents, beginning of period		130,976			190,928			90,706			130,976
Cash and cash equivalents, end of period	$	183,496		$	138,389		$	98,062		$	183,496

Supplemental disclosure of non-cash investing and financing activities
Property and equipment purchases in accounts payable and accrued expenses	$	37		$	437		$	0		$	37

The accompanying notes are an integral part of the Unaudited Consolidated Financial Statements.

Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform for consumers, employers, health plans (also known as insurance ~~carriers~~carriers) and brokers that is designed to simplify how organizations and individuals transact benefits. The financial statements of the Company include the financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. and BenefitStore, Inc.

These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in the consolidation. The Company is not the primary beneficiary of, nor does it have a controlling financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any variable interest entity.

The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with GAAP as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (the “Codification” or “ASC”) for interim financial information, and with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations and comprehensive loss, financial position, changes in stockholders’ deficit and cash flows. The results of operations and comprehensive loss for the three- and six-month ~~periods~~period ended June 30, ~~2020~~2021 are not necessarily indicative of the results for the full year or for any other future period. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related footnotes for the year ended December 31, ~~2019~~2020 included in the Company’s Annual Report on Form ~~10-K.~~10-K, as amended.

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Such estimates include allowances for doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, capitalizable software development costs and the related amortization, incremental borrowing rate used in lease accounting, the determination of the useful lives of assets, and the impairment assessment of acquired intangibles and ~~goodwill~~goodwill. Additionally as ~~well as the~~described in revenue and deferred revenue below, estimates ~~disclosed~~are utilized in association with revenue ~~recognition.~~recognition, in particular the estimation of variable consideration using the expected value method from insurance broker commissions reported in Platform revenue. Determination of these transactions and account balances are based on, among other things, the Company’s estimates and judgments. These estimates are based on the Company’s knowledge of current events and actions it may undertake in the future as well as on various other assumptions that it believes to be reasonable. Actual results could differ materially from these estimates.

~~On April 28, 2020,~~During January 2021, the Company announced a restructuring plan to contain costs and further strengthen its liquidity profile in response to the impact of the COVID-19 pandemic. This plan resulted in a reduction in the Company’s U.S. workforce of approximately 17%. The Company recorded restructuring costs of ~~$5,616 in~~$1,400 from a reduction to its workforce. In June 2021, the ~~second quarter~~Company recorded restructuring costs of ~~2020~~$2,727 from the elimination of the office of the executive chairman of the board of directors. Restructuring costs are comprised of one-time severance charges, continuation of health benefits and outplacement ~~services. Restructuring costs~~services and are presented separately in operating expenses in the ~~unaudited~~ consolidated statements of operations and comprehensive loss. ~~The plan was implemented and completed in the second quarter of 2020.~~

The Company derives its revenue primarily from fees for subscription services and professional services sold to employers and ~~insurance carriers~~health plans as well as platform revenue derived from the value of products sold on ~~our~~its platform. Revenue is recognized when control of these services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Taxes collected from customers relating to services and remitted to governmental authorities are excluded from revenue.

Software services revenue consists of subscription revenue and platform revenue.

Subscription revenue primarily consists of monthly or annual subscription fees paid to the Company by its employer and ~~insurance carrier~~health plan customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Fees are generally charged based on the number of employees or subscribers with access to the solution.

Subscription services revenue is generally recognized on a ratable basis over the contract term beginning on the date the subscription services are made available to the customer. The Company’s subscription service contracts are generally three years.

Subscription revenue also includes fees paid for other services, such as event sponsorships and certain data services.

Platform revenue is generated from the value of policies or products enrolled in through the Company’s marketplace. Platform revenue from insurance carriers is generally recognized over the policy period of the enrolled products. In arrangements where the Company sells policies to employees of its customers as the broker, it earns broker commissions. Revenue from insurance broker commissions and supplier transactions is recognized at a point in time when the orders for the policies are received and transferred to the insurance carrier or supplier, and is reduced by ~~estimates~~constraints for ~~risks from~~variable consideration associated with collectability, policy cancellation and ~~termination.~~termination risks.

Professional services revenue primarily consists of fees related to the implementation of software products purchased by customers. Professional services typically include discovery, configuration and deployment, integration, testing, and training. Fees from consulting services and support services are also included in professional services revenue.

The Company determined that implementation services for certain of its ~~insurance carrier~~health plan customers significantly modify or customize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these ~~insurance carrier~~health plan customers are generally recognized over the contract term of the associated subscription services contract, including any extension periods representing a material right. In certain arrangements, the Company utilizes estimates of hours as a measure of progress to determine revenue.

Revenue from implementation services with employer customers is generally recognized as those services are performed.

Certain of the Company’s contracts with customers contain multiple performance obligations. For these contracts, the individual performance obligations are accounted for separately if they are distinct. The Company allocates the transaction price to the separate performance obligations based on their relative standalone selling prices. The Company determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the subscription services sold, customer size and complexity, and the number and types of users under the contracts.

The Company capitalizes costs to obtain contracts that are considered incremental and recoverable, such as sales commissions. Payments of sales commissions generally include multiple payments. The Company capitalizes only those payments made within an insignificant time from the contract inception, typically three months or less. Subsequent payments are expensed as incurred. The capitalized costs are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is generally four to five years. The Company expenses the costs to obtain a contract when the amortization period is less than one year. Deferred costs related to obtaining contracts are included in deferred contract costs and other non-current assets.

The Company capitalizes contract fulfillment costs directly associated with customer contracts that are not related to satisfying performance obligations. The costs are amortized to cost of revenue expense over the estimated period of benefit, which is generally five years. Deferred fulfillment costs are included in deferred contract costs and other non-current assets.

Balance of deferred contract costs

As of

June 30,

2020

As of

December 31,

2019

As of

June 30,

2021

As of

December 31,

2020

Costs to obtain contracts

5,749

6,676

4,775

5,624

Costs to fulfill contracts

3,400

3,112

3,268

3,639

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
Amortization of deferred contract costs	2020		2019		2020		2019		2021		2020		2021		2020
Costs to obtain contracts included in sales and marketing expense	$	831	$	870	$	1,712	$	1,917	$	778	$	831	$	1,523	$	1,712
Costs to fulfill contracts included in cost of revenue	$	307	$	802	$	682	$	1,604	$	339	$	307	$	690	$	682

Marketable securities consist of short-term investments in corporate bonds, commercial paper, and U.S. Treasury and agency bonds. To reflect its intention, the Company classifies its marketable securities as held-to-maturity at the time of purchase. As a result, the marketable securities are recorded at amortized cost and any gains or losses realized upon maturity are reported in other expense, net in the consolidated statements of operations and comprehensive loss.

Debt securities classified as held-to-maturity are subject to the expected credit loss model prescribed under Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments”. The Company utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for held-to-maturity securities at the time the financial asset is originated or acquired. The Company measures expected credit losses on its held-to-maturity portfolio on a collective basis by major security type. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The Company’s credit loss calculations for held-to-maturity securities are based upon historical default and recovery rates of bonds rated with the same rating as its portfolio. An adjustment factor is applied to these credit loss calculations based upon the Company’s assessment of the expected impact from current economic conditions on its investments. The Company monitors the credit quality of debt securities classified as held-to-maturity through the use of their respective credit rating and updates them on a quarterly basis. The allowance for credit losses is discussed in Note 5.

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents, marketable securities, and accounts receivable. All of the Company’s cash and cash equivalents are held at financial institutions that management believes to be of high credit quality. The bank deposits of the Company might at times, exceed federally insured limits and are generally uninsured and uncollateralized. The Company has not experienced any losses on cash and cash equivalents to date.

To manage credit risk related to marketable securities, the Company invests in various types of highly rated corporate bonds, commercial paper, and various United States backed securities with maturities of less than two years. The weighted average maturity of the portfolio of investments must not exceed nine months, per the Company’s investment policy.

To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts. Accounts receivable are unsecured and derived from revenue earned from customers located in the United States. NaN customer exceeded 10% of accounts receivable as of June 30, ~~2020. Accounts receivable from 1 customer represented approximately 11% of the total accounts receivable as of~~2021 and December 31, ~~2019.~~2020. NaN customer exceeded 10% of total revenue in any of the three and six-month periods ended June 30, ~~2020~~2021 and ~~2019.~~2020.

~~Historically, the~~The Company used an incurred loss model to calculate its allowance for doubtful accounts. Upon the adoption of Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments” on January 1, 2020, the Company shifted touses a current expected credit loss model. Accounts receivable and allowance for doubtful accounts are discussed in Note 5.6.

The Company capitalizes certain costs related to its software developed or obtained for internal use. Costs related to preliminary project activities and post-implementation activities are expensed as incurred. Internal and external costs incurred during the application development stage, including upgrades and enhancements representing modifications that will result in significant additional functionality, are capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are recorded as part of property and equipment and are amortized on a straight-line basis to cost of revenue over the software’s estimated useful life, which is three years. The Company evaluates these assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

The following tables present information about capitalized software development costs:

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
Capitalized software development costs	2020		2019		2020		2019		2021		2020		2021		2020
Capitalized	$	3,100	$	2,620	$	6,572	$	4,683	$	1,991	$	3,100	$	3,739	$	6,572
Amortized	$	1,727	$	1,319	$	3,246	$	2,497	$	2,159	$	1,727	$	4,321	$	3,246

The Company periodically enters into finance leases for property and equipment. The leasing arrangements for the Company’s office space at its headquarters campus are classified as finance leases. The Company also leases office space under operating leases.

The Company determines if an arrangement is a lease at inception. Right of use, or ROU, assets represent the Company’s right to use an underlying asset for the lease term. Lease liabilities represent an obligation to make lease payments arising from the lease. Leases with a term of 12 months or less are not included in the recognized ROU assets and lease liabilities for all classes of assets.

ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Because the Company’s operating leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on information available at commencement date to determine the present value of lease payments. The ROU asset also consists of any prepaid lease payments, lease incentives, or initial direct costs. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense. The Company has lease agreements which require payments for lease and non-lease components (e.g. common area maintenance and equipment maintenance) that are accounted for as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease, such as maintenance costs based on future obligations, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense.

The Company’s net ~~loss equals~~losses equal comprehensive ~~loss~~losses for all periods presented. Presentation of the prior year comprehensive losses has been updated to reflect the exclusion of preferred dividends.

On January 1, ~~2020,~~2021, the Company adopted ASU No. ~~2016-13.~~2019-12. The purpose of this ASU is to require a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses. On adoption, the Company recorded an immaterial cumulative-effect adjustment to retained earnings in connection with expected credit losses on its trade receivables.

On January 1, 2020 the Company adopted ASU No. 2018-13, “Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement”. The ASU modifies the disclosure requirements required for fair value measurements. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

~~In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”. ASU No. 2019-12 is intended~~ to simplify various aspects related to accounting for income taxes, ~~eliminates~~eliminate certain exceptions to the general principles in ASC Topic 740 related to intra-period tax allocation, ~~simplifies~~simplify when companies recognize deferred taxes in an interim period, and ~~clarifies~~clarify certain aspects of the current guidance to promote consistent application. ASU No. 2019-12 had no impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)”. The update simplifies the accounting for convertible debt instruments and convertible preferred stock by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. This ASU isalso enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. It will be effective for the Company ~~for the interim and annual reporting periods starting~~beginning January 1, ~~2021. Early adoption is permitted.~~2022. This ASU permits the use of either the modified retrospective or fully retrospective method of transition. The Company is currently evaluating the ~~potential effects~~impact of ~~this guidance~~the adoption of ASU 2020-06 on its consolidated financial ~~statements.~~statements, but anticipates that it will result in a reduction in non-cash interest expense related to its convertible senior notes.

Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.

The following common share equivalent securities have been excluded from the calculation of weighted average common shares outstanding because the effect is anti-dilutive for the periods presented:

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
Anti-Dilutive Common Share Equivalents	2020		2019		2020		2019		2021		2020		2021		2020
Restricted stock units		2,930,636		2,139,570		2,930,636		2,139,570		3,351,575		2,930,636		3,351,575		2,930,636
Stock options		151,178		208,447		151,178		208,447		97,553		151,178		97,553		151,178
Convertible senior notes		4,513,824		4,513,824		4,513,824		4,513,824		4,161,182		4,513,824		4,161,182		4,513,824
Conversion of preferred stock		5,333,334		-		5,333,334		-		5,333,334		5,333,334		5,333,334		5,333,334
Employee Stock Purchase Plan		-		6,650		-		6,650
Total anti-dilutive common share equivalents		12,928,972		6,868,491		12,928,972		6,868,491		12,943,644		12,928,972		12,943,644		12,928,972

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2021			2020			2021			2020
Numerator:
Net loss	$	(11,862	)	$	(14,938	)	$	(22,998	)	$	(29,147	)	$	(15,020	)	$	(11,862	)	$	(17,117	)	$	(22,998	)
Preferred dividends		(462	)		-			(462	)		-			(1,600	)		(462	)		(3,200	)		(462	)
Net loss attributable to common stockholders	$	(12,324	)	$	(14,938	)	$	(23,460	)	$	(29,147	)	$	(16,620	)	$	(12,324	)	$	(20,317	)	$	(23,460	)
Denominator:
Weighted-average common shares outstanding, basic and diluted		32,058,387			32,613,718			32,348,673			32,336,864			33,080,257			32,058,387			32,787,162			32,348,673
Net loss per common share, basic and diluted	$	(0.38	)	$	(0.46	)	$	(0.73	)	$	(0.90	)	$	(0.50	)	$	(0.38	)	$	(0.62	)	$	(0.73	)

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable and other accrued liabilities, and accrued compensation and benefits, approximate fair value due to their short-term nature. The carrying value of the Company’s financing obligations approximates fair value, considering the borrowing rates currently available to the Company with similar terms and credit risks.

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs when determining fair value. The three tiers are defined as follows:

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level to classify them for each reporting period. This determination requires significant judgments to be made.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis using the above categories, as of the periods presented.

	June 30, 2020								June 30, 2021
Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash Equivalents:
Money market mutual funds⁽¹⁾	$	177,798	$	—	$	—	$	177,798
Money market mutual funds⁽¹⁾									$	92,451	$	0	$	0	$	92,451
Total assets	$	177,798	$	—	$	—	$	177,798	$	92,451	$	0	$	0	$	92,451

	December 31, 2019								December 31, 2020
Description	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash Equivalents:
Money market mutual funds⁽¹⁾	$	124,503	$	—	$	—	$	124,503
Money market mutual funds⁽¹⁾									$	87,224	$	0	$	0	$	87,224
Total assets	$	124,503	$	—	$	—	$	124,503	$	87,224	$	0	$	0	$	87,224

Marketable securities consist of corporate bonds, commercial paper and U.S. Treasury and agency bonds, and are classified as held-to-maturity. All marketable securities had contractual maturities of less than one year as of June 30, 2021 and December 31, 2020. The following tables present information about the Company’s marketable securities by major security type.

The fair value of marketable securities in the Government major security type is classified as a Level 1 in the Company’s fair value hierarchy described in Note 4. The fair values of the remaining major security types are classified as Level 2.

The Company invests in highly rated securities with maturities of two years or less at the time of purchase. Given the credit quality of the financial assets and the historical loss experience associated with their respective credit ratings as well as the duration of these financial assets and the short time horizon over which to consider expectations of future economic conditions, the Company has assessed that non-collection of the cost basis of these financial assets is remote.

	As of June 30, 2020			As of December 31, 2019			As of June 30, 2021			As of December 31, 2020
Accounts receivable	$	33,875		$	36,669		$	24,125		$	26,791
Less: Allowance for doubtful accounts		(298	)		(155	)		(218	)		(200	)
Less: Allowance for returns		(3,705	)		(2,760	)		(3,021	)		(4,351	)
Total accounts receivable, net	$	29,872		$	33,754		$	20,886		$	22,240

Accounts receivable are stated at their amortized cost adjusted for any write-offs and net allowances for returns. The Company estimates expected credit losses related to accounts receivable balances based on a review of available and relevant information including current economic conditions, projected economic conditions, historical loss experience, account aging, and other factors that could affect collectability. Expected credit losses are determined individually or collectively depending on whether the accounts receivable balances share similar risk characteristics. The allowance for doubtful accounts is the best estimate of the amount of expected credit losses related to existing accounts receivable. The Company does not have any off-balance sheet credit exposure related to its customers.

				Six Months Ended June 30,
Allowance for doubtful accounts	Six Months Ended June 30, 2020			2021			2020
Beginning of period	$	155		$	200		$	155
Provision for credit losses (including effect of adoption)		187
Provision for credit losses					44			187
Write-offs and recoveries		(44	)		(26	)		(44	)
End of period	$	298		$	218		$	298

The allowances for returns are accounted for as reductions of revenue and are estimated based on the Company’s periodic assessment of historical experience and trends. The Company considers factors such as historical reasons for adjustments, service and delivery issues or delays, and past due customer billings.

In December 2018, the Company issued $240,000 aggregate principal amount of 1.25% convertible senior notes (“Notes”) due December 15, 2023, unless earlier repurchased by the Company or converted by the holder pursuant to their terms. Interest is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2019.

The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National Association, as trustee. The Notes are unsecured and rank: senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right

of payment to the Notes; equal in right of payment to the Company’s unsecured indebtedness that is not subordinated; effectively junior in right of payment to any of the Company’s senior, secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election.

~~The~~At issuance, the Notes ~~have~~had an initial conversion rate of 18.8076 shares of common stock per $1 principal amount of ~~Notes. This represents~~Notes, which represented an initial effective conversion price of approximately $53.17 per share of common stock and 4,513,824 shares issuable upon conversion. Throughout the term of the Notes, the conversion rate may be adjusted upon the occurrence of certain events. Holders of the Notes will not receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note, except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock paid or delivered, as the case may be, to the holder upon conversion of Notes.

Prior to the close of business on September 14, 2023, the Notes will be convertible at the option of holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after September 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes at the conversion price at any time regardless of whether the conditions set forth below have been met.

Holders may convert all or a portion of their Notes prior to the close of business on September 14, 2023, in multiples of $1 principal amount, only under the following circumstances:

Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied market interest rate of its Notes to be approximately 7.30%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component of the Notes, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $181,500 upon issuance, calculated as the present value of future contractual payments based on the $240,000 aggregate principal amount. The excess of the principal amount of the liability component over its carrying amount, or the debt discount, is amortized to interest expense over the term of the Notes. The $58,500 difference between thegross proceeds received from issuance of the Notes of $240,000 and the estimated fair value of the liability component ~~represents~~represented the equity component of the Notes and was recorded in additional paid-in capital. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the Notes, the Company allocated the total amount incurred to the liability and equity components in proportion to the allocation of proceeds. Transaction costs attributable to the liability component,

totaling $4,808, are being amortized to expense over the term of the Notes, and transaction costs attributable to the equity component, totaling $1,550, ~~and were~~are included with the equity component in ~~shareholders’ equity.~~stockholders’ deficit.

	As of						As of
	June 30, 2020			December 31, 2019			June 30, 2021			December 31, 2020
Liability component:
Principal	$	240,000		$	240,000		$	221,250		$	221,250
Less: Debt discount, net of amortization		(46,157	)		(52,051	)		(31,161	)		(36,942	)
Net carrying amount	$	193,843		$	187,949		$	190,089		$	184,308
Equity component (a)		56,950			56,950			56,539			56,539

The following table sets forth total interest expense recognized related to the Notes:

	Three Months Ended June 30,					Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019
Interest expense						2021		2020		2021		2020
1.25% coupon	$	750	$	742	��	$	692	$	750	$	1,383	$	1,500
Amortization of debt discount and transaction costs		2,970		2,792			2,912		2,970		5,780		5,894
	$	3,720	$	3,534
Total						$	3,604	$	3,720	$	7,163	$	7,394

As of June 30, ~~2020,~~2021, the fair value of the Notes, which was determined based on inputs that are observable in the market or that could be derived from, or corroborated with, observable market data, quoted price of the Notes in an over-the-counter market (Level 2), and carrying value of debt instruments (carrying value excludes the equity component of the Company’s Notes classified in equity) were as follows:

In connection with the issuance of the Notes, the Company entered into capped call transactions with certain counterparties affiliated with the initial purchasers and others. The capped call transactions are expected to reduce potential dilution of earnings per share upon conversion of the Notes. Under the capped call transactions, the Company purchased capped call options that in the aggregate relate to the total number of shares of the Company’s common stock underlying the Notes, with an initial strike price of approximately $53.17 per share, which corresponds to the initial conversion price of the Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the Notes, and have a cap price of approximately $89.98. The cost of the purchased capped calls of $33,024 was recorded to stockholders’ deficit and will not be re-measured provided it continues to meet the conditions for equity classification.

In connection with the purchase of the Notes described above, the Company terminated a portion of the capped call transactions which resulted in an immaterial amount of payments to the Company in cash and common stock and was recorded in addition paid-in capital.

Based on the closing price of our common stock of ~~$10.76~~$14.10 on June 30, ~~2020,~~2021, the last trading day of the quarter, the if-converted value of the Notes was less than ~~their respective~~the principal ~~amounts.~~amount.

The Company entered into a ~~new~~ credit facility with Silicon Valley Bank providing for a revolving line of credit agreement on March 3, 2020. This agreement replaced the Company’s previous agreement with Silicon Valley Bank, which expired on February 20, 2020. The three-year agreement has a borrowing limit of $50,000, with the ability for the Company to increase it to up to $100,000. Interest is payable monthly. Advances under the agreement bear interest at (a) the higher of (i) the prime rate as published in the Wall Street Journal or (ii) the federal funds effective rate plus 0.50%, plus (b) an applicable margin ranging from (0.50%) to 0.50% based on the Company’s Average Daily Usage (“ADU”) of the credit facility in the preceding month. The Company also is charged for amounts unused under this arrangement at a rate ranging from 0.00% to 0.40% based on the Company’s ADU in the preceding month. Any outstanding principal is due at the end of the term.

The obligations of the Company under the ~~new~~ credit facility are secured by a first priority lien (subject to certain permitted liens) in substantially all of the personal property assets of the Company and its subsidiaries pursuant to the terms of a Guarantee and Collateral Agreement, dated March 3, 2020 and the other security documents.

The ~~new~~ credit facility requires the Company to maintain a Consolidated Adjusted Quick Ratio (“AQR”) of (i) Consolidated Quick Assets to (ii) Consolidated Current Liabilities minus the current portion of Deferred Revenue of at least 1.25 to 1.00 as of the last day of any fiscal quarter, and, if the AQR is less than 2.00 to 1.00, a Minimum Consolidated EBITDA of at least $1.00 for any such fiscal quarter calculated on a trailing 12 month basis. The Company has also agreed to fiscal year dollar limits on its capital expenditures. If an event of default occurs, the lender would be entitled to take various actions, including the acceleration of amounts due under the credit facility and all actions permitted to be taken by a secured creditor.

~~As of June 30, 2020 there~~There were 0 amounts outstanding under the Company’s revolving line of ~~credit.~~credit as of June 30, 2021 and December 31, 2020. The amount available to borrow was $50,000 and the interest rate was 2.75% as of June 30, ~~2020.~~ 2021.~~In March 2020,~~NaN amounts were borrowed or repaid under the credit facility during the six months ended June 30, 2021. The Company borrowed and repaid $10,000 under ~~its line of~~the credit ~~for general operating purposes.~~ Infacility during the six months ended June ~~2020, the Company repaid $10,000 of the amount outstanding under its line of credit.~~30, 2020.

Supplemental cash flow information related to the Company’s operating and finance leases was as follows:

	Six Months Ended June 30, 2020
Cash Paid for Amounts Included in the Measurement of Lease Liabilities			Six Months Ended June 30, 2021
Financing cash flows from finance leases	$	7,637	$	2,558
Operating cash flows from finance leases	$	4,105	$	721
Operating cash flows from operating leases	$	313	$	240
ROU Assets Obtained in Exchange for New Lease Obligations
Finance lease liabilities	$	3,593	$	15
Operating lease liabilities	$	-	$	0

As of June 30, ~~2020,~~2021, the Company had no additional significant operating or finance leases that had not yet commenced.

On March 13, 2020, the Company executed an amendment to its 3 leases for office space on its headquarters campus. Pursuant to this amendment, the Company paid the lessor, a related party, $3,993 for future rent due in the first half ofIn April 2021, ~~representing an approximately 17% discount on rent due for those periods. The ROU assets and financing lease liabilities were adjusted to reflect the effect of the amendment and associated payments.~~

~~In February 2020,~~ the Company entered into a ~~financing~~non-cancellable sublease agreement for part of 1 building on its headquarters campus. The sublease term expires May 31, 2028 and may be renewed at the option of the sublessee through November 30, 2031. Because market conditions and value have declined since the Company entered into its lease, ~~arrangement for servers and networking equipment used~~ in ~~operations. Total~~part due to the COVID-19 pandemic, payments to the Company under the ~~agreement~~sublease are ~~$3,723, including~~less than its current obligation for the ~~first annual payment of $784 and two annual payments of $1,470, each. In connection with this lease,~~asset. Accordingly, the Company recorded ~~financing ROU assets and~~an impairment loss of the financing lease ~~liabilities~~ROU asset of ~~$3,593.~~$4,003 based on the excess of the carrying amount over the calculated fair value of the sublease. This impairment expense was included in operating expenses in the Company’s consolidated statements of operations and comprehensive loss for the period ended June 30, 2021.

On June 4, 2020, the Company issued and sold 1,777,778 shares of its newly created series of preferred stock, par value of $0.001 per share, designated as “Series A Convertible Preferred Stock” (the “Preferred Stock”) to BuildGroup LLC (the “Buyer”) at a purchase price of $45 per share, resulting in total gross proceeds for the Company of approximately $80,000. A member of the Company’s Board of Directors is the Chief Executive Officer of the ~~BuildGroup LLC (the “Buyer”).~~Buyer. The Buyer also has a second representative on the Board.

The Preferred Stock ranks senior to the Company’s common stock with respect to dividends and distributions on liquidation, winding-up and dissolution. Each share of the Preferred Stock has an initial stated value of $45 per share. Holders of shares of the Preferred Stock are entitled to a dividend equal to 8.00% per annum (the “Regular Dividends”), payable quarterly, beginning on June 30, 2020. The Regular Dividends are payable in cash or in kind, at the Company’s option. In the event a Regular Dividend is paid in kind, the stated value of each share of the Preferred Stock will be increased by an amount equal to the accrued Regular Dividend not paid in cash. ~~The Company paid the~~As of June 30, ~~2020 dividend~~2021, the Company had paid all dividends on the Preferred Stock in cash. Holders of the Preferred Stock are also entitled to participate in and receive any dividends declared or paid on the common stock on an as-converted basis, and no dividends may be paid to holders of the common stock unless full participating dividends are concurrently paid to the holders of the Preferred Stock.

Each holder of the Preferred Stock has the right, at its option, to convert its shares of the Preferred Stock, in whole or in part, into fully paid and non-assessable shares of the common stock, at any time and from time to time. The number of shares of the common

stock into which a share of the Preferred Stock will convert at any time is equal to the quotient obtained by dividing its stated value then in effect plus any accumulated and unpaid Regular Dividends by its conversion price of $15.00. The conversion price is subject to customary anti-dilution adjustments, including in the event of any stock split, stock dividend, recapitalization or similar events. At closing, before payment of any dividends in kind, the 1,777,778 shares of the Preferred Stock were convertible into 5,333,334 shares of common stock.

The Company may, at its option, redeem the outstanding shares of the Preferred Stock following the fourth anniversary of its issuance. Redemption by the Company is subject to certain liquidity conditions as well conditions connected with the trading price of its common stock. Upon redemption by the Company, the Company will pay the holder of the Preferred Stock 105% of the initial stated value of such share plus any increase in the stated value from the initial stated value plus accumulated and unpaid Regular Dividends. If the Company undergoes a change of control as defined in the purchase agreement, the Company must redeem all of the then-outstanding shares of the Preferred Stock for cash consideration equal to the greater of the amount due for redemption as described above and the amount such holder of shares of the Preferred Stock would have received in respect of the number of shares of the Common Stock that would be issuable upon conversion of such share of the ~~Series A~~ Preferred Stock.

Unless and until approval of the Company’s stockholders is obtained as contemplated by the NASDAQ listing rules, no holder of the Preferred Stock may convert shares of the Preferred Stock into shares of common stock if and to the extent that such conversion would result in the holder beneficially owning in excess of 19.9% of the then-outstanding shares of the common stock.

As long as not less than 60% of the shares of the Preferred Stock originally issued remain outstanding, the holders of a majority of the then-outstanding shares of the Preferred Stock, voting together as a single class, have the right at any election of directors to elect two directors if the Board consists of nine or fewer directors or three directors if the Board consists of ~~10.~~10 directors. At any time, such elected director(s) may be removed with or without cause only by the affirmative vote or written consent of a majority of the holders of the Preferred Stock entitled to elect such director.

Holders of the Preferred Stock generally are entitled to vote with the holders of the shares of the common stock on all matters submitted for a vote of holders of shares of the common stock (voting together with the holders of shares of the common stock as one class) on an as-converted basis, subject to a limitation of ownership of 19.9% of common stock. Additionally, certain matters require the approval of the holders of a majority of the outstanding shares of the Preferred Stock, voting as a separate class.

The Buyer is subject to limitations while it holds at least 10% of the Preferred Stock originally purchased. Furthermore, until the earliest of May 30, 2024 and receipt of a notice of redemption, the Buyer cannot sell, transfer or otherwise dispose of the shares of the Preferred Stock or the underlying shares of the common stock, subject to limited exceptions that include exceptions in the case of transfers to certain permitted transferees.

For so long as the Buyer and its affiliates collectively hold at least 60% of the shares of the Preferred Stock originally purchased by it or the common stock issuable upon conversion thereof, the Company will pay the Buyer a fee of $400 for the first year following closing and $200 per year thereafter. These management and oversight fees are expensed over the period incurred.

~~The~~In the period of issuance, the Company incurred $807 in issuance costs related to the sale of the Preferred Stock, including $150 of reimbursement to the Buyer for reasonable fees and out-of-pocket expenses incurred by the Buyer in connection with the transaction. The issuance costs were netted against the proceeds from this transaction.

During the six months ended June 30, ~~2020,~~2021, the Company granted ~~1,277,455~~1,406,984 restricted stock units, or RSUs, to employees and officers with an aggregate grant date fair value of ~~$13,441.~~$19,583. These RSUs generally vest in equal annual installments over various periods ranging from three to four years from the grant date, subject to continued service to the Company. The Company amortizes the grant date fair value of the stock subject to the RSUs on a straight-line basis over the period of vesting. The weighted-average vesting period for these RSUs is approximately ~~3.13~~3.98 years from the date of grant.

The Company granted ~~787,050~~699,504 performance RSUs with an aggregate grant date fair value of ~~$8,044~~$9,693 during the six months ended June 30, ~~2020.~~2021. The aggregate grant date fair value of the performance RSUs assuming target achievement was ~~$6,216.~~$7,349. The number of performance RSUs that will vest will be determined upon the achievement of certain financial targets for ~~2020,~~2021, and vesting will then occur in equal annual installments over ~~one- and~~ ~~three-year~~various periods ranging from less than one year to up to four years from the grant date. The actual number of shares issued upon vesting could range between 0% and 100% of the number of awards granted. The grant date fair value of the stock subject to the performance RSUs is amortized to expense on an accelerated basis over the period of vesting. The weighted-average vesting period for these performance RSUs is approximately ~~2.36~~3.15 years from the date of grant.

In May 2021, the Company granted 106,640 performance RSUs with an aggregate derived fair value of $1,069. The performance RSUs vest in a single installment if the Company’s closing stock price is at least $23.00 for a period of 20 consecutive trading days occurring after the second anniversary of the grant ~~respectively~~.and prior to the fifth anniversary of the grant. If this price-based requirement is met before the third anniversary of the grant date, then the performance RSUs will vest on the third anniversary of the grant date subject to continued service to the Company. If this price-based requirement is met after the third anniversary but prior to the fifth anniversary of the grant date, then the performance RSUs will vest on the date the price requirement is met subject to continued service to the Company. The Company will amortize the aggregate derived fair value of the stock subject to the performance RSUs on a straight-line basis over the derived service period of 2.30 years from the date of grant.

The holders of common stock are entitled to one vote for each share. The voting, dividend and liquidation rights of the holders of common stock are subject to and qualified by the rights, powers and preferences of the holders of preferred stock.

At June 30, ~~2020,~~2021, the Company had reserved a total of ~~12,805,160~~11,111,633 of its authorized ~~50,000,000~~95,000,000 shares of common stock for future issuance as follows:

~~Under its stock repurchase program,~~At the ~~Company purchased 1,106,173 shares~~Company’s annual meeting of ~~its outstanding common stock, for~~stockholders held in June 2021, the stockholders approved an ~~aggregate~~amendment to the Company’s Restated Certificate of ~~$9,667 during~~Incorporation, as amended to increase the ~~six months ended June 30, 2020. All of these shares have been canceled and returned to its pool~~total number of authorized shares of common stock reserved for issuance thereunder from 50,000,000 to ~~be used for general purposes.~~95,000,000 shares.

The following tables provide information about disaggregation of revenue by service line:

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Service line:
Subscription	$	43,780	$	47,693	$	89,770	$	95,562	$	44,347	$	43,780	$	89,926	$	89,770
Platform		6,128		5,405		12,133		10,548		5,875		6,128		13,644		12,133
Total software services	$	49,908	$	53,098	$	101,903	$	106,110	$	50,222	$	49,908	$	103,570	$	101,903
Professional services		12,266		15,481		26,425		30,768		10,682		12,266		22,397		26,425
Total	$	62,174	$	68,579	$	128,328	$	136,878	$	60,904	$	62,174	$	125,967	$	128,328

The following table provides information about contract assets and contract liabilities from contracts with customers:

					Balance at Beginning of Period		Balance at End of Period
Six Months Ended June 30, 2021
Contract assets					$	15,105	$	9,722
Contract liabilities:
Deferred revenue					$	32,204	$	31,589
	Balance at Beginning of Period		Balance at End of Period
Six Months Ended June 30, 2020
Contract assets	$	16,685	$	9,704	$	16,685	$	9,704
Contract liabilities:
Deferred revenue	$	38,508	$	35,658	$	38,508	$	35,658

Six Months Ended June 30, 2019
Contract assets	$	12,798	$	10,134
Contract liabilities:
Deferred revenue	$	45,863	$	46,550

The Company recognizes payments from customers based on contractual billing schedules. Accounts receivable are recorded when the right to consideration becomes unconditional. Contract assets include amounts related to the Company’s contractual right to consideration for completed performance objectives not yet invoiced. Contract liabilities include payments received in advance of performance under the contract and are recognized as revenue when earned under the contract. The Company had 0 asset impairment charges related to contract assets during the six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

~~There~~During the three and six months ended June 30, 2021, there were 0 significant changes in the contract assets outside of standard revenue and billing activity.

Revenue recognized during the three and six months ended June 30, ~~2020~~2021 that was included in the deferred revenue balance at the beginning of the period was ~~$14,187~~$13,168 and ~~$25,395,~~$20,608, respectively.

The Company recorded favorable adjustments to revenue arising from performance obligations satisfied or partially satisfied in previous periods ~~$1,260~~of $576 and ~~$1,920~~$2,104 during the three and six months ended June 30, ~~2020, respectively~~2021, respectively.

As of June 30, ~~2020,~~2021, the aggregate amount of the Company’s performance obligations that are unsatisfied or partially unsatisfied were approximately ~~$170,000,~~$210,000, of which a majority are expected to be satisfied within the next three years. The Company excludes from its population of performance obligations contracts with original durations of one year or less, contract renewal periods that renew automatically, and amounts of variable consideration that are allocated to wholly unsatisfied distinct service that forms part of a single performance obligation and meets certain variable allocation criteria.

The Company’s effective ~~federal~~ tax rate for the six months ended June 30, ~~2020~~2021 was less than 1 percent, primarily as a result of estimated tax losses for the fiscal ~~year to date~~year-to-date offset by the increase in the valuation allowance in the net operating loss carryforwards. Current tax expense relates to estimated state income ~~taxes.~~taxes and indefinite life intangibles. The limitation on the utilization of net operating losses in the indefinite life period is limited to 80% of taxable income because of provisions in the Tax Cuts and Jobs Act.

The Company views its operations and manages its business as 1 operating segment. Segment information matches the consolidated financial information for the current period and prior periods reported.

As described in Note 9,10, the Company sold 1,777,778 shares of Preferred Stock to an entity whose Chief Executive Officer is a member of the Company’s Board of Directors. The Company paid dividends of $1,600 and $462 to the buyer for the three months ended June 30, 2021 and 2020, respectively and $3,200 and $462 for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company paid management oversight fees of $86 and $186 to the Buyer for the three and six months ended June 30, 2021, respectively. There were 0 management oversight fees paid in the three and six months ended June 30, 2020. In connection with this transaction, the Company reimbursed the ~~buyer~~Buyer $150 for fees incurred in closing the sale of the Preferred Stock in June ~~2020. Additionally, the Company paid dividends of $462 to the buyer for three and six months ended June 30,~~ 2020. The significant terms of the Preferred Stock are described in Note 9.10.

The Company leases its office space at its Charleston, South Carolina headquarters campus under the terms of three non-cancellable leases from entities affiliated with ana former executive who iswas also a Company director and significant stockholder. The Company’s headquarter campus building leases are accounted for as financing lease ~~right-of-use~~ROU assets and lease liabilities on the Consolidated Balance Sheet as of June 30, ~~2020.~~2021. The 3 lease agreements have 15-year terms ending on December 31, 2031, with Company options to renew for five additional years. The arrangements provide for 3.0% fixed annual rent increases. Payments under these agreements were ~~$2,573~~$574 and ~~$2,498~~$2,573 for the three months ended June 30, 2021 and 2020, respectively and ~~2019, respectively~~ $1,241 and $9,931 ~~and $5,829~~ for the six months ended June 30, 2021 and 2020, ~~and 2019, respectively~~.respectively. In the six months ended June 30, 2020, the Company prepaid rent in the amount of $3,993 for periods during the first half of 2021, representing an approximately 17% discount on the amounts due. Other amounts due to these related parties were ~~$418~~$334 and ~~$791~~$667 as of June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, and were recorded in “Accrued expenses”. ~~Payments made for the six months ended June 30, 2020 include amounts paid in connection with the amendment of these leases discussed in Note 8.~~

The Company utilizes the services of various companies that are owned and controlled by ana former executive who iswas also a Company director and significant stockholder. The companies provide construction project management services, private air transportation and other services. Expenses related to these companies were $7$18 and ~~$36~~$7 for the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$127~~$37 and ~~$155~~$127 for the six months ended June 30, 2021 and 2020, ~~and 2019,~~ respectively. ~~There were 0 amounts~~Amounts due to these companies were de minimus as of June 30, ~~2020~~2021 and December 31, ~~2019.~~2020.

The Company purchased software and services from a company affiliated with a Company director. Payments related to this agreement were ~~$25~~$27 and ~~$23~~$25 for the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$51~~$53 and ~~$58~~$51 for the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Amounts due to this company were ~~$26~~$28 and de minimus as of June 30, ~~2020. There were 0 amounts due to this company as of~~2021 and December 31, ~~2019.~~2020, respectively.

During July ~~and August 2020,~~2021, the Company granted ~~28,627~~approximately 126,417 RSUs with an aggregate grant date fair value of ~~$321~~approximately $1,791. These RSUs generally vest in equal annual installments over various periods ranging from one to four years from the grant date. ~~The weighted-average vesting period for these RSUs is approximately 1.59 years from the date of grant.~~

During July and August ~~2020, employees exercised stock options and~~2021, RSUs vested resulting in the issuance of ~~85,206 shares.~~approximately 111,502 shares of the Company’s common stock.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Such forward-looking statements include any expectation of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements about our ability to retain and hire necessary associates and appropriately staff our operations; statements about our ability to establish and maintain intellectual property rights; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends; and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed in our other SEC filings. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

As used in this report, the terms “Benefitfocus, Inc.,” “Benefitfocus,” “Company,” “company,” “we,” “us,” and “our” mean Benefitfocus, Inc. and its subsidiaries unless the context indicates otherwise.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with the financial statements, related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as amended for the fiscal year ended December 31, ~~2019.~~2020. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part II of this Quarterly Report on Form 10-Q, and the risks discussed below and in our other SEC filings.

Benefitfocus provides ~~a leading~~industry-leading, cloud-based benefits management ~~platform~~technology solutions for ~~buyers (consumers, employees~~employers and ~~employers) and sellers (insurance brokers, carriers and suppliers).~~health plans. The Benefitfocus ~~Platform~~enrollment platform simplifies how organizations procure benefits and ~~individuals transact benefits.~~connect to the necessary benefits products and services that improve the lives of their employees and the American workforce. Our ~~employer, carrier, broker~~core technology solutions facilitate employee benefits administration and ~~supplier customers rely on~~enrollment; our ~~platform~~solutions enable working Americans and their families to ~~manage, scale~~select and ~~exchange~~engage in the right benefits products and services for themselves; and our data ~~seamlessly. Our solutions drive value for all participants in our benefits ecosystem.~~advantage delivers insights to employers, health plans and their advisors to help control healthcare spending and reduce unnecessary expenses.

The Benefitfocus ~~platform~~Platform has a multi-tenant architecture and a user-friendly interface designed for ~~consumers~~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 ~~artificial intelligence~~ functionality designed to help consumers identify and evaluate benefit options ~~offered by their employer.~~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~~interest in the Benefitfocus Platform is growing.

~~In 2018, we expanded our~~Our economic model ~~to include~~includes a transaction-oriented ~~buyer~~ solution, now known as our Benefit Catalog, ~~(formerly BenefitsPlace), designed to align~~that aligns brokers, carriers and suppliers around the needs of employers ~~employees~~ and ~~consumers.~~employees. In this model, ~~our seller partners~~Benefit Catalog sellers, who are carriers and suppliers, offer their voluntary and specialty benefit products ~~through~~in a ~~holistic, multidimensional marketplace.~~“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 ~~the product catalog~~Benefit Catalog products to consumer needs. In exchange for Benefitfocus delivering employee/consumer access, data-driven analysis and operational efficiencies, seller partners pay us a percentage of the purchases completed on our platform. Carrier agreements generally have terms of two to four years and are typically cancellable upon breach of contract or insolvency. Supplier contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to cure, bankruptcy and termination for convenience.

We classify our revenue into three streams – subscription, platform, and professional services revenue. Subscription and platform revenue are combined and reported as software services revenue.

Subscription revenue primarily consists of monthly subscription fees paid to us by our employer and ~~insurance carrier~~health plan customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term. Subscription fees are generally charged based on the number of employees or subscribers with access to the solution. Subscription revenue accounted for approximately 73% and 70% of our total revenue during ~~each of~~ the ~~three- and six-month periods~~three-month period ended June 30, 2021 and 2020, respectively, and ~~2019.~~approximately 71% and 70% of our total revenue during the six-month period ended June 30, 2021 and 2020, 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 ~~produces~~products is generally recognized over the policy period of the enrolled products. In arrangements where we sell policies to employees of our customers as the broker, we earn insurance broker commissions. Revenue from insurance broker commissions and Benefit Catalog supplier transactions is generally recognized at the time when open enrollment is complete and the orders for policies are transferred to the supplier. Platform revenue accounted for approximately 10% ~~and 8%~~ of our total revenue during each of the ~~three-month period~~three month periods ended June 30, 2021 and 2020, and ~~2019, respectively,~~approximately 11% and ~~approximately~~ 10% ~~and 8%~~ of our total revenue during the six-month period ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

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%~~18% and ~~23%~~20% of our total revenue during the three-month period ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and approximately ~~21%~~18% and ~~23%~~21% of our total revenue during the six-month period ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Expanding our customer base is a key element of our growth strategy. We believe that our continued innovation and ~~new~~ solutions, ~~including artificial intelligence-enabled tools and Benefit Catalog,~~ which extend the functionality of our ~~mobile~~ offerings, provide more robust data analytics capabilities and enhance our ability to quickly respond to evolving market ~~needs with~~needs. We believe these innovative capabilities will help us attract additional ~~net benefit eligible~~ 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~~our services to further expand our offerings 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. ~~We have also substantially increased our marketing and sales efforts.~~ As we have invested in growth, we have had ~~GAAP~~ operating losses in each of the last ~~nine years, and expect~~ten years. Although our ~~GAAP~~operating results have improved, we could incur operating losses ~~to continue for at least the next year.~~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.

On March 11, 2020, the World Health Organization classified the COVID-19 outbreak as a pandemic. We continue to actively monitor COVID-19, including the development of COVID-19 variants, 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~~included 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~~included investing in accelerating automation efforts to gain efficiencies.

~~As a result~~During the initial peak of ~~shelter-in-place restrictions that were effective during~~the COVID-19 pandemic in the second quarter of 2020, we experienced sales delays ~~in completing selling.~~as HR professionals shifted their focus away from 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.~~strategy in the long-term. Therefore, we dodid 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. During the second quarter 2021, we recorded an impairment loss as a result of subleasing space based on the excess of carrying value over the calculated fair value of the sublease of one of our headquarter building financing lease ROU assets. As we continue to evaluate our real estate footprint and one that assumes fewer of our associates working from the office on a full-time basis, we may incur additional impairments on our ROU assets ~~noting no indicators of impairment.~~as we evaluate options to sublet certain locations.

The impact that the evolving COVID-19 pandemic will have on our consolidated financial statements ~~throughout 2020 remains~~in 2021 and beyond continues to remain uncertain and ultimately will be ~~dictated~~determined 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, ~~we believe~~ our business ~~could be~~has been particularly impacted by new sales. The longer sales cycles we experienced and slowdown in new sales activity in 2020 and the ~~following~~first half of 2021 negatively impacted growth in subscription revenue and platform revenue from new business in 2021 and beyond. In addition, the ~~near term, among other things:~~increase in unemployment has affected the rate at which certain voluntary benefits have been purchased in 2020 and therefore negatively impacted our ability for growth in 2021.

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 as well as the first and second quarters of 2021, and our ongoing investments in automation, we believe we will ~~be able~~continue to ~~increase~~generate cash flows from operations ~~and achieve profitability~~ in the relatively near future. Of course, our ability to ~~achieve profitability will continue to be~~generate cash flows from operations is subject to many risks and factors beyond our ~~control.~~control, such as the COVID-19 pandemic.

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~~“Components of Operating Results”. below. In addition, we utilize other key metrics as described below.

Adjusted EBITDA represents our ~~earnings~~losses before net interest and other expenses, taxes, and depreciation and amortization expense, adjusted to eliminate stock-based compensation, ~~and impairment of goodwill and intangible assets,~~ transaction and acquisition-related costs expensed, restructuring costs, impairment of goodwill, intangible assets, and long-lived assets, gain or loss on extinguishment of debt and costs not core to our business. We believe that the exclusion of the expenses eliminated in calculating adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results. However, adjusted EBITDA is not a measure calculated in accordance with United States generally accepted accounting principles, or GAAP, and should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with GAAP.

Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these limitations are:

Because of these and other limitations, you should consider adjusted EBITDA alongside other GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss and our other GAAP financial results. The following table presents for each of the periods indicated a reconciliation of adjusted EBITDA to the most directly comparable GAAP financial measure, net loss (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2021			2020			2021			2020
Reconciliation from Net Loss to Adjusted EBITDA:
Net loss	$	(11,862	)	$	(14,938	)	$	(22,998	)	$	(29,147	)	$	(15,020	)	$	(11,862	)	$	(17,117	)	$	(22,998	)
Depreciation		3,926			3,690			7,722			7,657			3,444			3,926			7,067			7,722
Amortization of software development costs		1,727			1,319			3,246			2,497			2,159			1,727			4,321			3,246
Amortization of acquired intangible assets		568			605			1,137			795			569			568			1,137			1,137
Interest income		(97	)		(762	)		(523	)		(1,422	)		(54	)		(97	)		(111	)		(523	)
Interest expense		5,862			5,837			11,753			11,651			5,646			5,862			11,201			11,753
Income tax expense		6			3			11			9			41			6			83			11
Stock-based compensation expense		3,323			3,719			7,000			10,086			4,376			3,323			5,899			7,000
Transaction and acquisition-related costs expensed		215			360			407			1,002			6			215			160			407
Restructuring costs		5,616			-			5,616			-			2,727			5,616			4,127			5,616
Impairment of long-lived assets														4,003			-			4,003			-
Costs not core to our business		-			266			-			586			1,717			-			3,598			-
Total net adjustments		21,146			15,037			36,369			32,861			24,634			21,146			41,485			36,369
Adjusted EBITDA	$	9,284		$	99		$	13,371		$	3,714		$	9,614		$	9,284		$	24,368		$	13,371

We are focused on 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. We believe net benefit eligible lives is highly correlated to our subscription revenue and is the foundation of our transaction 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.

~~During~~As previously disclosed, in the second quarter ~~2020,~~of 2021, we terminated our relationship with Shipt, Inc., which decreased the number of net benefit eligible lives in the second quarter of 2021 by approximately 1.9 million, all of which were freelancers. Excluding Shipt net benefit eligible lives were down slightly compared to the prior period. Freelancers generate only platform revenue by purchasing voluntary benefits and other offerings. The participation rate of freelancers on our platform was historically low and had minimum impact to revenue. As of June 30, 2021, there were no freelancers on our platform. We expect our net benefit eligible lives ~~experienced a decline~~to trend downward for the remainder of the year as we have certain health plan contracts renewing at lower levels in ~~carrier lives as a result~~the second half of economic impacts from the COVID-19 pandemic on the small business segment that our carrier customers serve. This decrease was offset by an increase in our freelancer net benefit eligible lives, resulting in our net benefit eligible lives remaining flat at 17.5 million sequentially from first quarter 2020 to second quarter 2020.2021.

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~~revenue for a given period. We then calculate our software services revenue retention rate by taking the amount of software services revenue we recognized for this group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the software services revenue we recognized for the group in the prior period.

Our software services revenue retention rate was ~~greater than 90% for the three~~approximately 95% and ~~six months ended June 30, 2020 compared to being~~ greater than 95% for the three and six months ended June 30, ~~2019.~~2021, respectively, and greater than 90% for both the three and six months ended June 30, 2020. The ~~reduction~~lower retention rates in the ~~rate was~~prior year are primarily the result of the impact on ~~2020~~ revenue from the renegotiation of a certain customer contract. Excluding this customer, our software revenue retention rate ~~exceeds~~exceeded 95% for ~~both~~ all periods. We expect our software revenue retention rate ~~will continue~~ to ~~be negatively impacted~~trend downward for the remainder of ~~2020 by~~ the ~~effects~~year as we have certain health plan contracts renewing at lower levels in the second half of ~~this customer contract negotiation along with the potential impacts of unemployment as a result of COVID-19 pandemic.~~ 2021.

We derive the majority of our revenue from monthly subscription fees paid to us by our employer and ~~carrier~~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 between software services and professional services for the periods indicated (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Subscription	$	43,780	$	47,693	$	89,770	$	95,562	$	44,347	$	43,780	$	89,926	$	89,770
Platform		6,128		5,405		12,133		10,548		5,875		6,128		13,644		12,133
Total software services	$	49,908	$	53,098	$	101,903	$	106,110	$	50,222	$	49,908	$	103,570	$	101,903
Professional services		12,266		15,481		26,425		30,768		10,682		12,266		22,397		26,425
Total revenue	$	62,174	$	68,579	$	128,328	$	136,878	$	60,904	$	62,174	$	125,967	$	128,328

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.

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 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 ~~(formerly BenefitsPlace)~~ 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 ~~estimates~~constraints for ~~risk from premium collection,~~variable consideration associated with collectability, policy cancellation and ~~termination.~~termination risks.

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~~health plan customers significantly modify or customize the software solution and, as such, do not represent a distinct performance obligation. Accordingly, revenue from such implementation services with these ~~insurance carrier~~health plan 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.

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.

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 primarily consists of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of revenue include co-location facility costs for our data centers, depreciation expense for computer equipment directly associated with generating revenue, infrastructure maintenance costs, professional fees, amortization expenses associated with 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 ~~expense~~ 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 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 will increase as a percentage of revenue ~~if and~~for the remainder of 2021, as we achieve economies of scale and ~~as a result of restructuring~~incur additional costs associated with various legal actions ~~taken~~described below in ~~April 2020.~~general and administrative expenses.

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 is One Place, which we hold annually. ~~We expect our sales and marketing expense to decrease, in absolute dollars, in the near term as we achieve the savings expected from the restructuring actions taken in April 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. We are investing in transforming our development philosophy and practices to that of an agile development organization. We believe this will allow us to more quickly innovate and adapt to changing market conditions and customer needs.

General and administrative expense. General and administrative expense consists primarily of salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation for administrative, finance and accounting, information

systems, legal, and human resource associates. Additional expenses include consulting and professional fees, insurance and other corporate expenses, and travel. We expect our general and administrative expenses to ~~decrease~~increase in ~~absolute terms~~the near-term as ~~a result of the restructuring actions taken~~we incur professional services expenses in ~~April 2020,~~connection with activist shareholder matters, securities class action, and executive employment agreement legal defense, which ~~included reducing headcount, renegotiating vendor service contracts, restricting travel, and reducing discretionary expenditures such as consultants.~~are not related to our core business.

Restructuring costs. Restructuring costs are comprised of one-time severance charges, continuation of health benefits and outplacement services. ~~As discussed above in “Overview,” in~~During the ~~quarter~~three and six months ended June 30, ~~2020,~~2021, we ~~reduced our work force by approximately 17%.~~incurred restructuring costs associated with eliminating certain positions in the organization.

Other income and expense consists primarily of interest income and expense and gain (loss) on disposal of property and equipment. Interest income represents interest received on our cash and cash equivalents. Interest expense consists primarily of the interest incurred on outstanding convertible debt and borrowings under our lease arrangements and credit facility.

Income tax expense consists of U.S. federal and state income taxes. We incurred minimal income tax expense for the three and six months ended June 30, ~~2020~~2021 and ~~2019.~~2020.

On March 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 dodid not ~~expect the~~utilize 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.~~

The following table sets forth our consolidated statements of operations data for each of the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019			2021			2020			2021			2020
Revenue	$	62,174		$	68,579		$	128,328		$	136,878		$	60,904		$	62,174		$	125,967		$	128,328
Cost of revenue⁽¹⁾		30,397			32,802			64,309			65,654
Cost of revenue⁽¹⁾														28,030			30,397			56,623			64,309
Gross profit		31,777			35,777			64,019			71,224			32,874			31,777			69,344			64,019
Operating expenses:
Sales and marketing⁽¹⁾		11,828			19,318			27,458			38,937
Research and development⁽¹⁾		11,045			14,461			22,813			27,551
General and administrative⁽¹⁾		9,381			11,785			19,896			23,581
Sales and marketing⁽¹⁾														10,921			11,828			21,812			27,458
Research and development⁽¹⁾														11,103			11,045			21,935			22,813
General and administrative⁽¹⁾														17,574			9,381			27,436			19,896
Restructuring costs⁽¹⁾		5,616			–			5,616			–			2,727			5,616			4,127			5,616
Total operating expenses		37,870			45,564			75,783			90,069			42,325			37,870			75,310			75,783
Loss from operations		(6,093	)		(9,787	)		(11,764	)		(18,845	)		(9,451	)		(6,093	)		(5,966	)		(11,764	)
Other income (expense):
Interest income		97			762			523			1,422			54			97			111			523
Interest expense		(5,862	)		(5,837	)		(11,753	)		(11,651	)		(5,646	)		(5,862	)		(11,201	)		(11,753	)
Other income (expense)		2			(73	)		7			(64	)
Other income														64			2			22			7
Total other expense, net		(5,763	)		(5,148	)		(11,223	)		(10,293	)		(5,528	)		(5,763	)		(11,068	)		(11,223	)
Loss before income taxes		(11,856	)		(14,935	)		(22,987	)		(29,138	)		(14,979	)		(11,856	)		(17,034	)		(22,987	)
Income tax expense		6			3			11			9			41			6			83			11
Net loss	$	(11,862	)	$	(14,938	)	$	(22,998	)	$	(29,147	)	$	(15,020	)	$	(11,862	)	$	(17,117	)	$	(22,998	)

	Three Months Ended June 30,					Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019			2020		2019		2021		2020		2021		2020
Cost of revenue	$	633	$	691		$	1,300	$	1,590	$	638	$	633	$	964	$	1,300
Sales and marketing		594		(12	)		1,474		1,674		927		594		1,507		1,474
Research and development		590		718			932		1,910		503		590		621		932
General and administrative		1,506		2,322			3,294		4,912		2,308		1,506		2,807		3,294
Restructuring costs		-		-			-		-

The following table sets forth our consolidated statements of operations data as a percentage of revenue for each of the periods indicated (as a percentage of ~~revenue)~~revenue⁽¹⁾):

	Three Months Ended June 30,								Six Months Ended June 30,								Three Months Ended June 30,								Six Months Ended June 30,
	2020				2019				2020				2019				2021				2020				2021				2020
Revenue		100.0		%		100.0		%		100.0		%		100.0		%		100.0		%		100.0		%		100.0		%		100.0		%
Cost of revenue		48.9				47.8				50.1				48.0				46.0				48.9				45.0				50.1
Gross profit		51.1				52.2				49.9				52.0				54.0				51.1				55.0				49.9
Operating expenses:
Sales and marketing		19.0				28.2				21.4				28.4				17.9				19.0				17.3				21.4
Research and development		17.8				21.1				17.8				20.1				18.2				17.8				17.4				17.8
General and administrative		15.1				17.2				15.5				17.2				28.9				15.1				21.8				15.5
Restructuring costs		9.0				-				4.4				-				4.5				9.0				3.3				4.4
Total operating expenses		60.9				66.4				59.1				65.8				69.5				60.9				59.8				59.1
Loss from operations		(9.8	)			(14.3	)			(9.2	)			(13.8	)			(15.5	)			(9.8	)			(4.7	)			(9.2	)
Other income (expense):
Interest income		0.2				1.1				0.4				1.0				0.1				0.2				0.1				0.4
Interest expense		(9.4	)			(8.5	)			(9.2	)			(8.5	)			(9.3	)			(9.4	)			(8.9	)			(9.2	)
Other income (expense)		-				(0.1	)			-				-
Other income																		0.1				-				-				-
Total other expense, net		(9.3	)			(7.5	)			(8.7	)			(7.5	)			(9.1	)			(9.3	)			(8.8	)			(8.7	)
Loss before income taxes		(19.1	)			(21.8	)			(17.9	)			(21.3	)			(24.6	)			(19.1	)			(13.5	)			(17.9	)
Income tax expense		-				-				-				-				0.1				-				0.1				-
Net loss		(19.1	)	%		(21.8	)	%		(17.9	)	%		(21.3	)	%		(24.7	)	%		(19.1	)	%		(13.6	)	%		(17.9	)	%

	Three Months Ended June 30,																	Three Months Ended June 30,
	2020					2019												2021					2020
			Percentage of					Percentage of			Period-to-Period Change									Percentage of					Percentage of			Period-to-Period Change
	Amount		Revenue			Amount		Revenue			Amount			Percentage				Amount		Revenue⁽¹⁾			Amount		Revenue⁽¹⁾			Amount			Percentage⁽¹⁾
	(in thousands)																	(in thousands)
Subscription	$	43,780		70.4	%	$	47,693		69.5	%	$	(3,913	)		(8.2	)	%	$	44,347		72.8	%	$	43,780		70.4	%	$	567			1.3		%
Platform		6,128		9.9			5,405		7.9			723			13.4				5,875		9.6			6,128		9.9			(253	)		(4.1	)
Total software services	$	49,908		80.3	%	$	53,098		77.4	%	$	(3,190	)		(6.0	)	%	$	50,222		82.5	%	$	49,908		80.3	%	$	314			0.6		%
Professional services		12,266		19.7			15,481		22.6			(3,215	)		(20.8	)			10,682		17.5			12,266		19.7			(1,584	)		(12.9	)
Total revenue	$	62,174		100.0	%	$	68,579		100.0	%	$	(6,405	)		(9.3	)	%	$	60,904		100.0	%	$	62,174		100.0	%	$	(1,270	)		(2.0	)	%

Subscription revenue ~~decreased as $3.9~~increased by $0.6 million asprimarily due to $3.3 million in increases from ~~the addition of~~ new customer contracts and sales to existing customers, ~~contractual price increases and volume~~as well as benefits from a lower sales returns allowance. These increases were partially offset by $2.7 million in decreases ~~of $4.0 million from customers that terminated products and services, and $3.6 million~~ from the renegotiation of a certain customer ~~contract.~~ contract and subscription terminations.

Platform revenue ~~increased~~decreased slightly primarily due to certain one-time items associated with timing of premiums recognized from growth in premiums and new products from Benefit Catalog (formerly BenefitsPlace), partially offset by decreases in revenue from broker and supplier commissions, primarily as a result of a change in commission rates. 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.insurance policies.

The decrease in professional services revenue was ~~primarily~~ attributable to a decrease in implementation revenue and lower demand for customer-specific development ~~and customer terminations. These decreases more than offset increases from new and existing~~for health plan customers.

~~We expect total revenue to continue to be less in 2020 compared to 2019 primarily due to the impact of the renegotiation of a customer contract.~~

The decrease in cost of revenue ~~in absolute terms~~ was attributable to a decreases in salaries and other personnel-related costs of ~~$1.6~~$2.0 million due to headcount reductions, and costs related to~~external development and engineering consulting~~ professional services of ~~$1.2 million, and travel-related expenses of $0.4~~

$0.6 million. ~~These decreases result from our actions taken during the period in response to the COVID-19 pandemic to maintain financial health and liquidity discussed in above in “Overview”.~~ These decreases were partially offset by increased depreciation expense of ~~$0.4~~$0.2 million attributable to higher ~~depreciation expense related to an increase in~~ capitalized software development costs. Cost of revenue ~~increased as a percentage of revenue due to revenue decreasing. Cost of revenue~~ included $0.6 ~~million and $0.7~~ million of stock-based compensation expense for each of the three-month periods ended June 30, 2021 and 2020, and ~~2019, respectively,~~$4.8 million and $4.6 ~~million and $4.0~~ million of depreciation and amortization for the three-month periods ended June 30, 2021 and 2020, ~~and 2019,~~ respectively.

	Three Months Ended June 30,																			Three Months Ended June 30,
	2020					2019														2021					2020
			Percentage of						Percentage of				Period-to-Period Change									Percentage of					Percentage of			Period-to-Period Change
	Amount		Revenue			Amount			Revenue				Amount			Percentage				Amount		Revenue			Amount		Revenue			Amount			Percentage
	(in thousands)																			(in thousands)
Software services	$	30,930		62.0	%	$	37,086			69.8		%	$	(6,156	)		(16.6	)	%	$	32,308		64.3	%	$	30,930		62.0	%	$	1,378			4.5		%
Professional services		847		6.9			(1,309	)		(8.5	)			2,156			(164.7	)			566		5.3			847		6.9			(281	)		(33.2	)
Gross profit	$	31,777		51.1	%	$	35,777			52.2		%	$	(4,000	)		(11.2	)	%	$	32,874		54.0		$	31,777		51.1		$	1,097			3.5

The ~~decrease~~increase in software services gross profit was driven by a ~~$3.2~~$0.3 million, or 6%0.6%, ~~decrease~~increase in software services revenue and ~~an increase~~a decrease in software services cost of revenue of ~~$3.0 million from increases~~$1.1 million. The decrease in ~~salary and personnel-related costs and depreciation expense. The increase in~~the software services cost of revenue was ~~primarily attributable to increased investment to support our ongoing customers. The increase~~driven by decreased salary and personnel-related costs and professional services totaling $2.0 million offset by $0.6 million in ~~depreciation expense was primarily attributable to an increase in amortization of capitalized internally developed software.~~higher data storage costs. Software services cost of revenue included approximately $0.4 ~~million and $0.3~~ million of stock-based compensation expense for each of the ~~three months~~three-month periods ended June 30, 2021 and 2020, and ~~2019, respectively,~~$4.1 million and $3.8 ~~million and $3.2~~ million of depreciation and amortization for the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

~~Professional~~The decrease in professional services gross profit ~~increased as~~was driven by a $1.6 million, or 12.9% decrease in professional services revenue ~~decreased by $3.2 million~~ and a decrease in professional services cost of revenue ~~decreased by $5.4~~of $1.3 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 period~~ and decreased ~~utilization of~~need for 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 approximately $0.3 million of stock-based compensation expense for each of the ~~three months~~three-month periods ended June 30, ~~2020~~2021 and ~~2019.~~2020. In addition, professional services cost of revenue included $0.8 million of depreciation and amortization ~~for~~in each of the three ~~months~~month periods ended June 30, ~~2020~~2021 and ~~2019.~~

~~We expect the trend of positive professional services margin to continue as a result of investing in accelerating automation and shifting to higher margin profession services work.~~2020.

	Three Months Ended June 30,																	Three Months Ended June 30,
	2020					2019												2021					2020
			Percentage of					Percentage of			Period-to-Period Change									Percentage of					Percentage of			Period-to-Period Change
	Amount		Revenue			Amount		Revenue			Amount			Percentage				Amount		Revenue			Amount		Revenue			Amount			Percentage
	(in thousands)																	(in thousands)
Sales and marketing	$	11,828		19.0	%	$	19,318		28.2	%	$	(7,490	)		(38.8	)	%	$	10,921		17.9	%	$	11,828		19.0	%	$	(907	)		(7.7	)	%
Research and development		11,045		17.8			14,461		21.1			(3,416	)		(23.6	)			11,103		18.2			11,045		17.8			58			0.5
General and administrative		9,381		15.1			11,785		17.2			(2,404	)		(20.4	)			17,574		28.9			9,381		15.1			8,193			87.3
Restructuring costs		5,616		9.0			-		0.0			5,616			100.0				2,727		4.5			5,616		9.0			(2,889	)		(51.4	)

The decrease in sales and marketing expense was primarily attributable to a ~~$5.5~~$0.6 million decrease in salaries and personnel-related costs, a $1.1 million decrease in travel-related costs, and a $0.6 million decrease in the cost of marketing events. These decreases result from our actions taken during the period in response to the COVID-19 pandemic to maintain financial health and liquidity as discussed above in “Overview”.costs. The decrease in salaries and personnel-related costs was primarily driven by decreased ~~headcount~~headcount.

The increase in research and development expense is primarily attributable to a $1.1 million decrease in capitalized software development costs partially offset by a decrease in personnel-related costs and external development and engineering consulting of $1.2 million.

The increase in general and administrative expense was primarily attributable to a $3.4 million increase in legal fees primarily related to costs incurred associated with activist shareholder matters, securities class action and executive employment agreement legal defense and a $4.0 million impairment charge related to a sublease of part of one our leased buildings on our headquarter campus.

Current period restructuring costs are the result of the elimination of the office of the executive chairman in June 2021, comprised of one-time costs, including severance charges and continuation of health benefits.

Subscription revenue increased by $0.2 million primarily due to a $2.0 decrease in customer returns allowances. The increase was partially offset by $1.6 million decrease from the renegotiation of a customer contract.

Platform revenue increased from growth in premiums and new products from Benefit Catalog primarily from insurance carriers and specialty products recognized over the policy period. As discussed above in “Components of Operating Results – Revenue”, we recognize platform revenue from carriers and specialty products over the policy period and we recognize commissions revenue at a point in time.

The decrease in professional services revenue was attributable to a decrease in implementation revenue and lower levels of demand for customer-specific development for health plan 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 lower revenues associated with our health plan customers. 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 continue to decline in 2021 as some customers might renew their agreements with a lower minimum number of covered employees. We also expect professional services revenue to decrease due to lower levels of demand for custom requests from health plan customers, as well as ~~lower commissions~~our focus on profitability by managing away from unprofitable work.

The decrease in cost of revenue was attributable to decreases in salaries and ~~bonuses earned caused by delays~~other personnel-related costs of $6.4 million, costs related toprofessional services of $2.0 million, and ~~longer sales cycle time for new sales activity~~travel-related expenses of $0.3 million as a result of our restructuring actions. These decreases were partially offset by increased depreciation expense of $0.8 million attributable to an increase in depreciation of capitalized software development costs. Cost of revenue included $1.0 million and $1.3 million of stock-based compensation expense for the ~~COVID-19 pandemic.~~six months ended June 30, 2021 and 2020, respectively, and $9.7 million and $8.9 million of depreciation and amortization for the six months ended June 30, 2021 and 2020, respectively.

The increase in software services gross profit was driven by a $1.7 million, or 1.6%, increase in software services revenue and a decrease in software services cost of revenue of $2.5 million. The decrease in the software services cost of revenue was driven by decreased salary and personnel-related costs and professional services offset by a $0.9 million increase in amortization of capitalized internally developed software. Software services cost of revenue included $0.5 million and $0.8 million of stock-based compensation expense for the six months ended June 30, 2021 and 2020, respectively, and $8.2 million and $7.3 million of depreciation and amortization for the six months ended June 30, 2021 and 2020, respectively.

Professional services gross profit increased by actively reducing our cost structure to align with the decrease in demand for professional services. The decrease in professional services cost of revenue is primarily attributable to decreases in salary and personnel-related costs due to headcount reductions and decreased use of contract labor. Professional services cost of revenue included $0.4 million and $0.5 million of stock-based compensation expense for the six months ended June 30, 2021 and 2020, respectively. In addition, professional services cost of revenue included $1.5 million and $1.7 million of depreciation and amortization in the six months ended June 30, 2021 and 2020, respectively.

We expect professional services margins on an annual basis to be lower than the prior year due to fewer large implementation projects and increased costs around our support services, slightly offset by shifting to higher margin professional services work.

The decrease in sales and marketing expense was primarily attributable to a $4.2 million decrease in salaries and personnel-related costs, including professional fees, a $0.6 million decrease in travel-related costs, and a $0.7 million decrease in the cost of marketing events and advertising expense resulting from of our restructuring actions. These decreases were partially offset by an increase in commissions expense of $0.4 million. The decrease in salaries and personnel-related costs was primarily driven by decreased headcount. 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 because of lower costs incurred with our annual user conference, One Place, which was planned as a ~~result of moving our user conference, OnePlace, to a~~ digital ~~platform in response to the COVID-19 pandemic which resulted in lower costs~~event in the current ~~period~~year compared to the prior ~~period.~~year when it was planned as an in-person event.

The decrease in research and development expense is primarily attributable to a decrease in personnel-related costs and external development and engineering consulting of ~~$2.9 million. Additionally,~~$4.0 million resulting from our restructuring actions, partially offset by a $2.8 million decrease ~~of $0.2 million~~ in ~~travel-related costs is attributable to travel restrictions imposed in response to the COVID-19 pandemic.~~capitalized software development costs.

The ~~decrease~~increase in general and administrative expense was primarily attributable to a ~~$1.3~~$4.0 million impairment charge related to a sublease of part of one our leased buildings on our headquarter campus and a $3.7 million increase in professional fees primarily related to costs incurred associated with activist shareholder matters, securities class action and executive employment agreement legal defense. These increases were partially offset by a $3.7 million decrease in salaries and personnel-related costs ~~as well as a decrease of $0.8 million in professional fees, travel-related costs~~ and contract ~~labor. These decreases result from our actions taken during~~labor driven by decreased headcount.

Current period restructuring costs are the ~~period in response to the COVID-19 pandemic to maintain financial health and liquidity as discussed above in “Overview”.~~

As discussed above in “Overview,” during the quarter ended June 30,2020, we reduced our work force by approximately 17%. Restructuring costs recognized as a result of this action were $5.6 million and consisted of $5.3 of salaries and personnel-related

~~expense related to severance payments. The remaining amount is attributable to professional fees for outplacement services and legal fees.~~

Subscription revenue decreased as $6.1 million of increases from the addition of new customers, contractual price increases and volume increases were more than offset by decreases of $5.6 million from customers that terminated products and services and $7.0 million from the renegotiation of a customer contract. The remaining increase is primarily attributable to the acquisition of Connecture, Inc. on February 23, 2019, because the 2020 period includes a full first quarter of revenue related to Connecture products compared to a partial first quarter in the comparable period in 2019.

Platform revenue increased from growth in premiums and new products from Benefit Catalog (formerly BenefitsPlace), partially offset by decreases in revenue from broker and supplier commissions, primarily as a result of a ~~change~~reduction to our workforce in commission rates. 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,~~January 2021 and the ~~result of terminations. The decreases were partially offset by increases from new and existing customers.~~

~~We expect total revenue to continue to be less in 2020 compared to 2019 primarily due to the impact~~elimination of the ~~renegotiation of a customer contract.~~

The decrease in cost of revenue in absolute terms was attributable to decreases in salaries and other personnel-related costs and travel-related expense of $2.3 million as a result of our actions taken during the period in response to the COVID-19 pandemic to maintain financial health and liquidity as discussed in above in “Overview”. These decreases were partially offset by increased depreciation expense of $1.1 million attributable to higher depreciation expense related to an increase in capitalized software development costs and amortization of acquired intangibles related to an acquisition completed in February 2019. Cost of revenue increased as a percentage of revenue due to revenue decreasing. Cost of revenue included $1.3 million and $1.6 million of stock-based compensation expense for the six-month periods ended June 30, 2020 and 2019, respectively, and $8.9 million and $7.9 million of depreciation and amortization for the six-month periods ended June 30, 2020 and 2019, respectively.

The decrease in software services gross profit was driven by a $4.2 million, or 4%, decrease in software services revenue and an increase in software services cost of revenue of $5.3 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. The increase in software services cost of revenue included $0.8 million of stock-based compensation expense for each of

~~the six months ended June 30, 2020 and 2019, and $7.3 million and $6.4 million of depreciation and amortization for the six months ended June 30, 2020 and 2019, respectively.~~

Professional services gross profit increased $2.3 million as professional services revenue decreased by $4.3 million and cost of revenue decreased by $6.7 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 period and 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 $0.5 million and $0.8 million of stock-based compensation expense for the six months ended June 30, 2020 and 2019, respectively. In addition, professional services cost of revenue included $1.7 million and $1.5 million of depreciation and amortization for the six months ended June 30, 2020 and 2019, respectively.

The decrease in sales and marketing expense was primarily attributable to a $8.2 million decrease in salaries and personnel-related costs, a $1.6 million decrease in travel-related costs, and a $1.7 million decrease in the cost of marketing events. These decreases result from our actions taken during the period 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 resultoffice of the ~~COVID-19 pandemic. The decrease~~executive chairman in ~~travel-related costs was driven by travel restrictions imposed in response to the pandemic. The cost~~June 2021, comprised of ~~marketing events decreased in part as a result~~one-time severance charges, continuation of ~~moving 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~~health benefits and development expense is primarily attributable to a decrease personnel-related costs and external development and engineering consulting of $4.2 million. Additionally, a decrease of $0.3 million in travel-related costs is attributable to travel restrictions imposed in response to the COVID-19 pandemic.

The decrease in general and administrative expense was primarily attributable to a $1.6 million decrease in salaries and personnel-related costs as well as a decrease of $1.9 million in professional fees, travel-related costs and contract labor. These decreases result from our actions taken during the period 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 of salaries and personnel-related expense related to severance payments. The remaining amount is attributable to professional fees for outplacement ~~services and legal fees.~~services.

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 are reasonable under the circumstances. Actual results might differ from these estimates under different assumptions or conditions and, to the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

During the six months ended June 30, ~~2020~~2021, there were no material changes to our ~~critical~~ accounting policies that are critical to the process of making significant judgements and ~~use~~estimates in the preparation of ~~estimates,~~our consolidated financial statements, which are disclosed in our Annual Report on Form 10-K, as amended for the year ended December 31, ~~2019, except for current expected credit loss accounting, which changed in connection with the adoption of ASC 326 on January 1, 2020 and is described elsewhere in this Quarterly Report on Form 10-Q.~~2020.

As of June 30, ~~2020,~~2021, our primary sources of liquidity were our cash and cash equivalents and marketable securities totaling ~~$183.5~~$193.2 million, ~~$29.9~~$20.9 million in accounts receivables, net of allowances, and ~~the~~our $50.0 million ~~unused portion of our revolving line of credit.~~

~~We entered into a new~~ revolving line of credit, agreement with Silicon Valley Bank on March 3, 2020. This agreement replaces our previous agreement with Silicon Valley Bank which expired on February 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 subsidiaries. The terms of ~~our revolving line of credit~~which are described in Note ~~7 of~~8 to the ~~unaudited consolidated~~ financial statements included ~~elsewhere~~ in this ~~Quarterly Report on Form 10-Q.~~

In June 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 on June 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. We paid the June 30, 2020 Preferred Stock dividend 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 9 of our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In December 2018, we issued $240 million aggregate principal amount of 1.25% convertible senior notes (the “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 on June 15 and December 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, with an aggregate of 4,513,824 shares issuable upon conversion. 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 in Note 6 of our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.report.

Our cash ~~flows~~flow from operations has improved in recent years and was positive for the six months ended June 30, 2021, and the year ended December 31, ~~2018. However, cash flows~~2020. Cash flow from operations may fluctuate between positive and negative due to the timing of payments and collections of cash on both a quarterly and annual basis.

On April 28, 2020, we announced a restructuring plan to tightly manage costs and further strengthen our liquidity profile in response to the impact of the COVID-19 pandemic. This restructuring plan resulted in a reduction in our U.S. workforce of approximately 17% that was implemented in the second quarter of 2020. We incurred restructuring costs of $5.6 million in the second quarter of 2020 from one-time severance charges, continuation of health benefits and outplacement services.

Based on our current level of operations and restructured costs, we believe our future cash ~~flows~~flow from operating activities and existing balances of cash ~~balances~~and marketable securities, and revolving line of credit will be sufficient to meet our cash requirements for at least the next 12 months.

Going forward, we may access capital markets to raise additional equity or debt financing for various business reasons, including required debt payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing on favorable terms or at all.

~~Commitments~~Operating and Capital Expenditure Requirements and Contractual Obligations

~~On March 13, 2020, we executed an amendment~~There have been no material changes to our ~~three leases for office space on our headquarters campus. Pursuant to this amendment, we paid~~operating and capital expenditure requirements and contractual obligations during the lessor, a related party, approximately $4.0 million for future rent due in the first half of 2021, representing an approximately 17% discount on rent due for those periods. The respective right-of-use assets and financing lease liabilities were adjusted to reflect the effect of the payment.

In February 2020, we entered into a financing lease arrangement for servers and networking equipment used in operations. Total payments under the agreement are $3.7 million, including the first annual payment of $0.8 million and two annual payments of

~~approximately $1.5 million. In connection with this lease, we recorded financing ROU assets and financing lease liabilities of $3.6 million.~~

~~As of~~six-months ending June 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K of the Securities Act, such as the use of unconsolidated subsidiaries, structured finance, special purpose entities or variable interest entities.2021.

In ~~December 2019,~~August 2020, the FASB issued ASU No. ~~2019-12 “Income Taxes (Topic 740): Simplifying~~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~~accounting for ~~Income Taxes”.~~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 ~~is intended to simplify various aspects related to accounting~~also enhances transparency and

improves disclosures for ~~income taxes, eliminates certain exceptions to~~convertible instruments and earnings per share guidance. It will be effective for 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.Company beginning January 1, 2022. This ASU permits the use of either the modified retrospective or fully retrospective method of transition. The Company is ~~effective for interim and annual reporting periods starting January 1, 2021. Early adoption is permitted. We are~~ currently evaluating the ~~potential effects~~impact of ~~this guidance~~the adoption of ASU 2020-06 on ~~our~~its consolidated financial ~~statements.~~statements, but anticipates that it will result in a reduction in non-cash interest expense related to its convertible senior notes.

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.

Market risk is the risk of loss to future earnings, values or future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument might change as a result of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we might enter into exchange rate hedging arrangements to manage the risks described below.

We are exposed to market risk related to changes in interest rates. Borrowings under our revolving line of credit bear interest at rates that are variable. Increases in the Prime Rate would increase the revolving line of credit.

We are subject to interest rate risk in connection with borrowings under the revolving line of credit, which are subject to a variable interest rate. At June 30, ~~2020,~~2021, we had no amounts outstanding under the revolving line of credit.

Under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on their evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that as of June 30, ~~2020~~2021 our disclosure controls and procedures were designed to, and were effective to, provide assurance at a reasonable level that the information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of June 30, ~~2020.~~2021.

No changes in internal control over financial reporting occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

As previously disclosed, on May 3, 2021, a complaint was filed against Matthew Levin by his former employer, ADP, Inc. (“ADP”), followed on May 5, 2021 by an application for a temporary restraining order and preliminary injunction in the United States District Court for the District of New Jersey (collectively, the “ADP Complaints”). The ADP Complaints allege that in beginning employment with the Company, Mr. Levin would be in violation of restrictive covenant agreements he entered into with ADP while he was employed as its Chief Strategy Officer. The ADP Complaints request, among other things, an injunction from the court barring Mr. Levin’s employment with the Company.

Following a hearing on May 25, 2021, the District Court denied ADP’s application for a temporary restraining order and preliminary injunction. One June 24, 2021, ADP filed an appeal with the U.S. Court of Appeals, Third Circuit. The litigation between ADP and Mr. Levin is ongoing. The Company continues to believe ADP’s claims are without merit and Mr. Levin will continue to vigorously defend himself against these actions.

There have been no material changes to the risk factors associated with our business previously disclosed in “Item 1A. Risk ~~Factors,”~~Factors”, in our Annual Report on Form 10-K, as amended for the period ended December 31, 2019, except as set forth in our Quarterly Report on Form 10-Q for the period ended March 31, 2020 and below. The risk factors set forth below update, and should be read together with, the risk factors disclosed in “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the period ended December 31, 2019 and “Item 1A. Risk Factors,” in our Quarterly Report on Form 10-Q for the period ended March 31, 2020.

The issuance of shares of our common stock upon conversion of our Series A Preferred Stock may dilute the ownership interest of our existing common stockholders, adversely impact the market price of our common stock and make it more difficult for us to raise funds through future equity offerings.

As of June 30, 2020, the outstanding shares of our Series A Preferred Stock (the “Preferred Stock”) were convertible into an aggregate of 5,333,334 shares of our common stock. Additional shares of our common stock may also be issued to the holders of our Preferred Stock in the event we make payment of the regular quarterly dividend on the Preferred Stock in kind, instead of in cash. The issuance of shares of common stock upon conversion of the Preferred Stock would dilute the percentage ownership interest of all holders of our common stock and any positive book value per share of our common stock, and would increase the number of publicly traded shares, which could depress the market price of our common stock. The fact that our stockholders can sell a substantial amount of our common stock in the public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional funds though the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate, or at all.

Our preferred stockholders have significant rights and preferences over the holders of our common stock that could limit us from taking certain corporate actions, and as a result affect our business, operating results, and the market price of our common stock.

Our preferred stockholders are entitled to a quarterly dividend equal to 8.0% per annum, payable in cash or in kind, before any dividends are paid on our common stock. Our preferred stockholders are also entitled to participate in and receive any dividends declared or paid on our common stock on an as-converted basis. No dividends may be paid on our common stock unless full participating dividends are concurrently paid to our preferred stockholders. Our preferred stockholders also have a claim against our assets senior to the claim of the holders of our common stock in the event of our liquidation, dissolution, or winding-up.

Our preferred stockholders are generally entitled to vote with our common stockholders on all matters submitted for a vote of the common stockholders (voting together with the common stockholders as one class) on an as-converted basis. In addition, the following matters require the approval of a majority of the outstanding shares of Preferred Stock, voting as a separate class: (1) the authorization, creation, or issuance of any securities of the Company having rights, preferences, or privileges senior to or on a parity with any of the rights, preferences, or privileges of the Preferred Stock; (2) effecting any alteration, repeal, change, or amendment of the rights, privileges, or preferences of the Preferred Stock; (3) amendments, modifications or repeal of any provision of the Company’s charter or bylaws in a manner adverse to the Preferred Stock; (4) changes in the authorized number of directors of the Company to a number greater than 10 individuals; (5) effecting any transaction between the Company and any of its affiliates (except for certain circumstances); (6) declaration or payment of any dividend or distribution with respect to any Company capital stock at any time the Company has any indebtedness outstanding; (7) incurring any indebtedness in excess of $500 million (including existing indebtedness and excluding lease obligations), or encumbering or granting a security interest in all or substantially all of the Company’s assets in connection with any such indebtedness (except existing security interests); or (8) agreeing or consenting to any of the foregoing actions.

As long as not less than 60% of the shares of the Series A Preferred Stock originally issued remain outstanding, the holders of a majority of the then-outstanding shares of the Preferred Stock, voting together as a single class, will have the right at any election of directors to elect (A) two directors if the board consists of nine or fewer directors; or (B) three directors if the board consists of 10 directors. At any time, such director may be removed with or without cause only by the affirmative vote or written consent of a majority of the holders of the Preferred Stock entitled to elect such director. In addition, while they have these rights to appoint directors, we may not expand the size of our board to greater than 10 directors without the consent of the holders of a majority of the then-outstanding shares of Preferred Stock.

The foregoing rights of our preferred stockholders could, while the Preferred Stock is outstanding, limit us from obtaining future financings or to otherwise conduct necessary corporate activities, and as a result may adversely affect our business, operating results, and the market price of our common stock.

There were no unregistered sales of equity securities during the three months ended June 30, 2020 other than as reported in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 26, 2020 in connection with the Company's offering of Preferred Stock.

Set forth below is a summary of the shares repurchased by the Company during the three months ended June 30, 2020, and the number of shares remaining authorized for repurchase by the Company (in thousands, except share and per share data):

~~(1)Stock repurchase program announced March 3, 2020 for the potential repurchase of up to $20,000 of the Company’s outstanding common stock.~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 Par Value	BNFT	Nasdaq Global Market


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS	3

Unaudited Consolidated Balance Sheets as of June 30, ~~2020~~2021 and December 31, ~~2019~~2020	3

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	4

Unaudited Consolidated Statements of Changes in Stockholders' Deficit for the Three and Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	5

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2020~~2021 and ~~2019~~2020	6

Notes to Unaudited Consolidated Financial Statements	7

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1920

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	31

ITEM 4. CONTROLS AND PROCEDURES	32

PART II. OTHER INFORMATION

ITEM ~~1A. RISK FACTORS~~1. LEGAL PROCEEDINGS	33

ITEM ~~2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~1A. RISK FACTORS	3433


ITEM 6. EXHIBITS	3534

SIGNATURES	3736

	As of June 30, 2021
Sector	Amortized cost		Allowance for credit losses		Net carrying amount		Gross unrealized gains		Gross unrealized losses		Fair value
Industrial	$	4,538	$	0	$	4,538	$	0	$	0	$	4,538
Financial		60,487		0		60,487		2		0		60,489
Government		30,082		0		30,082		2		0		30,084
Total	$	95,107	$	0	$	95,107	$	4	$	0	$	95,111

	As of December 31, 2020
Sector	Amortized cost		Allowance for credit losses		Net carrying amount		Gross unrealized gains		Gross unrealized losses			Fair value
Industrial	$	8,993	$	0	$	8,993	$	0	$	0		$	8,993
Financial		55,943		0		55,943		0		(5	)		55,938
Government		30,149		0		30,149		6		0			30,155
Total	$	95,085	$	0	$	95,085	$	6	$	(5	)	$	95,086

Outstanding stock options			~~151,178~~97,553
Restricted stock units			~~2,930,636~~3,351,575
Available for future issuance under stock award plans			~~4,286,512~~2,235,423
Available for future issuance under ESPP			~~103,500~~93,748
Issuable upon conversion of Series A Preferred Stock			5,333,334
Total common shares reserved for future issuance			~~12,805,160~~11,111,633

☐	Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer

☐	Smaller reporting company	☐	Emerging growth company

	As of June 30,
	2020	2019
	(in millions)
Net benefit eligible lives	17.5	16.5

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid Per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plan or Program		(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program
April 1 - 30, 2020⁽¹⁾		35,508	$	8.01		35,508	$	10,333
May 1 - 31, 2020		–		–		–		–
June 1 - 30, 2020		–		–		–		–
Total		35,508	$	8.01		35,508	$	10,333


		Incorporated by Reference (Unless Otherwise Indicated)
Exhibit Number	Exhibit Title	Form	File	Exhibit	Filing Date
3.1.1	Certificate of Designations for the Series A Convertible Preferred Stock of Benefitfocus, Inc., as filed with the Delaware Secretary of State on June 4, 2020.	8-K		3.1	June 8, 2020

10.24.1	Benefitfocus, Inc. Second Amended and Restated 2012 Stock Plan, as amended.#	8-K		10.24.1	June 12, 2020

10.30	Preferred Stock Purchase Agreement, dated May 22, 2020, by and between Benefitfocus, Inc. and BuildGroup LLC.	8-K		10.1	May 26, 2020

10.31	Consent to Senior Secured Revolving Credit Facility, dated as of May 22, 2020, by and among Benefitfocus, Inc., Benefitfocus.com, Inc., BenefitStore, Inc., several lenders, Silicon Valley Bank, as administrative agent, issuing lender and swingline lender, and the lenders from time to time party thereto.	8-K		10.2	May 26, 2020

10.32	Registration Rights Agreement, dated June 4, 2020, by and between Benefitfocus, Inc. and BuildGroup LLC.	8-K		10.1	June 8, 2020

10.33	Co-Sale and Voting Agreement, dated June 4, 2020, by and among Benefitfocus, Inc., BuildGroup LLC, and Mason R. Holland, Jr.	8-K		10.2	June 8, 2020


31.1	Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	__	__	__	Filed herewith


31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	__	__	__	Filed herewith

32.1	Certification of the President and Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	__	__	__	Filed herewith


101.INS	Inline XBRL Instance Document – the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Document.	__	__	__	Filed herewith


101.SCH	Inline XBRL Taxonomy Extension Schema Document.	__	__	__	Filed herewith


101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.	__	__	__	Filed herewith


101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.	__	__	__	Filed herewith

~~101.LAB~~104	~~Inline XBRL Taxonomy Extension Label Linkbase Document.~~	__	__	__	~~Filed herewith~~

~~101.PRE~~	~~Inline XBRL Taxonomy Extension Presentation Linkbase Document.~~	__	__	__	~~Filed herewith~~

~~104~~	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).	__	__	__	Filed herewith

Benefitfocus, Inc.

By:	/s/ ~~Stephen M. Swad~~Alpana Wegner
	~~Stephen M. Swad~~Alpana Wegner
	Chief Financial Officer
	(Principal financial and accounting officer)