(Reprinted from the Sept. 9 issue of Health Plan Market Trends).
BenefitFocus (Charleston, SC), which is seeking to raise up to $127 million in an initial public offering, revealed in a securities filing mounting losses and a few of those uncomfortable disclosures that should make investors think twice.
For starters, the offering is for 4.5 million shares at between $21.50 and $24.50 per share before underwriters’ commissions. BenefitFocus is offering 3 million of the shares and selling shareholder Goldman Sachs—which owns 66% of the company—is offering 1.5 million. That means a third of the proceeds from the offering after underwriters’ commissions go to Goldman. BenefitFocus will use its share for working capital and to fund expansion.
Goldman is also the lead underwriter. Assuming the sale of another 675,000 shares by the selling shareholder—i.e., Goldman—to cover over-allotments, then about 42% of the proceeds after underwriters’ commission would go to Goldman.
Goldman would still control BenefitFocus after the IPO, with nearly 52% of outstanding shares. BenefitFocus chairman Mason Holland and chief executive Shawn Jenkins would still own 12% each after the offering, and Oak Park Investments would own 10%. All told, the directors and executives of the company would own about 82% of shares following the IPO. Of 24 million outstanding shares after the IPO, 19.8 million would be restricted.
‘Material Weakness’ in BenefiFocus Accounting
Here’s another tidbit. According to the IPO filing, BenefitFocus “identified a material weakness in connection with preparation of our 2012 financial statements.” BenefitFocus offers private exchange software and other technology that helps people evaluate health coverage options and manage their benefits. Its clients are employers and health plans.
Because its platform is sold on a subscription basis, recognition of revenues is spread over the life of a contract or estimated length of a relationship with a client. In 2011, the company increased the estimated length of certain relationships—forcing it to spread its deferred revenues out over a longer period. The upshot: lower-than-expected recognized revenues and higher-than-expected losses in 2011 and 2012.
BenefitFocus reported a net loss of $15.2 million though six months of 2013, up from $10.4 million a year earlier. Combined net loss for 2010 through 2012 topped $32 million. Without the material weakness, net loss would have improved by $5.8 million in 2011 and $2.8 million in 2012. Accumulated deficit is $187 million.
Here’s more. BenefitFocus rents office space for its corporate headquarters in Charleston, SC, from Daniel Island Executive Center—with nearly $48 million in payments still due over the life of two 15-year leases expiring in 2021 and 2024. Holland owns Holland Properties, which owns a majority of Daniel Island Executive Center. Jenkins owns the rest. Holland also owns a majority of North American Jet Charter Group, which provides chartered jet service to BenefitFocus.
Insurer and Employer Segments
BenefitFocus has two segments. Its insurer segment accounts for more than 60% of revenues and was profitable from 2010 through 2012; although it slipped into the red through six months of 2013. The employer segment, which has been growing at a much faster pace, accounts for the remainder of revenues. Losses in the employer segment topped $12 million through six months of 2013.
Clearly, this is a company that needs to sell investors on its growth potential. Through six months of 2013, revenues were $48.2 million, up 25%. For the full year 2012, revenues were $81.7 million, up 19%. The company had 37 insurer clients, up 12%, including Aetna, Blue Cross Blue Shield of Kansas City, BCBS of South Carolina and WellPoint. It also had 348 employer clients as of June 30, 2013, up 46% from a year earlier, including Bon Secours Health System, Brooks Brothers, Columbia Sportswear and Fender Musical Instruments. The company says it had served 20 million consumers on its platform as of June 2013.
It’s a promising market, but also a highly competitive one. BenefitFocus lists as competitors in the employer space software vendors SAP, Oracle/PeopleSoft and Infor/Lawson; the private exchanges of Aon/Hewitt and Towers Watson; and payroll companies like ADP and Paychex. In the insurance market, competitors include traditional payer vendors like Trizetto and DST Health Solutions—as well as the plans themselves, many of which have built internal benefit management solutions.
On the bright side, BenefitFocus has very little debt. But all-in-all, this is an IPO that’s hard to get excited about.