CONNECTURE INC - FORM 10-Q

CONNECTURE INC - FORM 10-Q - August 9, 2016

Attached files

Attached files

CONNECTURE INC Reports

file	filename
EX-32.2 - EX-32.2 - CONNECTURE INC	d225397dex322.htm
EX-32.1 - EX-32.1 - CONNECTURE INC	d225397dex321.htm
EX-31.2 - EX-31.2 - CONNECTURE INC	d225397dex312.htm
EX-31.1 - EX-31.1 - CONNECTURE INC	d225397dex311.htm
EX-21.1 - EX-21.1 - CONNECTURE INC	d225397dex211.htm
EX-10.2 - EX-10.2 - CONNECTURE INC	d225397dex102.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36778

CONNECTURE, INC.

(Exact name of registrant as specified in its charter)


Delaware		58-2488736
(State or other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

18500 West Corporate Drive, Suite 250 Brookfield, WI		53045
(Address of principal executive offices)		(Zip Code)

(262) 432-8282

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

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, as amended, or the Exchange Act, 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of August 1, 2016, there were 22,344,064 shares of the registrant’s common stock issued and outstanding.

CONNECTURE, INC.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2016 and 2015	4
	Condensed Consolidated Statements of Stockholders’ Deficit for the Six Months Ended June 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37

PART II: OTHER INFORMATION		38

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55
SIGNATURES		56
Exhibit Index		57

PART I

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited)

CONNECTURE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

(In thousands, except share and per share information)


	As of June 30, 2016			As of December 31, 2015
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	18,980		$	5,424
Accounts receivable — net of allowances		9,769			10,792
Prepaid expenses and other current assets		955			652

Total current assets		29,704			16,868
PROPERTY AND EQUIPMENT — Net		2,227			2,109
GOODWILL		29,411			26,779
OTHER INTANGIBLE ASSETS — Net		12,304			11,392
DEFERRED IMPLEMENTATION COSTS		24,376			24,565
OTHER ASSETS		1,135			976

TOTAL ASSETS	$	99,157		$	82,689


LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:
Accounts payable	$	7,876		$	6,853
Accrued payroll and related liabilities		4,373			3,560
Other liabilities		1,354			2,188
Current maturities of debt		2,110			1,441
Deferred revenue		32,373			34,049

Total current liabilities		48,086			48,091
DEFERRED REVENUE		15,036			18,529
DEFERRED TAX LIABILITY		23			23
LONG-TERM DEBT		33,197			46,964
OTHER LONG-TERM LIABILITIES		235			262

Total liabilities		96,577			113,869


COMMITMENTS AND CONTINGENCIES (Note 5)

REDEEMABLE PREFERRED STOCK - SERIES A		49,936			—


STOCKHOLDERS’ DEFICIT:
Common stock, $0.001 par value, 75,000,000 shares authorized as of June 30, 2016 and December 31, 2015, and 22,277,985 and 22,063,357 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively		22			22
Additional paid-in capital		102,624			101,546
Accumulated deficit		(149,807	)		(132,571	)
Treasury stock, at cost		(195	)		(177	)

Total stockholders’ deficit		(47,356	)		(31,180	)

TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT	$	99,157		$	82,689

The accompanying notes to the condensed consolidated financial statements are an integral part of the statements.

CONNECTURE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(unaudited)

(In thousands, except share and per share information)


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
REVENUE	$	18,729		$	23,393		$	36,286		$	44,041

COST OF REVENUE		13,663			14,019			26,016			25,340


GROSS MARGIN		5,066			9,374			10,270			18,701


OPERATING EXPENSES:
Research and development		5,860			6,056			11,364			12,584
Sales and marketing		3,092			2,302			5,430			5,185
General and administrative		3,273			3,858			6,537			7,463

Total operating expenses		12,225			12,216			23,331			25,232


LOSS FROM OPERATIONS		(7,159	)		(2,842	)		(13,061	)		(6,531	)

OTHER EXPENSES:

Interest expense		858			1,424			2,267			2,837
Other expense, net		1,883			1			1,883			9

Total other expenses		2,741			1,425			4,150			2,846


LOSS BEFORE (PROVISION) BENEFIT FOR INCOME TAXES		(9,900	)		(4,267	)		(17,211	)		(9,377	)

BENEFIT (PROVISION) FOR INCOME TAXES		—			8			(25	)		19


NET LOSS	$	(9,900	)	$	(4,259	)	$	(17,236	)	$	(9,358	)


COMPREHENSIVE LOSS	$	(9,900	)	$	(4,259	)	$	(17,236	)	$	(9,358	)


NET LOSS PER COMMON SHARE:
Basic and diluted	$	(0.47	)	$	(0.20	)	$	(0.81	)	$	(0.43	)


WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted		22,217,696			21,710,951			22,164,984			21,703,483

The accompanying notes to the condensed consolidated financial statements are an integral part of the statements.

CONNECTURE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(unaudited)

(In thousands, except shares and per share information)


						Additional			Treasury						Total
	Common Stock					Paid-In			Stock, at			Accumulated			Stockholders’
	Shares			Amount		Capital			Cost			Deficit			Deficit
BALANCES — January 1, 2016		22,063,357		$	22	$	101,546		$	(177	)	$	(132,571	)	$	(31,180	)
Preferred Stock dividends, Series A							(650	)								(650	)
Stock-based compensation expense							1,411									1,411
Exercise of stock options and issuance of other stock awards		222,127					317									317
Treasury stock acquired		(7,499	)							(18	)					(18	)
Net loss													(17,236	)		(17,236	)

BALANCES — June 30, 2016		22,277,985		$	22	$	102,624		$	(195	)	$	(149,807	)	$	(47,356	)


						Additional			Treasury						Total
	Common Stock					Paid-In			Stock, at			Accumulated			Stockholders’
	Shares			Amount		Capital			Cost			Deficit			Deficit
BALANCES — January 1, 2015		21,689,223		$	22	$	96,365		$	—		$	(125,228	)	$	(28,841	)
Stock-based compensation expense							1,886									1,886
Exercise of stock options and vesting of restricted stock units		150,781					246									246
Net loss													(9,358	)		(9,358	)

BALANCES — June 30, 2015		21,840,004		$	22	$	98,497		$	—		$	(134,586	)	$	(36,067	)

The accompanying notes to the condensed consolidated financial statements are an integral part of the statements.

CONNECTURE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(unaudited)

(In thousands)


	Six Months Ended June 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(17,236	)	$	(9,358	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,277			2,550
Stock-based compensation expense		1,411			1,886
Interest accretion on financing obligations		232			624
Other adjustments		1,883			45
Change in operating assets and liabilities, net of acquisition:
Accounts receivable		1,529			2,534
Prepaid expenses and other assets		(444	)		277
Deferred implementation costs		189			644
Accounts payable		748			689
Accrued expenses and other liabilities		(339	)		999
Deferred revenue		(5,718	)		(14,136	)

Net cash used in operating activities		(15,468	)		(13,246	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(643	)		(407	)
Business acquisition, net of cash acquired		(4,683	)		—

Net cash used in investing activities		(5,326	)		(407	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit		3,550			—
Repayments under revolving line of credit		(3,550	)		(340	)
Borrowings of term debt		16,156			—
Repayments of term debt		(30,281	)		(3,462	)
Payment of financing fees		(1,063	)		—
Proceeds from preferred stock, net		49,286			—
Other		252			(752	)

Net cash provided by (used in) financing activities		34,350			(4,554	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		13,556			(18,207	)
CASH AND CASH EQUIVALENTS — Beginning of period		5,424			28,252

CASH AND CASH EQUIVALENTS — End of period	$	18,980		$	10,045

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	2,899		$	3,108

Cash paid for income taxes	$	27		$	18

Non-cash investing and financing activities:
Purchase of property and equipment in accounts payable	$	22		$	153

Accrued preferred stock dividends	$	650		$	—

The accompanying notes to the condensed consolidated financial statements are an integral part of the statements.

CONNECTURE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(Dollars in thousands, except share and per share data information)

1.	DESCRIPTION OF BUSINESS

Connecture, Inc. and its subsidiaries, including DestinationRx, Inc., (“DRX”), RxHealth Insurance Agency, Inc., ConnectedHealth, LLC, and Insurix, Inc. (collectively, the “Company”), is a Delaware corporation. The Company is a web-based consumer shopping, enrollment and retention platform for health insurance distribution in the United States. The Company’s solutions support the industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed. The Company’s solutions offer a personalized health insurance shopping experience that recommends the best fit insurance plan based on an individual’s preferences, health status, preferred providers, medications and expected out-of-pocket costs. The Company’s customers are health insurance marketplace operators, including health plans, brokers and exchange operators. The Company’s solutions automate key functions in the health insurance distribution process, allowing its customers to price and present plan options accurately to consumers and efficiently enroll, renew and manage plan members.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The consolidated financial statements include the accounts of Connecture, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.

Interim Unaudited Condensed Consolidated Financial Information—The accompanying unaudited consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America, or GAAP, as contained in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or 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, financial position, changes in stockholders’ deficit and cash flows. The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results for the full year or the results for any future periods. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates—The preparation of financial statements in conformity with generally accepted accounting principles requires management to make extensive estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents—The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced any losses related to these balances. The Company had $18,730 interest-bearing amounts on deposit in excess of federally insured limits as of June 30, 2016.

Accounts Receivable and Allowance for Doubtful Accounts—The Company’s normal and customary terms for customer payment is 30 days. The outstanding accounts receivable can vary significantly based on timing of billing milestones, renewals and other factors. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The estimates are based on the composition of the accounts receivable aging, historical bad debts, changes in payment patterns, customer creditworthiness, and current economic trends. The Company writes off uncollectible receivables after all reasonable efforts are made to collect payment.

Financial Instruments and Concentration of Credit Risk—The estimated fair values of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their carrying values due to the short-term nature of these instruments.

Financial instruments that potentially subject the Company to concentrations of credit risk are principally cash and cash equivalents and accounts receivable. The Company’s credit risk is managed by investing its cash and cash equivalents in high quality money market instruments with established financial institutions. Concentrations of credit risk relate to accounts receivable are limited to several customers to whom the Company makes substantial sales.

The Company has not experienced any material losses related to receivables from individual customers, geographic regions or groups of customers. No customers accounted for 10% or greater of total accounts receivable as of June 30, 2016 or December 31, 2015. The Company had the following customers that accounted for 10% or greater of total revenue:


	Revenue
Customers	Six Months Ended June 30, 2016			Six Months Ended June 30, 2015
A		<10.0	%		11.7	%
B		<10.0	%		13.1	%
C		10.2	%		<10.0	%

Revenue Recognition—The Company’s revenue is derived from four sources: (a) the sales of implementation and ongoing support of the Company’s software automation solutions; (b) fees from brokers for the right to access our multi-payer quoting platform; (c) a government cost-plus-fixed-fee contract in 2015; and (d) commissions. In all contractual arrangements, the Company determines whether persuasive evidence of an arrangement exists, services have been rendered, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, the Company does not recognize revenue until all of the criteria are met.

a) Software Automation Solutions Fees

Contractual terms for the delivery and ongoing support of the Company’s software automation solutions generally consist of multiple components including: (a) software license fees (non-hosted arrangements), (b) software maintenance fees, (c) software usage fees, (d) professional services fees, (e) hosting fees and (f) production support fees.

Software license fees represent amounts paid for the right to use the solution. Software usage fees represent amounts paid to cover only a specific period of time, after which usage and access rights expire. Software maintenance fees typically accompany software license fees and represent amounts paid for the right to receive commercially available updates and upgrades to the solution. Professional services fees represent amounts charged for services performed in connection with the configuration, integration and implementation of the solutions in accordance with customer specifications. Hosting fees represent fees related to post implementation hosting and monitoring of the solution. Production support fees are charged for the ongoing rate, benefits and related content management of the platform.

The Company’s contracts with its customers typically bundle multiple services and are generally priced on a fixed fee basis. The term over which the Company is committed to deliver these services can range from several months to several years.

The majority of the Company’s software automation solution services sold in the Enterprise/Commercial and Medicare segments and a portion of the Private Exchange segment are arrangements in which the Company hosts the web-based software automation solution and the customer pays a fee for access to and usage of the web-based software. The ownership of the technology and rights to the related code of such hosted web-based software remain with the Company and a customer has no contractual right to take possession of the software and run it on its own hardware platform. These arrangements are referred to as hosted arrangements and are accounted for as software-as-a-service under ASC 605, Revenue Recognition. A small percentage of the Company’s software automation solutions, sold primarily in the Enterprise/State segment, are arrangements in which the software is not hosted on the Company’s infrastructure. These arrangements include the licensed use of the software and are subject to accounting under ASC 985, Software Revenue Recognition.

For all arrangements (whether hosted or non-hosted) that include multiple elements, the Company evaluates each element in an arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has standalone value and delivery of the undelivered element is probable. Elements generally include implementation services, software licensing or usage fees and maintenance or other services.

Accounting guidance for multiple element arrangements containing hosted software provide a hierarchy to use when determining the relative selling price for each unit of accounting. Vendor-specific objective evidence (VSOE) of selling price, based on the price at which the item is regularly sold by the vendor on a standalone basis, should be used if it exists. If VSOE of selling price is not available, third-party evidence of selling price is used to establish the selling price if it exists. If VSOE and third-party evidence do not exist, the Company allocates the arrangement fee to the separate units of accounting based on its best estimate of selling price.

For hosted arrangements with multiple elements that are separate units of accounting, VSOE and third- party evidence do not currently exist and accordingly, the Company allocates the arrangement fee to the separate units of accounting based on management’s best estimate of selling price, when available. The Company determines its best estimate of selling price for services based on its overall pricing objectives, taking into consideration market conditions and customer-specific factors and by reviewing historical data related to sales of the Company’s services.

Hosted arrangement revenue is recognized as follows by revenue element:

•

Software usage fees and hosting fees—Recognized ratably over the customer contract.

•

Professional services for new customer software solution implementation—Initially deferred and recognized ratably from completion of implementation through the longer of the customer contract or estimated period of customer benefit based on facts and circumstances of each relationship.

•

Professional services for modifications to existing customer software solutions—Initially deferred and then recognized in the period services are completed.

•

Production support fees—Recognized as the work is performed consistent with the contractual terms of the production support.

Multiple deliverable arrangements accounting guidance for non-hosted arrangements provide an allocation of revenue to the separate elements based upon VSOE. To date, the elements of the Company’s non-hosted arrangements, whereby the customers take possession of the software, have not been sold separately. Therefore, the contractual consideration for a delivered element for the non-hosted arrangements does not qualify as a separate unit of accounting as VSOE does not currently exist for any element of the Company’s non-hosted arrangements. Accordingly, the delivered elements are combined with the other consideration for the remaining undelivered elements as a single unit of accounting. Revenue for non-hosted arrangements is recognized once all elements are delivered over the longer of the customer contract or estimated period of customer benefit. As of June 30 2016, the Company has a non-hosted arrangement with one remaining Enterprise/State customer.

b) Broker Multi-Payer Quoting Platform Fees

The Company provides an online quoting platform service to insurance brokers through its Private Exchange segment. The Company charges the brokers a monthly fee for access to the service. Revenue from the access fees is recognized in the period that the service is provided.

c) Government Cost-Plus-Fixed-Fee

The Company used a percentage-of-completion method of accounting for its federal government contract in its Medicare segment prior to the fourth quarter of 2015. Under percentage-of-completion, the costs incurred to date had been compared to total estimated project costs and revenue was recognized in proportion to costs incurred. In the fourth quarter of 2015, the contract was renewed as a fixed fee contract and is accounted for in accordance with the Company’s Software Automation Solution Fees, discussed above.

d) Commissions

Within the Private Exchange segment, the Company earns commissions on annual employee enrollments in which the Company’s health plan network and software solutions are used in connection with each enrollment. Commissions are recorded in the period the enrollment is completed.

Cost of Revenue—Cost of revenue primarily consists of employee compensation and benefits, professional services costs and depreciation and amortization of assets directly associated with generating revenue. In addition, the Company allocates a portion of overhead, such as rent, facility depreciation and utilities, to cost of revenue based on employee salary.

Deferred Implementation Costs—The Company’s accounting policy is to capitalize direct, incremental employee labor and related benefits along with third-party independent contractor costs related to implementing new customer software solutions, to the extent that they are deemed recoverable. Deferred implementation costs are amortized over the longer of the customer contract or estimated period of customer benefit, consistent with the recognition of the related deferred professional services revenue.

Stock-Based Compensation—The Company applies a fair-value based measurement method in accounting for stock-based payment transactions. Compensation cost is determined based on the grant-date fair value for stock options and performance-based restricted

stock units and the grant-date closing market value for time-vested restricted stock units. Compensation cost is amortized on a straight-line basis over the vesting period for time-based awards and over the derived service period for performance-based restricted stock units.

Preferred Stock Dividends—Given the Company’s accumulated deficit, the Company’s accounting policy is to record the mandatorily payable dividends as a reduction of additional paid-in capital (APIC) with the offset as an increase to redeemable preferred stock on the consolidated balance sheets.

Comprehensive Loss—The Company’s net loss equals comprehensive loss for the three and six months ended June 30, 2016 and 2015.

Income Taxes—Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that the change becomes enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items in income tax expense.

Basic and Diluted Net Loss Per Common Share—The Company uses the two-class method to compute net earnings per common share because the Company has issued securities, other than common stock, that contractually entitle the holders to participate in dividends and earnings of the Company. The two-class method requires earnings for the period to be allocated between common stock and participating securities based upon their respective rights to receive distributed and undistributed earnings. Holders of the Company’s redeemable convertible preferred stock are entitled to participate in distributions, when and if declared by the Board of Directors that are made to common stockholders, and as a result are considered participating securities.

Under the two-class method, for periods with net income, basic net income per common share is computed by dividing the net income attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Net income attributable to common stockholders is computed by subtracting from net income the portion of current year earnings that the participating securities would have been entitled to receive pursuant to their dividend rights had all of the year’s earnings been distributed. No such adjustment to earnings is made during periods in which the Company has an accumulated retained deficit, as the holders of the participating securities have no obligation to fund losses. Due to net losses for the three and six months ended June 30, 2016, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.

New Accounting Standards—In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue From Contracts With Customers, that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. Assuming the Company remains an emerging growth company (EGC), the ASU becomes effective for the Company for the fiscal year ended December 31, 2019; early adoption is permitted. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies a customer accounting for fees paid in a cloud computing arrangement. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company has adopted the provisions of this update, with no impact to the consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheet. Assuming the Company remains an EGC through December 31, 2019, the provisions of this update are expected to be effective for the Company beginning in the first quarter of 2020. Early adoption of ASU 2016-02 is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently assessing the impact that this update will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which simplifies several aspects of the accounting for stock compensation, including the accounting for income tax effects, forfeitures, statutory tax withholdings, and cash flow classifications. Assuming the Company remains an EGC, the provisions of this update are effective for the fiscal year ended December 31, 2018. Early adoption is permitted in any interim or annual period. The Company is currently assessing the impact that this standard will have on its consolidated financial statements.

3.	NET LOSS PER COMMON SHARE

Diluted loss per common share is the same as basic loss per common share for all periods presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss. The following common share equivalent securities have been excluded from the calculation of weighted-average common shares outstanding because the effect is anti-dilutive for the periods presented:


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Anti-Dilutive Common Share Equivalents
Redeemable convertible preferred stock		7,538,889		—		3,790,270		—
Restricted Stock Units		—		131,813		—		44,734
Stock options		144,374		1,170,373		286,046		1,165,980

Total anti-dilutive common share equivalents		7,683,263		1,302,186		4,076,316		1,210,714

Basic and diluted net loss per common share is calculated as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Numerator:
Net loss	$	(9,900	)	$	(4,259	)	$	(17,236	)	$	(9,358	)
Less: Preferred stock dividends		(650	)		—			(650	)		—

Net loss attributable to common stock	$	(10,550	)	$	(4,259	)	$	(17,886	)	$	(9,358	)
Denominator:
Weighted-average common shares outstanding, basic and diluted		22,217,696			21,710,951			22,164,984			21,703,483

Net loss per common share, basic and diluted	$	(0.47	)	$	(0.20	)	$	(0.81	)	$	(0.43	)

4.	CONNECTEDHEALTH ACQUISITION

On June 7, 2016, the Company completed the acquisition of all equity units of ConnectedHealth, LLC (“ConnectedHealth”) for a cash purchase price of $4,683, net of cash acquired, using available excess cash. ConnectedHealth is a benefits technology company with a software and services platform that makes it easier for consumers and employees to shop for personalized insurance benefits online. The Company completed the acquisition to acquire ConnectedHealth’s software technology.

The acquisition of ConnectedHealth was accounted for as a business combination in accordance with FASB ASC Topic 805, Business Combinations. Assets acquired and liabilities assumed were recorded at their fair value as of the acquisition date based on valuations using the income approach. The excess of purchase price over the estimated fair values of tangible assets, intangible assets and assumed liabilities was recorded as goodwill.

The initial allocation of the purchase price for ConnectedHealth as of June 30, 2016, is as follows:


Cash and cash equivalents	$	25
Trade accounts receivable		506
Prepaid expenses and other current assets		31
Goodwill and intangible assets		5,232
Other long-term assets		53
Accounts payable and other current liabilities		(940	)
Other long-term liabilities		(199	)

Total purchase price	$	4,708

The goodwill is primarily attributable to synergies with the software and services that ConnectedHealth provides and the anticipated value of selling the Company’s software and services to ConnectedHealth’s existing client base. The purchase price allocation is preliminary as the Company has not completed its analysis to estimate the fair value of intangible assets. The goodwill and intangible assets have been assigned to the Private Broker Exchange segment. The goodwill and intangible assets are not deductible for income tax purposes.

Revenue and net income attributable to ConnectedHealth from the acquisition date through June 30, 2016 were not meaningful. The following unaudited supplemental pro forma information presents the Company’s results of operations as

though the acquisition of ConnectedHealth had occurred on January 1, 2015. The information is not indicative of the Company’s operating results which would have occurred had the acquisition been consummated as of that date. The pro forma information below does not include anticipated synergies, the impact of purchase accounting adjustments or certain other expected benefits of the acquisition and should not be used as a predictive measure of the Company’s future results of operations.


	Three Months Ended June 30,						Six Months Ended June 30,
Pro forma	2016			2015			2016			2015
Total revenue	$	18,972		$	23,820		$	37,256		$	45,217
Net (loss)		(9,947	)		(5,898	)		(17,909	)		(12,347	)
Net (loss) per share - basic and diluted		(0.45	)		(0.27	)		(0.81	)		(0.57	)

The pro forma financial information has been adjusted, where applicable, for: (i) amortization of acquired intangible assets, (ii) additional interest expense on acquisition financing, and (iii) the income tax effect of the pro forma adjustments.

The acquisition related expenses were approximately $100 and have been recorded in General and Administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

5.	GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill—The Company has no accumulated goodwill impairments as of June 30, 2016 and December 31, 2015. Goodwill consists of following as of June 30, 2016 and December 31, 2015:


	Enterprise/ Commercial		Enterprise/ State		Medicare		Private Exchange		Total
December 31, 2015	$	7,732	$	—	$	14,711	$	4,336	$	26,779
Acquisition		—		—		—		2,632		2,632

June 30, 2016	$	7,732	$	—	$	14,711	$	6,968	$	29,411

The Company acquired ConnectedHealth, LLC on June 7, 2016, and has not completed its purchase price allocation of acquired intangible assets. On a preliminary basis we have recorded a $2,600 acquired technology intangible asset. Adjustments to the $2,632 preliminary goodwill will be recorded when the Company’s valuation of acquired intangible assets is complete.

Other Intangibles Assets—Other intangible assets consist of the following at June 30, 2016:


	Useful Lives - In Years		Gross Carrying Value		Accumulated Amortization			Net Carrying Value

Customer Relationship		3-10	$	7,298	$	(2,706	)	$	4,592
Covenants Not to Compete		2.5-5		800		(800	)		—
Acquired Technology		3-5		14,392		(8,616	)		5,776
Trademarks		10		2,800		(968	)		1,832
Software		3		1,764		(1,660	)		104

			$	27,054	$	(14,750	)	$	12,304

Other intangible assets consist of the following at December 31, 2015:


	Useful Lives - In Years		Gross Carrying Value		Accumulated Amortization			Net Carrying Value

Customer Relationship		3-10	$	7,298	$	(2,346	)	$	4,952
Covenants Not to Compete		2.5-5		800		(798	)		2
Acquired Technology		3-5		11,792		(7,566	)		4,226
Trademarks		10		2,800		(828	)		1,972
Software		3		1,764		(1,524	)		240

			$	24,454	$	(13,062	)	$	11,392

Amortization expense for the three months ended June 30, 2016 and 2015 was $797 and $1,041, respectively, and $1,688 and $2,073 for the six months ended June 30, 2016 and 2015, respectively, and has been recorded in cost of revenue and general and administrative expenses.

Estimated future amortization expense for the Company’s intangible assets is as follows:


Year Ending December 31	Amount
Remainder of 2016	$	1,849
2017		3,613
2018		1,613
2019		1,520
2020		1,520
thereafter		2,189

Total future amortization expense	$	12,304

6.	COMMITMENTS AND CONTINGENCIES

Operating Leases—The Company leases office space under operating leases that expire at various dates through 2025. Rent expense for the three months ended June 30, 2016 and 2015, was $451 and $437, respectively, and $887 and $862 for the six months ended June 30, 2016 and 2015, respectively.

Letter of Credit—As security for certain leased property, the Company was required to provide a lessor an unconditional and irrevocable letter of credit in the amount $200 at June 30, 2016 and December 31, 2015.

Indemnifications—The Company provides certain indemnifications from time to time in the normal course of business to its customers in its professional services and software license agreements and to strategic partners through certain insurance industry association marketing agreements that contain certain indemnifications for claims that may arise from acts or omissions, patent or trademark infringement, breach of contractual representations and warranties or intentional or grossly negligent acts. These indemnifications may require the Company to reimburse the indemnified party for losses suffered or incurred by the indemnified party. In the opinion of management, the liabilities, if any, which may result from such indemnifications are not expected to have a material effect on the Company’s consolidated financial statements.

Litigation—In the normal course of business, the Company and its subsidiaries are named as defendants in lawsuits and are party to contract terminations and settlements in which claims are or may be asserted against the Company. In the opinion of management, the liabilities, if any, which may ultimately result from such lawsuits and contract terminations are not expected to have a material effect on the Company’s consolidated financial statements.

DEBT

Debt consisted of the following at June 30, 2016 and December 31, 2015:


	2016			2015
Senior term loans	$	35,000		$	19,125
Senior revolving credit facility		360			316
Subordinated loans		—			30,000

		35,360			49,441
Less: original issue discounts and deferred financing costs		(53	)		(1,036	)
Less: current maturities of debt		(2,110	)		(1,441	)

Long-term debt	$	33,197		$	46,964

Senior Debt—The Company has a bank credit facility that provides for short-term working capital and long-term investment needs (the “Credit Facility”). The Credit Facility is collateralized by all of the Company’s assets.

On June 8, 2016, the Credit Facility was amended and restated (the “Amended Credit Facility”), to (i) extend the maturity date to June 8, 2021 from January 18, 2018, (ii) continue to provide for up to $10,000 of revolving credit through the maturity date (the “Senior Revolving Credit Facility”), (iii) increase the term loan funding to $35,000 from approximately $20,000 at June 8, 2016 (the “Senior Term Loans”), (iv) increase the quarterly term loan repayment amount to $438, beginning June 30, 2016, from $281, and (v) replace existing covenants with (a) a net leverage ratio covenant beginning with the quarter ending September 30, 2016 and continuing for each quarter thereafter and a minimum liquidity requirement of $10,000 at all times, in each case until the Company achieves trailing twelve month EBITDA of greater than $10.0 million and (b) thereafter a fixed coverage ratio covenant of 1.25:1.00 on a quarter-end basis through September 30, 2018 and 1:50:1.00 on a quarter end basis thereafter. The net leverage ratio covenant, as defined, requires that the Company maintain a Funded Debt less Qualified Cash to EBITDA ratio on a quarter-end basis of 4:1 beginning September 30, 2016 and declining to 1.75:1 for the quarter ended September 30, 2018.

The applicable interest rates on the term loan and revolving credit facility have been replaced with variable rates equal to base rate plus 2.75% to 4.25% or LIBOR rate plus 3.75% to 5.25% based on achievements with respect to net leverage and total leverage. As of June 30, 2016, the interest rate on our outstanding Senior Term Loans and the Senior Revolving Credit Facility were 5.90% and 8.00%, respectively.

The Amended Credit Facility was accounted for as an extinguishment of debt resulting in the immediate recognition of $381 of previous deferred financing costs, which was recorded in Other expense, net in the statements of operations for the three and six months ended June 30, 2016.

The Amended Credit Facility contains covenants and customary representations and warranties of the Company, as well as various limitations on the activities of the Company as they relate to additional indebtedness, junior liens, investments, capital expenditures, paying dividends, and mergers and acquisitions.

As of June 30, 2016, the Company was in compliance with the financial covenants, and expects to be in compliance throughout the year ended December 31, 2016.

THL Promissory Note—The Company had a Senior Subordinated Term Loan Agreement with THL Corporate Finance, Inc., (the “THL Note”) for total proceeds of $30,000 less $683 of original issue discount, or OID. On May 3, 2016, the Company repaid the $30,000 principal and accrued interest to settle the THL Note. The early extinguishment of the THL Note triggered a $560 breakage fee and the immediate recognition of the remaining $480 of OID and deferred financing costs, which were recorded in Other expense, net in the statements of operations for the three and six months ended June 30, 2016.

Based on rates for instruments with comparable maturities and credit quality, the estimated fair value of the Company’s total debt as of June 30, 2016 and December 31, 2015 approximates the carrying value.

8.	STOCKHOLDERS’ DEFICIT

The Company recognized stock-based compensation expense of $599 and $1,169 for the three months ended June 30, 2016 and 2015, respectively, and $1,411 and $1,886 for the six months ended June 30, 2016 and 2015, respectively.

As of June 30, 2016, approximately $4,785 of total unrecognized compensation expense related to unvested stock options and restricted stock unit awards is expected to be recognized over the remaining vesting periods of approximately 3 years. The maximum contractual term of equity awards is 10 years.

Common Stock—As of June 30, 2016 and December 31, 2015, the Company has authorized the issuance of 75,000,000 shares of common stock, par value of $0.001 per share.

Preferred Stock— On May 2, 2016, the Company issued and sold newly created Series A Convertible Preferred Stock (the “Preferred Stock”) for an aggregate purchase price of $52,000. The shares of Preferred Stock are convertible into shares of the Company’s common stock (the “Conversion Shares”) at the option of the investors at any time. Beginning in 2018, the Company may force conversion if the closing price of the common stock is at least 175% of the conversion price of the common stock for 45 consecutive trading days, with a minimum average trading volume of at least 75,000 shares for 40 of such 45 trading days. Each share of Preferred Stock is convertible into a number of Conversion Shares equal to (i) the sum of (a) the original purchase price, plus (b) all accrued and unpaid dividends thereon up to but not including the conversion date, divided by (ii) the conversion price of the common stock at such time (which initially is $4.50 per share, subject to customary anti-dilution adjustments).

The number of Conversion Shares underlying the Preferred Stock will be increased annually by the accrual of 7.5% cumulative dividends payable in-kind (which will increase in certain circumstances, but in no event will be more than 16.5% annually). Following the second anniversary of the May 2, 2016 closing, the Company may elect to pay such cumulative dividends in cash. The conversion price for the Preferred Stock is also subject to adjustment in the event of a stock split, reverse stock split, stock dividend, rights issuance, recapitalization, tender offer or similar transaction and to weighted-average price-based anti-dilution adjustments.

Reserved Shares—As of June 30, 2016, the Company has 44,469 shares of common stock reserved for issuance in connection with the Company’s 2014 Equity Incentive Plan (the 2014 “Plan”). The 2014 Plan provides that on the first day of January each year through 2024, the available shares of common stock shall generally be increased by the smaller of (a) 2.00% of the number of issued and outstanding shares of common stock on the immediately preceding December 31, or (b) an amount determined by the Company’s Board.

At June 30, 2016, a total of 239,034 shares of common stock have been reserved for issuance under the 2014 Employee Stock Purchase Plan (the “ESPP”). The ESPP provides that on the first day of January each year through 2024, the available shares of common stock shall generally be increased by (a) 100,000 shares or (b) 0.25% of issued and outstanding shares of common stock on the immediately preceding December 31.

Equity Incentive Plans—In connection with the Company’s December 2014 initial public offering, the Board of Directors approved the 2014 Plan as a replacement to the 2010 Plan. The Company will not grant any additional awards under the 2010 Plan; however the 2010 Plan will continue to govern the terms and conditions of all outstanding equity awards previously granted under the 2010 Plan. The 2014 Plan provides for the awarding of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and performance units, and other stock-based or cash settled equity awards as deemed appropriate by the compensation committee of the Company’s Board of Directors.

Stock Options—A summary of stock option activity for the six months ended June 30, 2016 and 2015 is presented below:


	Number of Shares			Average Exercise Price^(a)		Average Life (Years)^(b)		Aggregate Intrinsic Value
Outstanding — January 1, 2015		1,838,082		$	1.93		7.39
Granted		508,400		$	11.37
Exercised		(134,282	)	$	1.83			$	1,235
Forfeited		—		$	—

Outstanding — June 30, 2015		2,212,200		$	4.11		7.99	$	14,277

Outstanding — January 1, 2016		2,306,726		$	4.16		7.59
Granted		372,200		$	2.89
Exercised		(101,253	)	$	1.85			$	97
Forfeited		(224,550	)	$	8.39

Outstanding — June 30, 2016		2,353,123		$	3.66		7.43	$	578

Exercisable — June 30, 2016		1,380,485		$	2.18		6.39	$	522

(a)	Weighted-average exercise price

(b)	Weighted-average contractual life remaining

The weighted average fair value per option granted during the six months ended June 30, 2016 and 2015 was $1.14 and $5.09, respectively. The weighted average fair value of stock options is estimated at the date of grant using a Black-Scholes option pricing model. The following are weighted-average assumptions used for estimating the fair value of options granted for the six months ended June 30, 2016 and 2015:


	Six Months Ended June 30,			Six Months Ended June 30,
	2016			2015
Common stock share value	$	2.89		$	11.37
Expected life (years)		4.00			5.13
Volatility		50.00	%		50.00	%
Interest rate		0.95	%		1.46	%
Dividend yield		0.00	%		0.00	%

The Company currently estimates volatility by using the weighted-average historical volatility of comparable public companies. The risk-free interest rate is the rate available as of the option date on zero-coupon U.S. government issues with a remaining term equal to the expected term of the option. The Company has not paid dividends on its common stock in the past and does not plan to pay any dividends in the foreseeable future. The Company has estimated forfeitures in determining the weighted average fair value calculation. The forfeiture rates used for options granted in the six months ended June 30, 2016 were 0% for executive employees and 10% for all other employees. The Company’s estimate of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from the estimate.

The Company recognizes the grant date fair value of stock options that are expected to vest on a straight-line basis over the vesting period, which is generally three years from the date of grant.

Restricted Stock Units (RSUs)—A summary of RSU activity for the six months ended June 30, 2016 and 2015 is presented below:


	Shares			Average Fair Value per Share^(c)		Average Life (Years)^(d)		Aggregate Intrinsic Value
Outstanding — January 1, 2015		—		$	—
Granted		515,250		$	10.80
Vested		(16,500	)	$	9.83			$	165
Forfeited		(6,000	)	$	11.37

Outstanding — June 30, 2015		492,750		$	10.83		2.37	$	5,203


Outstanding — January 1, 2016		570,790		$	8.35
Granted		394,800		$	2.61
Vested		(40,454	)	$	10.36			$	109
Forfeited		(59,736	)	$	11.32

Outstanding — June 30, 2016		865,400		$	5.43		2.75	$	1,956

(c)	Weighted-average grant date fair value

(d)	Weighted-average contractual life remaining

The Company recognizes the grant date fair value of the RSUs that are expected to vest on a straight-line basis over the period of vesting, which is generally three years from the date of grant. The Company recognizes the income tax benefits resulting from vesting of RSUs in the period they vest, to the extent the compensation expense has been recognized.

Employee Stock Purchase Plan—In November 2014, the Company’s Board of Directors approved the ESPP, which is a broadly-based stock purchase plan in which any eligible employee may elect to participate by authorizing the Company to make payroll deductions in a specific amount or designated percentage to purchase shares of the Company’s common stock at 90% of the lower of the fair market value on the first day of trading of the offering period or on the purchase date. In no event will an employee be granted ability under the ESPP that would permit the purchase of common stock with a fair market value in excess of $25 in any calendar year. The ESPP is designed to comply with Section 423 of the Code, and thus is eligible for the favorable tax treatment afforded by Section 423.

During the six months ended June 30, 2016, 80,420 shares were purchased under the ESPP. No shares were purchased under the ESPP during the six months ended June 30, 2015.

9.	INCOME TAXES

The Company’s effective tax (provision)/benefit rate of less than 1.00% for the three and six months ended June 30, 2016 and 2015, respectively, differs from statutory federal income tax rates primarily due to changes in the deferred tax asset valuation allowance and current state income taxes.

10.

RELATED PARTIES

On May 2, 2016, a Chrysalis Ventures II, L.P., a holder of more than 5% of the Company’s outstanding common stock as of March 31, 2016, purchased $2,000 of the Preferred Stock offered in the transaction discussed in Note 8. A member of the Company’s Board of Directors is the chairman of the general partner of Chrysalis Ventures II, L.P.

The Company paid $2,900 of principal and $480 of interest to settle the subordinated promissory note with the sellers of DRX (the “DRX Seller Note”) during the six months ended June 30, 2015. Current employees of the Company, including the Company’s current Chief Innovation Officer, New Markets, were employees and stockholders of DRX at the time of its acquisition, and as previous stockholders of DRX they received an interest in the DRX Seller Note. The $480 interest was paid to two related party stockholders, or entities controlled by the stockholders of the Company, pursuant to a note guarantee agreement the DRX sellers had with such related parties.

11.

SEGMENTS OF BUSINESS

The Company is organized into four reportable segments, which are based on software and service offerings. Unallocated corporate expenses and assets that are not considered when evaluating segment performance are grouped with Corporate in the following segment information:


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenue from external customers by segment:
Enterprise/Commercial	$	11,365		$	13,878		$	21,774		$	24,863
Enterprise/State		887			3,919			1,668			8,210
Medicare		4,456			4,210			8,906			8,193
Private Exchange		2,021			1,386			3,938			2,775

Consolidated revenue	$	18,729		$	23,393		$	36,286		$	44,041


Gross margin by segment:
Enterprise/Commercial	$	2,272		$	4,876		$	4,186		$	9,799
Enterprise/State		134			1,811			322			3,525
Medicare		2,726			2,332			5,551			4,608
Private Exchange		(66	)		355			211			769

Consolidated gross margin	$	5,066		$	9,374		$	10,270		$	18,701


Consolidated operating expenses:
Research and development	$	5,860		$	6,056		$	11,364		$	12,584
Sales and marketing		3,092			2,302			5,430			5,185
General and administrative		3,273			3,858			6,537			7,463

Total consolidated operating expenses	$	12,225		$	12,216		$	23,331		$	25,232


Consolidated loss from operations	$	(7,159	)	$	(2,842	)	$	(13,061	)	$	(6,531	)

Depreciation and amortization by segment:
Enterprise/Commercial	$	165		$	134		$	326		$	271
Enterprise/State		8			24			17			48
Medicare		644			640			1,288			1,281
Private Exchange		214			237			448			469
Corporate		61			245			198			481

Consolidated depreciation and amortization	$	1,092		$	1,280		$	2,277		$	2,550

Identifiable assets by segment are as follows:


	As of June 30, 2016		As of December 31, 2015
Indentifiable assets by segment:
Enterprise/Commercial	$	32,887	$	33,857
Enterprise/State		1,216		1,975
Medicare		26,471		26,198
Private Exchange		15,254		11,255
Corporate		23,329		9,404

Consolidated assets	$	99,157	$	82,689

All Company assets were held and all revenue was generated in the United States during the six months ended June 30, 2016 and 2015.

* * * * * *

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Except for the historical financial information contained herein, the matters discussed in this Quarterly Report on Form 10-Q (as well as documents incorporated herein by reference) may be considered “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. When used in this Quarterly Report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “intend,” “expect,” “anticipate,” “plan,” “project” and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report, and in particular, the risks discussed under “Risk Factors” in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2015. Except as required by law, we do not intend to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report and in the documents incorporated in this report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.

Overview

We are a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution. Our solutions support the industry evolution towards a consumer-centric experience that is transforming how health insurance is purchased and distributed. Our solutions offer personalized health insurance shopping experience that recommends the best fit insurance plan based on an individual’s preferences, health status, preferred providers, medications and expected out-of-pocket costs. Our customers are health insurance marketplace operators, such as health plans, brokers, and exchange operators that must distribute health insurance in a cost-effective manner to a growing number of insured consumers. Our solutions automate key functions in the health insurance distribution process, allowing our customers to price and present plan options accurately to consumers and efficiently enroll, renew and manage plan members.

We serve four separate but related market segments: Enterprise/Commercial, Enterprise/State, Medicare and Private Exchange. Our largest market segment is the Enterprise/Commercial market, in which we sell our solutions to health plans. Our Enterprise/State segment sells our sales automation solutions to one state government as of June 30, 2016, allowing it to offer customized individual and small group exchanges. Our Medicare segment sells web-based Medicare plan comparison and enrollment tools to a variety of different customers, including health plans, pharmacy benefit managers, or PBMs, pharmacies, field marketing organizations, or FMOs, and call centers. Lastly, our Private Exchange segment sells comprehensive defined-contribution benefit exchange solutions to benefit consultants, brokers, exchange operators and aggregators. We believe our presence in these markets and resulting access to such a broad and diverse customer base gives us a strong position at the center of the health insurance distribution marketplace.

We sell our web-based solutions and related services primarily through our direct sales force. We derive most of our revenue from software services fees, which primarily consist of monthly subscription fees paid to us for access to, usage and hosting of our web-based insurance distribution software solutions, and related production support services. Software services fees paid to us from our Enterprise/Commercial customers are based on the size of the health plan for a specified period of time, which usually ranges from three to five years, and the number of software modules used. Software services fees paid to our Enterprise/State segment are based on the number of software solutions modules contracted to be used, for a specified period of time, which usually ranges from one to three years. Software services fees paid to us from our Medicare and Private Exchange customers are based on the volume of enrollments for which our software solutions are utilized for a contracted period, which usually ranges from one to three years.

Our Enterprise/State software service and professional services fees are largely derived from multiple element contracts for non-hosted software solutions and related services for which we do not have vendor specific objective evidence, or VSOE, of relative fair

value of the contractual elements. In addition, we derive ongoing production support revenues from separately contracted arrangements for which we do have VSOE. For purposes of presentation in management’s discussion and analysis, management classifies a portion of the overall arrangement fee as software services and professional services based on an evaluation of various available indicators of fair value, including relative contract value of the software and professional services elements to total contractual value, and applies judgment to reasonably classify the arrangement fee. Our classification of multiple element arrangement fees is for management’s discussion and analysis purposes only and does not affect the timing or amount of revenue recognized.

Another component of our revenue is professional services, which we primarily derive from the implementation of our customers onto our platform, and typically include discovery, configuration and deployment, integration, testing and training. In general, it takes from six to fifteen months to implement a new Enterprise/Commercial or Enterprise/State customer’s insurance distribution solution, and from one to three months to implement a new Medicare or Private Exchange insurance distribution solution.

We also derive a small portion of our revenue from commissions earned on annual member enrollments in which our health plan network and software solutions are used in connection with each enrollment.

Management is focused on risks that could have an adverse impact on our operations and our key financial and operating performance metrics, as described below, and takes actions to mitigate those risks. In our Enterprise/Commercial segment, for example, while fluctuations in bookings are not uncommon given the sales cycle for product and services in that segment, management routinely assesses staffing levels required to support contracted business volume and adjusts staffing levels accordingly. As part of its ongoing assessment of our software capabilities, management also considers industry trends, such as consumers’ increased reliance on mobile devices, to determine where to allocate research and development funding. One of our overall strategic initiatives is to continue to increase the percentage of software services revenue (and reduce professional services revenue as a percentage of total revenue) as we believe this will have a positive impact on overall gross margins in the future.

Key Financial and Operating Performance Metrics

We regularly monitor a number of financial and operating metrics in order to measure our current performance and project our future performance. These metrics help us develop and refine our growth strategies and make strategic decisions. We discuss consolidated revenue, gross margin and the components of operating loss, as well as segment revenue and components of segment gross margin, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Components of Operating Results.” In addition, we utilize other key metrics as described below.

Contracted Backlog

We believe the balance of contracted future billings, or Contracted Backlog, is an important indicator of the economic health of our business, as it provides an important source of visibility into our future sources of revenue.

We have generally signed multiple-year subscription contracts for our software services. The timing of our invoices to our customers is a negotiated term and thus varies among our software contracts. For multiple-year agreements, it is common to invoice an initial amount at contract signing for implementation work that is deferred, followed by subsequent annual, quarterly or monthly invoices once we launch a customer, which is when our product is usable by the customer. At any point in the contract term, there may be amounts that we have not yet been contractually able to invoice. Until such time as these amounts are invoiced, they are not recorded in revenue, deferred revenue or elsewhere in our consolidated financial statements and are considered by us to be Contracted Backlog. We define Contracted Backlog as the amount of our customer agreements that we have not yet billed, which was approximately $95.7 million and $89.7 million as of June 30, 2016 and December 31, 2015, respectively.

Our customer contracts are generally only cancellable by the customer in an instance of our uncured breach, although some of our customers (including government customers) are able to terminate their respective contracts without cause or for convenience. Of our top 20 customers by 2015 revenue, the customers that can terminate their contract for convenience upon written notice represented $23.6 million, or 25.1% of our Contracted Backlog balance as of June 30, 2016, of which one Medicare segment customer represents approximately $12.2 million or 13.0% of our Contracted Backlog balance due to the recent renewal of a multiple year contract.

We fulfill a portion of the Contracted Backlog associated with a customer contract when the customer implementation process is complete. Our implementation timelines can vary between one and 15 months based on the type of solution, source and condition of the data we receive from third parties, the configurations that we agree to provide and the size of the customer. As a result, our implementation timelines are subject to significant uncertainties, which can have a material impact on our total Contracted Backlog and Contracted Backlog that we fulfill in the current year. Based on our current implementation forecasts, we expect to fulfill our total Contracted Backlog as of June 30, 2016 over the following years:


Year ending December 31	Millions of Dollars
Remainder of 2016	$	28.0
2017		30.7
2018		18.3
2019		11.1
Thereafter		7.6

TOTAL	$	95.7

We expect that the amount of our Contracted Backlog relative to the total value of our contracts will change from period to period for several reasons, including the amount of cash collected early in the contract term, the specific timing and duration of large customer contracts, varying invoicing cycles of customer contracts, potential customer upsells dependent on our customer contracts, the specific timing of customer renewal and changes in customer financial circumstances. Our Contracted Backlog does not reflect any estimated variable usage fees. Accordingly, we believe that fluctuations in our Contracted Backlog may not be a reliable indicator of our future revenue beyond one year.

Software Revenue Retention Rate

We believe that our ability to retain our customers and expand the revenue we generate from them 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 Revenue Retention Rate. We calculate this metric for a particular period by establishing the group of our customers that had active contracts for a given period (excluding our Enterprise/State customers, of which there were one and two customers as of June 30, 2016 and 2015, respectively). We then calculate our Software Revenue Retention Rate by taking the amount of software revenue we recognized for this group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the software revenue we recognized for the group in the prior period. For the trailing twelve months ended June 30, 2016 and 2015, our Software Revenue Retention Rate was greater than 92%.

Adjusted Gross Margin and Adjusted EBITDA

Within this Quarterly Report on Form 10-Q, we use adjusted gross margin and adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, to provide investors with additional information regarding our financial results. Adjusted gross margin and adjusted EBITDA are non-GAAP (Generally Accepted Accounting Principles) financial measures. We have provided below reconciliations of these measures to the most directly comparable GAAP financial measures, which for adjusted gross margin is gross margin, and for adjusted EBITDA is net loss.

We have included adjusted gross margin and adjusted EBITDA in this filing because they are key measures used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget, and to develop short- and long-term operational plans. We believe the exclusion of non-cash charges such as depreciation, amortization and stock-based compensation from adjusted EBITDA and adjusted gross margin allows us to have better insight into the core operating performance of our business. The amount of such expenses in any specific period may not directly correlate with the underlying performance of our business operations during the period and such expenses can vary significantly between periods. The use of adjusted EBITDA and adjusted gross margin provides consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations that could otherwise be masked by the effect of the expenses that we exclude from these non-GAAP financial measures and facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Additionally, securities analysts use a measure similar to adjusted EBITDA and adjusted gross margin as supplemental measures to evaluate the overall operating performance and comparison of companies, and we anticipate that our investor and analyst presentations will continue to include these measures. Accordingly, we believe that adjusted gross margin and adjusted EBITDA provide useful information to investors and others in understanding and evaluating our operating results.

Our use of adjusted gross margin and adjusted EBITDA as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. Some of these limitations are:

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized might have to be replaced in the future, and adjusted gross margin and adjusted EBITDA do not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

•

adjusted gross margin and adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

•

adjusted gross margin and adjusted EBITDA do not reflect the potentially dilutive impact of stock-based compensation;

•

adjusted gross margin and adjusted EBITDA do not reflect interest or tax payments that could reduce the cash available to us; and

•

other companies, including companies in our industry, might calculate adjusted gross margin and adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as comparative measures.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(dollars in thousands)
Reconciliation from Gross Margin to Adjusted Gross Margin
Gross Margin	$	5,066		$	9,374		$	10,270		$	18,701
Depreciation and amortization		921			952			1,862			1,900
Stock-based compensation expense		187			277			349			424

Adjusted Gross Margin	$	6,174		$	10,603		$	12,481		$	21,025


Reconciliation from Net Loss to Adjusted EBITDA
Net Loss	$	(9,900	)	$	(4,259	)	$	(17,236	)	$	(9,358	)
Depreciation and amortization		1,092			1,280			2,277			2,550
Interest expense		858			1,424			2,267			2,837
Other expense, net		1,883			1			1,883			9
Income tax (benefit) provision		—			(8	)		25			(19	)
Stock-based compensation expense		599			1,169			1,411			1,886

Total Net Adjustments	$	4,432		$	3,866		$	7,863		$	7,263

Adjusted EBITDA	$	(5,468	)	$	(393	)	$	(9,373	)	$	(2,095	)

Components of Operating Results

Revenue

We derive most of our revenue from software services fees, which primarily consist of monthly subscription fees paid to us for access to, usage and hosting of our web-based insurance distribution software solutions, and related production support services.

Software services fees paid to us from our Enterprise/Commercial customers are contracted rates based on the size of the health plan using our solutions for a specified period of time, which usually ranges from three to five years, and the number of software modules used. Software services fees paid to us from our Enterprise/State customers are contracted rates based on the number of software solutions modules being used for a specified period of time, which usually ranges from one to three years. Software services fees paid to us from our Medicare and Private Exchange customers are based on the volume of enrollments for which our software solutions are utilized for a contracted period, which usually ranges from one to three years. Software services revenue accounted for approximately 70.8% and 65.2% of our total revenue during the six months ended June 30, 2016 and 2015, respectively.

Another component of our revenue is professional services, which we primarily derive from the implementation of our customers onto our platform, and typically include discovery, configuration and deployment, integration, testing and training. In general, it takes from six to 15 months to implement a new enterprise customer’s insurance distribution solutions and from one to

three months to implement a new Medicare or Private Exchange customer’s insurance distribution solutions. Professional services revenue accounted for approximately 28.6% and 34.0% of our total revenue during the six months ended June 30, 2016 and 2015, respectively.

We also derive a small portion of other revenue from commissions earned on annual member enrollments in which our health plan network and software solutions are used in connection with each enrollment.

For all contractual arrangements that include multiple elements, we allocate revenue from a customer contract to software services and professional services based on the type of multiple element arrangement. For instance, with respect to multiple-element arrangements containing hosted software, we identify each software and professional services unit of accounting based on the terms of the customer contract and allocate revenue to each unit of accounting based on the relative selling price of each deliverable. Revenue from each element is recognized as each element is delivered. Similarly, for multiple-element arrangements containing non-hosted software, during the periods reported, we accounted for the entire arrangement as a single unit of accounting, because some or all of the deliverable elements did not have stand-alone value when the related contracts were executed. In these situations, all revenue has been deferred until delivery of the final element, at which time the contract value is recognized ratably over the longer of the contract or estimated period of customer benefit. For purposes of presentation in management’s discussion and analysis, management classifies a portion of the overall multiple-element non-hosted software arrangement fee as software and professional services fees based on an evaluation of various available indicators of fair value, including relative contract value of the software and professional services elements to total contractual value, and applies judgment to reasonably classify the arrangement fee. Our classification of non-hosted multiple element arrangement fees does not affect the timing or amount of revenue recognized.

We generally invoice our customers for software services in advance, in monthly, quarterly or annual installments. We invoice our Medicare and Private Exchange customers for implementation fees at the inception of the arrangement. We generally invoice our Enterprise/Commercial and Enterprise/State customers for implementation fees at various contractually defined times throughout the implementation process. Implementation fees that have been invoiced are initially recorded as deferred revenue until recognized.

Overhead Allocation

Expenses associated with our facilities and depreciation are allocated between cost of revenue and operating expenses based on employee payroll costs determined by the nature of work performed.

Cost of Revenue

Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits, bonuses and stock-based compensation, for employees providing services to our customers and supporting our Enterprise or SaaS platform infrastructures. 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, amortization expenses associated with deferred implementation costs and acquired intangible assets, allocated overhead and other direct costs.

Our cost of revenue is expensed as we incur the costs, with the exception of certain direct, incremental costs associated with new customer implementation efforts, which we defer. The related revenue from fees we receive for our implementation services performed before a customer is operating on our platform is deferred until the commencement of the monthly subscription and recognized as revenue ratably over the longer of the related contract term or the estimated period of customer benefit. Therefore, certain costs incurred in providing these services are expensed in periods prior to the recognition of the corresponding revenue. Our cost associated with providing implementation services has been significantly higher as a percentage of revenue than our cost associated with providing our monthly subscription services due to the labor associated with providing implementation services.

We plan to continue to expand our capacity to support our growth, which will result in higher cost of revenue in dollars. However, we expect cost of revenue as a percentage of revenue to decline and gross margins to increase primarily from the growth of the percentage of our revenue from software services and the realization of economies of scale driven by retention of our customers.

Operating Expenses

Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Salaries and personnel-related costs are the most significant component of each of these expense categories. We expect to continue to hire new employees in these areas in order to support our anticipated revenue growth. As a result, we expect our operating expenses to increase in both aggregate dollars and as a percentage of revenue in the near term, but to decrease as a percentage of revenue over the longer term as we achieve greater economies of scale.

Research and development expense. The nature of our research and development activities includes market requirements and definition, product design, software development, quality assurance and product release. 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 employees. 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.

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 employees. We generally incur a liability to pay and record expense for commissions at the time of contract signing. Additional expenses include advertising, lead generation, promotional event programs, corporate communications, travel and allocated overhead. We expect our sales and marketing expense to increase in both dollars and as a percentage of revenue in the foreseeable future as we further increase the number of our sales and marketing employees and expand our marketing activities in order to continue to grow our business.

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, information technology and human resource employees. Additional expenses include consulting and professional fees, insurance and other corporate expenses, and travel. Our general and administrative expenses have increased as a result of operating as a public company and include costs associated with compliance with the Sarbanes-Oxley Act and other regulations governing public companies, increased costs of directors’ and officers’ liability insurance, increased professional services expenses and costs associated with an enhanced investor relations function.

Other Expenses

Other expenses primarily consists of interest expense incurred on outstanding borrowings under our financing obligations, existing notes and credit facilities and fees paid to amend and terminate financing obligations and notes.

Income Tax (Expense) Benefit

Income taxes primarily consist of United States federal and state income tax net operating loss benefits, net of changes in valuation allowances. Valuation allowances are recorded to reduce deferred tax assets to the amount we believe is more likely than not to be realized.

As a result of prior equity issuances and other transactions in our stock, we have previously experienced “ownership changes” under Section 382 which limit the amount of net operating loss carryforwards available to us. We may also experience ownership changes in the future, which may result in further limitation of the amount of net operating losses which may be available in future years. At June 30, 2016 and December 31, 2015, we had a full tax valuation allowance offsetting the recorded tax benefit of our federal and state net operating loss carryforwards.

Results of Operations

Condensed Consolidated Statements of Operations Data

The following table sets forth our condensed consolidated statements of operations data for each of the periods indicated.


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
	(dollars in thousands, except share and per share amounts)
Revenue	$	18,729		$	23,393		$	36,286		$	44,041
Cost of Revenue ⁽¹⁾		13,663			14,019			26,016			25,340

Gross Margin		5,066			9,374			10,270			18,701


Operating Expenses:
Research and Development ⁽¹⁾		5,860			6,056			11,364			12,584
Sales and Marketing ⁽¹⁾		3,092			2,302			5,430			5,185
General and Administrative ⁽¹⁾		3,273			3,858			6,537			7,463

Total Operating Expenses		12,225			12,216			23,331			25,232

Loss from Operations		(7,159	)		(2,842	)		(13,061	)		(6,531	)

Other Expenses:
Interest Expense		858			1,424			2,267			2,837
Other Expense, net		1,883			1			1,883			9

Loss before Income Taxes		(9,900	)		(4,267	)		(17,211	)		(9,377	)

Income Tax Benefit (Expense)		—			8			(25	)		19

Net Loss	$	(9,900	)	$	(4,259	)	$	(17,236	)	$	(9,358	)

Net loss per common share - basic and diluted	$	(0.47	)	$	(0.20	)	$	(0.81	)	$	(0.43	)

Weighted Average Common Shares Outstanding - basic and diluted		22,217,696			21,710,951			22,164,984			21,703,483

Other Financial Data:
Adjusted gross margin		6,174			10,603			12,481			21,025
Adjusted EBITDA		(5,468	)		(393	)		(9,373	)		(2,095	)

(1)	Cost of revenue and operating expenses include stock-based compensation expense as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
	(dollars in thousands)
Cost of Revenue	$	187	$	277	$	349	$	424
Research and Development		56		327		243		542
Sales and Marketing		79		142		195		188
General and Administrative		277		423		624		732

The following table sets forth our condensed consolidated statements of operations data as a percentage of revenue for each of the periods indicated.


	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of Revenue		73.0	%		59.9	%		71.7	%		57.5	%

Gross Margin		27.0	%		40.1	%		28.3	%		42.5	%


Operating Expenses:
Research and Development		31.3	%		25.9	%		31.3	%		28.6	%
Sales and Marketing		16.5	%		9.8	%		15.0	%		11.8	%
General and Administrative		17.5	%		16.5	%		18.0	%		16.9	%

Total Operating Expenses		65.3	%		52.2	%		64.3	%		57.3	%

Loss from Operations		(38.2	%)		(12.1	%)		(36.0	%)		(14.8	%)

Other Expenses:
Interest Expense		4.6	%		6.1	%		6.2	%		6.4	%
Other Expense, net		10.1	%		0.0	%		5.2	%		0.0	%

Loss before Income taxes		(52.9	%)		(18.2	%)		(47.4	%)		(21.3	%)

Income Tax Benefit (Expense)		0.0	%		0.0	%		(0.1	%)		(0.1	%)

Net Loss		(52.9	%)		(18.2	%)		(47.5	%)		(21.2	%)

Our Segments

The following table sets forth segment results for revenue and gross margin for the periods indicated:


	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016		2015
	(dollars in thousands)
Segment Statements of Operations Data:
Revenue:
Enterprise/Commercial	$	11,365		$	13,878	$	21,774	$	24,863
Enterprise/State		887			3,919		1,668		8,210
Medicare		4,456			4,210		8,906		8,193
Private Exchange		2,021			1,386		3,938		2,775

Total Revenue	$	18,729		$	23,393	$	36,286	$	44,041


Gross Margin:
Enterprise/Commercial	$	2,272		$	4,876	$	4,186	$	9,799
Enterprise/State		134			1,811		322		3,525
Medicare		2,726			2,332		5,551		4,608
Private Exchange		(66	)		355		211		769

Total Gross Margin	$	5,066		$	9,374	$	10,270	$	18,701

Comparison of Three Months Ended June 30, 2016 and 2015

Revenue


	Three Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
Revenue by Type:	(dollars in thousands)
Software services	$	12,761		68.2	%	$	15,891		67.9	%	$	(3,130	)		(19.7	%)
Professional services		5,869		31.3	%		7,477		32.0	%		(1,608	)		(21.5	%)
Other		99		0.5	%		25		0.1	%		74			296.0	%

Total revenue	$	18,729		100.0	%	$	23,393		100.0	%	$	(4,664	)		(19.9	%)

The decline in software services revenue was primarily attributable to a $2.3 million decrease resulting from the 2015 non-renewal of two state exchange contracts and a $1.4 million decrease in the volume of software services delivered to several Enterprise/Commercial customers, partially offset by increases in software services delivered to Medicare and Private Exchange customers added during the past year. The decrease in professional services revenue was attributable to the impact of the $3.6 million one-time professional services revenue that was recognized in 2015 upon the termination of our contractual relationship of two Enterprise/Commercial customers in the three months ended June 30, 2015, and a $0.7 million decrease related to the previously mentioned 2015 non-renewal of two state exchange contracts, partially offset by a $2.7 million increase attributable to year-over-year growth in customers implemented on our software solutions in all segments other than Enterprise/State.

Segment Revenue


	Three Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
Revenue by Segment:	(dollars in thousands)
Enterprise/Commercial	$	11,365		60.6	%	$	13,878		59.3	%	$	(2,513	)		(18.1	%)
Enterprise/State		887		4.6	%		3,919		16.8	%		(3,032	)		(77.4	%)
Medicare		4,456		23.8	%		4,210		18.0	%		246			5.8	%
Private Exchange		2,021		11.0	%		1,386		5.9	%		635			45.8	%

Total Revenue	$	18,729		100.0	%	$	23,393		100.0	%	$	(4,664	)		(19.9	%)

The decrease in our Enterprise/Commercial revenue was primarily attributable to the impact of the $3.6 million one-time professional services revenue recognized in the three months ended June 30, 2015 upon the termination of our contractual relationship with two Enterprise/Commercial customers, partially offset by an increase in other professional services revenue from an increase in installed customers. The decrease in our Enterprise/State revenue was primarily attributable to the non-renewal of two state exchange contracts in 2015. The growth in our Medicare and Private Exchange revenue was primarily attributable to an increase in software services revenue driven by an increase in the number of health plans and broker customers using our software solutions as of June 30, 2016 as compared to the three months ended June 30, 2015.

Cost of Revenue


	Three Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
Cost of Revenue	$	13,663		73.0	%	$	14,019		59.9	%	($	356	)		(2.5	%)

The decrease in cost of revenue was primarily attributable to a $0.3 million increase in salaries and personnel-related costs and professional fees to outside contractors, partially offset by a $0.7 million increase in capitalization of deferred implementation costs related to the implementation of new customer software solutions. The increase in personnel-related costs and professional fees to outside contractors primarily related to certain of our Enterprise/Commercial segment customers. We have taken actions to reduce the use of variable outside contractor labor and costs in the second half of 2016, which we believe will reduce our cost of revenue and improve our gross margins.

As a percentage of revenue, our costs of revenue increased primarily due to a reduction of Enterprise/State and Enterprise/Commercial revenue from add on software service projects completed in the three months ended June 30, 2016 as compared to June 30, 2015 and the relatively fixed cost structure of the Enterprise/Commercial segment.

Segment Gross Margins


	Three Months Ended June 30,
	2016						2015					Period-to-Period Change
	Amount			% of Revenue			Amount		% of Revenue			Amount			%
Segment Gross Margin:	(dollars in thousands)
Enterprise/Commercial	$	2,272			20.0	%	$	4,876		35.1	%	$	(2,604	)		(53.4	%)
Enterprise/State		134			15.1	%		1,811		46.2	%		(1,677	)		(92.6	%)
Medicare		2,726			61.2	%		2,332		55.4	%		394			16.9	%
Private Exchange		(66	)		(3.3	%)		355		25.6	%		(421	)		(118.6	%)

Total Gross Margin	$	5,066			27.0	%	$	9,374		40.1	%	$	(4,308	)		(46.0	%)

The decrease in Enterprise/Commercial gross margin was driven primarily by a $3.6 million decrease in revenue and a $2.6 million decrease in costs of revenue related to the termination of our contractual relationship with two Enterprise/Commercial customers during the comparative three months ended June 30, 2015, and a decrease in completed add on software services with existing installed customers in the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The decrease in revenue, our relatively fixed cost structure, and what we believe to be a temporary increase in professional fees to outside contractors related to certain of our Enterprise/Commercial customers have decreased gross margins as a percentage of revenue. Our Enterprise/Commercial gross margin included $0.1 million depreciation and amortization for each of the three months ended June 30, 2016 and 2015.

The decrease in Enterprise/State gross margin was driven primarily by a decrease in revenue and in cost of revenue, both primarily attributable to two customer arrangements that were not renewed beyond 2015. Our Enterprise/State gross margin included less than $0.1 million of depreciation and amortization for each of the three months ended June 30, 2016 and 2015.

The increase in Medicare gross margin was attributed to a $0.2 million increase in revenue primarily related to an increase in the number of health plans and broker customers using our platform and a $0.1 million decrease in cost of revenue primarily related to a decrease in share-based and incentive compensation in the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. Our Medicare gross margin included $0.6 million of depreciation and amortization for each of the three months ended June 30, 2016 and 2015.

The decrease in Private Exchange gross margin was driven primarily by a $0.6 million increase in revenue and $1.0 million increase in cost of revenue. The increase in revenue was primarily attributable to an increase in the number of customers using our platform, and the increase in cost of revenue was primarily attributable to an increase in our cost structure to support current and expected customer growth in the segment and $0.4 million of integration costs associated with the June 7, 2016 acquisition of ConnectedHealth, LLC. Our Private Exchange gross margin included $0.2 million of depreciation and amortization for each of the three months ended June 30, 2016 and 2015.

Research and Development


	Three Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
Research and Development	$	5,860		31.3	%	$	6,056		25.9	%	($	196	)		(3.2	%)

The decrease in research and development expense was primarily attributable to a $0.3 million decrease in salaries and personnel-related costs, inclusive of reductions in share-based and incentive compensation, partially offset by an increase in engineering consulting fees used to assist in product development efforts expected to benefit our Enterprise/Commercial and Private Exchange segments, as compared to the three months ended June 30, 2015.

While we expect to continue our research and development investment in new software solutions and functionality, we believe such expense will decline over time to our long-term target of under twenty percent of revenue.

Sales and Marketing


	Three Months Ended June 30
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount		%
	(dollars in thousands)
Sales and Marketing	$	3,092		16.5	%	$	2,302		9.8	%	$	790		34.3	%

The increase in sales and marketing expense was primarily attributable to increasing our sales and marketing headcount as we make efforts to expand our existing customer relationships and expand the end markets we serve. Additionally, the increase includes discrete costs related to the end of service by our former Executive Vice President of Sales and Marketing and a $0.3 million increase in commission expense associated with higher commissionable bookings in the three months ended June 30, 2016, as compared to the three months ended June 30, 2015.

General and Administrative


	Three Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
General and Administrative	$	3,273		17.5	%	$	3,858		16.5	%	($	585	)		(15.2	%)

The decrease in general and administrative expense was primarily attributable to a $0.6 million decrease in personnel costs, inclusive of reductions in share-based and incentive compensation, along with a $0.2 million decrease in amortization resulting from the full amortization of a covenant not to compete from our January 2013 DRX acquisition, partially offset by approximately $0.1 million of expenditures related to our June 7, 2016 acquisition of ConnectedHealth, LLC.

Interest Expense


	Three Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
Interest Expense	$	858		4.6	%	$	1,424		6.1	%	($	566	)		(39.7	%)

The decrease in interest expense was primarily attributable to a lower average debt balance, as well as lower weighted average cost of debt on our outstanding borrowings during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The decrease in our interest expense is directly attributable to our efforts to increase our balance sheet liquidity through our May 2, 2016 $52.0 million preferred stock offering and repayment of $30.0 million of subordinated notes, and our June 8, 2016 amendment and restatement of our bank credit facility.

Given our borrowings as of June 30, 2016, and our anticipated average outstanding borrowings for the remainder of 2016, we expect our third and fourth quarter 2016 interest expense will be lower than the comparative periods of 2015.

Other Expense, Net


	Three Months Ended June 30,
	2016					2015				Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue		Amount		%
	(dollars in thousands)
Other expense, net	$	1,883		10.1	%	$	1		*	$	1,882		*

*	Not meaningful

The increase in other expense, net was primarily due to a $0.6 million breakage fee and the $0.5 million recognition of OID and deferred financing costs triggered by the early extinguishment of the THL Note, in addition to $0.4 million of refinancing fees and the recognition of $0.4 million of previously deferred financing costs triggered by the amendment of our bank credit facility in the three months ended June 30, 2016.

Comparison of Six Months Ended June 30, 2016 and 2015

Revenue


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
Revenue by Type:	(dollars in thousands)
Software services	$	25,677		70.8	%	$	28,706		65.2	%	$	(3,029	)		(10.6	%)
Professional services		10,383		28.6	%		14,986		34.0	%		(4,603	)		(30.7	%)
Other		226		0.6	%		349		0.8	%		(123	)		(35.2	%)

Total revenue	$	36,286		100.0	%	$	44,041		100.0	%	$	(7,755	)		(17.6	%)

The decline in software services revenue was primarily attributable to a $4.6 million decrease resulting from the 2015 non-renewal of two state exchange contracts, partially offset by increases in software services delivered to Medicare and Private Exchange customers added during the past year. The decrease in professional services revenue was attributable to the 2015 accelerated recognition of the $3.6 million of revenue recognized upon the termination of our contractual relationship with two Enterprise/Commercial customers in the six months ended June 30, 2015, and a $1.9 million decrease related to the previously mentioned 2015 non-renewal of two state exchange contracts, partially offset by an increase attributable to year-over-year growth in customers implemented on our software solutions in all segments other than Enterprise/State.

As a percent of total revenue, software services was higher and professional services was lower, respectively, as compared to the six months ended June 30, 2015, due to the impact of the $3.6 million one-time professional services revenue that was recognized upon termination of the two Enterprise/Commercial customers in the six months ended June, 30, 2015.

Segment Revenue


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
Revenue by Segment:	(dollars in thousands)
Enterprise/Commercial	$	21,774		60.0	%	$	24,863		56.5	%	$	(3,089	)		(12.4	%)
Enterprise/State		1,668		4.6	%		8,210		18.6	%		(6,542	)		(79.7	%)
Medicare		8,906		24.5	%		8,193		18.6	%		713			8.7	%
Private Exchange		3,938		10.9	%		2,775		6.3	%		1,163			41.9	%

Total Revenue	$	36,286		100.0	%	$	44,041		100.0	%	$	(7,755	)		(17.6	%)

The decrease in our Enterprise/Commercial revenue was primarily attributable to the impact of the $3.6 million one-time professional services revenue recognized in the six months ended June 30, 2015 upon the termination of our contractual relationship with two Enterprise/Commercial customers, partially offset by an increase in software services and professional services revenue from an increase in installed customers. The decrease in our Enterprise/State revenue was primarily attributable to the non-renewal of two state exchange contracts in 2015. The growth in our Medicare and Private Exchange revenue was primarily attributable to an increase in software services revenue driven by an increase in the number of health plans and broker customers using our platform as of June 30, 2016 as compared to the six months ended June 30, 2015.

Cost of Revenue


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount		%
	(dollars in thousands)
Cost of Revenue	$	26,016		71.7	%	$	25,340		57.5	%	$	676		2.7	%

The increase in cost of revenue was primarily attributable to a $0.9 million increase in professional fees to outside contractors driven primarily by an increase in outside contractor costs related primarily to the completion of our post-implementation warranty period efforts in the first quarter of 2016 for a large customer we implemented in the later part of fourth quarter 2015, a $1.4 million increase in amortization of previously deferred implementation costs as an increased number of customers became implemented on our software solutions and a $0.2 million increase in salaries and personnel-related and other costs. These increases were partially offset by a $1.8 million increase in capitalization of deferred implementation costs related to the implementation of new customer software solutions.

As a percentage of revenue our costs of revenue increased, primarily due to a reduction of Enterprise/State and Enterprise/Commercial revenue from add on software services projects completed in the six months ended June 30, 2016 as compared to June 30, 2015, while our relatively fixed cost structure of the Enterprise/Commercial segment remained, in addition to an increase in our post-implementation warranty period efforts in the first quarter of 2016 as discussed above.

Segment Gross Margins


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
Segment Gross Margin:	(dollars in thousands)
Enterprise/Commercial	$	4,186		19.2	%	$	9,799		39.4	%	$	(5,613	)		(57.3	%)
Enterprise/State		322		19.3	%		3,525		42.9	%		(3,203	)		(90.9	%)
Medicare		5,551		62.3	%		4,608		56.2	%		943			20.5	%
Private Exchange		211		5.4	%		769		27.7	%		(558	)		(72.6	%)

Total Gross Margin	$	10,270		28.3	%	$	18,701		42.5	%	$	(8,431	)		(45.1	%)

The decrease in Enterprise/Commercial gross margin was driven primarily by a $0.9 million increase in outside contractor costs related primarily to the completion of our post-implementation warranty period efforts in the first quarter of 2016 for a larger customer we implemented in the later part of fourth quarter 2015, the impact of revenue and margin recognized in the first quarter of 2015 triggered by the final customer acceptance of a larger multiple element software and services solutions and the $3.6 million decrease in revenue and $2.6 million decrease in cost of revenue related to the termination of our contractual relationship with two Enterprise/Commercial customers in the second quarter of 2015. The decrease in revenue, our relatively fixed cost structure, and what we believe to be a temporary increase in professional fees to outside contractors have decreased gross margins as a percentage of revenue. Our Enterprise/Commercial gross margin included $0.2 million depreciation and amortization for each of the six months ended June 30, 2016 and 2015.

The decrease in Enterprise/State gross margin was driven primarily by a decrease in revenue and in cost of revenue both largely attributable to two customer arrangements that were not renewed beyond 2015. Our Enterprise/State gross margin included less than $0.1 million of depreciation and amortization for each of the six months ended June 30, 2016 and 2015.

The increase in Medicare gross margin was attributed primarily to a $0.7 million increase in revenue mainly related to an increase in the number of health plans using our platform and a $0.2 million decrease in cost of revenue primarily related to a decrease in share-based and incentive compensation in the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. Our Medicare gross margin included $1.3 million of depreciation and amortization for each of the six months ended June 30, 2016 and 2015.

The decrease in Private Exchange gross margin was driven primarily by a $1.2 million increase in revenue and $1.7 million increase in cost of revenue. The increase in revenue was primarily attributable to an increase in the number of customers using our platform, and the increase in cost of revenue was primarily attributable to an increase in our cost structure to support our current and expected customer growth in the segment and $0.4 million of integration costs associated with the June 7, 2016 acquisition of ConnectedHealth, LLC. Our Private Exchange gross margin included $0.4 million of depreciation and amortization for each of the six months ended June 30, 2016 and 2015.

Research and Development


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
Research and Development	$	11,364		31.3	%	$	12,584		28.6	%	($	1,220	)		(9.7	%)

The decrease in research and development expense was primarily attributable to a $1.0 million decrease in salaries and personnel-related costs, inclusive of reductions in share-based and incentive compensation. Additionally, we experienced an approximate $0.2 million year-over-year decrease in engineering consulting fees used to assist in product development due to the completion of certain efforts expected to benefit our Enterprise/Commercial and Private Exchange segments.

Sales and Marketing


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount		%
	(dollars in thousands)
Sales and Marketing	$	5,430		15.0	%	$	5,185		11.8	%	$	245		4.7	%

The increase in sales and marketing expense was primarily attributable to a $0.2 million increase in salaries personnel-related costs, due to increases in our sales and marketing headcount and discrete costs related to the end of service by our former Executive Vice President of Sales and Marketing. In addition, there was a $0.1 million increase in commission expense associated with higher commissionable booking levels in the six months ended June 30, 2016, as compared to the six months ended June 30, 2015, which was partially offset by a $0.1 million decrease in other expenses attributable to our 2015 Client Forum, as compared to the six months ended June 30, 2015.

We believe our 2016 investment in sales and marketing headcount will provide us resources to expand our existing customer relationships and the end markets we serve, most notably in our Private Exchange and Enterprise/Commercial segments.

General and Administrative


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
General and Administrative	$	6,537		18.0	%	$	7,463		16.9	%	($	926	)		(12.4	%)

The decrease in general and administrative expense was primarily attributable to a $0.7 million decrease in share-based and incentive compensation and a $0.3 million decrease in amortization resulting from the full amortization of a covenant not to compete from our January 2013 DRX acquisition, partially offset by approximately $0.1 million of expenditures related to our June 7, 2016 acquisition of ConnectedHealth, LLC.

Interest Expense


	Six Months Ended June 30,
	2016					2015					Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue			Amount			%
	(dollars in thousands)
Interest Expense	$	2,267		6.2	%	$	2,837		6.4	%	($	570	)		(20.1	%)

The decrease in interest expense was primarily attributable to a lower average debt balance, as well as lower weighted average cost of debt on our outstanding borrowings during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The decrease in our interest expense is directly attributable to our efforts to increase our balance sheet liquidity through our May 2, 2016 $52.0 million preferred stock offering and repayment of $30.0 million of subordinated notes, and our June 8, 2016 amendment and restatement of our bank credit facility.

Other Expense, net


	Six Months Ended June 30,
	2016					2015				Period-to-Period Change
	Amount		% of Revenue			Amount		% of Revenue		Amount		%
	(dollars in thousands)
Other expense, net	$	1,883		5.2	%	$	9		*	$	1,874		*

*	Not meaningful

Liquidity and Capital Resources

Sources of Liquidity

We fund our operations primarily through cash from operating activities and bank and subordinated debt borrowings. As of June 30, 2016, we have cash and cash equivalents of $19.0 million which is held for working capital and other general corporate purposes, including to develop new technologies, fund capital expenditures, make investments in or acquisitions of other businesses, solutions or technologies or repay a portion of our outstanding borrowings. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit and money market accounts that are currently providing only a minimal return.

On April 28, 2016, our shareholders approved the issuance of 52,000 shares of Series A Convertible Preferred Stock (the “Preferred Stock”) and shares of common stock issuable upon conversion of the Preferred Stock pursuant to the Investment Agreement, dated March 11, 2016, as amended by and among the Company, Francisco Partners IV, L.P., Francisco Partners IV-A, L.P. and Chrysalis Ventures II, L.P.

On May 2, 2016 we issued and sold the newly created Preferred Stock for an aggregate purchase price of $52.0 million. Net of customary transaction costs, we received cash of approximately $49.3 million, of which we used approximately $30.6 million to subsequently repay the principal balance, accrued interest, loan termination and professional fees associated with the THL Note. The remainder is available for general corporate purposes (see Notes 7, 8 and 10 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Form 10-Q).

We believe that cash from operations, the net proceeds from the May 2, 2016 Preferred Stock offering, the expected reductions in our cash used for on-going debt service as a result of the repaying the THL Note, and available capacity under our Amended Credit Facility described below, will provide liquidity to meet anticipated future short-term capital requirements for the next twelve months. The sufficiency of these liquidity sources to fund necessary and committed capital needs will be dependent upon our ability to meet covenant requirements of our Amended Credit Facility.

Our Amended Credit Facility, requires among other things, that we maintain a net leverage ratio covenant, defined as Funded Debt less Qualified Cash to EBITDA on a quarter-end basis of 4:1 beginning September 30, 2016 and declining to 1.75:1 for the quarter ended September 30, 2018. While we don’t anticipant a breach of any of our Amended Credit Facility covenants, if certain operating results are not achieved we may need to repay some of our Amended Credit Facility borrowings to maintain compliance with our net leverage ratio covenant.

In the future, we may seek to access the capital markets to raise additional equity 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. In addition, if we are unable to comply with our debt covenants in the future and as a result default on our loan agreements, all of our approximately $35.4 million of outstanding June 30, 2016 borrowings would become immediately payable, which could adversely affect our financial condition.

Senior Credit Facility

We have a bank credit facility (the “Credit Facility”) that provides for short-term working capital and long-term investment needs.

On June 8, 2016, the Credit Facility was amended and restated (the “Amended Credit Facility”), to (i) extend the maturity date to June 8, 2021 from January 18, 2018, (ii) continue to provide for up to $10.0 million of revolving credit, or the Senior Revolving Credit Facility, through the maturity date, (iii) increase the term loan, or Senior Term Loan, funding to $35.0 million from approximately $20.0 million at June 8, 2016, (iv) increase the quarterly term loan repayment amount to $0.4 million, beginning June 30, 2016, from $0.3 million, and (v) replace existing covenants with (a) a net leverage ratio covenant beginning with the quarter ending September 30, 2016 and continuing for each quarter thereafter and a minimum liquidity requirement of $10.0 million at all times, in each case until we achieve trailing twelve month EBITDA of greater than $10.0 million and (b) thereafter a fixed coverage ratio covenant of 1.25:1.00 on a quarter-end basis through September 30, 2018 and 1:50:1.00 on a quarter end basis thereafter. The net leverage ratio covenant, as defined, requires that the Company maintain a Funded Debt less Qualified Cash to EBITDA ratio on a quarter-end basis of 4:1 beginning September 30, 2016 and declining to 1.75:1 for the quarter ended September 30, 2018.

The applicable interest rates on the Senior Term Loan and Senior Revolving Credit Facility have been replaced with variable rates equal to base rate plus 2.75% to 4.25% or LIBOR rate plus 3.75% to 5.25% based on achievements with respect to net leverage and total leverage.

Subordinated Loans

Prior to May 3, 2016 we had a Senior Subordinated Term Loan Agreement with THL Corporate Finance, Inc., or the THL Note, for total proceeds of $30.0 million less $0.7 million of original issue discount. On May 3, 2016, we repaid the $30,000 principal and accrued interest to settle the THL Note (see Note 7 of the Notes to Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q).

The following table summarizes the principal balances of our outstanding borrowings as of June 30, 2016:


	Outstanding
	Principal Balance
	(in thousands)
Credit Facility: Revolving line of credit	$	360
Credit Facility: Term loans		35,000

	$	35,360

Cash Flows

Our cash flows were as follows for the six months ended June 30, 2016 and 2015:


	Six Months Ended June 30,
	2016			2015
Net cash flows (used in) provided by:	(in thousands)
Operating activities	$	(15,468	)	$	(13,246	)
Investing activities		(5,326	)		(407	)
Financing activities		34,350			(4,554	)

Net increase (decrease) in cash and cash equivalents	$	13,556		$	(18,207	)

Operating Activities

For the six months ended June 30, 2016, our net cash and cash equivalents used in operating activities of $15.5 million consisted of a net loss of $17.2 million and $4.0 million of cash used by changes in working capital, partially offset by $5.8 million in adjustments for non-cash and other items. The cash used by changes in working capital primarily consisted of a decrease in deferred revenue of $5.7 million, partially offset by a $1.5 million decrease in accounts receivable and a $0.7 million increase in accounts payable. The decrease in deferred revenue was primarily a result of contracts closed during prior periods with associated upfront cash fees, on which we are currently recognizing revenue as the contractual obligations are complete and software service usage periods have begun. For the six months ended June 30, 2016, we received less cash from upfront implementation services billings than in prior periods, which is largely attributed to a reduction in the amount of ongoing Enterprise/Commercial segment implementation efforts and having one remaining Enterprise/State customer as of June 30, 2016. The decrease in accounts receivable was primarily attributable to collections of our typically higher fourth quarter billings associated with insurance plan annual enrollment periods.

For the six months ended June 30, 2015, our net cash and cash equivalents used in operating activities of $13.2 million consisted of a net loss of $9.4 million and $9.0 million of cash used by changes in working capital, partially offset by $5.1 million in adjustments for non-cash and other items. The cash used by changes in working capital primarily consisted of a decrease in deferred revenue of $14.1 million, partially offset by a $2.5 million decrease in accounts receivable. The decrease in deferred revenue was primarily a result of contracts closed during prior periods with associated upfront cash fees, on which we are currently recognizing revenue as the contractual obligations are complete and software service usage periods have begun. The decrease in accounts receivable was primarily attributable to collections of our typically higher fourth quarter billings associated with insurance plan annual enrollment periods.

Generally, a substantial amount of revenue in any given period comes from the recognition of previously collected and deferred revenue, while period-end accounts receivable balances are directly influenced by the timing of contractually negotiated milestone and time-based advance billings and their subsequent collection. We generally have the contractual right to invoice and collect fees from customers ahead of delivery and revenue recognition of our software and professional services.

Investing Activities

For the six months ended June 30, 2016, net cash used in investing activities was $5.3 million, consisting of $4.7 million for the acquisition of ConnectedHealth, net of cash acquired. The remainder of the $0.6 million consisted of the purchase of property and equipment.

For the six months ended June 30, 2015, net cash used in investing activities was $0.4 million, for the purchase of property and equipment.

Financing Activities

For the six months ended June 30, 2016, net cash provided by financing activities was $34.4 million, consisting primarily of $49.3 million net proceeds from our May 2, 2016 preferred stock offering and $16.2 million of term debt borrowings under our Amended Credit Facility, partially offset by the $30.0 million repayment of the THL Note and payment of $1.1 million of financing fees.

For the six months ended June 30, 2015, net cash used in financing activities was $4.6 million, consisting primarily of $3.8 million of repayments of debt, including the scheduled repayment of the DRX Seller Note, and payment of $0.7 million of direct offering costs associated with our December 2014 initial public offering.

Quarterly Trends and Seasonality

Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, some of which are out of our control. These fluctuations are primarily driven by an increase in the third and fourth quarters in activity at our customers in preparation for and during the annual insurance enrollment cycle, which occurs annually during our fourth quarter. Our historical results should not be considered a reliable indicator of our future results of operations.

Contractual Obligations and Commitments

Our principal commitments consist of obligations under our outstanding debt facilities, non-cancelable leases for our office space and computer equipment and purchase commitments for our co-location and other support services.

The following table summarizes these contractual obligations as of June 30, 2016, and provides an update to the information previously presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, to reflect changes in our debt and the impacts of acquiring ConnectedHealth. Future events could cause actual payments to differ from these estimates.


Contractual Obligations:	Total		Less than 1 year⁽³⁾		1-3 years⁽⁴⁾		3-5 years⁽⁴⁾		More than 5 years⁽⁴⁾
	(in thousands)
Long-term debt — Revolving line of credit
Principal⁽¹⁾	$	360		360	$	—	$	—	$	—
Interest⁽²⁾		2		2		—		—		—
Long-term debt — Other senior and subordinated
Principal		35,000		875		3,500		3,500		27,125
Interest⁽²⁾		8,968		1,026		3,846		3,433		663
Operating lease obligations		8,374		1,531		2,533		1,763		2,547
Capital lease obligations		161		126		35		—		—

Total	$	52,865	$	3,920	$	9,914	$	8,696	$	30,335

(1)	Repayment of the revolving line of credit is due at end of the term in June 2021. Early repayment is allowed, and the revolving line of credit and interest was repaid subsequent to June 30, 2016.

(2)	Includes estimated interest payments based on contractual rates as of June 30, 2016.

(3)	Includes obligations for the remainder of 2016.

(4)	Includes obligations for the annual periods following the year ended December 31, 2016.

Off-Balance Sheet Arrangements

As of June 30, 2016, we had a standby letter of credit totaling $0.2 million as security for rented office space.

Critical Accounting Policies and Significant Judgments and Estimates

During the six months ended June 30, 2016, there were no significant changes to our critical accounting policies and significant judgments and estimates since reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Recent Accounting Pronouncements

See Note 2 to the Condensed Consolidated Financial Statements for information on new accounting standards.

JOBS Act

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As defined in the JOBS Act, a public company whose initial public offering of common equity securities occurred after December 8, 2011 and whose annual gross revenue is less than $1.0 billion will, in general, qualify as an “emerging growth company” until the earliest of:

•

the last day of its fiscal year following the fifth anniversary of the date of its initial public offering of common equity securities;

•

the last day of its fiscal year in which it has annual gross revenue of $1.0 billion or more;

•

the date on which it has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

•

the date on which it is deemed to be a “large accelerated filer,” which will occur at such time as the company (a) has an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of its most recently completed second fiscal quarter, and (b) has been required to file annual and quarterly reports under the Securities Exchange Act of 1934 for a period of at least 12 months and (c) has filed at least one annual report pursuant to the Securities Act of 1934.

Under this definition, we are an “emerging growth company” and could remain an emerging growth company until as late as December 31, 2019.

As an emerging growth company we have chosen to rely on such exemptions and are therefore not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate Risk

We are exposed to market risk related to changes in interest rates. Borrowings under the term loan and revolving line of credit with Wells Fargo Bank, which was amended and restated in June 2016, bear interest at rates that are variable. Increases in the LIBOR or Prime Rate would increase the amount of interest payable under these borrowings. As of June 30, 2016, we had total borrowings of $35.4 million subject to a variable interest rate. As a result, each change of one percentage point in interest rates would result in an approximate $0.4 million change in our annual interest expense on our outstanding borrowings as of June 30, 2016. Any debt we incur in the future may also bear interest at variable rates.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition, or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2016, which were identified in connection with management’s evaluation required by Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in litigation relating to claims arising in the ordinary course of business. Management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material impact on our consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that are currently considered immaterial. The trading price of our common stock could decline due to any of the risks and uncertainties described below, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes.

Risks Related to Our Business

We have a history of losses and we may be unable to achieve or sustain profitability.

We experienced a net loss of $7.3 million, $10.2 million and $26.4 million in 2015, 2014 and 2013, respectively. We cannot predict if we will achieve profitability in the near future or at all. We expect to make significant future expenditures to develop and expand our business. Our recent growth in revenue may not be sustainable, and we might not achieve sufficient revenue to achieve or maintain profitability. We may incur significant losses in the future for a number of reasons, including the other risks described in this Quarterly Report on Form 10-Q, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future.

Failure to manage our anticipated growth effectively could increase our expenses, decrease our revenue and prevent us from implementing our business strategy.

We have experienced growth for several years, which puts strain on our business. To manage this and our anticipated future growth effectively, we must continue to maintain and enhance our information technology infrastructure, financial and accounting systems and controls. We also must attract, train and retain a significant number of qualified software engineers, technical and management personnel, sales and marketing personnel, customer support personnel and professional services personnel. Failure to effectively manage our growth could lead us to over-invest or under-invest in development and operations, result in weaknesses in our infrastructure, systems or controls, give rise to operational mistakes, losses, loss of productivity or business opportunities and result in loss of employees and reduced productivity of remaining employees. Our anticipated growth could require significant capital expenditures and might divert financial resources from other projects such as the development of new products and services. If our management is unable to effectively manage our anticipated growth, our expenses might increase more than expected, our revenue could decline or might grow more slowly than expected, and we might be unable to implement our business strategy. The quality of our products and services might suffer, which could negatively affect our reputation and harm our ability to retain and attract customers.

The market for health insurance exchanges in the United States is relatively undeveloped, rapidly evolving and volatile, which makes it difficult to forecast adoption rates and demand for our solutions. If the market does not develop or develops more slowly than we expect, or if individuals, brokers or health plans select more traditional or alternative channels for the purchase and sale of health insurance, it could have a material adverse effect on our business and results of operations.

The market for health insurance exchanges in the United States is relatively undeveloped, rapidly evolving and volatile. Accordingly, our future financial performance will depend in part on growth in this market and on our ability to adapt to emerging demands and trends in this market. Demand for our exchange solutions has been driven in large part by recent regulatory changes, broader use of the Internet, shifts from group plans to the purchase of individual plans and advances in technology. It is difficult to predict, with any precision, adoption rates or the future growth rate and size of our target market. The market for health insurance sales automation software is relatively new and unproven, and it is uncertain whether it will achieve and sustain high levels of demand and market acceptance. The volatility and rapidly evolving nature of the market in which we operate, as well as other factors that are beyond our control, reduces our ability to accurately evaluate our long-term outlook and forecast annual performance.

Additionally, our success depends in part upon widespread individual and health plan acceptance of the Internet as a shopping platform and marketplace for the purchase and sale of health insurance. Individuals, employers, employees and health plans may

choose to depend on more traditional sources, such as individual agents, or alternative sources may develop, including as a result of significant reforms to healthcare legislation through the Patient Protection and Affordable Care Act, or PPACA, and the Healthcare and Education Reconciliation Act of 2010, or HCERA, which we refer to collectively as Healthcare Reform.

A reduction in demand for health insurance exchanges caused by lack of acceptance, technological challenges, and competing solutions, or as a result of individuals, brokers, or health plans determining that other distribution channels for health insurance are superior to ours, would have a material adverse effect on our business, growth, results of operations and financial condition.

If our existing customers do not continue or renew their agreements with us, renew at lower fee levels or decline to license additional software or purchase additional applications and services from us, it could have a material adverse effect on our business and operating results.

We derive a significant portion of our revenue from renewal of existing customer agreements and sales of additional software and services to existing customers and expect to continue to do so. As a result, achieving a high renewal rate of our customer agreements and selling additional software and services is critical to our future operating results.

We generally sell our software and services pursuant to agreements for terms of multiple years. Our customers may choose not to renew these contracts after the initial contract period expires. Additionally, some of our customers are able to terminate their respective contracts without cause or for convenience at any time. We may not be able to accurately predict future trends in customer renewals, and our customers’ renewal rates may decline or fluctuate. Without the continuance or renewal of our customer contracts our business and operating results may suffer.

Factors that may affect the renewal rate for our existing contracts, and our ability to sell additional applications and services, include:

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the price, performance and functionality of our offering;

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the availability, price, performance and functionality of competing solutions;

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our ability to develop complementary applications and services;

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our continued ability to access the pricing and other data necessary to enable us to deliver reliable offerings to customers;

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the stability, performance and security of our hosting infrastructure and hosting services;

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changes in healthcare laws, regulations or trends; and

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the business environment of our customers.

If any of our customers terminate or do not renew their contracts for our services, renew on less favorable terms, or do not purchase additional functionality or software, our revenue may grow more slowly than expected or decline, and our profitability and gross margins may be harmed.

A significant amount of our revenue is derived from a limited number of customers, and any reduction in revenue from any of these customers could have a material adverse effect on our business.

Our ten largest customers by revenue accounted for 48.2% of our consolidated revenue in 2015. If any of our key customers decides not to renew its contracts with us, or to renew on less favorable terms, our business, revenue, reputation, and our ability to obtain new customers could be materially and adversely affected. None of our customers exceeded 10% of our revenue in 2015.

We operate in the highly competitive software industry. If we are not able to compete effectively, our business and operating results will be harmed.

The software market is highly competitive and is likely to attract increased competition, which could make it hard for us to succeed. Small, specialized providers continue to become more sophisticated and effective. In addition, large, well-financed, and technologically sophisticated software companies might focus more on our market. The size and financial strength of these entities is increasing as a result of continued consolidation in both the IT and health insurance industries. We expect large integrated software companies to become more active in our market, both through acquisitions and internal investment. As costs fall and technology improves, increased market saturation might change the competitive landscape in favor of our competitors.

Some of our current competitors have greater name recognition, longer operating histories, and significantly greater resources than we do. As a result, our competitors might be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, standards, or customer requirements. In addition, current and potential competitors have established, and

might in the future establish, cooperative relationships with vendors of complementary products, technologies, or services to increase the availability of their products in the marketplace. Accordingly, new competitors or alliances might emerge that have greater market share, a larger customer base, more widely adopted proprietary technologies, greater marketing expertise, greater financial resources and larger sales forces than we have, which could put us at a competitive disadvantage. Further, in light of these advantages, even if our products and services are more effective than those of our competitors, current or potential customers might accept competitive offerings in lieu of purchasing our offerings. Increased competition is likely to result in pricing pressures, which could negatively impact our sales, profitability or market share. In addition to new niche vendors, who offer stand-alone products and services, we face competition from existing enterprise vendors, including those currently focused on software solutions that have information systems in place with potential customers in our target market. These existing enterprise vendors might promise products or services that offer ease of integration with existing systems and which leverage existing vendor relationships. In addition, large health plans often have internal technology staffs and proprietary software for benefits and distribution management, making them less likely to buy our solutions.

We have experienced quarterly fluctuations, and expect to continue to experience quarterly fluctuations, in our operating results due to a number of factors, including the seasonality of our revenue, the sales and implementation cycles for our products and services and other factors, that make our future results difficult to predict and could cause our operating results to fall below expectations.

Our business is subject to seasonal fluctuations and our operating results are traditionally strongest in the fourth quarter of each year as a result of the open enrollment period established by PPACA. Therefore, our stock price might be based on expectations of future performance that we might not meet and, if our revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

The sales cycle for our products and services can vary from, on average, two to 12 or more months, from initial contact to contract execution, depending on the client and complexity of the solution. After a customer contract is signed, we provide an implementation process for the customer which typically ranges from two to four months for our cloud-based implementations and from three to 15 months for complex enterprise implementations, each from contract execution to completion of implementation. As a result, the period of time between contract signing and recognition of associated revenue may be lengthy, and we are not able to predict with certainty the period in which implementation will be completed.

During the sales and implementation cycles for our enterprise segments, we expend substantial time and effort, and incur significant additional operating expenses, but accounting principles do not allow us to recognize the resulting revenue until implementation is complete and the services are available for use by our customers, at which time we begin recognition of implementation revenue over the life of the contract or the estimated period of customer benefit, whichever is longer. Unanticipated difficulties and delays in implementation might arise as a result of failure by us or our customers to complete one or more of our or their respective responsibilities and, if implementation periods are extended or implementations are cancelled, revenue recognition could be delayed or fail to occur.

Our operating results have varied in the past. In addition to the other risk factors listed in this section, some of the important factors that may cause fluctuations in our quarterly operating results include:

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the extent to which our products and services achieve or maintain market acceptance;

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our ability to introduce new products and services and enhancements to our existing products and services on a timely basis;

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new competitors and the introduction of enhanced products and services from competitors;

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the financial condition of our current and potential customers;

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changes in customer budgets and procurement policies;

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the amount and timing of our investment in research and development activities;

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technical difficulties with our products or interruptions in our services;

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our ability to hire and retain qualified personnel, including the rate of expansion of our sales force;

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changes in the regulatory environment related to benefits and healthcare;

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regulatory compliance costs;

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the timing, size and ability to successfully integrate potential future acquisitions; and

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unforeseen legal expenses, including litigation and settlement costs.

In addition, a significant portion of our operating expense is relatively fixed in nature, and planned expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected revenue shortfalls might decrease our gross margins and could cause significant changes in our operating results from quarter to quarter. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time.

Our history of incurring substantial levels of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting obligations on our indebtedness.

We have a history of incurring substantial amounts of indebtedness. As of June 30, 2016, our total indebtedness was $35.4 million. Our indebtedness, combined with our other existing and any future financial obligations and contractual commitments, could have important adverse consequences. For example, it could:

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make it more difficult for us to satisfy our obligations with respect to our indebtedness, including making interest payments on our debt obligations, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under the agreements governing such indebtedness;

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require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, selling and marketing efforts, research and development and other purposes;

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cause us to incur substantial fees from time to time in connection with debt amendments or refinancing;

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increase our exposure to rising interest rates because a portion of our borrowings is at variable interest rates;

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place us at a disadvantage compared to our competitors that have less debt;

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limit our ability to pursue acquisitions;

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limit our flexibility in planning for, or reacting to, changes in our business and the health insurance industry;

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limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions, selling and marketing efforts, research and development and other corporate purposes; and

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increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage compared to our competitors that have relatively less indebtedness.

See the section titled “Liquidity and Capital Resources—Senior Credit Facility” for a description of our bank credit facility.

We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our common stock.

We intend to continue to make investments to support our business growth and might require additional funds to respond to business challenges or opportunities, including the need to develop new products and services or enhance our existing services, enhance our operating infrastructure, and acquire complementary businesses and technologies. Accordingly, we might need to engage in equity or debt financings to secure additional funds. If we raise additional funds through new issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we might not be able to obtain additional financing on terms favorable to us, if at all. Similarly, upon the occurrence of certain fundamental events, the holders of our Series A Preferred Stock will have the right to require us to repurchase any or all of our outstanding Series A Preferred Stock. It is possible that we would not have sufficient funds at the time that we are required to make any such purchase of Series A Preferred Stock. We cannot assure the holders of the Series A Preferred Stock that we will have sufficient financial resources, or will be able to arrange financing, to pay the repurchase price in cash with respect to any such Series A Preferred Stock that holders have requested to be repurchased upon the occurrence of such an event. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

If our transition from our current technology platforms to new platforms does not occur rapidly or as efficiently as anticipated, it could have a material adverse effect on our business and results of operations.

We are expanding our cloud-based software-as-a-service, or SaaS, offerings, including building new shared capabilities such as consumer shopping and personalization. Our ability to (i) complete that development and (ii) efficiently transition existing enterprise-platform customers to new cloud-based components is important to our future operating results. We are also investing in platform delivery improvements that will lower our cost of implementation and configuration and improve competitiveness. Our SaaS business model depends heavily on achieving economies of scale because the initial upfront investment is costly and the associated revenue is recognized on a ratable basis. If we fail to achieve efficient transitions, improvements to our capabilities, appropriate economies of scale or if we fail to manage or anticipate the evolution and demand of the SaaS pricing model, then our business and operating results will be adversely affected.

In the event that our proprietary software does not operate properly, our reputation would suffer, claims would likely be asserted against us, and we would likely be required to divert our resources from other purposes, any of which could have a material adverse effect on our business.

Proprietary software development is time-consuming, expensive and complex. We may experience difficulties with software development, industry standards, design or marketing that could delay or prevent the development, introduction, or implementation of new solutions and enhancements. If our solutions do not function reliably or fail to achieve customer expectations in terms of performance, customers could assert liability claims against us and/or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to attract or maintain customers.

Moreover, software as complex as ours has in the past contained, and may in the future contain, or develop, undetected defects or errors. Material performance problems or defects in our products and services might arise in the future. Errors might result from the interface of our services with legacy systems and data, which we did not develop and the function of which is outside of our control. Defects or errors might arise in our existing or new software or service processes. Because changes in health plan and legal requirements and practices relating to health insurance are frequent, we are continuously discovering defects and errors in our software and service processes compared against these requirements and practices. These defects and errors and any failure by us to identify and address them could result in loss of enrollment by our customers, loss of revenue or market share, liability to customers or others, failure to achieve market acceptance or expansion, diversion of development and other resources, injury to our reputation, and increased service and maintenance costs. Defects or errors in our product or service processes might discourage existing or potential customers from purchasing services from us. Correcting defects or errors could prove to be impossible or impracticable. The costs incurred in correcting any defects or errors or in responding to resulting claims or liability might be substantial and could adversely affect our operating results.

Our customers might assert claims against us in the future alleging that they suffered damages due to a defect, error, or other failure of our product or service processes. A claim could subject us to significant legal defense costs and adverse publicity regardless of the merits or eventual outcome of such claim.

If we do not continue to provide innovative products and services, along with high quality support services, that are useful to our customers and consumers of insurance products, we might not remain competitive and our newer solutions may not be adopted by new and existing customers, which would have a material adverse effect on our business and results of operations.

Our success depends in part on our ability to successfully develop and sell innovative products and services that health insurance plans and brokers and their customers will utilize. We must continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high quality products and services that customers will want. If we are unable to predict preferences of our customers or consumers or industry changes, or if we are unable to modify our products and services on a timely basis, we might lose customers. Our operating results would also suffer if our innovations are not responsive to the needs of our customers, are not appropriately timed with market opportunity, or are not effectively brought to market. As technology continues to develop, our competitors might be able to offer results that are, or that are perceived to be, substantially similar to or better than those generated by us. This would force us to compete on additional product and service attributes and to expend significant resources in order to remain competitive.

Our success also depends on providing high quality support services to resolve any issues related to our products and services. High quality education and customer support are important for the successful marketing and sale of our products and services and for the renewal of existing customers. If we do not help our customers quickly resolve issues and provide effective ongoing support, our ability to sell additional products and services to existing customers would suffer and our reputation with existing or potential customers would be harmed.

We rely on data center providers, Internet infrastructure, bandwidth providers, third-party computer hardware and software, other third parties, and our own systems for providing services to our customers, and any failure of or interruption in the services provided by these third parties or our own systems could expose us to litigation and may negatively impact our relationships with customers, adversely affecting our brand and our business.

We currently serve our customers from two primary data centers, one located in Atlanta, Georgia and the other located in El Segundo, California. While we control and have access to our servers, we do not control the operation of these facilities. The owners of our data center facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. With respect to the provision of core services, our two data center agreements provide for either automatic renewal or routine renewal unless terminated by one of the parties. If we are unable to renew these agreements on commercially reasonable terms, or if one of our data center operators is acquired, we may be required to transfer our servers and other infrastructure to new data center facilities, and we may incur significant costs and possible service interruption in connection with doing so. Problems faced by our third-party data center locations, with the telecommunications network providers with whom we or they contract, or with the systems by which our telecommunications providers allocate capacity among their customers, including us, could adversely affect the experience of our customers. Our third-party data centers operators could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy faced by our third-party data centers operators or any of the service providers with whom we or they contract may have negative effects on our business, the nature and extent of which are difficult to predict.

In addition, our ability to deliver our web-based services depends on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity, bandwidth capacity and security. Our services are designed to operate without interruption in accordance with our service level commitments. However, we have experienced and expect that we will experience future interruptions and delays in services and availability from time to time. In the event of a catastrophic event with respect to one or more of our systems, we may experience an extended period of system unavailability, which could negatively impact our relationship with customers. To operate without interruption, both we and our service providers must guard against:

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damage from fire, power loss, natural disasters and other force majeure events outside our control;

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communications failures;

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software and hardware errors, failures and crashes;

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security breaches, computer viruses, hacking, denial-of-service attacks and similar disruptive problems; and

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other potential interruptions.

We also rely on purchased or leased computer hardware and software licensed from third parties in order to offer our services. These licenses are generally commercially available on varying terms. However, it is possible that this hardware and software might not continue to be available on commercially reasonable terms, or at all. Any loss of the right to use any of this hardware or software could result in delays in the provisioning of our services until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.

We exercise limited control over third-party vendors, which increases our vulnerability to problems with technology and information services they provide. Interruptions in our network access and services might in connection with third-party technology and information services reduce our revenue, cause us to issue refunds to customers for prepaid and unused subscription services, subject us to potential liability, or adversely affect our renewal rates. Although we maintain insurance for our business, the coverage under our policies might not be adequate to compensate us for all losses that may occur. In addition, we might not be able to continue to obtain adequate insurance coverage at an acceptable cost, if at all.

If our security measures are breached or fail, and unauthorized persons gain access to customers’ and consumers’ data, our products and services might be perceived as being unsecure, customers and consumers might curtail or stop using our products and services, and we might incur significant liabilities.

Our products and services involve the collection, processing, storage and transmission of customers’ and consumers’ confidential information, which may include sensitive individually identifiable information that is subject to stringent statutory and regulatory obligations. Because of the sensitivity of this information, security features of our software and applications are very important. From time to time we may detect vulnerabilities in our systems, which, even if they do not result in a security breach, may reduce customer confidence and require substantial resources to address. If our security measures or those of our third-party service providers are breached or fail and/or are bypassed as a result of third-party action, employee error, malfeasance, or otherwise, someone might be able to obtain unauthorized access to our customers’ confidential information and/or patient data. As a result, our reputation could be damaged, our business might suffer, and we could face damages for contract breach, penalties for violation of applicable laws or regulations, and significant costs for remediation efforts to prevent future occurrences.

In addition, we rely on various third parties, including health plans, brokers and other third-party service providers and consumers themselves, as users of our system, for key activities to protect and promote the security of our systems and the data and information accessible within them, such as enrollment information, consumer status changes and payment. On occasion, certain individuals have failed to perform these activities. For example, authorized users have failed to administer and use the login/password appropriately, which may allow the system to be accessed by unauthorized third parties. When we become aware of such breaches or incidents, we work with our customers to remedy the issue, terminate inappropriate access as necessary, and provide additional instruction in order to avoid the reoccurrence of such problems. Although to date these breaches have not resulted in claims against us or in material harm to our business, failures to perform these activities might result in claims against us, which could expose us to significant expense, legal liability, and harm to our reputation, which might result in loss of business.

Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain, including payment card systems which may subject us to fines or higher transaction fees or limit or terminate our access to certain payment methods. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we and our hosting service providers might not be able to detect or prevent these techniques or to implement adequate preventive measures until after the techniques or other attacks have already been launched. If an actual or perceived breach of our security or that of our hosting service providers occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers. In addition, our customers might authorize or enable third parties to access their information and data that is stored on our systems. Because we do not control such access, we cannot ensure the complete integrity or security of such data in our systems.

For a more detailed discussion of the risks associated with a failure by us to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection and data security, see the risk factor below under “—Risks Related to Regulation—The healthcare and health insurance industries are heavily regulated. Our failure to comply with regulatory requirements could create liability for us, result in adverse publicity and negatively affect our business.”

Various events could interrupt customers’ access to our platform, exposing us to significant costs.

The ability to access our platform is critical to our customers. Our operations and facilities are vulnerable to interruption and/or damage from a number of sources, many of which are beyond our control, including, without limitation: (i) power loss and telecommunications failures, (ii) fire, flood, hurricane, and other natural disasters, (iii) software and hardware errors, failures or crashes in our own systems or in other systems, (iv) computer viruses, denial-of-service attacks, hacking and similar disruptive problems in our own systems and in other systems, and (v) civil unrest, war, and/or terrorism. We have implemented various measures to protect against interruptions of customers’ access to our platform. If customers’ access is interrupted because of problems in the operation of our facilities, we could be exposed to significant claims by customers. Our plans for disaster recovery and business continuity rely on third-party providers of related services. If those vendors fail us at a time when our systems are not operating correctly, we could incur a loss of revenue and liability for failure to fulfill our obligations. Any significant instances of system downtime could negatively affect our reputation and ability to retain customers and sell our services, which would adversely impact our revenue.

Because we recognize revenue and expense relating to delivery of software, transaction fees and professional services over varying periods, downturns or upturns in sales are not immediately reflected in full in our operating results.

We recognize recurring revenue monthly over the term of our contracts and recognize the majority of our professional services revenue ratably over the contract term or the estimated period of customer benefit, whichever is longer. As a result, a portion of the revenue we report each quarter is the recognition of deferred revenue from contracts we entered into during previous quarters. Consequently, a shortfall in demand for our software solutions and professional services or a decline in new or renewed contracts in any one quarter might not significantly reduce our revenue for that quarter, but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new or renewed sales of our products and services is not reflected in full in our results of operations until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, because revenue from new customers must be recognized over the applicable term of the contracts or the estimated period of customer benefit, whichever is longer. In addition, we recognize professional services expenses as incurred, which could cause professional services gross margin to be negative.

We have recorded a significant amount of goodwill, intangible assets and deferred implementation costs. We may need to record write-downs from future impairments of these assets, which could adversely affect our costs and business operations.

Our consolidated balance sheet includes significant goodwill, intangible assets and deferred implementation costs, including $29.4 million in goodwill, $12.3 million in other intangible assets and $24.4 million of deferred implementation costs, together representing approximately 66.7% of our total assets as of June 30, 2016. The determination of related estimated useful lives and whether these assets are impaired involves significant judgments and our ability to accurately predict future cash flows related to these intangible assets may not be accurate. We test our goodwill for impairment each fiscal year, but we also test goodwill, other intangible assets and deferred implementation costs for impairment at any time when there is a change in circumstances that indicates that the carrying value of these assets may be impaired. Any future determination that these assets are carried at greater than their fair value could result in substantial non-cash impairment charges, which could significantly impact our reported operating results.

If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to liability for additional sales and use taxes and our future sales may decrease.

We might incur significant expenses, and, as a result, lose sales, if states successfully impose broader guidelines on state sales and use taxes or successfully argue that current guidelines apply to us. We currently collect sales and use tax in a limited number of states. A successful assertion by one or more states requiring us to collect sales or other taxes on the licensing of our software or sale of our services could result in substantial tax liabilities for past transactions and otherwise harm our business. Each state has different rules and regulations governing sales and use taxes, and these rules and regulations are subject to varying interpretations that change over time. We review these rules and regulations periodically and, when we believe we are subject to sales and use taxes in a particular state, voluntarily engage with state tax authorities in order to determine how to comply with their rules and regulations. We cannot assure you that we will not be subject to sales and use taxes or related interest and penalties for past sales or use taxes in states where we currently believe no such taxes are required.

Vendors of services, like us, are typically held responsible by taxing authorities for the collection and payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we might be liable for past taxes in addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty charges. Our customer contracts typically provide that our customers must pay all applicable sales and similar taxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse responsibility for interest or penalties associated with those taxes. If we are required to collect and pay back taxes and the associated interest and penalties, and if our customers fail or refuse to reimburse us for all or a portion of these amounts (or if we decline to seek reimbursement from our clients), we will incur unplanned expenses that may be substantial. Moreover, imposition of such taxes on us going forward will effectively increase the cost of our software and services to our customers and might adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.

Our estimate of the market size for our solutions may prove to be inaccurate, and even if the market size is accurate, we cannot assure you that our business will serve a significant portion of the market.

Our estimate of the market size for our solutions is subject to significant uncertainty and is based on assumptions and estimates, including our internal analysis and industry experience, which may not prove to be accurate. Our ability to serve a significant portion of this estimated market is subject to many factors, including our success in implementing our business strategy, which is subject to many risks and uncertainties. Accordingly, even if our estimate of the market size is accurate, we cannot assure you that our business will serve a significant portion of this estimated market for our solutions.

We might not be able to utilize a significant portion of our net operating loss or other tax credit carryforwards, which could adversely affect our future operating cash flows.

As of June 30, 2016, we had federal and state net operating loss carryforwards due to prior period losses, which if not utilized, will begin to expire in 2020. These carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our future operating cash flows.

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, our ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their collective ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules might apply under state tax laws. As a result of prior equity issuances and other transactions in our stock, we have previously experienced “ownership changes” under Section 382 which limit the amount of net operating losses available to us.

Future issuances and other transactions in our stock may cause an additional “ownership change.” Accordingly, the application of Section 382 could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our future operating cash flows.

As of June 30, 2016 and December 31, 2015, we have recorded a full valuation allowance against net operating loss carryforwards, because we believe it is more likely than not that some portion or all of these deferred tax assets will not be realized.

Failure to adequately expand our direct sales force will impede our growth.

We believe that our future growth will depend on the continued expansion of our direct sales force and its ability to obtain new customers and sell additional products and services to existing customers. Identifying and recruiting qualified personnel and training them in the use of our software requires significant time, expense, and attention. It can take up to six months or longer before a new sales representative is fully trained and productive. Our business may be adversely affected if our efforts to expand and train our direct sales force do not generate a corresponding increase in revenue. In particular, if we are unable to hire and develop sufficient numbers of productive direct sales personnel or if new direct sales personnel are unable to achieve desired productivity levels in a reasonable period of time, sales of our products and services will suffer and our growth will be impeded.

Our government business relies on working effectively with the prime contractors that hold the contract with the government customers and those contracts being renewed or extended, as applicable. To the extent those relationships are not positively maintained or such contracts, such as our subcontract in connection with the Centers for Medicare and Medicaid Services, or CMS, contract, are not renewed or extended, it could have a material adverse effect on our business.

In our government business to date, we have primarily worked as a subcontractor to prime contractors and systems integrators that contract directly with the federal government and state governments. In the scope of these relationships, we have provided specified components of the applicable government entity’s overall request, but have not assumed responsibility for the operation of the government websites. Based on our risk analysis of multiple factors, including the scope of the government entity’s request, the total potential contract value and the terms and conditions of the applicable contract, we have determined that operating in a subcontractor role has been most appropriate for our government business. It may or may not be more beneficial for us to contract directly with the government due to various factors including insurance, risk and liability issues. In order to secure government business, it is important that we identify and market our capabilities to the prime contractor community, participate on joint requests for proposals, and maintain effective working relationships throughout the term of the contract.

In many cases, payment for our products and services is dependent upon the prime contractor getting paid by the government customer. As such, we may not be paid on a timely basis or at all if the prime contractor or other subcontractors have not completed their work.

We use staff contracting firms located internationally or that source their resources from outside the United States to augment our employee base and assist in the development, distribution and delivery of our solutions. Future work with these firms might expose us to risks that could have a material adverse effect on our business.

We use staff contracting firms (both onshore and offshore) to scale up or down based on customer needs, work across various time zones to meet speed to market requirements, and lower our total cost of delivery. For over ten years, we have used staff contracting firms with employees located internationally. Associated risks include:

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operating in international markets requires significant resources and management attention and might subject us to regulatory, economic, and political risks that are different from those in the United States, including data privacy and security considerations;

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ability of our vendor firms to continue to identify and staff local talent that meets our quality and turnaround requirements;

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currency fluctuations which raises the price of offshore labor and does not allow us to obtain cost efficiencies;

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difficulties in working with firms that staff and manage foreign operations;

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weaker protection for intellectual property and other legal rights than in the United States and practical difficulties in enforcing intellectual property and other rights outside of the United States;

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adverse tax consequences; and

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unstable regional economic and political conditions.

In addition, our customers may require us to staff projects with only employed or domestically-based staff. That requirement could increase our cost of delivery, which in turn could decrease our competiveness and lower our overall profitability.

Any future litigation against us could be costly and time-consuming to defend and could have a material adverse effect on our business, financial condition and results of operations.

We may become subject, from time to time, to legal proceedings and claims that arise in the ordinary course of business such as claims brought by our customers in connection with commercial disputes or employment claims made by our current or former employees. Litigation might result in substantial costs and may divert management’s attention and resources, which might seriously harm our business, overall financial condition, and operating results. We generally intend to defend ourselves vigorously; however, we cannot be certain of the ultimate outcomes of any claims that may arise in the future. Insurance might not cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more such claims, and might not continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating results and leading analysts or potential investors to reduce their expectations of our performance, which could reduce the trading price of our stock. Additionally, certain litigation or the resolution of certain litigation may affect the availability or cost of some of our insurance coverage, which could adversely impact our results of operations and cash flows, expose us to increased risks that would be uninsured and adversely impact our ability to attract officers and directors.

We might be unable to adequately protect our intellectual property, and intellectual property claims against us could result in the loss of significant rights. Even if we are successful in enforcing our intellectual property rights, we may incur significant costs in doing so, which could have a material adverse effect on our business.

Our success depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including trademark, copyright, trade secret and other intellectual property rights, as well as customary contractual protections. Our intellectual property rights extend to our technologies and software applications. We also rely on intellectual property licensed from third parties. Our attempts to protect our intellectual property might be challenged by others or invalidated through administrative process or litigation. To the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, each of which could materially harm our business.

From time to time, third parties have alleged, and may allege in the future that we have violated their intellectual property rights. If we are forced to defend ourselves against intellectual property infringement claims, regardless of the merit or ultimate result of such claims, we may face costly litigation, diversion of technical and management personnel, limitations on our ability to market or provide our products and services. As a result of any such dispute, we may have to:

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develop non-infringing technology;

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pay damages or refund fees;

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enter into or modify royalty or licensing agreements;

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cease providing certain products or services; or

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take other actions to resolve the claims.

Moreover, if we are unable to implement one or more of the remedial actions described above, we may be prevented from continuing to offer, and our customers may be prevented from continuing to use, any of our affected products or services.

The use of open source software in our products and solutions may expose us to additional risks and harm our intellectual property rights.

Some of our products and solutions use or incorporate software that is subject to one or more open source licenses. Open source software is typically freely accessible, usable, and modifiable. Certain open source software licenses require a user who intends to distribute the open source software as a component of the user’s software to disclose publicly part or all of the source code to the user’s software. In addition, certain open source software licenses require the user of such software to make any derivative works of the open source code available to others on potentially unfavorable terms or at no cost.

The terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that event, we could be required to seek licenses from third parties in order to continue offering our products or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or to release our proprietary software code under the terms of an open source license, any of which could harm our business. Further, given the nature of open source software, it may be more likely that third parties might assert copyright and other intellectual property infringement claims against us based on our use of these open source software programs.

While we monitor the use of all open source software in our products, solutions, processes, and technology and try to ensure that no open source software is used in such a way as to require us to disclose the source code to the related product or solution when we do not wish to do so, it is possible that such use may have inadvertently occurred in deploying our proprietary solutions. In addition, if a third-party software provider has incorporated certain types of open source software into software we license from such third party for our products and solutions without our knowledge, we could, under certain circumstances, be required to disclose the source code to our products and solutions. This could harm our intellectual property position and our business, results of operations, and financial condition.

Our confidentiality arrangements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information, and any such disclosure could have a material adverse effect on our business.

We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality arrangements with our employees, independent contractors, advisers and customers. These arrangements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert trade secret rights against such parties. The loss of trade secret protection could make it easier for third parties to compete with our products and services by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could have a material adverse effect on our business.

If we acquire companies or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value, and adversely affect our operating results and the value of our common stock.

As part of our business strategy, we might acquire, enter into joint ventures with, or make investments in complementary companies, services, and technologies in the future. For example, in 2016, we acquired ConnectedHealth, LLC. Acquisitions and investments involve numerous risks, including:

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difficulties in identifying and acquiring products, technologies or businesses that will help our business;

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difficulties in integrating operations, technologies, services and personnel;

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diversion of financial and managerial resources from existing operations;

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risk of entering new markets in which we have little to no experience; and

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delays in customer purchases due to uncertainty and the inability to maintain relationships with customers of the acquired businesses.

If we fail to properly evaluate acquisitions or investments, we might not achieve the anticipated benefits of any such acquisitions, we might incur costs in excess of what we anticipate, and management resources and attention might be diverted from other necessary or valuable activities, which would have a material adverse effect on our business and results of operations.

Consolidation in the health insurance industry in which our customers operate could cause us to lose customers or could reduce the volume of services purchased by consolidated customers following an acquisition or merger, which could have a material adverse effect on our business.

Consolidation in the health insurance industry has accelerated in recent years, and this trend could continue. We may lose customers due to industry consolidation, and we may not be able to expand sales of our solutions and services to new customers to replace lost customers. In addition, new companies or organizations that result from such consolidation may decide that our solutions are no longer needed because of their own internal processes or the use of alternative solutions. As these entities consolidate,

competition to provide solutions and services to industry participants will become more intense and the importance of establishing relationships with large industry participants will become greater. These industry participants may try to use their market power to negotiate price reductions for our solutions. Also, if consolidation of larger current customers occurs, the combined company may represent a larger percentage of business for us and, as a result, we are likely to rely more significantly on the combined company’s revenue to continue to achieve growth. As a result, industry consolidation or consolidation among current customers or potential customers could adversely affect our business.

We depend on our senior management team and other key employees, and the loss of one or more key personnel or an inability to attract hire, integrate and retain highly skilled personnel could adversely affect our business.

Our success depends largely upon the continued services of key personnel. We also rely on our leadership team in the areas of research and development, marketing, services, and general and administrative functions, and on mission-critical individual contributors in research and development. From time to time, there may be changes in our executive management team resulting from the hiring or departure of executives, which could disrupt our business. The loss of one or more of our executive officers or other key employees could have a serious adverse effect on our business. The replacement of one or more of our executive officers or other key employees would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

To continue to execute our growth strategy, we also must identify, hire and retain highly skilled personnel. Competition is intense for engineers with high levels of experience in designing and developing software and Internet-related services. We might not be successful in maintaining our unique culture and continuing to attract and retain qualified personnel. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled personnel with appropriate qualifications. The pool of qualified personnel is limited overall and specifically in the geographic regions in which our principal offices are located. Failure to identify, hire and retain necessary key personnel could have a material adverse effect on our business, financial condition and results of operations.

Consumers of health insurance are increasingly relying on mobile devices as part of their decision-making process. If we are unsuccessful in expanding the capabilities of our shopping tools for mobile platforms, it could adversely affect our business.

We believe that consumers of health insurance are increasingly relying on mobile devices, such as smartphones and tablets, in connection with their health insurance purchasing decisions. Traditionally, our solutions have been designed for desktop platforms, and we must develop new capabilities to deliver compelling user experiences via mobile devices. To deliver high quality mobile offerings, it is important that our solutions integrate with a wide range of other mobile technologies, systems, networks and standards that we do not control. We may not be successful in developing products that operate effectively with these technologies, systems, networks or standards. Further, our success on mobile platforms will be dependent on our interoperability with popular mobile operating systems that we do not control, such as Android, iOS and Windows Mobile, and any change in such systems that degrade our functionality or give preferential treatment to competitive products could adversely affect usage of our solutions through mobile devices. If we fail to achieve success with our mobile offerings, our ability to deliver compelling user experiences to consumers as they increasingly rely on mobile devices in connection with their health insurance purchasing decisions will be constrained and our business could be adversely affected.

If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contribute to our success, which could have a material adverse effect on our business.

We believe that a critical component to our success has been our corporate culture. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain the innovation, teamwork, passion and focus on execution that we believe are important aspects of our corporate culture. Any failure to preserve our culture could negatively affect our future success, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives.

Failure by our customers to obtain proper permissions and waivers might result in claims against us or may limit or prevent our use of data, which could have a material adverse effect on our business.

We require our customers to provide necessary notices and to obtain necessary permissions and waivers for use and disclosure of information on our platform, and we require contractual assurances from them that they have done so and will do so. If, however, despite these requirements and contractual obligations, our customers do not obtain necessary permissions and waivers, then our use and disclosure of information that we receive from them or on their behalf might be limited or prohibited by state or federal privacy laws or other laws. This could impair our functions, processes and databases that reflect, contain, or are based upon such data and might prevent use of such data. In addition, this could interfere with, or prevent creation or use of, rules, analyses, or other data-driven

activities that benefit us and our business. Moreover, we might be subject to claims or liability for use or disclosure of information by reason of lack of valid notices, agreements, permissions or waivers. These claims or liabilities could subject us to unexpected costs and adversely affect our operating results.

Risks Related to Regulation

The healthcare and health insurance industries are heavily regulated. Our failure to comply with regulatory requirements could create liability for us, result in adverse publicity and negatively affect our business.

The healthcare and health insurance industries are highly regulated and are subject to changing political, legislative, regulatory, and other influences. Existing and new laws and regulations could create unexpected liabilities for us, cause us to incur additional costs and restrict our operations. These laws and regulations are complex and their application to specific services and relationships are not clear. In particular, many existing laws and regulations affecting healthcare and health insurance and related benefits or products when enacted, did not anticipate the services that we provide, and these laws and regulations might be applied to our services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our failure to comply, could require us to change our operations or cease using certain datasets, create liability for us, result in adverse publicity, and negatively affect our business. Some of the risks we face from the regulation of healthcare and health insurance are as follows:

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Patient Protection and Affordable Care Act. Numerous lawsuits have challenged and continue to challenge the constitutionality and other aspects of PPACA, and regulations and regulatory guidance continue to be issued on various aspects of PPACA that may affect our business. While many of the provisions of PPACA are not directly applicable to us, PPACA, as enacted, affects the business of many of our customers. Our customers might experience changes in the numbers of individuals they insure as a result of Medicaid expansion and the creation of state and national exchanges. Although we are unable to predict with any reasonable certainty or otherwise quantify the likely impact of PPACA on our business model, financial condition, or results of operations, changes in the business of our customers and the number of individuals they insure may negatively impact our business.

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False or Fraudulent Claim Laws. There are numerous federal and state laws that forbid submission of false information or the failure to disclose information in connection with submission and payment of claims for reimbursement from the government. In some cases, these laws also forbid abuse of existing systems for such submission and payment. Any contract we have with a government entity or in support of a government entity requires us to comply with these laws and regulations. Any failure of our services to comply with these laws and regulations could result in substantial liability, including but not limited to criminal liability, could adversely affect demand for our services, and could force us to expend significant capital, research and development, and other resources to address the failure. Any determination by a court or regulatory agency that our services with government customers violate these laws and regulations could subject us to civil or criminal penalties, invalidate all or portions of some of our government customer contracts, require us to change or terminate some portions of our business, require us to refund portions of our services fees, cause us to be disqualified from serving not only government customers but also all customers doing business with government payers, and have an adverse effect on our business.

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HIPAA and Other Privacy and Security Requirements. There are numerous federal and state laws and regulations related to the privacy and security of personal health information. In particular, regulations promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, established privacy and security standards, or Privacy Standards and Security Standards, that limit the use and disclosure of individually identifiable health information, and require the implementation of administrative, physical, and technological safeguards to ensure the confidentiality, integrity, and availability of individually identifiable health information in electronic form. Health plans, healthcare clearinghouses, and most providers are considered by the HIPAA regulations to be “Covered Entities.” With respect to our operations, we are a Business Associate of our health plan customers and we are directly subject to the privacy and security regulations established under HIPAA. We enter into written Business Associate Agreements with our health plan customers, under which we are required to safeguard individually identifiable health information and comply with restrictions how we may use and disclose such information. Effective February 2010, the American Recovery and Reinvestment Act of 2009, or ARRA, and effective March 2013, the HIPAA Omnibus Final Rules extended the direct application of certain provisions of the Privacy Standards and Security Standards to us when we are functioning as a Business Associate of our health plan customers. ARRA and the HIPAA Omnibus Final Rule also subject Business Associates to direct oversight and audit by the HHS.

Violations of the Privacy Standards and Security Standards might result in civil and criminal penalties, and ARRA increased the penalties for HIPAA violations and strengthened the enforcement provisions of HIPAA. For example, ARRA authorizes state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of Privacy Standards and Security Standards that threaten the privacy of state residents. Additionally, some health plans interpret HIPAA requirements differently than we do, and as our customers are the Covered Entity under HIPAA we may be required to comply with their interpretations.

We might not be able to adequately address the business risks created by HIPAA implementation. Furthermore, we are unable to predict what changes to HIPAA or other laws or regulations might be made in the future or how those changes could affect our business or the costs of compliance.

In addition to the Privacy Standards and Security Standards, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical and/or health information, and many states have adopted or are considering further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. Such state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements and we are required to comply with them. Additionally, other laws or standards may apply to our operations, including requirements related to handling certain financial information, federal tax information, or FTI, and payment card association operating rules with respect to credit card data.

Failure by us to comply with any state standards regarding patient privacy may subject us to penalties, including civil monetary penalties and, in some circumstances, criminal penalties. Such failure may injure our reputation and adversely affect our ability to retain customers and attract new customers.

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Medicare and Medicaid Regulatory Requirements. We have contracts with health plans that offer Medicare Managed Care (also known as Medicare Advantage or Medicare Part C). We also have contracts with health plans that offer Medicare prescription drug benefits (also known as Medicare Part D) plans. The activities of the Medicare plans are regulated by CMS. Though our health plan customers remain responsible to comply with CMS requirements, we operate as a First Tier, Downstream & Related Entity, or FDR, in support of our customers. Some of the activities that we might perform, such as the enrollment of beneficiaries, may be subject to CMS and/or state regulation, and such regulations may force us to change the way we do business or otherwise restrict our ability to provide services to such plans. Moreover, the regulatory environment with respect to these programs has become, and will likely continue to become, increasingly complex.

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Financial Services-Related Laws and Rules. Financial services and electronic payment processing services are subject to numerous laws, regulations and industry standards, some of which might impact our operations and subject us, our vendors, and our customers to liability as a result of the payment distribution and processing solutions we offer. In addition, payment distribution and processing solutions might be impacted by payment card association operating rules, certification requirements, and rules governing electronic funds transfers. If we fail to comply with applicable payment processing rules or requirements, we might be subject to fines and changes in transaction fees and may lose our ability to process credit and debit card transactions or facilitate other types of billing and payment solutions. Moreover, payment transactions processed using the Automated Clearing House Network, or ACH, are subject to network operating rules promulgated by the National Automated Clearing House Association and to various federal laws regarding such operations, including laws pertaining to electronic funds transfers, and these rules and laws might impact our billing and payment solutions. Further, our solutions might impact the ability of our payer customers to comply with state prompt payment laws. These laws require payers to pay healthcare claims meeting the statutory or regulatory definition of a “clean claim” within a specified time frame.

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Insurance Broker Laws. Insurance laws in the United States are often complex, and states have broad authority to adopt regulations regarding brokerage activities. These regulations typically include the licensing of insurance brokers and agents and govern the handling and investment of customer funds held in a fiduciary capacity. We and our broker/agency customers may be subject to some of these regulations, and may not be able to fully comply.

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ERISA. The Employee Retirement Income Security Act of 1974, as amended, or ERISA, regulates how employee benefits are provided to or through certain types of employer-sponsored health benefits plans. ERISA is a set of laws and regulations that is subject to periodic interpretation by the United States Department of Labor as well as the federal courts. In some circumstances, and under certain customer contracts, we might be deemed to have assumed duties that make us an ERISA fiduciary, and thus be required to carry out our operations in a manner that complies with ERISA in all material respects. Our current operations may render us subject to ERISA fiduciary obligations, and while we believe we are in compliance with ERISA and that any such compliance does not currently have a material adverse effect on our operations, there can be no assurance that continuing ERISA compliance efforts or any future changes to ERISA will not have a material adverse effect on us.

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Third-Party Administrator Laws. Numerous states in which we do business have adopted regulations governing entities engaged in third-party administrator, or TPA, activities. TPA regulations typically impose requirements regarding enrollment into benefits plans, claims processing and payments, and the handling of customer funds. Additions to our service offerings and/or changes in state regulations could result in us being obligated to comply with such regulations, which might require us to obtain licenses to provide TPA services in such states.

The growth in the Medicare plan market is important to the overall growth rate of our business. The marketing and sale of Medicare plans are subject to numerous, complex and frequently changing laws and regulations, and the impact of changes in laws related to Medicare or any failure to comply with them could harm our business, results of operations and financial condition.

The number of people eligible for Medicare is one of the most significant drivers in the growth of Medicare plans. Any changes in the eligibility requirements for Medicare such as raising the age of eligibility would decrease the available pool of recipients and lower our growth expectations.

The marketing and sale of Medicare plans are subject to numerous laws, regulations and guidelines at both the Federal and state level. The marketing and sale of Medicare Advantage and Medicare Part D prescription drug plans are principally regulated by CMS, which is a division of the United States Department of Health and Human Services, and the marketing and sale of Medicare supplement plans is principally regulated on a state- by- state basis by state departments of insurance. The laws and regulations applicable to the marketing and sale of Medicare plans lack clarity, are numerous and complex, were not drafted to contemplate health insurance exchanges, and change frequently, particularly with respect to regulations and guidance issued by CMS for Medicare Advantage and Medicare Part D prescription drug plans and by the various state departments of insurance for Medicare supplement plans.

As a result of these laws, regulations and guidelines, we have altered, and will need to continue to alter, our business operations and procedures, including without limitation, to comply with these changing requirements. Though our health plan customers remain responsible to comply with CMS requirements, we operate as an FDR, in support of our customers. Changes to the laws, regulations and guidelines relating to Medicare plans, the scope of their application to our business, their interpretation by regulators or our health plan customers, or the manner in which they are enforced could be incompatible with our business model. As a result, our business could be slowed or we could be prevented from operating portions of our business altogether, either of which would materially harm our results of operations and financial condition, particularly if this occurred during the Medicare annual enrollment period, which is when the vast majority of Medicare plans are sold.

Health plans may adjust their commission rates to comply with regulatory guidelines, such as those published by CMS with respect to the marketing of Medicare Advantage and Medicare Part D prescription drug plans. If these contractual changes result in reduced commissions, our revenue may decline. Because insurance rates may vary between health plans, plans and enrollment dates, changes in enrollment mix may impact our commission revenue. Future changes in health plan pricing practices could harm our business, results of operations and financial condition.

In March 2010, the Federal government enacted significant reforms to healthcare legislation through the PPACA and the HCERA, which we refer to collectively as Healthcare Reform. In addition, one of the elements of the Budget Control Act of 2011 is the creation of a joint select committee on deficit reduction to develop recommendations, including changes to entitlement programs such as Medicare, to reduce the national debt by at least $1.5 trillion over 10 years. In connection with the United Sates Congress’s failure to agree on a proposal to lower the national deficit, the Budget Control Act mandates automatic cuts to domestic and defense spending, including a significant reduction in Medicare spending. The impact that Healthcare Reform and the Budget Control Act will have on the market for Medicare plans could change the demand for Medicare plans, the way these plans are delivered, or the commissions that health plans pay to us in connection with their sale or otherwise adversely impact us.

In the event that these laws and regulations or changes in these laws and regulations, or other laws and regulations that impact the marketing and sale of Medicare plans, adversely impact our ability or our customers’ ability to market any type of Medicare plan on an exchange platform or the commissions that we receive for selling these plans, our business, results of operations and financial condition would be harmed.

Additional regulatory requirements placed on our software, services, and content could impose increased costs on us, delay or prevent our introduction of new service types, and impair the function or value of our existing service types.

Our products and services are and are likely to continue to be subject to increasing regulatory requirements in a number of ways. As these requirements proliferate, we must change or adapt our products and services to comply. Changing regulatory requirements might render our services obsolete or might prevent us from pursuing our business objective or developing new services. This might in turn impose additional costs upon us to comply or to further develop our products and services. It might also make introduction of new product or service types more costly or more time-consuming than we currently anticipate. It might even prevent introduction by us of new products or services or cause the continuation of our existing products or services to become unprofitable or impossible.

Potential government subsidy of services similar to ours, or creation of a single-payer system, might reduce customer demand.

Recently, entities including brokers and United States federal and state governments have offered to subsidize adoption of online benefits platforms or clearinghouses. In addition, prior proposals regarding healthcare reform have included the concept of creation of a single payer for health insurance. This kind of consolidation of critical benefits activity could negatively impact the demand for our services.

Risks Related to Ownership of Our Common Stock

Our stock price may be volatile.

The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, including the risk factors described in this “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q and other factors which are beyond our control. These factors include:

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our operating performance and the operating performance of similar companies;

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the overall performance of the equity markets;

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announcements by us or our competitors of acquisitions, business plans, or commercial relationships;

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threatened or actual litigation;

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changes in laws or regulations relating to the sale of health insurance;

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any major change in our Board of Directors or management;

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publication of research reports or news stories about us, our competitors, or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

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large volumes of sales of our shares of common stock by existing stockholders; and

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general political and economic conditions.

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. This litigation, if instituted against us, could result in substantial costs, divert our management’s attention and resources, and harm our business, operating results, and financial condition.

A limited number of stockholders have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

As of July 31, 2016, our directors, executive officers, and their affiliated entities beneficially owned approximately 52% of our outstanding common stock, assuming conversion of all convertible preferred stock to common stock on a 4.5 to 1.0 basis. In addition, a limited number of stockholders beneficially own more than a majority of our outstanding common stock. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the amendment of our amended and restated certificate of incorporation and amended and restated bylaws, and the approval of mergers or other business combination transactions.

This concentration of ownership might discourage, delay, or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and might reduce our stock price. These actions may be taken even if they are opposed by other stockholders.

If securities or industry analysts do not continue to publish research or reports about our business, or publish inaccurate or unfavorable research or reports about our business, our stock price and trading volume could decline.

The trading market for our common stock, to some extent, depends on the research and reports that securities or industry analysts publish about us and our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon future appreciation in its value, if any. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders purchased their shares.

The issuance of shares of our Series A Preferred Stock reduces the relative voting power of holders of our common stock, would dilute the ownership of such holders and may adversely affect the market price of our common stock.

On May 2, 2016, we completed the sale of 52,000 shares of our Series A Convertible Preferred Stock (the “Financing”) pursuant to an Investment Agreement, dated March 11, 2016, as amended, by and among the Company, Francisco Partners IV, L.P., Francisco Partners IV-A, L.P. (together, “Francisco Partners”) and Chrysalis Ventures II, L.P (the “Investment Agreement”). As of July 31, 2016, these shares represented approximately 35% of our outstanding common stock, on an as-converted basis. Holders of Series A Convertible Preferred Stock are entitled to a cumulative dividend at the rate of 7.5% per annum (subject to adjustment), payable quarterly in arrears. The dividends are to be paid in-kind, through the issuance of additional shares of Series A Convertible Preferred Stock, through at least May 2, 2018, and thereafter in cash or in-kind at our option. If we fail to timely declare and pay a dividend, the dividend rate will increase.

As holders of our Series A Convertible Preferred Stock are entitled to vote, on an as-converted basis, together with holders of our common stock on all matters submitted to a vote of the holders of our common stock, the issuance of the Series A Convertible Preferred Stock, and the subsequent issuance of additional shares of Series A Convertible Preferred Stock through the payment of dividends, effectively reduces the relative voting power of the holders of our common stock.

In addition, the conversion of the Series A Convertible Preferred Stock to common stock would dilute the ownership interest of existing holders of our common stock, and any sales in the public market of the common stock issuable upon conversion of the Series A Convertible Preferred Stock could adversely affect prevailing market prices of our common stock. We granted the holders of the Series A Convertible Preferred Stock customary registration rights in respect of their shares of Series A Convertible Preferred Stock, and any shares of common stock issued upon conversion of the Series A Convertible Preferred Stock. These registration rights would facilitate the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by such holders of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

The holders of shares of the Series A Convertible Preferred Stock may exercise significant influence over us, including through their ability to designate a member of our Board of Directors.

Under the terms of the Investor Rights Agreement that we entered into with the holders of Series A Convertible Preferred Stock as of May 2, 2016 (the “Investor Rights Agreement”) and of the Series A Convertible Preferred Stock, the holders of shares of the Series A Convertible Preferred Stock have consent rights with respect to certain actions by us, including:

•

amending our organizational documents in a manner that would have an adverse effect on the Series A Convertible Preferred Stock; and

•

issuing securities that are senior to, or equal in priority with, the Series A Convertible Preferred Stock;

The Investor Rights Agreement also imposes a number of affirmative and negative covenants on us. As a result, the holders of shares of the Series A Convertible Preferred Stock have the ability to significantly influence the outcome of any matter submitted for the vote of the holders of our common stock. Such holders and their affiliates are in the business of making or advising on investments in companies, including businesses that may directly or indirectly compete with certain portions of our business, and they may have interests that diverge from, or even conflict with, those of our other stockholders. They may also pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

The terms of the Investor Rights Agreement and of the Series A Convertible Preferred Stock also grant Francisco Partners certain rights to designate a director to serve on our Board. Specifically, Francisco Partners (i) can designate one member of the Board, which designee shall be entitled to serve on the compensation committee of the Board, and one Board observer for so long as Francisco Partners continues to hold at least 25% of the equity interests purchased by it at the closing of the Financing and 5% of all outstanding Common Stock (on an as-converted basis) of the Company and (ii) can designate one Board observer for so long as it holds at least 10% of the equity interests purchased by it at the closing of the Financing. In addition, David A. Jones, Jr., the chairman of our Board, is a general partners of Chrysalis Ventures, which in addition to holding shares of our common stock, also holds shares of our Series A Convertible Preferred Stock. Notwithstanding the fact that all directors will be subject to fiduciary duties to us and to applicable law, the interests of the directors designated by Francisco Partners and of Mr. Jones may differ from the interests of our security holders as a whole or of our other directors.

Our Series A Convertible Preferred Stock has rights, preferences and privileges that are not held by, and are preferential to, the rights of our common stockholders, which could adversely affect our liquidity and financial condition, and may result in the interests of the holders of our Series A Convertible Preferred Stock differing from those of our common stockholders.

The holders of Series A Convertible Preferred Stock have the right to receive a liquidation preference entitling them to be paid out of our assets available for distribution to stockholders before any payment may be made to holders of any other class or series of capital stock, an amount equal to the greater of the stated value of such holder’s shares of Series A Convertible Preferred Stock or the amount that such holder would have been entitled to receive upon our liquidation, dissolution and winding up if all outstanding shares of Series A Convertible Preferred Stock had been converted into common stock immediately prior to such liquidation, dissolution or winding up, plus accrued but unpaid dividends.

In addition, dividends on the Series A Convertible Preferred Stock accrue and are cumulative at the rate of 7.5% per annum, payable quarterly in arrears. If we fail to timely declare and pay a dividend, the dividend rate will increase. The dividends are to be paid in-kind, through the issuance of additional shares of Series A Convertible Preferred Stock, until May 2, 2018, and thereafter in cash or in-kind at our option. The holders of our Series A Convertible Preferred Stock also have certain redemption rights, including the right to require us to repurchase all or any portion of the Series A Convertible Preferred Stock upon the occurrence of certain events.

These dividend and share repurchase obligations could impact our liquidity and reduce the amount of cash flows available for working capital, capital expenditures, growth opportunities, acquisitions, and other general corporate purposes. Our obligations to the holders of Series A Convertible Preferred Stock could also limit our ability to obtain additional financing or increase our borrowing costs, which could have an adverse effect on our financial condition. The preferential rights could also result in divergent interests between the holders of shares of Series A Convertible Preferred Stock and holders of our common stock.

Provisions in our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay, or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws and Delaware law might discourage, delay, or prevent a merger, acquisition, or other change in control that stockholders consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions might also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

•

limitations on the removal of directors;

•

advance notice requirements for stockholder proposals and nominations;

•

limitations on the ability of stockholders to call special meetings;

•

the inability of stockholders to cumulate votes at any election of directors;

•

the classification of our Board of Directors into three classes with only one class, representing approximately one-third of our directors, standing for election at each annual meeting; and

•

the ability of our Board of Directors to make, alter or repeal our amended and restated bylaws.

Our Board of Directors has the ability to designate the terms of and issue new series of preferred stock without stockholder approval. In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors are willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

We currently qualify as an emerging growth company under the JOBS Act and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

The JOBS Act permits “emerging growth companies” like us to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

For as long as we continue to be an emerging growth company, we intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and exemptions from the requirements of auditor attestation reports on the effectiveness of our internal control over financial reporting. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards under Section 102(B)(1), which will allow us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) ending December 31, 2019, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we become a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then most recently completed second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities

Reference is made to the description of our sale and issuance of unregistered shares of Series A Convertible Preferred Stock on May 2, 2016, as previously disclosed in our Current Report on Form 8-K filed on May 4, 2016, which is incorporated herein by reference.

(b) Use of Proceeds

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

On August 3, 2016, the board of directors of the Company appointed Jeffery Surges, the Company’s Chief Executive Officer, as President, to fill the vacancy in such position created by the resignation of Robert Douglas Schneider as of July 29, 2016. There are no changes to Mr. Surges’ compensation in connection with his appointment as President.

Mr. Surges, 49, has served as our Chief Executive Officer and as a member of our Board of Directors since November 2015. Prior to joining the Company, Mr. Surges served as President of Healthgrades Operating Company, Inc., an online resource for comprehensive information about physicians and hospitals, from June 2014 through April 2015. Previously, Mr. Surges served as the Chief Executive Officer of Merge Healthcare Inc., a medical imaging company acquired by IBM in 2015, from November 2010 through August 2013, and as President of Sales for Allscripts Healthcare Solutions, Inc., a provider of healthcare information technology solutions, from January 2008 through November 2010. Mr. Surges also served as chief executive officer of Extended Care Information Network, Inc. from 1999 through its acquisition by Allscripts Healthcare Solutions in December 2007. Mr. Surges currently serves as the chairman of the Board of Directors of Strategic Health Strategies and previously served on the Board of Directors of Merge Healthcare from May 2010 through August 2013. Mr. Surges holds a B.A. from Eastern Illinois University.

Item 6. Exhibits

See the Index to Exhibits immediately following the signature pages of this Quarterly Report on Form 10-Q, which is incorporated herein by reference.

SIGNATURES

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.

INDEX TO EXHIBITS

Incorporated by Reference

Exhibit
Number

Description

Form

File No.

Exhibit

Filing Date

2.1

Agreement and Plan of Merger, dated June 7, 2016, by and among ConnectedHealth, LLC, Connecture, Inc., Speed Merger Sub, Inc., the Principal Equityholders, and Shareholder Representative Services, LLC.

8-K

001-36778

2.1

June 9, 2016

3.1

Sixth Amended and Restated Certificate of Incorporation, dated December 16, 2014

10-K

001-36778

3.1

March 25, 2015

3.2

Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock

8-K

001-36778

3.1

May 4, 2016

3.3

Amended and Restated Bylaws of the Registrant

S-1/A

333-199484

3.4

November 10, 2014

4.1

Investor Rights Agreement, dated as of May 2, 2016, by and among the Registrant and Francisco Partners IV, L.P., Francisco Partners IV-A, L.P. and Chrysalis Ventures II, L.P.

8-K

001-36778

4.1

May 4, 2016

10.1.1

Investment Agreement, dated as of March 11, 2016, by and among the Registrant and Francisco Partners IV, L.P., Francisco Partners IV-A, L.P. and Chrysalis Ventures II, L.P.

8-K

001-36778

10.1

March 14, 2016

10.1.2.

Amendment No. 1 to Investment Agreement, dated as of May 2, 2016, by and among the Registrant and Francisco Partners IV, L.P., Francisco Partners IV-A, L.P. and Chrysalis Ventures II, L.P.

8-K

001-36778

10.1

May 4, 2016

10.2*†

Amended and Restated Credit Agreement, Dated June 8, 2016

21.1*

List of Subsidiaries of the Registrant

31.1*

Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2*

Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1**

Certification of Chief Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

32.2**

Certification of Chief Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*

XBRL Instance Document

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

*	Filed herewith

**	Furnished herewith

†	Portions of this agreement have been redacted pursuant to a request for confidential treatment that has been submitted to the Securities and Exchange Commission.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company