EHEALTH, INC. In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "expect," "anticipate," "believe," "estimate," "target," "goal," "project," "hope," "intend," "plan," "seek," "continue," "may," "could," "should," "might," "forecast," and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include, among other things, statements regarding our expectations relating to approved members, new paying members and estimated membership; our estimates regarding the constrained lifetime value of commissions; our expectations relating to revenue, operating costs, cash flows and profitability; our expectations regarding our strategy and investments, including investments in our ecommerce and call center capabilities, technology, agent training and quality assurance efforts; our expectations regarding our Medicare business, including market opportunity, consumer demand and our competitive advantage; our expectations regarding our individual and family business, including anticipated trends and our ability to enroll individuals and families into qualified health plans; our expectations regarding our strategic plans, including our growth strategy, cost savings and enrollment quality initiatives; the impact of future and existing laws and regulations on our business; the expected impact of the COVID-19 pandemic and continued remote operations on our business; the expected impact of inflation and general economic conditions on our business; our expectations regarding commission rates, payment rates, conversion rates, plan termination rates and duration, membership retention rates and membership acquisition costs; our expectations regarding health insurance agents licensing and productivity; our expectations regarding beneficiary complaints, customer experience and enrollment quality; our expectations relating to the seasonality of our business; expected competition from government-run health insurance exchanges and other sources; our expectations relating to marketing and advertising expense and expected contributions from our marketing and strategic partnership channels; the timing of our receipt of commission and other payments; our critical accounting policies and related estimates; liquidity and capital needs; political, legislative, regulatory and legal challenges; the merits or potential impact of any lawsuits filed against us; as well as other statements regarding our future operations, financial condition, prospects and business strategies. We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including our ability to retain existing members and enroll new members during the annual health care open enrollment period, the Medicare annual enrollment period and other special enrollment periods; changes in laws, regulations and guidelines, including in connection with health care reform or with respect to the marketing and sale of Medicare plans; competition, including competition from government-run health insurance exchanges and other sources; the seasonality of our business and the fluctuation of our operating results; our ability to accurately estimate membership, lifetime value of commissions and commissions receivable; changes in product offerings among carriers on our ecommerce platform and the resulting impact on our commission revenue; our ability to execute on our growth strategy in the Medicare market; the impact of the COVID-19 pandemic and other public health crises, illness, epidemics or pandemics on our operations, business, financial condition and growth prospects, as well as on the general economy; changes in our management and key employees; exposure to security risks and our ability to safeguard the security and privacy of confidential data; our relationships with health insurance carriers; the success of our carrier advertising and sponsorship program; customer concentration and consolidation of the health insurance industry; our success in marketing and selling health insurance plans and our unit cost of acquisition; our ability to hire, train, retain and ensure the productivity of licensed health insurance agents and other employees; our ability to effectively manage our operations as our business evolves and execute on our transformational plan and other strategic initiatives; the need for health insurance carrier and regulatory approvals in connection with the marketing of Medicare-related insurance products; changes in the market for private health insurance; consumer satisfaction of our service and actions we take to improve the quality of enrollments; changes in member conversion rates; changes in commission rates; our ability to sell qualified health insurance plans to subsidy-eligible individuals and to enroll subsidy-eligible individuals through government-run health insurance exchanges; our ability to maintain and enhance our brand identity; our ability to derive desired benefits from investments in our business, including membership growth and retention initiatives; reliance on marketing partners; the impact of our direct-to-consumer mail, email, social media, telephone and television marketing efforts; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; dependence on our operations inChina ; the restrictions in our debt obligations; the restrictions in 30
--------------------------------------------------------------------------------
Table of Contents
our investment agreement with H.I.G.; our ability to raise additional capital; compliance with insurance, privacy and other laws and regulations; the outcome of litigation in which we are and may from time to time become involved; the performance, reliability and availability of our information technology systems, ecommerce platform and underlying network infrastructure; and those identified under the heading "Risk Factors" in Part II, Item 1A. of this report and those discussed in our otherSecurities and Exchange Commission filings. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required by applicable law, we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. The following discussion should be read in conjunction with our Annual Report on Form 10-K as filed with theSecurities and Exchange Commission inMarch 2022 , and the audited consolidated financial statements and related notes contained therein.
Overview
We are a leading private health insurance marketplace with a technology and service platform that provides consumer engagement, education and health insurance enrollment solutions. Our mission is to connect every person with the highest quality, most affordable health insurance and Medicare plans for their life circumstances. Our platform leverages technology to solve a critical problem in a large and growing market by aiding consumers in what has traditionally been a complex, confusing, and opaque health insurance purchasing process. Our omnichannel consumer engagement platform enables consumers to use our services online, by telephone with a licensed insurance agent, or through a hybrid online assisted interaction. We have created a consumer-centric marketplace that offers consumers a broad choice of insurance products that includes thousands of Medicare Advantage, Medicare Supplement, Medicare Part D prescription drug, individual and family, small business and other ancillary health insurance products from approximately 200 health insurance carriers across all fifty states and theDistrict of Columbia . Our plan recommendation tool curates this broad plan selection by analyzing customer health-related information against plan data for insurance coverage fit. This tool is supported by a unified data platform and is available to our ecommerce customers and our licensed agents.
Updates on Business Initiatives
During 2021, we made a number of changes to our telesales and online
capabilities with a focus on driving performance and improving enrollment
quality in preparation for the annual enrollment period ("AEP") in the fourth
quarter. We continue to build on these initiatives in 2022. The introduction of
enrollment quality assurance in the third quarter of 2021, in particular,
resulted in an initial decline in conversion rates and longer talk times through
the second quarter 2022. However, we are seeing improvement in enrollment
quality metrics including Complaint Tracking Module scores and retention
characteristics for the new enrollments that we added during the 2022 AEP,
relative to comparable enrollment cohorts from the 2021 and 2020 AEPs. This
suggests that the enrollments are of higher quality, resulting in higher
customer satisfaction, increased plan longevity and potentially higher lifetime
values.
Enrollment quality has been our focus since the launch of our retention program
in 2020, which helps ensure that we present Medicare beneficiaries with choices
that best align with their eligibility status, lifestyle, health conditions and
economic means with the goal of minimal disruption in existing provider
relationships. We have been seeking additional ways to improve our customer
experience, enhance accuracy of plan recommendations and reduce disenrollment.
In addition, over the past twelve months, we introduced a number of significant
enhancements to our sales and marketing processes. This includes increased agent
specialization by product and geography, improvement of agent training to
further enhance their sales skills, and continued improvements in our
omnichannel enrollment platform. For example, we launched an online chat tool
powered by licensed agents and a co-browsing feature that allows agents and
customers to share screens for more effective navigation of the enrollment
experience. These initiatives enhance our technology differentiation and allow
beneficiaries to progress through shopping and enrollment more easily. As a
result, we saw a significant year-over-year increase in conversion rates in the
third quarter of 2022 on our Medicare calls and increased productivity from our
tenured and newly hired agents. We expect to continue to build on the positive
momentum in our conversion rates as we move through the 2023 AEP season.
31--------------------------------------------------------------------------------
Table of Contents
Transformational Plan - We are implementing a multi-year transformational plan to right-size our cost structure and drive future profitability. This plan incorporates different operational and cost savings initiatives, including a reduction in vendor-related spend outside of mission critical areas, plans to reduce our real-estate footprint as we become a virtual-first workplace, and a targeted workforce reduction implemented during the second quarter of 2022. InApril 2022 , we eliminated over 300 full-time positions, representing approximately 14% of our workforce, primarily within our customer care and enrollment group, and to a lesser extent, in our marketing and advertising, technology and content, and general and administrative groups. We are also making changes to variable cost management. These initiatives are intended to improve our operations through re-engineering, reorganizing, and better deployment of marketing expenses. For example, we have de-emphasized underperforming demand generation channels in favor of channels that bring higher quality leads. Through this transformational plan, we expect to achieve ongoing significant cost savings while preserving our competitive edge and focusing on initiatives with highest in-period returns on investment. In 2022, we expect to achieve over$90 million in annualized cost savings compared to 2021. The variable cost reduction is expected to lead to a temporary decline in our Medicare enrollments and revenue in 2022 before a return to enrollment growth in 2023 on a significantly improved operational and cost foundation.
Changes in Senior Management
InJanuary 2022 , we announced the termination of employment of chief revenue officer,Timothy C. Hannan , effectiveJanuary 31, 2022 , and the appointment ofRobert S. Hurley as interim chief revenue officer effectiveFebruary 1, 2022 .Mr. Hurley served as an interim chief revenue officer untilMichelle Barbeau was appointed as chief marketing officer effectiveSeptember 6, 2022 .Mr. Hurley continues to serve as an executive advisor to senior management.
In
In
COVID-19 Impact Updates
We experienced a number of changes in our business related to the impacts from the COVID-19 pandemic from 2020 onwards. During the first quarter of 2020, we closed our offices inthe United States andChina and shifted our employees to a work-from-home model in response to the virus outbreak. Our office inChina has reopened since the second quarter of 2020 given the improvements in the situation in the region where our office is located. As a result of the pandemic, we have had to adjust our business operations, including onboarding and training new health insurance agents remotely. Since the pandemic, we have offered several programs to provide additional support to our employees and contractors, including our comfort equipment reimbursement program and internet and mobile phone reimbursement programs, to assist all employees with purchasing equipment to better enable remote work; access to digital health and mental wellness services for employees; and rigorous remote training programs.
Remote Work
We currently operate with a combination of remote and in-office work inthe United States . All of our offices are open for employees who would prefer to work from one of our offices. Except for those whose job responsibilities require in-office work, none of our employees are required to return to the office full time. Most of our employees work remotely at this time, and we are taking steps to become a virtual-first workplace. For example, inAugust 2022 , we signed a sublease agreement for our office space located inSanta Clara, California , and we may consider entering into additional sublease arrangements in the future. As we continue to assess challenges associated with enabling remote work, including the reconfiguration of work space and our facility footprint and fostering a cohesive workplace culture, we believe flexible workforce positions will make us a more attractive employer, increase productivity and enable us to recruit from a more diverse pool of applicants. 32
--------------------------------------------------------------------------------
Table of Contents Summary of Selected Metrics
We rely upon certain metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate strategic planning. Our commission revenue is influenced by a number of factors including but not limited to:
•the number of individuals on applications for Medicare-related, individual and family, small business and ancillary health insurance plans that are approved by the relevant health insurance carriers; •the number of approved members for Medicare-related, individual and family, small business and ancillary health insurance plans from whom we have received an initial commission payment; and
•the constrained lifetime value ("LTV"), of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell, as well as the estimated annual value of approved members for small business plans we sell.
Approved Members
Approved members represent the number of individuals on submitted applications
that were approved by the relevant insurance carrier for the identified product
during the period presented. The applications may be submitted in either the
current period or prior periods. Not all approved members ultimately become
paying members.
The following table shows approved members by product for the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 % Change 2022 2021 % Change
Medicare
Medicare Advantage 37,777 36,836 3 % 171,714 222,289 (23) %
Medicare Supplement 2,581 4,258 (39) % 12,229 18,170 (33) %
Medicare Part D 4,532 5,690 (20) % 16,200 20,677 (22) %
Total Medicare 44,890 46,784 (4) % 200,143 261,136 (23) %
Individual and Family 4,859 8,232 (41) % 19,261 29,019 (34) %
Ancillary 17,019 23,084 (26) % 54,255 73,643 (26) %
Small Business 2,436 2,320 5 % 6,775 7,856 (14) %
Total Approved Members 69,204 80,420 (14) % 280,434 371,654 (25) %
Three Months Ended September 30, 2022 and 2021 - Total Medicare approved members
decreased 4% in the three months ended September 30, 2022 compared to the same
period in 2021. The decrease was attributable to a 39% and 20% decline in
Medicare Supplement and Medicare Part D approved members, respectively,
partially offset by an increase of 3% in Medicare Advantage approved members.
The decrease in Medicare Supplement and Medicare Part D plan approved members
was driven primarily by a shift in consumer demand which now favors Medicare
Advantage as well as our targeted deployment of marketing and advertising costs
toward Medicare Advantage. The increase in Medicare Advantage approved members
was due to an increase in telephonic conversion rates and growth in online
unassisted applications.
Individual and family plan approved members decreased 41% in the three months
ended September 30, 2022 compared to the same period in 2021 due to an extension
of the enrollment period in 2021 that did not occur in 2022.
Ancillary product approved members declined 26% in the three months ended
September 30, 2022 compared to the same period in 2021 primarily due to declines
in approved members across all ancillary insurance products that are typically
cross sold with new individual and family plan enrollments. Small business group
health insurance approved members increased 5% in the three months ended
September 30, 2022 compared to the same period in 2021.
33--------------------------------------------------------------------------------
Table of Contents
Nine Months EndedSeptember 30, 2022 and 2021 - Total Medicare approved members decreased 23% in the nine months endedSeptember 30, 2022 compared to the same period in 2021. This decrease was attributable to a decrease in approved members across all Medicare products that we market including Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans, driven primarily by a decrease in member acquisition spend including marketing and customer care and enrollment, as well as a decline in conversion rates in the first half of 2022 compared to the same period 2021.
Individual and family plan approved members declined 34% in the nine months
ended
Ancillary product approved members declined 26% in the nine months endedSeptember 30, 2022 compared to the same period in 2021 primarily due to declines in approved members across all ancillary insurance products. Small business group health insurance approved members declined 14% in the nine months endedSeptember 30, 2022 compared to the same period in 2021.
New Paying Members
New Paying Members consist of approved members from the period presented and any
periods prior to the period presented from whom we have received an initial
commission payment during the period presented. The following table shows our
new paying members by product for the periods presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 % Change 2022 2021 % Change
Medicare
Medicare Advantage 35,934 38,193 (6) % 203,053 256,900 (21) %
Medicare Supplement 1,972 3,832 (49) % 11,796 19,145 (38) %
Medicare Part D 4,146 5,601 (26) % 35,979 41,620 (14) %
Total Medicare 42,052 47,626 (12) % 250,828 317,665 (21) %
Individual and Family 5,034 8,143 (38) % 26,214 34,961 (25) %
Ancillary 17,751 24,662 (28) % 58,669 79,356 (26) %
Small Business 1,916 2,230 (14) % 6,921 8,746 (21) %
Total New Paying Members 66,753 82,661 (19) % 342,632 440,728 (22) %
Three Months Ended September 30, 2022 and 2021 - Total new paying members
declined 19% in the three months ended September 30, 2022 compared to the same
period in 2021 primarily due to a decline in Medicare Supplement and Medicare
Part D plan approved members, as well the timing of the receipt of payments with
respect to Medicare Advantage plan approved members.
Nine Months Ended September 30, 2022 and 2021 - Total new paying members
declined 22% in the nine months ended September 30, 2022 compared to the same
period in 2021, primarily due to an overall decline in approved members for all
products.
34
--------------------------------------------------------------------------------
Table of Contents
Estimated Constrained Lifetime Value of Commissions Per Approved Member
The following table shows our estimated constrained LTV of commissions per approved member by product for the periods presented below:
Three Months Ended
September 30,
2022 2021 % Change
Medicare
Medicare Advantage (1) $ 953 $ 975 (2) %
Medicare Supplement (1) 956 955 - %
Medicare Part D (1) 219 227 (4) %
Individual and Family
Non-Qualified Health Plans (1) 306 254 20 %
Qualified Health Plans (1) 289 296 (2) %
Ancillary
Short-term (1) 149 157 (5) %
Dental (1) 100 98 2 %
Vision (1) 61 60 2 %
Small Business (2) 217 186 17 %
__________
(1)Constrained LTV of commissions per approved member represents commissions
estimated to be collected over the estimated life of an approved member's plan
after applying constraints in accordance with our revenue recognition policy.
The estimate is driven by multiple factors, including but not limited to,
contracted commission rates, carrier mix, estimated average plan duration, the
regulatory environment, and cancellations of insurance plans offered by health
insurance carriers with which we have a relationship. These factors may result
in varying values from period to period. For additional information on
constrained LTV, see Critical Accounting Policies and Estimates in our Annual
Report on Form 10-K for the year ended December 31, 2021 .
(2)For small business, the amount represents the estimated commissions we expect
to collect from the plan over the following twelve months. The estimate is
driven by multiple factors, including but not limited to, contracted commission
rates, carrier mix, estimated average plan duration, the regulatory environment,
and cancellations of insurance plans offered by health insurance carriers with
which we have a relationship and applied constraints. These factors may result
in varying values from period to period.
Medicare
The constrained LTV of commissions per approved member declined by 2% and 4% for Medicare Advantage and Medicare Part D prescription drug plans, respectively, during the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease in Medicare Advantage LTVs was primarily driven by less stable churn observations and a decrease in estimated average plan duration.
Individual and Family, Ancillary and Small Business
The constrained LTV of commissions per non-qualified health plan approved member increased 20% and qualified health plan approved member decreased 2% during the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase for non-qualified health plans was primarily due to more stable churn observations and an increase in estimated average plan duration. The decrease for qualified health plans was due to pressures on churn performance. The constrained LTV of commissions per approved member for dental, vision, and small business insurance plans increased by 2%, 2% and 17%, respectively, during the three months endedSeptember 30, 2022 compared with the same period in 2021. The increase for small business was due to higher commissions per group. The constrained LTV of commissions per approved member for short-term health insurance decreased 5% during the three months endedSeptember 30, 2022 compared with the same period in 2021 primarily due to lower expected commissions. 35
--------------------------------------------------------------------------------
Table of Contents
The constraints applied to the total estimated lifetime commissions we expect to
receive for selling the plan after the carrier approves an application in order
to derive the constrained LTV of commissions for approved members recognized for
the periods presented below are summarized as follows:
Three Months Ended
September 30,
2022 2021
Medicare
Medicare Advantage 7 % 7 %
Medicare Supplement 9 % 9 %
Medicare Part D 7 % 7 %
Individual and Family
Non-Qualified Health Plans 4 % 7 %
Qualified Health Plans 4 % 4 %
Ancillary
Short-term 20 % 20 %
Dental 5 % 5 %
Vision 5 % 5 %
Other 10 % 10 %
Small Business 5 % 5 %
The constraints for all Medicare products remained the same during the three
months ended September 30, 2022 , as compared to the same period in the prior
year. The constraints for non-qualified health plans decreased during the three
months ended September 30, 2022 , as compared to the same period in the prior
year, due to stabilization of market conditions and historical increases in LTV
values. The constraints for ancillary and small business insurance plans
remained the same during the three months ended September 30, 2022 , as compared
to the same period in the prior year.
36--------------------------------------------------------------------------------
Table of Contents
Estimated Membership
Estimated membership represents the estimated number of members active as of the
date indicated based on the estimation methodology below. The following table
shows estimated membership by product for the periods presented below:
As of September 30,
2022 2021 % Change
Medicare (1)
Medicare Advantage 582,203 559,235 4 %
Medicare Supplement 97,829 99,622 (2) %
Medicare Part D 224,542 216,582 4 %
Total Medicare 904,574 875,439 3 %
Individual and Family (1) 103,262 108,126 (4) %
Ancillary (1) 215,616 241,366 (11) %
Small Business (2) 49,543 45,697 8 %
Total Estimated Membership 1,272,995 1,270,628 - %
__________________
(1)To estimate the number of members on Medicare-related, Individual and Family
("IFP"), and ancillary health insurance plans, we take the respective sum of (i)
the number of members for whom we have received or applied a commission payment
for a month that may be up to three months prior to the date of estimation
(after reducing that number using historical experience for assumed member
cancellations over the period being estimated); and (ii) the number of approved
members over that period (after reducing that number using historical experience
for an assumed number of members who do not accept their approved policy and for
estimated member cancellations through the date of the estimate). To the extent
we determine through confirmations from a health insurance carrier that a
commission payment is delayed or is inaccurate as of the date of estimation, we
adjust the estimated membership to also reflect the number of members for whom
we expect to receive or to refund a commission payment. Further the extent we
have received substantially all of the commission payments related to a given
month during the period being estimated, we will take the number of members for
whom we have received or applied a commission payment during the month of
estimation. For ancillary health insurance plans, the one to three-month period
varies by insurance product and is largely dependent upon the timeliness of
commission payment and related reporting from the related carriers.
(2)To estimate the number of members on small business health insurance plans,
we use the number of initial members at the time the group was approved, and we
update this number for changes in membership if such changes are reported to us
by the group or carrier. However, groups generally notify the carrier directly
of policy cancellations and increases or decreases in group size without
informing us. Health insurance carriers often do not communicate policy
cancellation information or group size changes to us. We often are made aware of
policy cancellations and group size changes at the time of annual renewal and
update our membership statistics accordingly in the period they are reported.
A member who purchases and is active on multiple standalone insurance plans will
be counted as a member more than once. For example, a member who is active on
both an individual and family health insurance plan and a standalone dental plan
will be counted as two continuing members.
Health insurance carriers bill and collect insurance premiums paid by our
members. The carriers do not report to us the number of members that we have as
of a given date. The majority of our members who terminate their plans do so by
discontinuing their premium payments to the carrier or notifying the carrier
directly and do not inform us of the cancellation. Also, some of our members pay
their premiums less frequently than monthly. Given the number of months required
to observe non-payment of commissions in order to confirm cancellations, we
estimate the number of members who are active on insurance policies as of a
specified date.
After we have estimated membership for a period, we may receive information from
health insurance carriers that would have impacted the estimate if we had
received the information prior to the date of estimation. We may receive
commission payments or other information that indicates that a member who was
not included in our estimates for a prior period was in fact an active member at
that time, or that a member who was included in our estimates was in fact not an
active member of ours. For instance, we reconcile information carriers provide
to us and may determine that we were not historically paid commissions owed to
us, which would cause us to have underestimated membership. Conversely, carriers
may require us to return commission payments paid in a prior
37--------------------------------------------------------------------------------
Table of Contents
period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. If we experience a significant variance in historical membership as compared to our initial estimates, we keep the prior period data consistent with previously reported amounts, while we may provide the updated information in other communications or disclosures. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Various circumstances could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate. Medicare-related plan estimated membership as ofSeptember 30, 2022 increased 3% compared to estimated membership as ofSeptember 30, 2021 due to a 4% growth in both Medicare Advantage and Medicare Part D plan estimated memberships and a 2% decline in Medicare Supplement plan estimated membership. The overall growth in Medicare estimated membership was due to new paying members we added over the last twelve months, net of churn. Individual and family plan estimated membership as ofSeptember 30, 2022 declined 4% compared to estimated membership as ofSeptember 30, 2021 due to a decrease in applications. Ancillary plan estimated membership as ofSeptember 30, 2022 declined 11% compared to estimated membership as ofSeptember 30, 2021 primarily as a result of the decline across all ancillary plans estimated membership.
Member Acquisition
Marketing initiatives are an important component of our strategy to increase
revenue and are primarily designed to encourage consumers to complete an
application for health insurance. Variable marketing cost represents direct
costs incurred in member acquisition from our direct, marketing partners and
online advertising channels. In addition, we incur customer care and enrollment
("CC&E") expenses in assisting applicants during the enrollment process.
Variable marketing costs exclude fixed overhead costs, such as personnel related
costs, consulting expenses, facilities and other operating costs allocated to
the marketing and advertising department.
The following table shows the estimated variable marketing cost per approved
member and the estimated customer care and enrollment expense per approved
member metrics for the periods presented below. The numerator used to calculate
each metric is the portion of the respective operating expenses for marketing
and advertising and customer care and enrollment that is directly related to
member acquisition for our sale of Medicare Advantage, Medicare Supplement and
Medicare Part D prescription drug plans (collectively, "Medicare Plans") and for
all individual and family major medical plans and short-term health insurance
(collectively, "IFP Plans"), respectively. The denominator used to calculate
each metric is based on a derived metric that represents the relative value of
the new members acquired. For Medicare Plans, we call this derived metric
Medicare Advantage ("MA")-equivalent members, and for IFP Plans, we call this
derived metric IFP-equivalent members. The calculations for MA-equivalent
members and for IFP-equivalent members are based on the weighted number of
approved members for Medicare Plans and IFP Plans during the period, with the
number of approved members adjusted based on the relative LTV of the product
they are purchasing. Since the LTV for any product fluctuates from period to
period, the weight given to each product was determined based on their relative
LTVs at the time of our adoption of Accounting Standards Codification 606 -
Revenue from Contracts with Customers ("ASC 606").
38--------------------------------------------------------------------------------
Table of Contents
Three Months Ended
September 30,
2022 2021 % Change
Medicare
Estimated CC&E cost per MA-equivalent approved member (1)
$ 1,099 (40) %
Estimated variable marketing cost per MA-equivalent approved member (1)
554 775 (29) %
Total Medicare estimated cost per approved member
$ 1,874 (35) %
Individual and Family Plan Estimated CC&E cost per IFP-equivalent approved member (2)
$ 173 $ 119 45 %
Estimated variable marketing cost per IFP-equivalent approved member (2)
91 65 40 %
Total IFP estimated cost per approved member $ 264 $ 184 43 %
__________________
(1)MA-equivalent approved members is a derived metric with a Medicare Part D
approved member being weighted at 25% of a Medicare Advantage member and a
Medicare Supplement member based on their relative LTVs at the time of our
adoption of ASC 606. We calculate the number of approved MA-equivalent members
by adding the total number of approved Medicare Advantage and Medicare
Supplement members and 25% of the total number of approved Medicare Part D
members during the period presented.
(2)IFP-equivalent approved members is a derived metric with a short-term
approved member being weighted at 33% of a major medical individual and family
health insurance plan member based on their relative LTVs at the time of our
adoption of ASC 606. We calculate the number of approved IFP-equivalent members
by adding the total number of approved qualified and non-qualified health plan
members and 33% of the total number of short-term approved members during the
period presented.
Estimated CC&E cost per MA-equivalent approved member decreased 40% in the three
months ended September 30, 2022 compared to the same period in 2021 due to
better channel mix and higher telephonic conversion rates. Estimated variable
marketing cost per MA-equivalent approved member decreased 29% compared to the
same period in 2021 primarily as a result of the improvements to our sales and
marketing operations.
Estimated CC&E cost per IFP-equivalent approved member increased 45% in the
three months ended September 30, 2022 compared to the same period in
2021 primarily due to an increase in the number of agents as we invest in
individual coverage health reimbursement arrangement and state exchange
opportunities. Estimated variable marketing cost per IFP-equivalent approved
member increased 40% in the three months ended September 30, 2022 compared to
the same period in 2021 primarily due to the decline in approved members
compared to the same period in 2021.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected. An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions and are most critical to understanding and evaluating our reported financial results are as follows: 39
--------------------------------------------------------------------------------
Table of Contents
•Revenue Recognition and contract assets - commission receivable; •Stock-Based Compensation; and •Accounting for Income Taxes.
There have been no changes to our critical accounting policies and estimates described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onMarch 1, 2022 , that have had a significant impact on our condensed consolidated financial statements and related notes. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , for a complete discussion of our other critical accounting policies and estimates.
Results of Operations
Our operating results and related percentage of total revenue are summarized below for the periods presented (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenue
Commission $ 48,977 92 % $ 59,191 93 % $ 190,662 91 % $ 276,066 94 %
Other 4,399 8 % 4,723 7 % 18,373 9 % 18,619 6 %
Total revenue 53,376 100 % 63,914 100 % 209,035 100 % 294,685 100 %
Operating costs and expenses (1)
Cost of revenue 494 1 % (25) - % 790 - % 1,217 - %
Marketing and advertising 30,556 57 % 43,317 68 % 118,973 57 % 138,772 47 %
Customer care and enrollment 29,398 55 % 48,956 77 % 100,711 48 % 121,480 41 %
Technology and content 19,399 36 % 20,369 31 % 56,842 27 % 63,996 22 %
General and administrative 17,300 32 % 16,640 26 % 54,485 26 % 57,812 20 %
Amortization of intangible assets - - % 121 - % - - % 416 - %
Impairment, restructuring and other
charges 4,498 8 % 573 1 % 10,690 5 % 3,004 1 %
Total operating costs and expenses 101,645 190 % 129,951 203 % 342,491 164 % 386,697 131 %
Loss from operations (48,269) (90) % (66,037) (103) % (133,456) (64) % (92,012) (31) %
Other income (expense), net (647) (1) % 189 - % (2,835) (1) % 511 - %
Loss before income taxes (48,916) (92) % (65,848) (103) % (136,291) (65) % (91,501) (31) %
Benefit from income taxes (9,767) (18) % (12,834) (20) % (26,898) (13) % (19,278) (7) %
Net loss $ (39,149) (73) % $ (53,014) (83) % $ (109,393) (52) % $ (72,223) (24) %
____________
(1)Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Marketing and advertising $ 570 $ 2,297 $ 1,311 $ 6,922
Customer care and enrollment 610 740 1,576 1,901
Technology and content 1,341 2,380 5,012 7,483
General and administrative 2,623 (183) 8,035 8,575
Total stock-based compensation expense
15,934$ 24,881 40
--------------------------------------------------------------------------------
Table of Contents Revenue
Our commission revenue, other revenue and total revenue are summarized as follows (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Commission $ 48,977 $ 59,191 $ (10,214) (17) % $ 190,662 $ 276,066 $ (85,404) (31) %
% of total revenue 92 % 93 % 91 % 94 %
Other 4,399 4,723 (324) (7) % 18,373 18,619 (246) (1) %
% of total revenue 8 % 7 % 9 % 6 %
Total revenue $ 53,376 $ 63,914 $ (10,538) (16) % $ 209,035 $ 294,685 $ (85,650) (29) %
Three Months Ended September 30, 2022 and 2021 - Commission revenue decreased
$10.2 million , or 17% during the three months ended September 30, 2022 compared
to the same period in 2021 due to a $1.2 million decrease in commission revenue
from the Medicare segment and a $9.0 million decrease in commission revenue from
the Individual, Family and Small Business segment.
The decrease in commission revenue from the Medicare segment was driven by a 4%
decline in Medicare plan approved members. This was primarily due to a 39% and
20% decline in Medicare Supplement and Medicare Part D plan approved members,
respectively, partially offset by a 3% increase in Medicare Advantage plan
approved members compared to the same period in 2021. The decrease in commission
revenue from the Individual, Family and Small Business segment was primarily due
to $1.8 million in net adjustment revenue from prior period enrollments for the
three months ended September 30, 2022 compared to $10.0 million for the same
period in 2021, a 41% decrease in individual and family plan approved members
and a 26% decline in ancillary product approved members, partially offset by an
increase in constrained lifetime value of commissions per approved IFP member
compared to the same period in 2021. See Approved Members above and Segment
Information below for further discussion.
Other revenue decreased
Nine Months EndedSeptember 30, 2022 and 2021 - Commission revenue decreased$85.4 million , or 31%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021 due to a$59.5 million decrease in commission revenue from the Medicare segment and a$25.9 million decrease in Individual, Family and Small Business segment commission revenue. The decrease in commission revenue from the Medicare segment was driven by a 23% decline in overall Medicare plan approved members, specifically a 23% decline in Medicare Advantage plan approved members compared to the same period in 2021. The decrease in commission revenue from the Individual, Family and Small Business segment was primarily due to a 34% decline in individual and family plan approved members, a 26% decline in ancillary product approved members, and$4.4 million in net adjustment revenue from prior period enrollments for the nine months endedSeptember 30, 2022 compared to$29.1 million for the same period in 2021. See Approved Members above and Segment Information below for further discussion.
Other revenue decreased
Cost of Revenue
Cost of revenue consists of payments related to health insurance plans sold to
members who were referred to our website by marketing partners with whom we have
revenue-sharing arrangements. In order to enter into a revenue-sharing
arrangement, marketing partners must be licensed to sell health insurance in the
state where the policy is sold. Costs related to revenue-sharing arrangements
are expensed as the related revenue is recognized.
41--------------------------------------------------------------------------------
Table of Contents
Additionally, cost of revenue includes the amortization of consideration we paid to certain broker partners in connection with the transfer of their health insurance members to us as the new broker of record on the underlying plans. These transfers include primarily Medicare plan members. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.
Our cost of revenue is summarized as follows (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Cost of revenue $ 494 $ (25) $ 519 2,076 % $ 790 $ 1,217 $ (427) (35) %
% of total revenue 1 % - % - % - %
Three Months Ended September 30, 2022 and 2021 - Cost of revenue increased by
$0.5 million during the three months ended September 30, 2022 , compared to the
same period in 2021, primarily due to increased activity from our revenue
sharing arrangements.
Nine Months Ended September 30, 2022 and 2021 - Cost of revenue decreased by
$0.4 million during the nine months ended September 30, 2022 , compared to the
same period in 2021, primarily due to decreased activity from our revenue
sharing arrangements.
Marketing and Advertising
Marketing and advertising expenses consist primarily of member acquisition
expenses associated with our direct, marketing partner and online advertising
member acquisition channels, in addition to compensation and other expenses
related to marketing, business development, partner management, public relations
and carrier relations personnel who support our offerings.
Our marketing and advertising expenses are summarized as follows (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Marketing and advertising $ 30,556 $ 43,317 $ (12,761) (29) % $ 118,973 $ 138,772 $ (19,799) (14) %
% of total revenue 57 % 68 % 57 % 47 %
Three Months Ended September 30, 2022 and 2021 - Marketing and advertising
expenses decreased $12.8 million , or 29%, during the three months ended
September 30, 2022 compared to the same period in 2021, primarily driven by
decreases of $10.0 million in Medicare plan related variable advertising, $1.7
million in stock-based compensation expense, and $1.4 million in personnel and
compensation costs, partially offset by an increase of $0.4 million in
consulting expenses. The decrease in variable advertising expenses was due to a
decrease in our advertising expense through select lead generation partners and
direct TV channels as we shift to a more targeted deployment of our marketing
budget to emphasize highest performing channels.
Nine Months Ended September 30, 2022 and 2021 - Marketing and advertising
expenses decreased $19.8 million , or 14%, during the nine months ended September
30, 2022 compared to the same period in 2021, primarily driven by decreases of
$14.6 million in Medicare plan related variable advertising, $5.6 million in
stock-based compensation expense, and $1.7 million in personnel and compensation
costs, partially offset by an increase of $1.7 million in consulting expenses.
The decrease in variable advertising expenses was due to a decrease in our
advertising expense through select lead generation partners and direct TV
channels.
42
--------------------------------------------------------------------------------
Table of Contents Customer Care and Enrollment
Customer care and enrollment expenses primarily consist of compensation, benefits and licensing costs for personnel engaged in assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the enrollment process.
Our customer care and enrollment expenses are summarized as follows (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Customer care and enrollment
(40) % $ 100,711 $ 121,480 $ (20,769) (17) %
% of total revenue 55 % 77 % 48 % 41 %
Three Months Ended
Nine Months EndedSeptember 30, 2022 and 2021 - Customer care and enrollment expenses decreased$20.8 million , or 17%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily due to decreases of$15.4 million in personnel costs and$6.5 million in consulting expenses, partly offset by an increase of$0.8 million in facilities and other expenses.
Technology and Content
Technology and content expenses consist primarily of compensation and benefits costs for personnel associated with developing and enhancing our website technology as well as maintaining our website. A portion of our technology and content group is located at our wholly-owned subsidiary inChina , where technology development costs are generally lower than inthe United States . Our technology and content expenses are summarized as follows (dollars in thousands): Three Months Ended Nine Months Ended September 30, Change September 30, Change 2022 2021 $ % 2022 2021 $ %
Technology and content
(5) %$ 56,842 $ 63,996 $ (7,154) (11) % % of total revenue 36 % 31 % 27 % 22 % Three Months EndedSeptember 30, 2022 and 2021 - Technology and content expenses decreased$1.0 million , or 5%, during the three months endedSeptember 30, 2022 compared to the same period in 2021 primarily driven by decreases of$1.0 million in stock-based compensation expense,$0.7 million in consulting costs, and$0.6 million in personnel and compensation costs due to lower headcount, partially offset by increases of$1.2 million in amortization of internally developed software and$0.7 million in facilities and other operating costs. Nine Months EndedSeptember 30, 2022 and 2021 - Technology and content expenses decreased$7.2 million , or 11%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021 primarily driven by decreases of$3.3 million in personnel and compensation costs due to lower headcount,$2.5 million in stock-based compensation expense,$2.1 million in consulting costs, and$2.0 million in facilities and other operating costs, partially offset by an increase of$3.6 million in amortization of internally developed software.
General and Administrative
General and administrative expenses include compensation and benefits costs for personnel working in our executive, finance, investor relations, government affairs, legal, human resources, internal audit, facilities and
43--------------------------------------------------------------------------------
Table of Contents
internal information technology departments. These expenses also include fees
paid for outside professional services, including audit, tax, legal, government
affairs and information technology fees.
Our general and administrative expenses are summarized as follows (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
General and administrative
4 %$ 54,485 $ 57,812 $ (3,327) (6) % % of total revenue 32 % 26 % 26 % 20 % Three Months EndedSeptember 30, 2022 and 2021 - General and administrative expenses increased$0.7 million , or 4%, during the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily driven by increases of$2.8 million in stock-based compensation expense,$0.4 million in other professional fees, and$0.4 million in personnel costs, partially offset by a decrease of$3.1 million in facilities and other operating costs. The increase in stock-based compensation expense during the third quarter of 2022 was primarily due to a$4.1 million credit related to equity awards forfeited in the third quarter of 2021 in connection with the termination of employment of our former chief executive officer. Nine Months EndedSeptember 30, 2022 and 2021 - General and administrative expenses decreased$3.3 million , or 6%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily driven by a decrease of$4.3 million in in facilities and other operating cost, partially offset by an increase of$1.0 million in consulting expenses.
Amortization of Intangible Assets
Our intangible asset amortization expense is summarized as follows (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Amortization of intangible
assets $ - $ 121 $ (121) (100) % $ - $ 416 $ (416) (100) %
% of total revenue - % - % - % - %
Amortization expense decreased during the three and nine months ended
Impairment, Restructuring and Other Charges
Our impairment, restructuring and other charges consist primarily of severance,
transition and other related costs and impairment charges. Our impairment,
restructuring and other charges are summarized as follows (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Impairment, restructuring and
other charges $ 4,498 $ 573 $ 3,925 685 % $ 10,690 $ 3,004 $ 7,686 256 %
% of total revenue 8 % 1 % 5 % 1 %
Three Months Ended September 30, 2022 and 2021 - Impairment, restructuring and
other charges for the three months ended September 30, 2022 primarily consisted
of $3.7 million of impairment charges, which were related to $2.5 million of
operating lease right-of-use assets impairment and $0.9 million of property,
plant and equipment impairment related to our Santa Clara, California office
sublease and $0.3 million of impairment charges related to abandoned in-process
internally developed software during the quarter. Additionally, we incurred
44--------------------------------------------------------------------------------
Table of Contents
Nine Months EndedSeptember 30, 2022 and 2021 - Impairment, restructuring and other charges for the nine months endedSeptember 30, 2022 primarily consisted of$7.0 million of severance and other personnel related cost related to the restructuring that took place throughout 2022 as well as$3.7 million of impairment charges, which were related to$2.5 million of operating lease right-of-use assets impairment and$0.9 million of property, plant and equipment impairment related to ourSanta Clara, California office sublease and$0.3 million of impairment charges related to abandoned in-process internally developed software during the quarter. In the first half of 2022, we completed a reduction in force inApril 2022 in which we eliminated 339 full-time positions, representing approximately 14% of our workforce, primarily within the customer care and enrollment groups, and to a lesser extent, in our marketing and advertising and general and administrative groups, and, as a result, incurred$6.2 million of restructuring charges. In the three months endedSeptember 30, 2022 , we incurred restructuring charges of$0.8 million for additional eliminated positions.
Other Income (Expense), Net
Other income (expense), net, primarily consisted of interest income, sublease
income and margin earned on commissions received from Medicare plan members
transferred to us in 2010 through 2012 by a broker partner, partially offset by
interest expense on finance leases and debt and other bank fees.
Our other income (expense), net is summarized as follows (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Other income (expense), net $ (647) $ 189 $ (836) (442) % $ (2,835) $ 511 $ (3,346) (655) %
% of total revenue (1) % - % (1) % - %
Three Months Ended September 30, 2022 and 2021 - Other income (expense), net was
$(0.6) million and $0.2 million during the three months ended September 30, 2022
and September 30, 2021 , respectively. The change for the three months ended
September 30, 2022 was primarily due to $2.1 million of interest expense for the
Credit Agreement entered into during the first quarter of 2022, partially offset
by an increase of approximately $0.8 million in interest income.
Nine Months Ended September 30, 2022 and 2021 - Other income (expense), net was
$(2.8) million and $0.5 million during the nine months ended September 30, 2022
and September 30, 2021 , respectively. The change for the nine months ended
September 30, 2022 was primarily due to $4.7 million of interest expense for the
Credit Agreement entered into during the first quarter of 2022 and $0.4 million
of expenses related to the termination of the RBC revolving credit facility at
the same time, partially offset by an increase of $1.2 million in interest
income.
Benefit from Income Taxes
Our benefit from income taxes are summarized as follows (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Benefit from income taxes
(24) %
40 %
Effective tax rate 20.0 % 19.5 % 19.7 % 21.1 %
45
--------------------------------------------------------------------------------
Table of Contents
Three Months EndedSeptember 30, 2022 and 2021 - Our effective tax rate of 20.0% for the three months endedSeptember 30, 2022 was higher than our 19.5% effective tax rate for the three months endedSeptember 30, 2021 primarily due to fluctuations in stock-based compensation adjustments. Our effective tax rate for the three months endedSeptember 30, 2022 was lower than the statutory federal tax rate primarily due to stock-based compensation adjustments, non-deductible lobbying expenses, partially offset by research and development credits and state taxes. Nine Months EndedSeptember 30, 2022 and 2021 - Our effective tax rate of 19.7% for the nine months endedSeptember 30, 2022 was lower than our 21.1% effective tax rate for the nine months endedSeptember 30, 2021 primarily due to fluctuations in stock-based compensation adjustments. Our effective tax rate for the nine months endedSeptember 30, 2022 was lower than the statutory federal tax rate due primarily to stock-based compensation adjustments, non-deductible lobbying expenses, partially offset by research and development credits and state taxes. Segment Information We report segment information based on how our chief executive officer, who is our chief operating decision maker, or CODM, regularly reviews our operating results, allocates resources and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit (loss). Our business structure is comprised of two operating segments: •Medicare; and •Individual, Family and Small Business.
Our CODM does not separately evaluate assets by segment, with the exception of commissions receivable, and therefore assets by segment are not presented.
The Medicare segment consists primarily of commissions earned from our sale of
Medicare-related health insurance plans, including Medicare Advantage, Medicare
Supplement and Medicare Part D prescription drug plans, and to a lesser extent,
ancillary products sold to our Medicare-eligible applicants, including but not
limited to, dental and vision plans, as well as our advertising program that
allows Medicare-related carriers to purchase advertising on a separate website
developed, hosted and maintained by us and to purchase other marketing and
advertising services, as well as our delivery and sale to third parties of
Medicare-related health insurance leads generated by our ecommerce platforms and
our marketing activities.
The Individual, Family and Small Business segment consists primarily of
commissions earned from our sale of individual, family and small business health
insurance plans and ancillary products sold to our non-Medicare-eligible
applicants, including but not limited to, dental, vision, and short-term health
insurance. To a lesser extent, the Individual, Family and Small Business segment
consists of amounts earned from our online sponsorship program that allows
carriers to purchase advertising space in specific markets in a sponsorship area
on our website, our licensing to third parties for the use of our health
insurance ecommerce technology, and our delivery and sale to third parties of
individual and family health insurance leads generated by our ecommerce
platforms and our marketing activities.
Marketing and advertising, customer care and enrollment, technology and content,
and general and administrative operating expenses that are directly attributable
to a segment are reported within the applicable segment. Indirect marketing and
advertising, customer care and enrollment, and technology and content operating
expenses are allocated to each segment based on usage. Other indirect general
and administrative operating expenses are managed in a corporate shared services
environment and, since they are not the responsibility of segment operating
management, are not allocated to the operating segments and instead reported
within Corporate.
46
--------------------------------------------------------------------------------
Table of Contents
Segment profit (loss) is calculated as total revenue for the applicable segment
less direct and indirect allocated marketing and advertising, customer care and
enrollment, technology and content, and general and administrative operating
expenses, excluding stock-based compensation expense, depreciation and
amortization expense, amortization of intangible assets, and impairment,
restructuring and other charges.
Our operating segment revenue and profit (loss) are summarized as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2022 2021 $ % 2022 2021 $ %
Revenue:
Medicare $ 45,137 $ 46,381 $ (1,244) (3) % $ 181,266 $ 240,633 $ (59,367) (25) %
Individual, Family and Small
Business 8,239 17,533 (9,294) (53) % 27,769 54,052 (26,283) (49) %
Total revenue $ 53,376 $ 63,914 $ (10,538) (16) % $ 209,035 $ 294,685 $ (85,650) (29) %
Segment profit (loss)
Medicare $ (22,962) $ (52,882) $ 29,920 57 % $ (63,050) $ (46,141) $ (16,909) (37) %
Individual, Family and Small
Business 2,688 12,499 (9,811) (78) % 12,285 38,476 (26,191) (68) %
Segment loss (20,274) (40,383) 20,109 50 % (50,765) (7,665) (43,100) (562) %
Corporate (12,795) (14,827) 2,032 14 % (40,382) (43,206) 2,824 7 %
Stock-based compensation
expense (5,144) (5,234) 90 2 % (15,934) (24,881) 8,947 36 %
Depreciation and amortization
(1) (5,558) (4,899) (659) (13) % (15,685) (12,840) (2,845) (22) %
Amortization of intangible
assets - (121) 121 100 % - (416) 416 100 %
Impairment, restructuring and
other charges (4,498) (573) (3,925) (685) % (10,690) (3,004) (7,686) (256) %
Other income (expense), net (647) 189 (836) (442) % (2,835) 511 (3,346) (655) %
Loss before income taxes $ (48,916) $ (65,848) $ 16,932 26 % $ (136,291) $ (91,501) $ (44,790) (49) %
_______
(1)Depreciation and amortization has been adjusted to include amortization of software development costs.
Revenue Three Months EndedSeptember 30, 2022 and 2021 - Revenue from our Medicare segment declined$1.2 million , or 3%, during the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily attributable to a$1.2 million decrease in commission revenue, driven by an overall decline of 4% in Medicare plan approved members and a 2% decline in Medicare Advantage LTVs. Revenue from our Individual, Family and Small Business segment declined$9.3 million , or 53%, during the three months endedSeptember 30, 2022 compared to the same period in 2021, primarily attributable to a$9.0 million decrease in commission revenue driven by a 41% decrease in individual and family plan approved members and a 26% decline in ancillary product approved members. Based on our evaluation of the updated LTV models and retention trends, we recognized$1.8 million in net adjustment revenue from prior period enrollments during the three months endedSeptember 30, 2022 compared to$10.0 million for the same period in 2021. Nine Months EndedSeptember 30, 2022 and 2021 - Revenue from our Medicare segment declined$59.4 million , or 25%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily attributable to a$59.5 million decrease in commission revenue. The decrease in Medicare segment commission revenue is primarily due to a$57.2 million decrease in Medicare Advantage plan related commission revenue, driven by a 23% decline in Medicare Advantage plan approved members. 47
--------------------------------------------------------------------------------
Table of Contents
Revenue from our Individual, Family and Small Business segment declined$26.3 million , or 49%, during the nine months endedSeptember 30, 2022 compared to the same period in 2021, primarily attributable to a$25.9 million decrease in commission revenue driven by a 34% decline in individual and family plan approved members and a decline of 26% in ancillary product approved members. Based on our evaluation of the updated LTV models and retention trends, we recognized$4.4 million in net adjustment revenue from prior period enrollments during the nine months endedSeptember 30, 2022 compared to$29.1 million for the same period in 2021. Segment Profit (Loss) Three Months EndedSeptember 30, 2022 and 2021 - Our Medicare segment loss was$23.0 million during the three months endedSeptember 30, 2022 , a decrease of$29.9 million , or 57%, compared to segment loss of$52.9 million for the same period in 2021. The improvement in net segment loss was primarily due to a decrease of$31.2 million in operating expenses, excluding stock-based compensation expense, depreciation and amortization expense, impairment, restructuring and other charges, and other income (expense), partially offset by a$1.2 million decrease in revenue. The decrease in operating expenses was due to impacts from our transformation initiatives. Our Individual, Family and Small Business segment profit was$2.7 million during the three months endedSeptember 30, 2022 , a decrease of$9.8 million , or 78%, compared to segment profit of$12.5 million for the same period in 2021. The decrease was primarily driven by a$9.3 million decrease in revenue. Nine Months EndedSeptember 30, 2022 and 2021 - Our Medicare segment loss was$63.1 million during the nine months endedSeptember 30, 2022 , an increase of$16.9 million , or 37%, compared to segment loss of$46.1 million for the same period in 2021. This was primarily due to a$59.4 million decrease in revenue, partially offset by a$42.5 million decrease in operating expenses, excluding stock-based compensation expense, depreciation and amortization expense, impairment, restructuring and other charges, and other income (expense). The decrease in operating expenses was mostly attributable to impacts from our transformation initiatives. Our Individual, Family and Small Business segment profit was$12.3 million during the nine months endedSeptember 30, 2022 , a decrease of$26.2 million , or 68% compared to segment profit of$38.5 million for the same period in 2021. The decrease was primarily driven by a$26.3 million decrease in revenue.
Liquidity and Capital Resources
Material Cash Requirements
Our material cash requirements include our operating leases and service and licensing obligations. See Note 10 - Leases in our Notes to Condensed Consolidated Financial Statements for the details of our operating lease obligations. We have entered into service and licensing agreements with third party vendors to provide various services, including network access, equipment maintenance and software licensing. The terms of these services and licensing agreements are generally up to three years. We record the related service and licensing expenses on a straight-line basis, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements. See Note 8 - Commitments and Contingencies in our Notes to Condensed Consolidated Financial Statements. Short-term obligations were$8.3 million for leases and$9.1 million for service and licensing as ofSeptember 30, 2022 . Long-term obligations were$36.9 million for leases and$4.3 million for service and licensing as ofSeptember 30, 2022 . We expect to fund these obligations through our existing cash and cash equivalents and cash generated from operations. Our future capital requirements will depend on many factors, including our enrollment volume, membership, retention rates, telesales conversion rates, and our level of investment in technology and content, marketing and advertising, customer care and enrollment, and other initiatives. In addition, our cash position could be impacted by the level of investments we make to pursue our strategy. To the extent that available funds are insufficient to fund our future activities or to execute our financial strategy, we may raise additional capital through bank debt, or public or private equity or debt financing to the extent such funding sources are available. We are implementing a multi- 48
--------------------------------------------------------------------------------
Table of Contents
year transformational plan to right-size our cost structure and drive future profitability. This plan incorporates different operational and cost savings initiatives, including a reduction in vendor-related spend outside of mission critical areas, plans to reduce our real-estate footprint as we become a virtual-first workplace, and a targeted workforce reduction implemented during 2022. InApril 2022 , we eliminated 339 full-time positions, representing approximately 14% of our workforce, primarily within our customer care and enrollment group, and to a lesser extent, in our marketing and advertising, technology and content, and general and administrative groups. These reductions could adversely impact the growth of membership and revenue. We believe our current cash and cash equivalents, including the proceeds from the term loan we obtained onFebruary 28, 2022 under our Credit Agreement and expected cash collections will be sufficient to fund our operations for at least 12 months after the filing date of this Quarterly Report on Form 10-Q.
Our cash, cash equivalents, and short-term marketable securities are summarized as follows (in thousands):
September 30, 2022 December 31, 2021
Cash and cash equivalents $ 160,258 $ 81,926
Short-term marketable securities 4,491 41,306
Total cash, cash equivalents, and short-term marketable
securities $ 164,749 $ 123,232
While we recognize constrained LTV as revenue at the time applications are
approved, our collection of the cash commissions resulting from approved
applications generally occurs over a number of years. The expense associated
with approved applications, however, is generally incurred at the time of
enrollment. As a result, the net cash flow resulting from approved applications
is generally negative in the period of revenue recognition and generally becomes
positive over the lifetime of the member. In periods of membership growth, cash
receipts associated with new and continuing members may be less than the cash
outlays to acquire new members. We expect a reduction in cash and cash
equivalents in the future resulting from our continued investments to grow our
business. To the extent that available funds are insufficient to fund our future
activities or to execute our financial strategy, we may raise additional capital
through bank debt, or public or private equity or debt financing to the extent
such funding sources are available. Alternatively, we may decide to reduce
marketing and advertising, customer care and enrollment, technology and content,
or other expenses in order to manage liquidity. These reductions could adversely
impact our rate of membership and revenue growth.
As of September 30, 2022 , our cash and cash equivalents totaled $160.3 million .
Cash equivalents, which are comprised of financial instruments with an original
maturity of 90 days or less from the date of purchase, primarily consist of
money market funds and commercial paper. The increase in cash and cash
equivalents reflects $8.3 million of net cash used in operating activities,
$24.1 million of net cash provided by investing activities, and $62.9 million of
net cash provided by financing activities. We also maintained $3.2 million in
restricted cash as of September 30, 2022 and December 31, 2021 .
The following table presents a summary of our cash flows for the nine months
ended
Nine Months Ended
September 30,
2022 2021
Net cash used in operating activities $ (8,290) $ (60,321)
Net cash provided by (used in) investing activities 24,135 (36,822) Net cash provided by financing activities
62,925 210,914
49
--------------------------------------------------------------------------------
Table of Contents Operating Activities Net cash used in operating activities primarily consists of net loss, adjusted for certain non-cash items, including, deferred income taxes, stock-based compensation expense, depreciation and amortization, amortization of intangible assets and internally developed software, other non-cash items, and the effect of changes in working capital and other activities. Collection of commissions receivable depends upon the timing of our receipt of commission payments and associated commission reports from health insurance carriers. If we were to experience a delay in receiving a commission payment from a health insurance carrier within a quarter, our operating cash flows for that quarter could be adversely impacted. A significant portion of our marketing and advertising expense is directly correlated with the number of health insurance applications submitted on our ecommerce platforms. Since our marketing and advertising costs are expensed and generally paid as incurred, and since commission revenue is recognized upon approval of a member but commission payments are paid to us over time, our operating cash flows could be adversely impacted by a substantial increase in the volume of applications submitted during a quarter or positively impacted by a substantial decline in the volume of applications submitted during a quarter. During the Medicare annual enrollment period that takes place during the last quarter of each year and the reintroduced Medicare Advantage open enrollment period in the first quarter of the year, we experience an increase in the number of submitted Medicare-related health insurance applications and marketing and advertising expenses compared to outside of these enrollment periods. Similarly, during the open enrollment period for individual and family health insurance plans which typically takes place during the fourth quarter of each year, we experience an increase in the number of submitted individual and family plan health insurance applications and marketing and advertising expenses compared to outside of open enrollment periods. The timing of enrollment periods for individual and family health insurance plans, the Medicare annual enrollment period and the open enrollment period for Medicare-related health insurance can positively or negatively affect our cash flows during each quarter. Nine Months EndedSeptember 30, 2022 - Net cash used in operating activities was$8.3 million during the nine months endedSeptember 30, 2022 , primarily driven by a net loss of$109.4 million , offset by changes in net operating assets and liabilities of$91.6 million and adjustments for non-cash items of$9.5 million . Adjustments for non-cash items primarily consisted of$15.9 million of stock-based compensation expense and$12.7 million of amortization of internally-developed software, partially offset by a$27.2 million decrease due to the change in deferred income taxes. Cash provided by changes in net operating assets and liabilities during the nine months endedSeptember 30, 2022 primarily consisted of decreases of$122.4 million in contract assets - commissions receivable,$2.7 million in prepaid expenses and other assets, and$3.9 million in accounts receivable, partly offset by decreases of$28.2 million in accrued marketing expenses and$7.1 million in accounts payable. Nine Months EndedSeptember 30, 2021 - Net cash used in operating activities was$60.3 million during the nine months endedSeptember 30, 2021 , primarily driven by net loss of$72.2 million and changes in net operating assets and liabilities of$7.0 million , partially offset by adjustments for non-cash items of$18.9 million . Adjustments for non-cash items primarily consisted of$24.9 million of stock-based compensation expense,$9.6 million of amortization of intangible assets and internally-developed software, and$3.7 million of depreciation and amortization, partially offset by a$20.1 million decrease due to the change in deferred income taxes. Cash used from changes in net operating assets and liabilities during the nine months endedSeptember 30, 2021 primarily consisted of decreases of$26.9 million in accounts payable,$6.5 million in accrued marketing expense, increases of$20.8 million in prepaid expenses and other current asset, and decreases in$0.1 million in accrued compensation and benefits, partially offset by decreases of$35.2 million in contract assets - commissions receivable, increases of$10.2 million in deferred revenue and$1.4 million in accrued expenses and other liabilities. 50
--------------------------------------------------------------------------------
Table of Contents Investing Activities Our investing activities primarily consist of purchases, maturities, and redemptions of marketable securities as well as purchases of computer hardware and software to enhance our website and customer care operations, leasehold improvements related to facilities expansion, capitalized internal-use software and website development costs and security deposit payments. Nine Months EndedSeptember 30, 2022 - Net cash provided by investing activities of$24.1 million for the nine months endedSeptember 30, 2022 mainly consisted of$45.3 million of proceeds from the maturities and redemptions of marketable securities, partially offset by$12.5 million in capitalized internal-use software and website development costs and$8.4 million used to purchase marketable securities. Nine Months EndedSeptember 30, 2021 - Net cash used in investing activities of$36.8 million for the nine months endedSeptember 30, 2021 mainly consisted of$89.0 million used to purchase marketable securities,$12.6 million in capitalized internal-use software and website development costs and$3.6 million used to purchase property and equipment and other assets, partially offset by$68.3 million of proceeds from the maturities and redemptions of marketable securities.
Financing Activities
Nine Months EndedSeptember 30, 2022 - Net cash provided by financing activities of$62.9 million for the nine months endedSeptember 30, 2022 was primarily due to$64.9 million of net proceeds from debt financing and$1.1 million of net proceeds from the exercise of common stock options, partially offset by$2.9 million in repurchases of shares to satisfy employee tax withholding obligations. Nine Months EndedSeptember 30, 2021 - Net cash provided by financing activities of$210.9 million for the nine months endedSeptember 30, 2021 was primarily due to$214.0 million of net proceeds from the issuance of convertible preferred stock and$5.0 million of net proceeds from exercise of common stock options, partially offset by$8.0 million in repurchases of shares to satisfy employee tax withholding obligations. Convertible Preferred Stock OnApril 30, 2021 (the "Closing Date"), we issued and sold 2,250,000 shares of our newly designated Series A convertible preferred stock ("Series A preferred stock") at an aggregate purchase price of$225.0 million , at a price of$100 (the "Stated Value" per share of Series A preferred stock) per share. We received$214.0 million net proceeds from the private placement withEchelon Health SPV, LP ("H.I.G."), which are net of sales commissions and certain transaction fees. Dividends on our outstanding shares of Series A preferred stock accrue daily at 8% per annum on the Stated Value per share and compound semiannually, payable in kind untilApril 30, 2023 , which is the second anniversary of the Closing Date, onJune 30 andDecember 31 of each year, beginning onJune 30, 2021 , and will thereafter become 6% payable in kind and 2% payable in cash in arrears onJune 30 andDecember 31 of each year, beginning onJune 30, 2023 (each, a "Cash Dividend Payment Date"). Dividends payable in kind will be cumulative. The Series A preferred stock also participates, on an as-converted basis (without regard to conversion limitations) in all dividends paid to the holders of our common stock. If we fail to declare and pay full cash dividend payments as required by the certificate of designations for the Series A preferred stock for two consecutive Cash Dividend Payment Dates, the cash dividend rate then in effect shall increase one time by 2%, retroactive to the first day of the semiannual period immediately preceding the first Cash Dividend Payment Date at which we failed to pay such accrued cash dividends, until such failure to pay full cash dividends is cured (at which time the dividend rate shall return to the rate prior to such increase). The dividend rights of the Series A preferred stock are senior to all of our other equity securities. Beginning onApril 30, 2027 , which is the sixth anniversary of the Closing Date, each holder of Series A preferred stock will have the right to require us to redeem all or any portion of the Series A preferred stock for cash at a price calculated as set forth in the certificate of designations. In addition, upon certain change of control events, 51
--------------------------------------------------------------------------------
Table of Contents
holders of Series A preferred stock can require us, subject to certain exceptions, to repurchase any or all of their Series A preferred stock.
As ofSeptember 30, 2022 , no shares of the Series A preferred stock have been converted and the balance of our Series A preferred stock was$255.2 million , including a change in the redemption value of$8.2 million and the accrued paid-in-kind dividends of$14.4 million , which was equivalent to 3.2 million shares of common stock on an as-converted basis. See Note 6 - Convertible Preferred Stock in our Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
Term Loan Credit Agreement
We entered into a Credit Agreement withBlue Torch Finance LLC , as administrative agent and collateral agent, and the other lenders party thereto inFebruary 2022 (the "Original Credit Agreement") and entered into an amendment (the "Amendment") to the Original Credit Agreement inAugust 2022 (as amended by the Amendment, the "Credit Agreement"). The Credit Agreement provides for a$70.0 million secured term loan credit facility, which term loans were made available to us onFebruary 28, 2022 . We terminated our credit agreement with Royal Bank of Canada ("RBC"), pursuant to which we had an up to$75 million revolving credit facility in connection with our receiving the loan under the Term Loan Credit Agreement. The Amendment replaced the LIBOR-based Adjusted Eurocurrency Rate (as defined in the original Term Loan Credit Agreement) with Adjusted Term SOFR (as defined in the Amendment) as a reference rate for loans under the Credit Agreement The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes, to refinance our credit agreement with RBC and to pay fees and expenses in connection with the entry into the Credit Agreement. The Original Credit Agreement bore interest, at our option, at either a rate based on the LIBOR for the applicable interest period or a base rate, in each case plus a margin. The base rate was the highest of the prime rate, the federal funds rates plus 0.50% and one month adjusted LIBOR plus 1.0%. The margin was 7.50% for LIBOR loans and 6.50% for base rate loans. After the Amendment, the loans under the Credit Agreement bear interest, at our option, at either a rate based on the Adjusted Term SOFR or a base rate, in each case plus a margin. The base rate is the highest of the prime rate, the federal funds rate plus 0.50% and three-month Adjusted Term SOFR plus 1.00%. The margin is 7.50% for Adjusted Term SOFR loans and 6.50% for base rate loans. Furthermore, as part of the Credit Agreement, we will incur a$0.3 million fee per annum, payable annually. The outstanding obligations under the Credit Agreement are payable in full on the maturity date. The Credit Agreement matures in February of 2025. We have the right to prepay the loans under the Credit Agreement in whole or in part at any time, subject, in the case of certain mandatory prepayments or any voluntary prepayment of the loans under the Credit Agreement afterFebruary 28, 2023 , to an exit fee. Our obligations under the Credit Agreement are guaranteed by certain of our material domestic subsidiaries and substantially all of our assets and the assets of such guarantors, in each case, subject to customary exclusion. We are obligated to pay administration fees under the Credit Agreement. As ofSeptember 30, 2022 , we had$65.7 million outstanding principal amount under our Credit Agreement, net of closing costs. See Note 12 - Debt of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding the Credit Agreement.
Recent Accounting Pronouncements
See Note 1 - Summary of Business and Significant Accounting Policies in the
Notes to Condensed Consolidated Financial Statements of this Quarterly Report on
Form 10-Q for recently issued accounting standards that could have an effect on
us.
52
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
