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 and Section 21E of the Securities Exchange Act of 1934. 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; 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; the impact of future and existing healthcare laws and regulations on our business; the expected impact of the COVID-19 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 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 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 healthcare open enrollment period, the Medicare annual enrollment period and a COVID-19-related or other special enrollment period; changes in laws and regulations, including in connection with healthcare reform or with respect to the marketing and sale of Medicare plans; competition, including competition from government-run health insurance exchanges; the seasonality of our business and the fluctuation of our operating results; our ability to accurately estimate membership and lifetime value of commissions; 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 continued impact of the COVID-19 pandemic on our operations, business, financial condition and growth prospects, as well as on the general economy; exposure to security risks and our ability to safeguard the security and privacy of confidential data; our relationships with health insurance carriers; 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 and retain licensed health insurance agents and other employees; 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; 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 initiatives; reliance on marketing partners; the impact of our direct-to-consumer email, telephone and television marketing efforts; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; our ability to successfully make and integrate acquisitions; dependence on our operations inChina ; the restrictions in our debt obligations; compliance with insurance and other laws and regulations; the outcome of litigation in which we are involved; and the performance, reliability and availability of our 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 2020 , and the audited consolidated financial statements and related notes contained therein. 25
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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 integrates proprietary and third-party developed educational content regarding health insurance plans with decision support tools to aid consumers in what has traditionally been a confusing and opaque health insurance purchasing process, and to help them obtain the health insurance products that meet their individual health and economic needs. Our omni-channel consumer engagement platform is designed to meet the consumer wherever they prefer to engage with us, and enables consumers to use our services online, through interactive chat, or by telephone with a licensed insurance agent. We have created a marketplace that offers consumers a broad choice of insurance products that include thousands of Medicare Advantage, Medicare Supplement, Medicare Part D prescription drug, individual and family, small business and other ancillary health insurance products from over 180 health insurance carriers across all fifty states and theDistrict of Columbia . Impact from COVID-19 Our results of operations for the six months endedJune 30, 2020 were not materially impacted by the COVID-19 pandemic. In response to the virus outbreak, we closed our offices inthe United States andChina and shifted our employees to a work-from-home model. While our offices inthe United States remain closed, we reopened our office inChina given the improvements in the situation in the region where our office is located. Despite the changes in the US economy related to COVID-19, our Medicare business experienced revenue growth of 53.7% in the second quarter of 2020 as compared to the second quarter of 2019. During the second quarter of 2020, we experienced strong consumer demand due in part to the COVID-related special enrollment period, strong online enrollment growth, and continued productivity gains by our agent workforce. In addition, we expanded our work-from-home capabilities and have expanded our technology investment to focus on both agent productivity and our consumer experience. See Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for additional discussion of COVID-19.
Summary of Selected Metrics
We rely upon certain metrics to evaluate our business performance and facilitate strategic planning. Our business performance 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, or 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.
We have included the number of new paying members in our selected metrics to
provide more detail and visibility into new paying member contribution to the
changes in membership. We count an approved member as a paying member when we
have received a commission payment from the carrier for the plan. Not all
approved members become paying members for various reasons. In addition, for any
given period, the rate at which approved members become new paying members is
impacted by the time lag between carrier approval and our receipt of the
commission payment from the carrier. The difference in our metrics between the
number of approved members and new paying members tends to vary, especially in
the first and fourth quarters given this time lag and given that the plans we
sell in the fourth quarter do not begin generating commissions until the first
quarter when they become effective.
We have removed submitted applications from our selected metrics given that we
do not recognize revenue based on this metric, and it is not as indicative of
our commission receivable collection as other metrics we do provide.
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--------------------------------------------------------------------------------Approved Members
Approved members represents the number of individuals on submitted applications
that were approved by the relevant insurance carrier for the identified product
during the current period. 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 June 30, Six Months Ended June 30,
2020 2019 % Change 2020 2019 % Change
Medicare:
Medicare Advantage 60,477 36,576 65 % 125,375 77,317 62 %
Medicare Supplement 8,794 8,769 - % 19,632 17,400 13 %
Medicare Part D 7,603 7,224 5 % 16,569 15,751 5 %
Total Medicare 76,874 52,569 46 % 161,576 110,468 46 %
Individual and Family:
Non-Qualified Health Plans 2,798 1,934 45 % 7,618 8,005 (5) %
Qualified Health Plans 2,512 920 173 % 7,057 6,447 9 %
Total Individual and Family 5,310 2,854 86 % 14,675 14,452 2 %
Ancillaries:
Short-term 9,446 14,129 (33) % 21,584 29,061 (26) %
Dental 7,722 9,478 (19) % 17,432 22,534 (23) %
Vision 3,764 4,428 (15) % 8,265 10,843 (24) %
Other 3,946 6,146 (36) % 8,271 11,358 (27) %
Total Ancillaries 24,878 34,181 (27) % 55,552 73,796 (25) %
Small Business 3,118 3,245 (4) % 6,721 7,497 (10) %
Total Approved Members 110,180 92,849 19 % 238,524 206,213 16 %
Total approved members grew 19% in the three months ended June 30, 2020 compared
to the same period in 2019. Medicare total approved members grew 46% in the
three months ended June 30, 2020 compared to the same period in 2019, primarily
attributable to a 65% increase in approved Medicare Advantage plan members. The
increase in Medicare total approved members was primarily attributable to our
direct-to-consumer marketing effort, an increase in our agent productivity, and
favorable market dynamics, including the introduction of a COVID-related special
enrollment period, which was in effect for a large part of the second quarter of
2020. During this special enrollment period, certain individuals were permitted
to enroll, disenroll or switch their Medicare Advantage and Medicare Part D
prescription drug plans.
Individual and family plan approved members grew 86% in the three months ended
June 30, 2020 compared to the same period in 2019 primarily driven by a 173%
growth in approved members for qualified health plans. Ancillary approved
members declined 27% in the three months ended June 30, 2020 compared to the
same period in 2019 primarily due to a decrease in short-term health insurance
approved members. Small business approved members declined 4% in the three
months ended June 30, 2020 compared to the same period in 2019 mainly due to
decreases in the volume of submitted applications for small group health
insurance.
Total approved members grew 16% in the six months ended June 30, 2020 compared
to the same period in 2019. Medicare total approved members grew 46% in the six
months ended June 30, 2020 compared to the same period in 2019, primarily
attributable to a 62% increase in approved Medicare Advantage plan members and a
13% increase in approved Medicare Supplement plan members. The increase in
Medicare total approved members was primarily driven by our direct-to-consumer
marketing effort, an increase in our agent productivity and higher consumer
demand resulting from the COVID-19 related special enrollment period in the
second quarters of 2020. Individual and family plan approved members grew 2% in
the six months ended June 30, 2020 compared to the same period in 2019 due to a
9% increase in approved members for qualified health plans, partially offset by
a 5% decrease in approved members for non-qualified health plans. Ancillary plan
approved
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-------------------------------------------------------------------------------- members declined 25% in the six months endedJune 30, 2020 compared to the same period in 2019 as a result of decreases in short-term health, dental and vision insurance approved members. Small business group health insurance approved members declined 10% in the six months endedJune 30, 2020 compared to the same period in 2019 mainly due to decreases in the volume of submitted applications and group size. 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 member by product for the periods presented below: Three Months Ended March 31, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change Medicare: Medicare Advantage 57,232 36,122 58 % 143,531 85,653 68 % Medicare Supplement 7,914 7,508 5 % 19,474 17,294 13 % Medicare Part D 7,505 8,100 (7) % 71,210 48,896 46 % Total Medicare 72,651 51,730 40 % 234,215 151,843 54 % Individual and Family: Non-Qualified Health Plans 3,817 2,179 75 % 13,370 16,191 (17) % Qualified Health Plans 3,095 1,017 204 % 9,052 8,407 8 % Total Individual and Family 6,912 3,196 116 % 22,422 24,598 (9) % Ancillaries: Short-term 9,572 13,695 (30) % 21,832 33,814 (35) % Dental 6,935 9,150 (24) % 17,348 23,534 (26) % Vision 3,646 4,601 (21) % 9,217 13,449 (31) % Other 3,474 5,301 (34) % 7,787 11,192 (30) % Total Ancillaries 23,627 32,747 (28) % 56,184 81,989 (31) % Small Business 3,138 3,668 (14) % 8,294 10,660 (22) % Total New Paying Members 106,328 91,341 16 % 321,115 269,090 19 % Medicare total new paying members grew 40% in the three months endedJune 30, 2020 compared to the same period in 2019, primarily driven by a 58% increase in Medicare Advantage plan new paying members. Individual and family plan new paying members increased 116% in the three months endedJune 30, 2020 compared to the same period in 2019 due to a 204% increase in new paying members for qualified health plans and a 75% increase in new paying members for non-qualified plans. Ancillary new paying members declined 28% in the three months endedJune 30, 2020 compared to the same period in 2019 primarily due to a reduction in short-term health insurance, dental and vision insurance paying members. Small business group health insurance new paying members declined 14% in the three months endedJune 30, 2020 compared to the same period in 2019 primarily due to a decrease in the submitted application volume. Medicare total new paying members grew 54% in the six months endedJune 30, 2020 compared to the same period in 2019, primarily driven by a 68% increase Medicare Advantage plan new paying members and a 46% increase in Medicare Part D prescription drug plan new paying members. The increases were primarily driven by an increase in enrollment volume and approved members from the recent Medicare annual enrollment period, Medicare Advantage open enrollment period and the special enrollment period introduced in the second quarter of 2020. Individual and family plan new paying members declined 9% in the six months endedJune 30, 2020 compared to the same period in 2019 due to market conditions in the individual and family plan market and the shift of our focus to invest in our Medicare business. Ancillary new paying members declined 31% in the six months endedJune 30, 2020 compared to the same period in 2019 primarily due to a reduction in short-term health 28 -------------------------------------------------------------------------------- insurance, dental and vision insurance new paying members. Small business new paying members declined 22% in the six months endedJune 30, 2020 compared to the same period in 2019 primarily due to a decrease in the submitted application volume and group size.
Estimated Constrained Lifetime Value of Commissions Per Approved Member
The following table shows our estimated constrained lifetime value ("LTV") of commissions per approved member by product for the periods presented below:
Three Months Ended June 30,
2020 2019 % Change
Medicare
Medicare Advantage (1) $ 945 $ 983 (4) %
Medicare Supplement (1) $ 1,134 $ 967 17 %
Medicare Part D (1) $ 244 $ 257 (5) %
Individual and Family
Non-Qualified Health Plans (1) $ 184 $ 167 10 %
Qualified Health Plans (1) $ 258 $ 160 61 %
Ancillaries
Short-term (1) $ 163 $ 95 72 %
Dental (1) $ 60 $ 65 (8) %
Vision (1) $ 44 $ 45 (2) %
Small Business (2) $ 149 $ 160 (7) %
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(1)Constrained LTV of commissions per approved member represents commissions
estimated to be collected over the estimated life of an approved member's policy
after applying constraints in accordance with our revenue recognition policy.
The estimate is driven by multiple factors, including but not limited to,
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, 2019 .
(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.
The constrained LTV of commissions per approved member for Medicare Advantage
and Medicare part D prescription drug plans declined by 4% and 5%, respectively,
during the three months ended June 30, 2020 compared to the same period in 2019
primarily due to a decline in estimated average plan duration. The decline in
estimated average plan duration was primarily caused by a combination of
market-related factors as well as factors specific to our business, in
particular our historical emphasis on enrollment growth and optimizing member
experience during the initial enrollment process with less emphasis and
resources allocated to post-transaction communications and existing member
retention. With respect to market-related factors, we believe that a larger
number of Medicare Advantage and Medicare part D prescription drug plan members
terminated their plans due to an increased selection of plans available to
consumers for the 2020 plan year and the additional opportunities for consumers
to shop and switch Medicare Advantage and Medicare part D prescription drug
plans during the recent open enrollment periods. The decline had a more
pronounced impact on our newer member cohorts and on our telephonic enrollments,
while our online enrollments continue to have higher average duration. When
comparing the three months ended June 30, 2020 to the same period in 2019, the
constrained LTV of commissions per Medicare Supplement approved member grew by
17% primarily as a result of an increase in the average projected commission
payments per member and an increase in estimated average plan duration.
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The constrained LTV of commissions per qualified health plan and non-qualified
health plan for approved members increased 61% and 10%, respectively, during the
three months ended June 30, 2020 compared with the same period in 2019,
respectively, mostly due to increased estimates of average plan duration.
The constrained LTV of commissions per short-term health insurance approved
member increased 72% during the three months ended June 30, 2020 compared to the
same period in 2019 primarily as a result of selling plans with higher premium
and an increase in estimated average plan duration.
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 June 30,
2020 2019
Medicare
Medicare Advantage 7 % 7 %
Medicare Supplement 5 % 5 %
Medicare Part D 5 % 5 %
Individual and Family
Non-Qualified Health Plans 15 % 15 %
Qualified Health Plans 4 % 20 %
Ancillaries
Short-term 20 % - %
Dental 10 % 10 %
Vision 10 % 10 %
Small Business - % - %
The constraint for qualified health plans decreased to 4% during the three
months ended
The constraint for short-term health insurance plans increased to 20% during the three months endedJune 30, 2020 from 0% in the same period in the prior year due to an increase in volatility. 30 --------------------------------------------------------------------------------
Estimated Membership
Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the period of estimation.
The following table shows estimated membership by product for the periods
presented below:
As of June 30,
2020 2019 % Change
Medicare (1)
Medicare Advantage 407,243 291,171 40 %
Medicare Supplement 94,838 80,779 17 %
Medicare Part D 213,949 149,312 43 %
Total Medicare 716,030 521,262 37 %
Individual and Family (2) 115,832 133,543 (13) %
Ancillaries (3)
Short-term 23,203 21,513 8 %
Dental 118,198 134,044 (12) %
Vision 68,666 74,157 (7) %
Other 35,404 37,102 (5) %
Total Ancillaries 245,471 266,816 (8) %
Small Business (4) 40,090 46,076 (13) %
Total Estimated Membership 1,117,423 967,697 15 %
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(1)To estimate the number of members on Medicare-related health insurance plans,
we take the 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 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.
(2)To estimate the number of members on Individual and Family health insurance
plans ("IFP"), we take the sum of (i) the number of IFP 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 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.
(3)To estimate the number of members on ancillary health insurance plans (such
as short-term, dental and vision insurance), we take the 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 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. 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.
(4)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.
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 and do not inform us of the
cancellation. Also, some of our members pay
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--------------------------------------------------------------------------------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 under estimated membership. Conversely, carriers may require us to return commission payments paid in a prior 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. 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. 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. Medicare-related plan estimated membership as ofJune 30, 2020 grew 37% compared to estimated membership as ofJune 30, 2019 due to a 40% growth in Medicare Advantage estimated membership, a 43% growth in Medicare Part D prescription drug plan estimated membership, and a 17% growth in Medicare Supplement plan estimated membership. The overall growth in Medicare estimated membership was due to our marketing investment in our Medicare business. Individual and family plan estimated membership as ofJune 30, 2020 declined 13% compared to estimated membership as ofJune 30, 2019 due to market conditions in the individual and family plan market and our decision to shift our marketing investment to our Medicare business. Ancillary plan estimated membership as ofJune 30, 2020 declined 8% compared to estimated membership as ofJune 30, 2019 primarily as a result of the decline in dental and vision plan members, partially offset by an increase in short-term insurance plan 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
expenses ("CC&E") 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, the "Medicare Plans") and
for all IFP plans including individual and family plans and short-term health
insurance (collectively, the "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 ASC 606.
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Three Months Ended June 30,
2020 2019 % Change
Medicare:
Estimated CC&E cost per approved MA-equivalent
approved member (1) $ 354 $ 407 (13) %
Estimated variable marketing cost per MA-equivalent approved member (1)
334 335 - %
Total Medicare estimated cost per approved member
$ 742 (7) %
Individual and Family Plan: Estimated CC&E cost per IFP-equivalent approved member (2)
$ 105 $ 160 (34) %
Estimated variable marketing cost per IFP-equivalent approved member (2)
60 57 5 %
Total IFP estimated cost per approved member $ 165 $ 217 (24) %
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(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 Accounting Standards Codification 606 - Revenue from Contracts with
Customers ("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 costs per approved MA-equivalent member decreased 13% in the
three months ended June 30, 2020 compared to the same period in 2019 reflecting
increased cost effectiveness of our demand generation and fulfillment. Estimated
variable marketing costs per approved MA-equivalent member remained consistent
in the three months ended June 30, 2020 compared to the same period in 2019.
Estimated CC&E cost per approved IFP-equivalent member decreased 34% in the
three months ended June 30, 2020 compared to the same period in 2019 primarily
driven by a decrease in personnel-related costs. Estimated variable marketing
cost per IFP-equivalent member increased 5% in the three months ended June 30,
2020 compared to the same period in 2019 due to an increase in online marketing
costs.
We expect the costs per approved member for Medicare to decrease in the second
half of 2020 as the result of our internal initiatives to improve agent
productivity by launching a new agent performance management model, upgrading
our call routing system to better account for both agent skills and call
quality, and increasing the percentage of our internal agents relative to agents
provided by our outsourced call center partners. CC&E cost per MA-equivalent
member for the second half of 2020 is also expected to benefit form a larger
contribution from online enrollment to our total Medicare enrollments compared
to a year ago. We expect that variable marketing per approved MA-equivalent
member in the third quarter 2020 to be consistent with the same period in 2019;
however, we expect it to reduce in the fourth quarter of 2020 due to reduced
usage of higher-cost channels and an increase in approved members resulting from
higher agent productivity.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles, orU.S. GAAP, 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 operations 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 33
-------------------------------------------------------------------------------- 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: •Revenue Recognition; •Stock-Based Compensation; •Business Combinations; •Realizability of Long-Lived Assets; and •Accounting for Income Taxes. There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onMarch 2, 2020 , that have had a material 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, 2019 , for a complete discussion of our other critical accounting policies and estimates. 34 --------------------------------------------------------------------------------
Results of Operations
The following table sets forth our operating results and related percentages of total revenue for the periods presented below (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Revenue:
Commission $ 80,773 91 % $ 60,606 92 % $ 180,442 92 % $ 124,833 93 %
Other 7,993 9 % 5,161 8 % 14,732 8 % 9,707 7 %
Total revenue 88,766 100 % 65,767 100 % 195,174 100 % 134,540 100 %
Operating costs and expenses:
Cost of revenue 540 1 % 449 1 % 1,678 1 % 372 - %
Marketing and advertising 32,873 37 % 23,104 35 % 70,637 36 % 47,045 35 %
Customer care and enrollment 27,148 31 % 21,479 33 % 57,683 30 % 41,423 31 %
Technology and content 13,373 15 % 10,437 16 % 29,113 15 % 19,454 14 %
General and administrative 20,713 23 % 14,862 23 % 40,366 21 % 26,140 19 %
Amortization of intangible assets 373 - % 547 1 % 920 - % 1,094 1 %
Change in fair value of earnout
liability - - % 7,200 11 % - - % 20,506 15 %
Total operating costs and expenses 95,020 107 % 78,078 119 % 200,397 103 % 156,034 116 %
Loss from operations (6,254) (7) % (12,311) (19) % (5,223) (3) % (21,494) (16) %
Other income, net 452 1 % 699 1 % 825 1 % 1,256 1 %
Loss before benefit from income
taxes (5,802) (6) % (11,612) (18) % (4,398) (2) % (20,238) (15) %
Benefit from income taxes (2,432) (2) % (5,858) (9) % (4,480) (2) % (9,325) (7) %
Net income (loss) $ (3,370) (4) % $ (5,754) (9) % $ 82 - % $ (10,913) (8) %
____________
(1)Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Marketing and advertising $ 1,539 $ 711 $ 3,269 $ 1,340
Customer care and enrollment 573 285 1,235 558
Technology and content (82) 668 1,535 1,217
General and administrative 4,646 3,014 9,351 4,792
Total stock-based compensation expense $ 6,676 $ 4,678 $ 15,390 $ 7,907
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Revenue
The following table presents our commission revenue, other revenue and total revenue for the periods presented (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Commission $ 80,773 $ 60,606 $ 20,167 33 % $ 180,442 $ 124,833 $ 55,609 45 %
% of total revenue 91 % 92 % 92 % 93 %
Other 7,993 5,161 2,832 55 % 14,732 9,707 5,025 52 %
% of total revenue 9 % 8 % 8 % 7 %
Total revenue $ 88,766 $ 65,767 $ 22,999 35 % $ 195,174 $ 134,540 $ 60,634 45 %
Three Months Ended June 30, 2020 and 2019 - Commission revenue increased $20.2
million , or 33%, during the three months ended June 30, 2020 compared to the
same period in 2019 due to a $25.1 million increase in commission revenue from
the Medicare segment, partially offset by a $4.9 million decrease in commission
revenue from Individual, Family and Small Business segment. The increase in
commission revenue from the Medicare segment was driven by a 46% increase in
Medicare plan approved members, primarily attributable to a 65% growth in
Medicare Advantage plan approved members. The decrease in commission revenue
from Individual, Family and Small Business segment was primarily driven by a
decrease in adjustment revenue, partially offset by an 86% increase in
individual and family plan approved members. See Segment Information below for
further discussion.
Adjustment revenue for our Medicare segment during the three months ended June
30, 2020 and 2019 was $0.7 million and $0.3 million , respectively. For our
Individual, Family and Small Business segment adjustment revenue during the
three months ended June 30, 2020 and 2019 was $3.6 million and $9.0 million ,
respectively.
Other revenue increased
Six Months EndedJune 30, 2020 and 2019 - Commission revenue increased$55.6 million , or 45%, during the six months endedJune 30, 2020 compared to the same period in 2019 due to a$63.5 million increase in commission revenue from the Medicare segment, partially offset by a$7.9 million decrease in commission revenue from Individual, Family and Small Business segment. The increase in commission revenue from the Medicare segment was driven by a 46% increase in Medicare plan approved members, primarily attributable to a 62% growth in Medicare Advantage plan approved members due to the recent enrollment periods and an increase in adjustment revenue during the six months endedJune 30, 2020 compared to 2019. The decrease in commission revenue from Individual, Family and Small Business segment was primarily driven by a decrease in adjustment revenue. See Segment Information below for further discussion. Adjustment revenue for our Medicare segment for the six months endedJune 30, 2020 and 2019 was$9.7 million and$1.4 million , respectively. For our Individual, Family and Small Business segment adjustment revenue for the six months endedJune 30, 2020 and 2019 was$7.3 million and$15.4 million , respectively.
Other revenue increased
Our LTV estimation models for the three and six months endedJune 30, 2020 indicated increases in LTVs and estimates of future cash collections for earlier period cohorts of certain products within our Individual, Family and Small Business segment. However, after considering various market factors and recent changes due to the impact of COVID-19 on theU.S. economy, such as increases in unemployment rate, potential delays in insurance premium payments and/or health insurance carrier commission payments, potential changes to enrollment periods, and potential changes to qualified health plan subsidies, we limited the adjustment revenue recognized during the three and six months endedJune 30, 2020 to actual cash collected in excess of previously recognized revenue for certain individual and family and ancillary plan cohorts. These prevailing market conditions did not have an impact on the amount of adjustment revenue recognized for any other products we sell. 36 --------------------------------------------------------------------------------
Cost of Revenue
Included in cost of revenue are 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. 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 June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Cost of revenue $ 540 $ 449 $ 91 20 % $ 1,678 $ 372 $ 1,306 351 %
% of total revenue 1 % - % 1 % - %
Cost of revenue increased by $0.1 million and $1.3 million during the three and
six months ended June 30, 2020 , respectively, compared to the same periods in
2019, mostly due to increased 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 June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Marketing and advertising $ 32,873 $ 23,104 $ 9,769 42 % $ 70,637 $ 47,045 $ 23,592 50 %
% of total revenue 37 % 35 % 36 % 35 %
Three Months Ended June 30, 2020 and 2019 - Marketing and advertising expenses
increased $9.8 million , or 42%, during the three months ended June 30, 2020
compared to the same period in 2019, primarily due to increases of $8.1 million
in variable advertising expenses, $0.8 million personnel and compensation costs,
and $0.8 million in stock-based compensation expenses. The increase in
Medicare-related variable advertising expenses was due to an increase in our
investment in marketing to drive volume growth.
Six Months Ended June 30, 2020 and 2019 - Marketing and advertising expenses
increased $23.6 million , or 50%, during the six months ended June 30, 2020
compared to the same period in 2019, primarily due to increases of $18.4 million
in variable advertising expenses, $2.1 million in personnel and compensation
costs, and $1.9 million in stock-based compensation expense. The increase in
Medicare-related variable advertising expenses was due to an increase in our
investment in marketing to drive volume growth.
37
--------------------------------------------------------------------------------Customer Care and Enrollment
Customer care and enrollment expenses primarily consist of compensation and
benefits 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 June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Customer care and
enrollment $ 27,148 $ 21,479 $ 5,669 26 % $ 57,683 $ 41,423 $ 16,260 39 %
% of total revenue 31 % 33 % 30 % 31 %
Three Months Ended June 30, 2020 and 2019 - Customer care and enrollment
expenses increased $5.7 million , or 26%, during the three months ended June 30,
2020 compared to the same period in 2019, primarily due to increases of $5.1
million in personnel costs associated with an increase in customer care and
enrollment headcount and $0.7 million in facilities and other operating costs.
Six Months Ended June 30, 2020 and 2019 - Customer care and enrollment expenses
increased $16.3 million , or 39%, during the six months ended June 30, 2020
compared to the same period in 2019, primarily due to increases of $11.7 million
in personnel costs associated with an increase in customer care and enrollment
headcount, $2.2 million in consulting expenses, and $1.7 million in facilities
and other operating costs.
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 websites.
Our technology and content expenses are summarized as follows (dollars in
thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Technology and content $ 13,373 $ 10,437 $ 2,936 28 % $ 29,113 $ 19,454 $ 9,659 50 %
% of total revenue 15 % 16 % 15 % 14 %
Three Months Ended June 30, 2020 and 2019 - Technology and content expenses
increased $2.9 million , or 28%, during the three months ended June 30, 2020
compared to the same period in 2019 primarily due to increases of $2.0 million
in personnel and compensation costs due to higher headcount, $1.3 million in
facilities and other operating costs, and $0.9 million in amortization of
internal developed software, partially offset by decreases of $0.7 million in
stock-based compensation expense and $0.7 million of consulting fees.
Six Months Ended June 30, 2020 and 2019 - Technology and content expenses
increased $9.7 million , or 50%, during the six months ended June 30, 2020
compared to the same period in 2019 primarily due to increases of $5.0 million
in personnel and compensation costs due to higher headcount, $2.7 million in
facilities and other operating costs, and $1.7 million in amortization of
internal developed software.
General and Administrative
General and administrative expenses include compensation and benefits costs for
staff working in our executive, finance, investor relations, government affairs,
legal, human resources, facilities, and internal information technology
departments. These expenses also include fees paid for outside professional
services, including audit, tax, legal, government affairs and information
technology fees.
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Our general and administrative expenses are summarized as follows (dollars in
thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
General and administrative $ 20,713 $ 14,862 $ 5,851 39 % $ 40,366 $ 26,140 $ 14,226 54 %
% of total revenue 23 % 23 % 21 % 19 %
Three Months Ended June 30, 2020 and 2019 - General and administrative expenses
increased $5.9 million , or 39%, during the three months ended June 30, 2020
compared to the same period in 2019, primarily due to increases of $2.6 million
in personnel and compensation costs, $1.6 million in stock-based compensation
expense, $1.3 million in consulting expenses, and $0.7 million in facilities and
other operating costs driven by the expansion of our facilities.
Six Months Ended June 30, 2020 and 2019 - General and administrative expenses
increased $14.2 million , or 54%, during the six months ended June 30, 2020
compared to the same period in 2019, primarily due to increases of $5.7 million
in personnel and compensation costs, $4.6 million in stock-based compensation
expense, $2.0 million in consulting expenses, and $1.4 million in facilities and
other operating costs driven by the expansion of our facilities.
Change in Fair Value of Earnout Liability
During the three and six months endedJune 30, 2019 , we recorded$7.2 million and$20.5 million , respectively, of additional earnout consideration expense due to an adjustment in the estimated fair value of the earnout liability related to our acquisition of GoMedigap, which was completed onJanuary 2018 . During the three and six months endedJune 30, 2020 , there were no changes in fair value of earnout liability as the earnout consideration was settled inJanuary 2020 .
Amortization of Intangible Assets
Our intangible asset amortization expense is summarized as follows (dollars in
thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Amortization of
intangible assets $ 373 $ 547 $ (174) (32) % $ 920 $ 1,094 $ (174) (16) %
% of total revenue - % 1 % - % 1 %
Amortization expense related to intangible assets was primarily related to
intangible assets purchased through our acquisitions. Amortization expense
decreased during the three and six months ended June 30, 2020 compared to the
same periods in 2019 due to certain intangible assets being fully amortized in
2020.
Other Income, Net
Our other income, net is summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Other income, net $ 452 $ 699 $ (247) (35) % $ 825 $ 1,256 $ (431) (34) %
% of total revenue 1 % 1 % 1 % 1 %
Other income, net, for the six months ended June 30, 2020 and 2019 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.
39
-------------------------------------------------------------------------------- Three Months EndedJune 30, 2020 and 2019 - Other income, net decreased$0.2 million during the three months endedJune 30, 2020 compared to the same period in 2019, primarily due to a decrease in interest income.
Six Months Ended
Benefit from Income Taxes
Our benefit from income taxes are summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Benefit from income
taxes $ (2,432) $ (5,858) $ 3,426 (58) % $ (4,480) $ (9,325) $ 4,845 (52) %
Effective tax rate 41.9 % 50.4 % 101.9 % 46.1 %
Three Months Ended June 30, 2020 and 2019 - During the three months ended June
30, 2020 , we recognized a benefit from income taxes of $2.4 million representing
an effective tax rate of 41.9% which was higher than the statutory federal tax
rate due primarily to stock-based compensation adjustments, non-deductible
lobbying expenses and state taxes, partially offset by research and development
credits. During the three months ended June 30, 2019 , we recognized a benefit
from income taxes of $5.9 million , representing an effective tax rate of 50.4%
which was higher than the statutory federal tax rate due primarily to
stock-based compensation adjustments and lobbying and other non-deductible
expenses, partially offset by research and development credits.
Six Months Ended June 30, 2020 and 2019 - During the six months ended June 30,
2020 , we recognized a benefit from income taxes of $4.5 million representing an
effective tax rate of 101.9% which was higher than the statutory federal tax
rate due primarily to stock-based compensation adjustments, non-deductible
lobbying expenses and state taxes, partially offset by research and development
credits. During the six months ended June 30, 2019 , we recognized a benefit from
income taxes of $9.3 million , representing an effective tax rate of 46.1% which
was higher than the statutory federal tax rate due primarily to stock-based
compensation adjustments and lobbying and other non-deductible expenses,
partially offset by research and development credits.
The Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into
law on March 27, 2020 . The business tax provisions of the CARES Act include
temporary changes to income based tax laws, including the ability to utilize net
operating losses, interest expense deductions, alternative minimum tax credit
refunds, charitable contributions, and depreciation of qualified improvement
property. The income tax provisions of the CARES Act did not have a material
impact on our Condensed Consolidated Financial Statements for the three and six
months ended June 30, 2020 .
Segment Information
We report segment information based on how our chief executive officer, who is
our chief operating decision maker ("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. Our business structure is comprised of two operating segments:
•Medicare; and
•Individual, Family and Small Business.
Our CODM does not separately evaluate assets, with the exception of commissions receivable, by segment, 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
40
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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 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 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 two operating segments and instead reported
within Corporate.
Segment profit is calculated as total revenue for the applicable segment less
direct and allocated marketing and advertising, customer care and enrollment,
technology and content, and general and administrative operating expenses,
excluding stock-based compensation expense, change in fair value of earnout
liability, depreciation and amortization expense, and amortization of intangible
assets.
Our operating segment revenue and profit are summarized as follows (in
thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2020 2019 $ % 2020 2019 $ %
Revenue:
Medicare $ 80,379 $ 52,267 $ 28,112 54 % $ 176,530 $ 107,168 $ 69,362 65 %
Individual, Family and Small
Business 8,387 13,500 (5,113) (38) % 18,644 27,372 (8,728) (32) %
Total revenue $ 88,766 $ 65,767 $ 22,999 35 % $ 195,174 $ 134,540 $ 60,634 45 %
Segment profit:
Medicare segment profit $ 13,430 $ 6,095 $ 7,335 120 % $ 35,390 $ 16,921 $ 18,469 109 %
Individual, Family and Small
Business segment profit 2,570 5,268 (2,698) (51) % 5,173 11,292 (6,119) (54) %
Total segment profit 16,000 11,363 4,637 41 % 40,563 28,213 12,350 44 %
Corporate (14,347) (10,516) (3,831) 36 % (27,795) (18,812) (8,983) 48 %
Stock-based compensation
expense (6,676) (4,678) (1,998) 43 % (15,390) (7,907) (7,483) 95 %
Change in fair value of
earnout liability - (7,200) 7,200 (100) % - (20,506) 20,506 (100) %
Depreciation and amortization (858) (733) (125) 17 % (1,681) (1,388) (293) 21 %
Amortization of intangible
assets (373) (547) 174 (32) % (920) (1,094) 174 (16) %
Other income, net 452 699 (247) (35) % 825 1,256 (431) (34) %
Loss before benefit from
income taxes $ (5,802) $ (11,612) $ 5,810 (50) % $ (4,398) $ (20,238) $ 15,840 (78) %
41
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Revenue
Three Months EndedJune 30, 2020 and 2019 - Revenue from our Medicare segment increased$28.1 million , or 54%, during the three months endedJune 30, 2020 compared to the same period in 2019 due to a$25.1 million increase in Medicare commission revenue and a$3.0 million increase in other revenue. The increase in Medicare segment commission revenue was primarily attributable to a 65% growth in Medicare Advantage plan approved members during the three months endedJune 30, 2020 compared to the same period in 2019. The overall growth of our Medicare business was a result of our investment in this segment and marketing efforts, and the increase in approved application volume due to the open enrollment period and recently introduced special enrollment period. The increase in other revenue was mostly due to an increase in advertising revenue. Revenue from our Individual, Family and Small Business segment decreased$5.1 million , or 38%, during the three months endedJune 30, 2020 compared to the same period in 2019 primarily attributable to a$4.9 million decrease in commission revenue and a$0.2 million decrease in other revenue. The decrease in commission revenue from the Individual, Family and Small Business segment was primarily due to a decrease in commission revenue adjustments of$5.5 million during the three months endedJune 30, 2020 compared to the same period in 2019. Due to various market factors and recent changes in theU.S. economy, we limited the adjustment revenue recognized during the three months endedJune 30, 2020 to actual cash collected in excess of previously recognized revenue for certain cohorts related to individual and family as well as ancillary plans. These prevailing market conditions did not have an impact on the amount of adjustment revenue recognized for any other products we sell. Six Months EndedJune 30, 2020 and 2019 - Revenue from our Medicare segment increased$69.4 million , or 65%, during the six months endedJune 30, 2020 compared to the same period in 2019 due to a$63.5 million increase in Medicare commission revenue and a$5.8 million increase in other revenue. The increase in Medicare segment commission revenue was primarily attributable to a 62% growth in Medicare Advantage plan approved members and a$8.3 million increase in adjustment revenue during the six months endedJune 30, 2020 compared to the same period in 2019. The overall growth of our Medicare business was a result of our investment and marketing efforts in this segment and the increases in approved application volume due to the open enrollment period and recently introduced special enrollment period. The increase in other revenue was mostly due to an increase in advertising revenue. Revenue from our Individual, Family and Small Business segment decreased$8.7 million , or 32%, during the six months endedJune 30, 2020 compared to the same period in 2019 primarily attributable to a$7.9 million decrease in commission revenue and a$0.8 million decrease in other revenue. The decrease in commission revenue from the Individual, Family and Small Business segment was primarily due to a decrease in adjustment revenue of$8.1 million during the six months endedJune 30, 2020 compared to the same period in 2019. Due to various market factors and recent changes in theU.S. economy, we limited the adjustment revenue recognized during the six months endedJune 30, 2020 to actual cash collected in excess of previously recognized revenue for certain cohorts related to individual and family as well as ancillary plans. These prevailing market conditions did not have an impact on the amount of adjustment revenue recognized for any other products we sell.
Segment Profit
Three Months EndedJune 30, 2020 and 2019 - Our Medicare segment profit increased$7.3 million , or 120%, during the three months endedJune 30, 2020 compared to the same period in 2019. The increase was primarily due to a$28.1 million increase in Medicare segment revenue, partially offset by a$20.8 million increase in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses and amortization of intangible assets. The increase in operating expenses was mostly attributable to an increase in marketing costs and customer care and enrollment costs. Our Individual, Family and Small Business segment profit decreased$2.7 million , or 51%, during the three months endedJune 30, 2020 compared to the same period in 2019. The decrease in profit from the Individual, Family and Small Business segment was primarily due to a$5.1 million decrease in Individual, Family and Small Business segment revenue, partially offset by a$2.4 million decrease in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses and amortization of intangible assets. 42
-------------------------------------------------------------------------------- Six Months EndedJune 30, 2020 and 2019 - Our Medicare segment profit increased$18.5 million , or 109%, during the six months endedJune 30, 2020 compared to the same period in 2019. The increase was primarily due to a$69.4 million increase in Medicare segment revenue, partially offset by a$50.9 million increase in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses and amortization of intangible assets. The increase in operating expenses was mostly attributable to an increase in marketing costs and customer care and enrollment costs as we continued to invest in improving our technology platform to enhance the personalized consumer experience on our platform. Our Individual, Family and Small Business segment profit decreased$6.1 million , or 54%, during the six months endedJune 30, 2020 compared to the same period in 2019. The decrease in profit from the Individual, Family and Small Business segment was primarily due to a$8.7 million decrease in Individual, Family and Small Business segment revenue, partially offset by a$2.6 million decrease in operating expenses, excluding stock-based compensation expense, change in earnout liability, depreciation and amortization expenses and amortization of intangible assets. We expect our profit margins to improve in the coming quarters as we plan to implement initiatives to increase our agent productivity and online enrollment penetration, with increased reliance on data analytics and a growing contribution from our strategic partner channel.
Liquidity and Capital Resources
We believe our current cash and cash equivalents, credit facility and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including our expected membership and retention rates and our level of investment in technology, marketing and advertising and our customer care initiatives. In addition, our cash position could be impacted by further acquisitions and investments we make to pursue our growth strategy. 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. As ofJune 30, 2020 , our cash and cash equivalents totaled$76.8 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. As ofDecember 31, 2019 , our cash and cash equivalents totaled$23.5 million . The increase in cash and cash equivalents reflects$212.3 million of net cash provided by financing activities, partially offset by$12.4 million of net cash used in operating activities and$146.6 million of net cash used in investing activities. See Note 5 - Equity in our Notes to Condensed Consolidated Financial Statements for information regarding our equity offering inMarch 2020 . We also had$3.4 million in restricted cash as ofJune 30, 2020 andDecember 31, 2019 . As ofJune 30, 2020 , we had 1.0 million shares held in treasury stock that were previously surrendered by employees to satisfy tax withholding in connection with the vesting of certain restricted stock units. As ofJune 30, 2020 andDecember 31, 2019 , we had a total of 11.7 million shares held in treasury, including 10.7 million shares previously repurchased. 43 --------------------------------------------------------------------------------
The following table presents a summary of our cash flows for the six months
ended
Six Months Ended
2020 2019
Net cash provided by (used in) operating activities $ (12,398) $ 1,225
Net cash used in investing activities (146,569) (8,115)
Net cash provided by financing activities 212,344 111,262
Operating Activities
Net cash provided by (used in) operating activities primarily consists of net
income (loss), adjusted for certain non-cash items, including change in fair
value of earnout liability, 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 expenses is driven by 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 which takes place during the last quarter of each year,
we experience an increase in the number of submitted Medicare-related health
insurance applications and marketing and advertising expenses compared to
outside of Medicare annual enrollment periods. Similarly, during open enrollment
periods for individual and family health insurance plans which takes place
during the first 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 open enrollment periods for individual and family health
insurance and the Medicare annual and open enrollment period for
Medicare-related health insurance can positively or negatively affect our cash
flows during each quarter.
Six Months Ended June 30, 2020 - Net cash used in operating activities was $12.4
million during the six months ended June 30, 2020 , primarily driven by changes
in net operating assets and liabilities of $29.4 million , partially offset by a
net income of $0.1 million and adjustments for non-cash items of $17.0 million .
Adjustments for non-cash items primarily consisted of $15.4 million of
stock-based compensation expense, $4.2 million of amortization of intangible
assets and internally-developed software, and $1.7 million of depreciation and
amortization, partially offset by a $4.5 million decrease due to the change in
deferred income taxes. Cash used from changes in net operating assets and
liabilities during the six months ended June 30, 2020 primarily consisted of
decreases of $17.5 million in accounts payable, $7.8 million in accrued
compensation and benefits, $7.3 million in accrued marketing expense, a
reduction of $2.5 million in deferred revenue, an increase of $1.0 million in
prepaid expenses and other current assets and $0.4 million in accounts
receivable, partially offset by decreases of $4.8 million in contract assets -
commissions receivable and an increase in $2.2 million in accrued expenses and
other liabilities.
Six Months Ended June 30, 2019 - Net cash provided by operating activities was
$1.2 million during the six months ended June 30, 2019 , primarily consisting of
adjustments for non-cash items of $21.8 million , partially offset by cash
provided by changes in net operating assets and liabilities of $9.7 million and
a net loss of $10.9 million . Adjustments for non-cash items primarily consisted
of $20.5 million of expense related to the fair value adjustment of our earnout
liability, $7.9 million of stock-based compensation expense, $2.6 million of
amortization of intangible assets and internally developed software, and $1.4
million of depreciation and amortization, partially offset by a $9.5 million
decrease in deferred income taxes and a $1.0 million decrease in other non-cash
items. Cash used from changes in net operating assets and liabilities during the
six months ended June 30, 2019 primarily consisted of decreases of $7.3 million
in accrued marketing expenses, $5.5 million in accrued compensation and
benefits, $1.2 million in accrued expenses and other liabilities and a $2.7
million increase in prepaid
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expenses and other current assets, partially offset by decreases of
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. Six Months EndedJune 30, 2020 - Net cash used in investing activities of$146.6 million for the six months endedJune 30, 2020 was due to$147.5 million in purchases of marketable securities,$7.6 million in capitalized internal-use software and website development costs and$4.7 million in cash used to purchase property and equipment and other assets, partially offset by proceeds from the maturities and redemptions of marketable securities. Six Months EndedJune 30, 2019 - Net cash used in investing activities of$8.1 million for the six months endedJune 30, 2019 was due to$3.8 million used to purchase property and equipment and other assets and$3.4 million in capitalized internal-use software and website development costs.
Financing Activities
Six Months EndedJune 30, 2020 - Net cash provided by financing activities of$212.3 million for the six months endedJune 30, 2020 was primarily due to$228.0 million net proceeds from the issuance of common stock in a public equity offering and$1.3 million of net proceeds from the exercise of common stock options, partially offset by$8.8 million of acquisition-related contingent payments and$8.2 million repurchase of shares to satisfy employee tax withholding obligations. Six Months EndedJune 30, 2019 - Net cash provided by financing activities of$111.3 million for the six months endedJune 30, 2019 was primarily due to$126.1 million net proceeds from the issuance of common stock in a public equity offering and$3.3 million of proceeds from the exercise of common stock options, partially offset by$9.5 million of acquisition-related contingent payments, a$5.0 million debt repayment, and$3.5 million used to net-share settle equity awards. Credit Agreement We entered into a credit agreement with Royal Bank of Canada, or RBC, as administrative agent and collateral agent, (the "Credit Agreement") inSeptember 2018 . The Credit Agreement provides for a$40.0 million secured asset-backed revolving credit facility with a$5 million letter of credit sub-facility. OnDecember 20, 2019 , we amended our revolving credit facility agreement with RBC (the "Amendment") and increased the maximum borrowing amount to$75.0 million and extended the expiration toDecember 20, 2022 . The borrowing base under the Credit Agreement is comprised of an amount equal to (a) the lesser of (i) eighty percent (80%) of Eligible Commissions Receivables (as defined in the Credit Agreement) we actually collected during the immediately preceding period of three months or (ii) eighty percent (80%) of our Eligible Commission Receivables for the immediately succeeding period of three months, plus (b) fifty percent (50%) of our Eligible Commission Receivables for the immediately succeeding period of six months (excluding the immediately succeeding period of three months), in each case subject to reserves established by RBC, or the Borrowing Base. The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes. We have the right to prepay the loans under the Credit Agreement in whole or in part at any time without penalty. Subject to availability under the Borrowing Base, amounts repaid may be reborrowed. Amounts not borrowed under the Credit Agreement are subject to a commitment fee of 0.5% per annum on the daily unused portion of the credit facility, to be paid in arrears on the first business day of each calendar quarter. At closing of the Credit Agreement, we paid a one-time facility fee of 1.75% of the total commitments of$40 million . We also paid a one-time closing fee of 0.5% of the new commitment of$75.0 million in connection with the Amendment. We are also obligated to pay other customary administration fees for a credit facility of this size and type. 45 -------------------------------------------------------------------------------- As ofJune 30, 2020 , we had no outstanding principal amount under our revolving credit facility. See Note 10 - Debt of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding this credit agreement and subsequent amendment.
Common Stock Issuance
Pursuant to an effective registration statement that was filed onDecember 17, 2018 , and amended onJanuary 22, 2019 andMarch 2, 2020 , we entered into an underwriting agreement inMarch 2020 to issue a total of 2,070,000 shares of common stock, which included the exercise in full of the underwriters' option to purchase 270,000 additional shares of common stock, at a price to the public of$115.00 per share. Net proceeds from the offering were approximately$228.0 million after deducting underwriting discounts, commissions and expenses of the offering. We intend to use the net proceeds of the offering for general corporate purposes, including working capital.
Contractual Obligations and Commitments
The following table presents a summary of our future minimum payments under
non-cancellable operating lease agreements and contractual service and licensing
obligations as of
Operating Lease Service and Licensing
For the Years Ending December 31, Obligations Obligations Total Obligations
Reminder of 2020 $ 3,897 $ 2,700 $ 6,597
2021 7,644 2,748 10,392
2022 7,702 855 8,557
2023 8,597 444 9,041
2024 8,462 229 8,691
Thereafter 30,862 - 30,862
Total $ 67,164 $ 6,976 $ 74,140
_______* See Note 9 - Leases of our Notes to Condensed Consolidated Financial Statements for details of our operating lease obligations.
Service and Licensing 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 over the terms of the agreements, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, investments in special purpose entities, undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
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.
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