Overview
Our Company
We are a leading developer and administrator of affordable, web-based individual health insurance plans and ancillary products. Our highly scalable, proprietary, web-based technology platform allows for
mass distribution of, and online enrollment in, our large and diverse portfolio of affordable health insurance offerings.
Our
technology platform provides customers, who we refer to as members, immediate access to our products through our distribution partners anytime, anyplace. The health insurance products we develop are underwritten by insurance carrier companies, and
we assume no underwriting, insurance or reimbursement risk. Members can price and tailor product selections to meet their needs, buy policies and print policy documents and identification cards in real-time. Our sales are executed online and offer
instant electronic fulfillment. Our technology platform uses abbreviated online applications, some with health questionnaires, to provide an immediate accept or reject decision on applications for all products that we offer. Once an application is
accepted, individuals can use our automated payment system to complete the enrollment process and obtain instant electronic access to their policy fulfillment documents, including the insurance policy, benefits schedule and identification cards. We
receive credit card and Automated Clearing House (ACH) payments directly from members at the time of sale. Our technology platform provides significant operating leverage as we add members and reduces the costs associated with marketing,
selling, underwriting and administering policies.
We are an industry leader in the sale of 12-month short-term medical
(STM) insurance plans, an alternative to traditional Individual Major Medical (IMM) plans, which provide lifetime renewable coverage. STM plans generally offer qualifying individuals comparable benefits for fixed short-term
durations of six or 12 months at approximately half the cost of IMM plans. While applications for IMM insurance may take up to 60 days to process, STM plans feature a streamlined underwriting process offering immediate coverage options. We also
offer guaranteed-issue hospital indemnity plans for individuals under the age of 65, which pay fixed cash benefits for covered procedures and services, and a variety of ancillary products such as pharmacy benefit cards, dental plans, vision plans
and cancer/critical illness plans that are frequently purchased as supplements to STM and hospital indemnity plans. We design and structure insurance products on behalf of insurance carrier companies, market them to individuals through our large
network of distributors and manage member relations via our online member portal, which is available 24 hours a day, seven days a week. Our online enrollment process allows us to aggregate and analyze consumer data and purchasing habits to track
market trends and drive product innovation. We have established relationships with several highly rated insurance carriers, including Starr Indemnity & Liability Company, Companion Life, United States Fire, ING, Markel and CIGNA, among
others. In addition, as of December 31, 2012, the large independent distribution network we access consists of 46 licensed agent call centers and 262 wholesalers, including Marsh, eHealthInsurance and MasterCard, among others,
that work with over 8,275 licensed brokers. Our data-driven product design, technology platform and extensive distribution network have enabled us to grow our revenues from $29,878,000 in 2011 to $41,940,000 in 2012.
We focus on the large and under-penetrated segment of the U.S. population who are uninsured or underinsured, which includes individuals
who are unable to afford traditional IMM premiums, individuals not covered by employer-sponsored insurance plans, such as those who are self-employed as well as small business owners and their employees, and underserved gap populations
that require insurance due to changes caused by life events, such as new graduates, divorcees, early retirees, military discharges, the unemployed, part-time and seasonal employees and temporary workers. Our target market consists of approximately
64 million Americans, including approximately 50 million Americans who were uninsured in 2010, according to the U.S. Census Bureau, and approximately 14 million non-elderly Americans who purchased individual health insurance plans in
2010, according to a 2010 Kaiser Family Foundation survey. As of December 31, 2012, we had 23,747 STM members. We expect the number of uninsured and underinsured to significantly increase due to the rising costs and burdensome underwriting
requirements of traditional IMM plans and a decline in employer-sponsored health insurance programs.
As of December 31,
2012, we had 23,747 STM plans in force, compared with 18,059 on December 31, 2011, with an average monthly retention rate of 79% from December 31, 2011 to December 31, 2012. We earn our revenues from commissions and fees related
to the sale of products to our members. Our ancillary products have created several additional revenue streams and resulted in a significant portion of our business being generated by monthly member renewals. For the year ended December 31,
2012, our premium equivalents, revenues and EBITDA were $75,872,000, $41,940,000 and $4,543,000, respectively, representing a 42.6%, 40.4% and 65.7% increase compared to premium equivalents, revenues and EBITDA of $53,206,000, $29,878,000 and
$2,742,000, respectively, for the year ended December 31, 2011. For more detail about the use of premium equivalents as a business metric and a reconciliation of premium equivalents to revenues, see Item 7. Managements
Discussion and Analysis of Financial Condition and Results of OperationsKey Business MetricsPremium Equivalents.
2
Health Insurance Industry and Market Opportunity
We believe ongoing changes in the health insurance industry will expand and reshape our target market. For example, the Patient Protection
and Affordable Care Act, or PPACA, and the Health Care and Education Reconciliation Act of 2010, or HCERA, which we refer to, collectively, as Healthcare Reform, were signed into law on March 23, 2010. After facing a number of legal
challenges, Healthcare Reform was upheld by the U.S. Supreme Court on June 28, 2012. Healthcare Reform includes a mandate requiring individuals to carry health insurance or face tax penalties; a mandate that certain employers with over 50
employees offer their employees group health insurance coverage or face tax penalties; prohibitions against insurance companies that offer traditional IMM insurance plans using pre-existing health conditions as a reason to deny an application for
health insurance; and medical loss ratio (MLR) requirements that require each health insurance carrier to spend a certain percentage of its IMM premium revenue on reimbursement for clinical services and activities that improve healthcare
quality.
According to a 2011 McKinsey survey, the implementation of Healthcare Reform will likely increase the number of
Americans in the individual health insurance market from 14 million to more than 100 million starting in 2014. We believe this increase will be primarily driven by two key factors: employers dropping group coverage and an additional
45 million uninsured Americans entering the individual insurance market. The McKinsey survey estimates that approximately 30% of employers would definitely or probably drop employer-sponsored insurance starting in
2014. The estimated penalty employers will face for not providing their employees coverage is $2,000 per employee for employers with over 50 employees (there is no penalty for employers with less than 50 employees), which is significantly less than
the estimated price currently paid for employee coverage ($9,000 to $14,000 per employee). Assuming a 30% drop in employer-sponsored insurance, approximately 50 million Americans would join the individual health insurance market starting in
2014. In addition, because Americans will face penalties if they are uninsured, we expect that a large number of the current uninsured population of 50 million will enter the individual health insurance market. Accordingly, after 2014, we
expect that the individual health insurance market will grow more than 600% to over 100 million policyholders, representing annual individual aggregate health insurance premiums in the United States of approximately $361 billion, compared with
approximately $50 billion in 2010.
We believe certain dynamics in the health insurance industry present an opportunity to
increase our market share in the individual health insurance market. For example, the minimum MLR thresholds require that IMM carriers use 80% of all premiums collected to pay claims. This has significantly reduced distributor commission rates
on traditional IMM policies, forcing many distributors to abandon the traditional face-to-face IMM sales model. Starting in 2014, IMM carriers will also be subject to a pre-existing condition mandate, requiring them to accept all customers
regardless of their pre-existing conditions. This must-carry pre-existing conditions requirement will further increase the costs of IMM coverage. Unlike traditional IMM plans, our STM products are exempt from the minimum MLR thresholds
and must-carry pre-existing conditions requirements under Healthcare Reform, allowing us to offer attractive distributor commission rates while providing affordable products for individuals. In addition, Healthcare Reform also
requires that states establish health insurance exchanges where uninsured individuals can select and purchase health insurance plans. We believe that these exchanges will further the transition from group-based insurance coverage to individual
health insurance coverage and that our STM products will be an attractive option in the non-subsidized exchange environment. Moreover, consumers are increasingly accessing the Internet to find affordable health insurance solutions. The current
number of Internet users in the United States continues to grow and, according to a report published by Pew Research Center, represented 74% of the population in 2010. In addition, according to the same report, 33% of Internet users in 2010 looked
online for information related to health insurance. This represents approximately 75 million Americans who used the Internet to access information related to health insurance in 2010.
We intend to aggressively pursue opportunities to help consumers identify our STM products as the right choice for healthcare coverage,
and we believe our technology platform, product focus and industry expertise will allow us to gain an increasing share of this growing market.
Our Solutions
We believe that our products address a significant
portion of the issues facing the healthcare system in the United States and improve access to coverage for certain underserved segments of the population.
|
|
|
Lack of Access to Health Insurance.
Due to the streamlined underwriting process for our STM plans, we are able to provide an instant decision
regarding acceptance. Individuals applying for STM coverage only have to answer an abbreviated, online questionnaire regarding the status of their health to screen for risks that cannot be supported by the rate structure and design of the plan
before a decision is generated. We also offer hospital indemnity plans under which members are paid fixed dollar amounts by procedure or service according to a defined schedule which includes doctor visits, lab tests, surgeries and hospitalizations.
As these plans are not based on an individuals health status, they guarantee issuance to individuals under the age of 65 and provide a viable coverage alternative for otherwise uninsurable individuals.
|
|
|
|
Growing Number of Uninsured and Underinsured Americans.
We focus on the large and under-penetrated segment of the U.S. population that is
uninsured or underinsured. According to the U.S. Census Bureau, 16% of Americans were uninsured in 2011, representing approximately 50 million individuals. In addition, the percentage of non-elderly Americans with employer-sponsored insurance
decreased from 68% in 2000 to 59% in 2009, driving more Americans into the individual health insurance market. The number of uninsured and underinsured Americans continues to grow in part due to reductions in employer-provided health benefits.
|
|
|
|
High Cost of Health Insurance.
We offer affordable alternatives to IMM. According to the U.S. Census Bureau, approximately 34 million of
the 50 million uninsured Americans in 2011 were members of families with annual incomes of less than $50,000. Based on these figures, we estimate that a sizable portion of the uninsured population chooses not to purchase insurance primarily due
to its high cost.
According to a 2010 Kaiser Family Foundation survey, traditional IMM premiums increased an average of approximately 20% over a 12-month period, while the cost of our STM plans remained stable. In addition, as a result
of Healthcare Reform, IMM premiums are expected to increase significantly in price as a result of guaranteed issue requirements for individuals with pre-existing health conditions. For individuals with pre-existing conditions, we currently offer
guaranteed-issue hospital indemnity plans and, only where required by state mandate, STM plans. The implementation of Healthcare Reform will not expand our coverage of such individuals, allowing us to continue to offer attractive distributor
commission rates while providing affordable products for members.
|
3
Our Competitive Strengths
We have the following key competitive strengths that we believe collectively provide significant barriers to entry:
|
|
|
Value Generated for All Key Constituents
. By combining extensive management experience with our technology platform, we have developed a
business model that we believe enables us to create a win-win proposition for our key constituents.
|
|
|
|
Our Carriers.
We offer carriers access to a large member base with no covered pre-existing conditions. Our technology platform connects our
carriers directly to a large independent distribution network. Our platform also provides our carriers access to real-time sales and membership data. We use this information to assist our carriers in designing products that cater to their target
populations. We currently utilize several carrier companies, including Starr Indemnity & Liability Company, Companion Life, United States Fire, ING, Markel and CIGNA, among others. Our management team has long-standing relationships
with most of the major carrier companies we utilize and has not lost a carrier relationship in over 10 years.
|
|
|
|
Our Distributors.
At a time when commission rates on many health insurance products, including traditional IMM plans, are declining, we provide
our distributors with specialized, highly sought-after product offerings and a compensation structure characterized by attractive commission rates and advanced payments. We believe our long-standing relationships with most of the major carriers we
utilize, as well as our technology platform, which enables real-time underwriting decisions, immediate sales conversions and access to commission data and selling tools, drive demand for distributors to partner with us. We also offer a turnkey
solution that allows us to design products that best meet our distributors needs. This solution enables us to assist our distributors in choosing between insurance carriers on a single website and allows them to create customized products for
their customers by bundling our STM and hospital indemnity products with our various ancillary products into one package. As of December 31, 2012, we utilized a network of 46 licensed agent call centers and 262 wholesalers
that work with over 8,275 licensed brokers nationally.
|
|
|
|
Our Members.
We provide our members with easy access to health insurance coverage at an affordable price. For qualifying individuals, our STM
plans offer benefits comparable to traditional IMM plans at approximately half the cost. For example, according to a 2010 Kaiser Family Foundation survey, the average cost for an IMM plan is $3,606 for an individual and $7,102 for a
family. However, the average cost for one of our 12-month STM plans is $1,800 for an individual and $3,600 for a family. Our technology platform allows our members to compare and quote prices for a broad spectrum of STM and hospital indemnity
products and, after they have made informed purchase decisions, to buy and print policies online. In addition to STM and hospital indemnity plans, we allow our members the opportunity to purchase high quality ancillary products with automatic,
monthly renewals at rates that fit our members budgets, all at the click of a button. For example, during the year ended December 31, 2012, in addition to the 59,877 STM plans that we sold, we successfully cross-sold 44,064 new
ancillary products.
|
|
|
|
Proprietary, Web-Based Technology Platform
. We believe our technology platform represents a distinct competitive advantage as it reduces the
need for customer care agents and provides significant operating leverage as we add members and product offerings. Our primary technology platform is named A.R.I.E.S. (Automated Real-Time Integrated E System). We believe our business
benefits from the increasing trend of Internet use by individuals to research and purchase health insurance. The Internet offers a means of providing individuals access to health insurance products 24 hours a day, seven days a week and, for the
carriers and distributors, reduces the cost and time associated with marketing, selling, underwriting and administering these products. We believe our target market is increasingly researching and applying for health insurance products online and
shifting away from more traditional buying patterns. We believe our technology platform positions us for strong continued growth due to the following factors:
|
|
|
|
Plan and Product Design
. Our technology platform provides real-time data that enables us, our carriers and our distributors to receive immediate
information on our members, and allows us to design products that meet the changing demands of the market. Our platform also allows individuals to supplement our STM and hospital indemnity offerings with ancillary products such as pharmacy benefit
cards, dental plans, vision plans and cancer/critical illness plans and makes it possible for us to instantly offer these products, which can be bundled to fit member needs.
|
4
|
|
|
Sales
. Our technology platform combined with our customer service model drives faster sale conversions. The entire underwriting procedure is
processed through our technology platform, which uses abbreviated, online health questionnaires and provides an immediate accept or reject decision, allowing for instant electronic fulfillment. Individuals can obtain full access to our technology
platform through our distribution partners and can price products, buy policies and print their policy documents and identification cards anytime, anyplace. Our call centers use our technology platform to, among other functions, perform online,
real-time electronic quoting, to process electronic applications and to provide instant electronic approval and fulfillment, back-office administrative support and commission reporting.
|
|
|
|
Distribution.
Our technology platform allows for low cost mass distribution of our products and provides significant operating leverage. Our
automated payment system allows us to collect credit card and ACH payments electronically and directly from members and to disburse commission payments to our distributors in advance, weekly or monthly. In addition, the system provides distributors
with direct access to commission statements, selling tools, reporting tools (for example, information as to cancelations, failed credit card and ACH payments and persistency, renewal and cross-sell rates) and custom links to support their business.
|
|
|
|
Compliance.
In addition to our A.R.I.E.S. platform, we have obtained a license to use a technology platform called HiiVe, which we use to
implement a highly automated compliance program that has enhanced quality while minimizing overhead and allowed us to offer higher commissions to our distributors. The compliance program enables us to record each enrollment phone call, retrieve
archived calls within seconds and score calls based on script adherence.
|
|
|
|
Established Long-Standing Insurance Carrier Relationships.
Our access to carriers is essential to our business. Our management team has
developed close relationships with the senior management teams of many of our insurance carriers, some lasting over 15 years. Our management team has not lost a carrier relationship in over 10 years. We believe that the nature of our relationships
with our insurance carriers, combined with our product knowledge and technology platform, allow us to provide value-added products to our members.
|
|
|
|
Extensive Long-Term Relationships with Licensed Insurance Distributors.
We believe our product expertise, our relationships with multiple
insurance carriers, our focus on compliance and our technology platform make us a partner of choice for our distributors. We offer an appealing, incentive-based compensation structure that we believe drives demand for distributors to partner with
us. We have extensive knowledge of the individual health insurance products that we design and administer, which allows us to assist our distribution partners in placing business. Our management team has built a broad distribution network and
continuously adds new distributors. As of December 31, 2012, we utilized a network of 46 licensed agent call centers and 262 wholesalers that work with over 8,275 licensed brokers. Over the last 12 months, we added
over 4,675 licensed brokers, 24 independent licensed broker call centers and 73 wholesalers to our national distributor network.
|
|
|
|
Seasoned Management Team.
Our management team has substantial experience and long-standing relationships developed over an average of
25 years in the insurance industry. Our management team draws on its industry experience to identify opportunities to expand our business and collaborate with insurance carriers and distributors to help develop products and respond to market
trends. In addition, the majority of our management team has worked together under the leadership of Michael W. Kosloske, our Chairman, President, and Chief Executive Officer, for more than a decade.
|
Our Strategy
Our
objective is to continue to expand our business and increase our presence in the affordable, web-based health insurance solutions market. Our principal strategies to meet this objective are:
|
|
|
Expand and Enhance Distributor Relationships, Distribution Channels and Lead Generation Methods.
We believe we will continue to attract new
distributors as the insurance marketplace continues to evolve, and we intend to continue to identify large distributor and lead relationships through the following strategies:
|
|
|
|
Advanced Commission Structure.
We will continue to focus on attracting additional distributors through expansion of our advanced commission
structure. We believe distributors increasingly demand alternative methods to fund the large and growing costs of lead generation. We estimate that these costs usually range from $2 to $20 per lead and represent a significant startup cost for our
distributors. We are in the process of growing our advanced commission structure, whereby we pay distributors commissions on policies sold in advance of when they would ordinarily be due to the distributor. Commissions are advanced for up to
six months and are made to distributors with an established track record of selling our products. In return, we reduce subsequent commission fees payable to the distributor by up to 2% of premiums for each month that we advance commissions. We
believe this structure will assist our distributors in funding their lead generation costs and will provide us with a competitive advantage in attracting and retaining distributors and will increase sales.
|
5
|
|
|
Call Centers.
We believe we can grow our distribution network organically by developing call center managers and incentivizing them via
attractive commissions. As part of this strategy, we assist in enhancing the sales model of many of our current call centers in order to increase efficiencies and maximize returns, and we established our Insurance Center for Excellence, LLC
(ICE or Insurance Academy) in June 2012 to expand the number of call centers selling our products. We anticipate that our Insurance Academy operations will closely resemble a franchise model, in that we will
provide the tools (sales scripts, key metrics, lead programs, compensation programs, technology systems, etc.) for building a profitable and successful call center that focuses on selling our products and leverages our technology. Our goal is to
assist in the training of owners and managers, who in return agree to enter into long-term agreements with us, under which they are required to market our products. We anticipate establishing relationships with 10 to 20 new call centers per year
through our Insurance Academy initiative. We believe that this will enhance our ability to convert leads from our current distribution channels into sales.
|
|
|
|
Lead Generation and Innovative Distributor Relationships.
We will continue to identify large and innovative distributor and lead relationships
that we believe will increase revenue and diversify distribution. For example, in September 2012, we entered into an agreement whereby MasterCard, through its approved pre-paid card member networks, will assist us in targeting and acquiring
new relationships or leads for marketing our products. Upon notification from MasterCard of a prospective lead, we will negotiate a separate referral fee arrangement with MasterCard at which point such prospective lead
will be identified to us. We will then attempt to enter into an agreement with the prospective lead under which it will provide us with a list of its customers who hold MasterCard prepaid cards or it will directly market our products to those
customers on our behalf. For example, we have entered into such an agreement with KEEPS America LLC, (KEEPS) for our prescription benefits cards. When sending their own pre-paid cards to customers, KEEPS includes our prescription
benefits cards in the mailing. If the KEEPS customer uses our card, we pay KEEPS and MasterCard referral fees in connection with the distribution. To further expand our lead generation efforts, we will also continue to explore methods of screening
member data for key demographic factors to identify populations for whom our products are well suited.
|
|
|
|
Increase Sales of Hospital Indemnity and Ancillary Products.
We believe we have a significant opportunity to expand our market share in the
hospital indemnity market. Our hospital indemnity plans in force have grown with 5,243 plans in force at December 31, 2011 and 8,141 plans in force at December 31, 2012. After the implementation of Healthcare Reform in 2014, we
expect hospital indemnity plans to be used increasingly to supplement high deductible plans. In addition, our technology platform enables us to sell ancillary products that carry higher profit margins than our core STM products and that can be
issued to a broader population than STM plans. Our members demand a wide range of ancillary products, including pharmacy benefit cards and dental, cancer and critical illness plans. Ancillary product policies in force grew from 6,649 at
December 31, 2011 to 26,230 at December 31, 2012. We believe we are well-positioned to take advantage of these additional opportunities at the time of sale.
|
|
|
|
Enhance Product and Name Recognition.
We are focused on increasing our marketing efforts to consumers. We intend to aggressively pursue
opportunities to help consumers identify our products as the right choice for health insurance coverage. We are pursuing multiple avenues to increase our brand awareness among distributors, carriers and our target market, such as through our
arrangement with MasterCard that introduces our products and name to MasterCards large pre-paid card member networks.
|
|
|
|
Develop and Establish New and Specialized Products to Meet Consumer Needs.
We plan to continue to develop and add new products to our existing
portfolio of offerings. By leveraging our technology platform member data, feedback gathered by customer service agents and distributors and expertise in plan design, we believe we are well-positioned to design and bundle products that meet customer
needs and add a viable source of revenue for us, our distributors and our carriers. For example, in June 2012, we introduced our cancer plan. We sold 1,491 of these policies during the year ended December 31, 2012, and we are currently
developing new products, including fully-insured prescription cards.
|
|
|
|
Supplement Our Growth through Strategic Acquisitions.
Part of our continuing business strategy is to acquire or invest in, companies, products
or technologies that complement our current products, enhance our market coverage, technical capabilities or production capacity, or offer growth opportunities.
|
Our Products
Our differentiated product offering allows us to build
leading positions in our target markets for insurance products and related services. The key products we provide include:
|
|
|
Short-Term Medical Plans
. Our STM plans cover individuals for up to six- and 12-month periods with a wide range of co-pay and deductible options
at approximately half the cost of traditional IMM plans. For example, according to a 2010 Kaiser Family Foundation survey, the average cost for an IMM plan is $3,606 for an individual and $7,102 for a family. However, the average cost for
one of our 12-month STM plans is $1,800 for an individual and $3,600 for a family. STM plans offer similar benefits for qualifying individuals as IMM plans. For example, both STM plans and IMM plans offer a choice of deductibles, a choice of
coinsurance, coverage for emergency room care, surgeries, x-rays, lab work, diagnostics, doctor office co-payments, and preferred provider organization network discounts. However, while IMM plans cover prescription drugs, pre-existing conditions and
|
6
|
preventive care, STM plans provide optional coverage for prescription drugs and do not cover pre-existing conditions or preventive care unless such coverage is mandated by the state. STM
plans do not cover certain medical events such as pregnancy. Additionally, while IMM plans have guaranteed renewability and can be of a permanent duration, STM plan renewal is not guaranteed and STM plans have a limited duration of up to 12
months. Our STM plans provide up to $2 million of lifetime coverage for each insured individual, allow members to choose any doctor or hospital, offer $50 physician office and urgent care co-pays, cover foreign travel and offer phone access to
physician services. As of December 31, 2012, we had 23,747 STM plans in force. For the year ended December 31, 2012, revenues associated with the sale of our STM plans accounted for approximately 63% of our revenues for the
period.
|
|
|
|
Hospital Indemnity Plans
. Our hospital indemnity plans provide a daily cash benefit for hospital treatment and doctor office visits as well as
accidental injury and death or dismemberment benefits. The claims process for hospital indemnity plans is streamlined: the member simply provides proof of hospitalization and the carrier pays the benefits. These policies are primarily used by
customers who do not have adequate health insurance and do not qualify for our STM plans or who wish to supplement existing coverage, typically in conjunction with high deductible plans. As of December 31, 2012, we had 8,141 hospital
indemnity plans in force. For the year ended December 31, 2012, revenues associated with the sale of our hospital indemnity plans accounted for approximately 27% of our revenues for the period.
|
|
|
|
Ancillary Products
. We provide numerous low-cost ancillary insurance products, including pharmacy benefit cards, dental plans and
cancer/critical illness plans. These are typically monthly policies with automatic renewal. As of December 31, 2012, we had 26,230 ancillary product plans in force. For the year ended December 31, 2012, revenues associated with
the sale of our ancillary products accounted for approximately 10% of our revenues for the period.
|
Healthcare Laws and
Regulations
Our business is subject to extensive, complex and rapidly changing federal and state laws and regulations.
Various federal and state agencies have discretion to issue regulations and interpret and enforce healthcare laws. While we believe we comply in all material respects with applicable healthcare laws and regulations, these regulations can vary
significantly from jurisdiction to jurisdiction, and interpretation of existing laws and regulations may change. Federal and state legislatures also may enact various legislative proposals that could materially impact certain aspects of our
business. The following are summaries of key federal and state laws and regulations that impact our operations:
Healthcare Reform
In March 2010, Healthcare Reform was signed into law. Healthcare Reform contains provisions that have changed and will continue to change the health insurance industry in substantial ways. For example,
Healthcare Reform includes a mandate requiring individuals to be insured or face tax penalties; a mandate that employers with over 50 employees offer their employees group health insurance coverage or face tax penalties; prohibitions against
insurance companies that offer traditional IMM plans using pre-existing health conditions as a reason to deny an application for health insurance; MLR requirements that require each health insurance carrier to spend a certain percentage of their
premium revenue on reimbursement for clinical services and activities that improve healthcare quality; establishment of state and/or federal health insurance exchanges to facilitate access to, and the purchase of, health insurance; subsidies and
cost-sharing credits to make health insurance more affordable for those below certain income levels; and expanded eligibility for Medicaid for individuals and families with incomes of up to 133% of the poverty level.
Healthcare Reform amended various provisions in many federal laws, including the Internal Revenue Code, the Employee Retirement Income
Security Act of 1974 and the Public Health Services Act. Healthcare Reform is being implemented by the Department of Health and Human Services, the Department of Labor and the Department of Treasury. These agencies have already issued a number of
proposed, interim final and final regulations, as well as general guidance, on key aspects of Healthcare Reform. While many aspects of Healthcare Reform do not become effective until 2014, health insurance carriers have been required to maintain
MLRs of 80% in their individual and family health insurance business since the beginning of 2011.
These laws have been the
subject of multiple constitutional challenges and the U.S. Supreme Court held hearings in March 2012 in
National Federation of Independent Business v. Sebeliu
s to review the constitutionality of Healthcare Reform. On June 28, 2012, the
United States Supreme Court released its decision, upholding Healthcare Reforms mandate requiring individuals to purchase health insurance. Also, under the U.S. Supreme Courts ruling, states are able to opt out of expanding Medicaid
eligibility to families and individuals with incomes up to 133% of the poverty level. Despite the decision, some uncertainty about whether parts of Healthcare Reform or Healthcare Reform in its entirety will remain in effect is expected to continue
with the possibility of future litigation with respect to certain provisions as well as legislative efforts to repeal and defund portions of Healthcare Reform or Healthcare Reform in its entirety. We cannot predict the outcome of any future
legislation or litigation related to Healthcare Reform. As described under Item 1. BusinessHealth Insurance Industry and Market Opportunity, we expect Healthcare Reform to result in profound changes to the individual health
insurance market and our business.
7
Anti-Kickback Laws
In the United States, there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes
or other remuneration in exchange for the referral of patients or other health-related business. The United States federal healthcare programs Anti-Kickback Statute makes it unlawful for individuals or entities knowingly and willfully to
solicit, offer, receive or pay any kickback, bribe or other remuneration, directly or indirectly, in exchange for or to induce the referral of an individual to a person for the furnishing or arranging for the furnishing of any item or service for
which payment may be made in whole or in part under a federal healthcare program or the purchase, lease or order, or arranging for or recommending purchasing, leasing, or ordering, any good, facility, service, or item for which payment may be made
in whole or in part under a federal healthcare program. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment, and possible exclusion from federal healthcare programs.
Federal Civil False Claims Act and State False Claims Laws
The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be
presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam or whistleblower provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal
government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. Our future activities relating to the manner in which we sell and market our services may be subject to scrutiny
under these laws.
HIPAA, Privacy and Data Security Regulations
By processing data on behalf of our clients and customers, we are subject to specific compliance obligations under privacy and data
security-related laws, including the Health Insurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and Clinical Health Act (the HITECH Act), and related state laws. We are also
subject to federal and state security breach notification laws, as well as state laws regulating the processing of protected personal information, including laws governing the collection, use and disclosure of social security numbers and related
identifiers.
The regulations that implement HIPAA and the HITECH Act establish uniform standards governing the conduct of
certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans, and healthcare clearinghouses, all of which are
referred to as covered entities, and their business associates (which is anyone who performs a service on behalf of a covered entity involving the use or disclosure of protected health information and is not a member of the
covered entitys workforce). Our carrier companies and our clients health plans generally will be covered entities, and as their business associate they may ask us to contractually comply with certain aspects of these standards by
entering into requisite business associate agreements.
As part of the payment-related aspects of our business, we may also
undertake security-related obligations arising out of the Gramm-Leach-Bliley Act and the Payment Card Industry guidelines applicable to card systems. These requirements generally require safeguards for the protection of personal and other payment
related information.
HIPAA Healthcare Fraud Standards
The HIPAA healthcare fraud statute created a class of federal crimes known as the federal healthcare offenses, including
healthcare fraud and false statements relating to healthcare matters. The HIPAA healthcare fraud statute prohibits, among other things, executing a scheme to defraud any healthcare benefit program while the HIPAA false statements statute prohibits,
among other things, concealing a material fact or making a materially false statement in connection with the payment for healthcare benefits, items or services. Entities that are found to have aided or abetted in a violation of the HIPAA federal
healthcare offenses are deemed by statute to have committed the offense and are punishable as a principal.
State
Privacy Laws
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security
statutes or regulations, or State Privacy Laws, that govern the use and disclosure of a persons medical information or records and, in some cases, are more stringent than those issued under HIPAA. These State Privacy Laws include regulation of
health insurance providers and agents, regulation of organizations that perform certain administrative functions such as utilization review or third-party administration, issuance of notices of privacy practices, and reporting and providing access
to law enforcement authorities. In those cases, it may be necessary to modify our operations and procedures to comply with these more stringent State Privacy Laws. If we fail to comply with applicable State Privacy Laws, we could be subject to
additional sanctions.
Consumer Protection Laws
Federal and state consumer protection laws are being applied increasingly by the United States Federal Trade Commission, or FTC, and
states attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of web site content. Courts may also adopt the standards for
fair information practices promulgated by the FTC, which concern consumer notice, choice, security and access.
8
State Insurance Laws
Some of the states in which we operate have laws prohibiting unlicensed persons or business entities, including corporations, from making
certain direct and indirect payments or fee-splitting arrangements with licensed insurance agents and brokers. Possible sanctions for violation of these restrictions include loss of license and civil penalties. These statutes vary from state to
state, are often vague and have seldom been interpreted by the courts or regulatory agencies.
State insurance laws also
require us to maintain an insurance agency or broker license in each state in which we transact health insurance business and adhere to sales, documentation and administration practices specific to that state. In addition, each of our employees who
solicits, negotiates, sells or transacts health insurance business for us must maintain an individual insurance agent or broker license in one or more states. Because we transact business in the majority of states, compliance with health
insurance-related laws, rules and regulations is difficult and imposes significant costs on our business.
State regulations
may also require that individuals enroll in group programs or associations in order to access certain insurance products, benefits and services. We have entered into relationships with such associations in order to provide individuals access to our
products. For example, we have an agreement with Med-Sense Guaranteed Association (Med-Sense), a non-profit association that provides membership benefits to individuals and gives members access to certain of our products. Under the
agreement, we primarily market membership in the association and collect certain fees and dues on its behalf. In return, we have sole access to its membership list, and Med-Sense exclusively endorses the insurance products that we offer. Under the
agreement, we receive a monthly fee per member. Our agreement with Med-Sense is automatically renewable for one-year terms, unless terminated on 120 days written notice by either party. The agreement is also terminable on 15 days written notice by
either party under certain circumstances, such as in the case of a breach of the agreement.
Sales and Marketing
Our sales and marketing initiatives primarily consist of hiring seasoned sales professionals who have worked with or been referred to us
by our distributors in order to strengthen our relationships with such distributors, marketing campaigns and attendance at meetings and conferences associated with acquiring new distributors. As we do not distribute insurance products to
individuals, we utilize third-party distributors to market our products directly to potential members, and are engaged in their own sales and marketing efforts that include investments in lead acquisition, online marketing and customer referrals. We
focus on building brand awareness among our distributors and members, increasing the number of distributors and converting sales leads into buyers. Our marketing initiatives include:
Third-Party Distributors
. Our third-party distributor acquisition channel consists of independent licensed agent call centers and
individual insurance brokers who market directly to individuals. We have established several initiatives to assist these call centers and distributors in helping individuals select our products, including the provision of sales scripting and
monitoring services through the HiiVe technology platform discussed below. We generally compensate our distributors for their individual health insurance sales based on the consumer submitting a health insurance application to us. If a marketing
partner is licensed to sell health insurance, we may share a percentage of the commission revenue we earn from the health insurance carrier for each member referred by that distributor.
Marketing Partners
. Our marketing partner member acquisition channel consists of a network of affiliate partners, including credit
card companies, national banks and database marketing services who make our products available to individuals. We have established a pay-for-performance network that drives individuals to our products. These partners generally fall into one of the
following categories:
|
|
|
Financial and online services partners in industries such as credit card services, banking, insurance and mortgage and association partners; and
|
|
|
|
Employers who do not offer health insurance benefits to their employees or to one or more classes of their employees.
|
Carrier Relationships
One of our core strengths is our deep integration with some of the leading insurance carriers in the United States, which enables us to
offer our STM, hospital indemnity and ancillary products on our technology platform. We currently have relationships with several insurance carriers, including Starr Indemnity & Liability Company, Companion Life, United States Fire,
ING, Markel and CIGNA, among others. We have entered into written contracts with each of these carriers pursuant to which we are authorized to sell the carriers health plans and products in exchange for the payment of commissions that vary by
carrier and by plan. These contracts are typically non-exclusive and terminable on short notice by either party for any reason. In some cases, the amendment or termination of an agreement we have with a health insurance carrier may impact the
commissions we are paid on health insurance plans and products that we have already sold through the carrier.
9
For the year ended December 31, 2012, Starr Indemnity & Liability Company
accounted for approximately 46% of our premium equivalents. The commission percentage used to calculate our commissions under our agreement with Starr Indemnity & Liability Company is based on net written premium and varies by the state of
a members domicile. The agreement is terminable on 180 days written notice by either party for any reason and may be terminated on shorter notice under certain circumstances, such as in the case of a breach of the agreement.
For the year ended December 31, 2012, United States Fire accounted for approximately 25% of our premium equivalents. The commission
percentage used to calculate our commissions under our agreement with United States Fire is based on gross collected premium. Our agreement with United States Fire is for automatically renewable one-year terms, unless otherwise terminated. The
agreement is terminable on 120 days written notice by either party for any reason and may be terminated on shorter notice under certain circumstances, such as in the case of a breach of the agreement.
For the year ended December 31, 2012, Companion Life accounted for approximately 22% of our premium equivalents. The commission
percentage used to calculate our commissions under our agreement with Companion Life is based on gross written premium. The agreement is terminable on 180 days written notice by either party for any reason and may be terminated on shorter notice
under certain circumstances, such as in the case of a breach of the agreement.
To create an improved experience for our
members, we regularly evaluate insurance carriers by comparing their market presence and brand, cost competitiveness, breadth of plans, emphasis on improving the customer experience, and ability to integrate with our data systems. We plan to
continue to expand and adjust the number of insurance carriers with which we partner.
Technology
Since we began operations in 2008, we have invested significant financial and human resources in building a unique and scalable
proprietary, web-based technology platform. Our technology represents a distinct competitive advantage as it reduces the need for customer care agents, the time associated with billing, underwriting, fulfillment, sale and marketing and provides
significant operating leverage as we add members and product offerings. We purchased the intellectual property rights to certain of the software in August 2012.
The key components of our technology platform include:
|
|
|
Automated Real-Time Integrated E System.
A.R.I.E.S. is the core of our technology platform. This proprietary technology reduces the need for the
continual involvement of customer care representatives after a member has enrolled by allowing him or her to change payment information and print identification cards anytime, anyplace. A.R.I.E.S. also offers distributors an unprecedented ability to
manage their business by providing direct access to real-time commission statements, commission payment and real-time sales and membership data (including cancelations, failed credit card and ACH payments, persistency, renewal and cross-sell rates).
Key elements of A.R.I.E.S. include:
|
|
|
|
Quote-Buy-Print
. Individuals access our technology platform through our distribution partners and can quote products and buy and print their
policy documents and identification cards anytime, anyplace.
|
|
|
|
Automated Underwriting.
The entire underwriting process is handled by A.R.I.E.S. through the use of health questionnaires. Because our STM
products are largely targeted to healthy individuals who do not have pre-existing conditions, we do not have a traditional underwriting department. Underwriting is an immediate accept or reject decision based on a prospective members answers
to an abbreviated online health-related questionnaire.
|
|
|
|
Multiple Value-Added Products.
Consumers can purchase multiple plans and specialty products with the click of a button. Consumers are able to
supplement our core STM and hospital indemnity offerings with ancillary products such as pharmacy benefit cards, dental plans, vision plans and cancer/critical illness plans. Our technology platform makes it possible for us to instantly offer these
bundled products to fit member needs.
|
|
|
|
Turn-Key Solution.
Our technology platform is a turnkey solution, allowing distributors to tailor their offering to meet member needs and can be
customized to enhance the experience of an affinity group or employer.
|
|
|
|
Payment.
Our sales are executed online and offer instant electronic fulfillment through our platform, through which we receive credit card ACH
payments directly from members at the time of sale.
|
|
|
|
Member Services.
Members have the ability to log-in and change payment information and print new identification cards, all without the need of a
customer service representative.
|
|
|
|
HiiVe
.
The HiiVe
technology system streamlines compliance by providing real-time sales scripting and monitoring for
distributors to ensure customers are making informed purchase decisions. The compliance system enables us to record each enrollment phone call, retrieve archived calls within seconds and score calls based on script adherence. In addition, this
technology has also allowed us to automate our compliance program, enhancing quality while minimizing overhead and thereby allowing us to offer higher commissions to our distributors.
|
10
We rely on BimSym eBusiness Solutions, Inc. (BimSym) and other vendors to
provide various services relating to our A.R.I.E.S. technology platform, including hosting, support, maintenance and development services, for which we pay both recurring and one-off fees. A.R.I.E.S. was placed in service in March 2011 through an
informal relationship with BimSym. On August 1, 2012, we entered into a software assignment agreement with BimSym pursuant to which we acquired certain proprietary rights to the A.R.I.E.S. software for a one-time payment of
$45,000. On August 1, 2012, we also entered into a master services agreement with BimSym with respect to the hosting, support, maintenance and development of our A.R.I.E.S. technology platform. This agreement obligates us to make minimum future
payments of $312,000 per year for the next five years. Thereafter, this agreement provides for automatic one-year renewals, unless we notify BimSym of our intent not to renew. Additionally, on August 1, 2012, we entered into an exclusivity agreement
with BimSym whereby neither BimSym nor any of its affiliates will create, market or sell a software, system or service with the same or similar functionality as that of A.R.I.E.S., under which we are required to make monthly payments of $16,000 for
five years. Prior to March 2011, the Company contracted with a third party vendor, Carpe Datum L.L.C., to provide some of the services now provided through A.R.I.E.S. The HiiVe technology system is based on software we license from a third-party.
For more information see Item 1A. Risk FactorsWe rely on third-party vendors to develop, host, maintain, service and enhance our technology platform and Item 1A. Risk FactorsOur failure to obtain, maintain and enforce
the intellectual property rights on which our business depends could have a material adverse effect on our business, financial condition and results of operations.
Seasonality
Our business of marketing individual STM insurance plans is
subject to seasonal fluctuations. A large number of undergraduate and post-graduate students complete their studies during the second fiscal quarter of each year and are no longer eligible for health insurance coverage through the insurance plans of
their parents or educational institutions. As a result, we experience a higher volume of new member enrollment from these demographics during the third fiscal quarter when such students purchase our products, producing a seasonal increase in
revenue. During the fourth quarter of each fiscal year, many of our call centers and licensed agents are closed or maintain shorter business hours for varying periods of time due to the holiday season. We experience a lower volume of new member
enrollment during the fourth quarter compared with other quarters, resulting in a seasonal decrease commission revenue. As our business matures, other seasonality trends may develop and the existing seasonality and consumer behavior that we
experience may change.
Competition
The market for selling insurance products is highly competitive and the sale of health insurance over the Internet is rapidly evolving. We compete with individuals and entities that offer and sell health
insurance products utilizing traditional distribution channels, as well as the Internet. Our current or potential competitors include:
Traditional local insurance agents
. There are tens of thousands of local insurance agents across the United States who sell health insurance products in their communities. We believe that the vast
majority of these local agents offer health insurance without significantly utilizing the Internet or technology other than simple desktop applications such as word processing and spreadsheet programs. Some traditional insurance agents, however,
utilize general agents that offer online quoting services and other tools to obtain quotes from multiple carriers and prepare electronic benefit proposals to share with their potential customers. These general agents typically offer their services
only for the small and mid-sized group markets (not the individual and family markets) and operate in only a limited geographic region. Additionally, some local agents use the Internet to acquire new consumer referrals from companies that have
expertise in Internet marketing. These lead aggregator companies utilize keyword search, primarily paid keyword search listings on Google, Bing and Yahoo! and other forms of Internet advertising, to drive Internet traffic to the lead
aggregators website. The lead aggregator then collects and sells consumer information to agents and, to a lesser extent, to carriers, both of whom endeavor to close the referrals through traditional offline sales methods.
Health insurance carriers direct-to-member sales
. Some carriers directly market and sell their plans and
products to consumers through call centers and their own websites. Although we offer health insurance plans and products for many of these carriers, they also can compete with us by offering their products directly to consumers. Most of these
carriers have superior brand recognition, extensive marketing budgets and significant financial resources to influence consumer preferences for searching and buying health insurance online. The carriers we choose to represent, however, do not have a
competitive price advantage over us. Because individual and family plan health insurance prices are regulated in all U.S. jurisdictions, a consumer is entitled to pay the same price for a particular plan, whether the consumer purchased the plan
directly from one of our carrier companies or from us.
Online agents
. There are a number of agents that operate
websites and provide a limited online shopping experience for consumers interested in purchasing health insurance (e.g., online quoting of health insurance product prices). Most of these online agents operate in only one or very few states, and some
represent only one or a limited number of health insurance carriers. Some online agents also sell non-health insurance products such as auto insurance, life insurance and home insurance. We are one of the leading sources of STM insurance products.
11
National insurance brokers.
Although insurance brokers have traditionally not focused
on the affordable STM market, they may enter our markets and could compete with us. These large agencies have existing relationships with many of our carrier companies, are licensed nationwide and have large customer bases and significant financial,
technical and marketing resources to compete in our markets. Some of these large agencies and financial services companies, such as eHealthInsurance have partnered with us in order to offer our services to their customer and member bases.
We believe the principal factors that determine our competitive advantage in the online distribution of health insurance
include the following:
|
|
|
value added healthcare products;
|
|
|
|
strength of carrier relationships and depth of technology integration with carriers;
|
|
|
|
proprietary, web-based technology platform;
|
|
|
|
data-driven product design;
|
|
|
|
highly automated compliance program;
|
|
|
|
strength of distribution relationships; and
|
|
|
|
proven capabilities measured in years of delivering sales and creating and using reliable technology.
|
Employees
As of
December 31, 2012, we had 79 employees, of which 73 were full-time employees. We have not experienced any work stoppages and consider our employee relations to be good. None of our employees is represented by a labor union.
Intellectual Property
Our success depends, in part, on our ability to protect our intellectual property and proprietary technology, and to operate our business
without infringing or violating the intellectual property or proprietary rights of others. We rely on a combination of copyrights, trademarks, domain names, and trade secrets, intellectual property licenses and other contractual rights (including
confidentiality and non-disclosure agreements) to establish and protect our intellectual property and proprietary technology. However, these intellectual property rights may not prevent others from creating a competitive online platform or otherwise
competing with us.
We may be unable to obtain, maintain and enforce the intellectual property rights on which our business
depends, and assertions by third-parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations. For more information see Item 1A. Risk
FactorsOur failure to obtain, maintain and enforce the intellectual property rights on which our business depends could have a material adverse effect on our business, financial condition and results of operations and Item 1A. Risk
FactorsAssertions by third-parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
Our History and the Reorganization of Our Corporate Structure
Overview
Our business began operations in 2008, and historically,
we operated through Health Plan Intermediaries, LLC. In anticipation of our recent initial public offering (the IPO), on November 7, 2012, Health Plan Intermediaries, LLC assigned the operating assets of our business through a
series of transactions to Health Plan Intermediaries Holdings, LLC, and Health Plan Intermediaries Holdings, LLC assumed the operating liabilities of Health Plan Intermediaries, LLC.
Health Insurance Innovations, Inc. was incorporated as a Delaware corporation on October 26, 2012. Immediately prior to the
completion of the IPO, we amended and restated our certificate of incorporation to, among other things, authorize two classes of common stock, Class A common stock and Class B common stock. We also granted the underwriters, which consisted of
Credit Suisse, Citigroup, BofA Merrill Lynch and Raymond James, the right to purchase additional shares of Class A common stock to cover over-allotments. Our Class A common stock was issued to investors in the IPO and is held by certain of our
employees. As of March 27, 2013, all of our Class B common stock is held by Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub, LLC (a subsidiary of Health Plan Intermediaries, LLC that was formed on
October 31, 2012 in connection with the IPO), which are beneficially owned by our Chairman, President, and Chief Executive Officer, Michael Kosloske. Shares of our Class B common stock vote together with shares of our
Class A common stock as a single class, except as otherwise required by law. As of March 27, 2013, Mr. Kosloske beneficially owns 62.4% of our outstanding Class A and Class B common stock on a combined basis, which
equals his combined economic interest in our Company, and will have effective control over the outcome of votes on all matters requiring approval by our stockholders. As described in more detail below, each Series B Membership Interest of
Health Plan Intermediaries Holdings, LLC can be exchanged (together with one share of Class B common stock) for one share of Class A common stock. Health Insurance Innovations, Inc. was formed for purposes of the IPO and prior to the IPO
engaged only in activities in contemplation of the IPO. Following the IPO, Health Insurance Innovations, Inc. remains a holding company owning as its principal asset Series A Membership Interests in Health Plan Intermediaries Holdings, LLC.
12
The diagram below shows our organizational structure immediately after completion of the IPO
and the reorganization.
(1)
|
The members of Health Plan Intermediaries Holdings, LLC, other than us, include Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub, LLC, which are
beneficially owned by Mr. Kosloske.
|
(2)
|
Class A shares represent 100% of the economic rights of the holders of all classes of our common stock to share in our distributions. Class B shares do not entitle
their holders to any dividends paid by, or rights upon liquidation of, Health Insurance Innovations, Inc. Each share of our Class A common stock and our Class B common stock entitle its holder to one vote.
|
(3)
|
As of March 27, 2013, (i) the Series A Membership Interests held by Health Insurance Innovations, Inc. represent 37.6% of the outstanding membership interests, 37.6% of
the economic interests and 100% of the voting interests in Health Plan Intermediaries Holdings, LLC and (ii) the Series B Membership Interests held by the entities beneficially owned by Mr. Kosloske represent 62.4% of the outstanding membership
interests, 62.4% of the economic interests and 0% of the voting interests in Health Plan Intermediaries Holdings, LLC.
|
13
Amended and Restated Limited Liability Company Agreement of Health Plan Intermediaries
Holdings, LLC
Following our reorganization and the IPO, we have operated our business through Health Plan
Intermediaries Holdings, LLC. The operations of Health Plan Intermediaries Holdings, LLC, and the rights and obligations of its members, are governed by the amended and restated limited liability company agreement of Health Plan Intermediaries
Holdings, LLC. The following is a description of the material terms of that amended and restated limited liability company agreement.
Governance
We serve as sole managing member of Health Plan Intermediaries
Holdings, LLC. As such, we control its business and affairs and will be responsible for the management of its business. No other members of Health Plan Intermediaries Holdings, LLC, in their capacity as such, we have any authority or right
to control the management of Health Plan Intermediaries Holdings, LLC or to bind it in connection with any matter.
Voting
and Economic Rights of Members
Health Plan Intermediaries Holdings, LLC has two series of outstanding equity:
Series A Membership Interests, which may only be issued to Health Insurance Innovations, Inc., as sole managing member, and Series B Membership Interests. The Series B Membership Interests are held by Health Plan Intermediaries, LLC
and Health Plan Intermediaries Sub, LLC (a subsidiary of Health Plan Intermediaries, LLC that was formed on October 31, 2012 in connection with the IPO), entities beneficially owned by Mr. Kosloske. The Series A Membership Interests
and Series B Membership Interests entitle their holders to equivalent economic rights meaning an equal share in the profits and losses of, and distributions from, Health Plan Intermediaries Holdings, LLC. Holders of Series B Membership
Interests have no voting rights, except for the right to approve certain amendments to the amended and restated limited liability company agreement of Health Plan Intermediaries Holdings, LLC. As of March 27, 2013, (i) the Series A Membership
Interests held by Health Insurance Innovations, Inc. represent 37.6% of the outstanding membership interests, 37.6% of the economic interests and 100% of the voting interests in Health Plan Intermediaries Holdings, LLC and (ii) the Series B
Membership Interests held by the entities beneficially owned by Mr. Kosloske represent 62.4% of the outstanding membership interests, 62.4% of the economic interests and 0% of the voting interests in Health Plan Intermediaries Holdings, LLC.
Net profits and losses of Health Plan Intermediaries Holdings, LLC generally will be allocated, and distributions made, to
its members
pro rata
in accordance with the number of Membership Interests (Series A or Series B, as the case may be) they hold. Accordingly, as of March 27, 2013, net profits and net losses of Health Plan Intermediaries Holdings, LLC
would be allocated, and distributions would be made, 37.6% to us and 62.4% to the holders of Series B Membership Interests.
Subject to the availability of net cash flow at the Health Plan Intermediaries Holdings, LLC level and to applicable legal and
contractual restrictions, we intend to cause Health Plan Intermediaries Holdings, LLC to distribute to us, and to the other holders of Membership Interests, cash payments for the purposes of funding tax obligations in respect of any net taxable
income that is allocated to us and the other holders of Membership Interests as members of Health Plan Intermediaries Holdings, LLC, to fund dividends, if any, declared by us and to make any payments due under the tax receivable agreement, as
described below. See Tax Consequences below. If Health Plan Intermediaries Holdings, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A common stockholders
will be made by our board of directors. We do not, however, expect to declare or pay any cash or other dividends in the foreseeable future on our Class A common stock, as we intend to reinvest any cash flow generated by operations in our
business. Class B common stock will not be entitled to any dividend payments. We may enter into credit agreements or other borrowing arrangements in the future that prohibit or restrict our ability to declare or pay dividends on our
Class A common stock.
Coordination of Health Insurance Innovations, Inc. and Health Plan Intermediaries Holdings, LLC
Except with respect to shares of Class A common stock issued pursuant to the exercise of the underwriters
over-allotment option, whenever we issue one share of Class A common stock for cash, the net proceeds will be transferred promptly to Health Plan Intermediaries Holdings, LLC, and Health Plan Intermediaries Holdings, LLC will issue to us one
Series A Membership Interest. If we issue other classes or series of equity securities, we will contribute to Health Plan Intermediaries Holdings, LLC the net proceeds we receive in connection with such issuance, and Health Plan Intermediaries
Holdings, LLC will issue to us an equal number of equity securities with designations, preferences and other rights and terms that are substantially the same as our newly issued equity securities. Conversely, if we repurchase any shares of
Class A common stock (or equity securities of other classes or series) for cash, Health Plan Intermediaries Holdings, LLC will, immediately prior to our repurchase, redeem an equal number of Series A Membership Interests (or its equity
securities of the corresponding classes or series), upon the same terms and for the same price, as the shares of our Class A common stock (or our equity securities of such other classes or series) are repurchased. Membership Interests and
shares of our common stock will be subject to equivalent stock splits, dividends and reclassifications.
We will not conduct
any business other than the management and ownership of Health Plan Intermediaries Holdings, LLC and its subsidiaries, or own any other assets (other than on a temporary basis), although we may take such actions and own such assets as are necessary
to comply with applicable law, including compliance with our responsibilities as a public company under the U.S. federal securities laws, and may incur indebtedness and may take other actions if we determine that doing so is in the best
interest of Health Plan Intermediaries Holdings, LLC.
14
Issuances of Membership Interests
Series A Membership Interests may be issued only to us as the sole managing member of Health Plan Intermediaries Holdings,
LLC. Series B Membership Interests may be issued only to persons or entities we permit, which initially will be Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub, LLC, which are beneficially owned by
Mr. Kosloske. Such issuances shall be in exchange for cash or other consideration. Series B Membership Interests may not be transferred as Series B Membership Interests except to certain permitted transferees and in accordance with
the restrictions on transfer set forth in the amended and restated limited liability company agreement of Health Plan Intermediaries Holdings, LLC, and any such transfer must be accompanied by the transfer of an equal number of shares of our Class B
common stock.
Exchange Agreement
On February 13, 2013, we entered into an exchange agreement with the holders of Series B Membership Interests. Pursuant to and subject to the terms of the exchange agreement and the amended and
restated limited liability company agreement of Health Plan Intermediaries Holdings, LLC, holders of Series B Membership Interests, at any time and from time to time, may exchange one or more Series B Membership Interests, together with an
equal number of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications.
Holders will not have the right to exchange Series B Membership Interests if we determine that such exchange would be prohibited by law
or regulation or would violate other agreements to which we may be subject. We may impose additional restrictions on exchange that we determine necessary or advisable so that Health Plan Intermediaries Holdings, LLC is not treated as a
publicly traded partnership for U.S. federal income tax purposes. If the Internal Revenue Service were to contend successfully that Health Plan Intermediaries Holdings, LLC should be treated as a publicly traded partnership
for U.S. federal income tax purposes, Health Plan Intermediaries Holdings, LLC would be treated as a corporation for U.S. federal income tax purposes and thus would be subject to entity-level tax on its taxable income.
A holder that exchanges Series B Membership Interests will also be required to deliver an equal number of shares of our Class B common
stock. In connection with each exchange, Health Plan Intermediaries Holdings, LLC will cancel the delivered Series B Membership Interests and issue to us Series A Membership Interests on a one-for-one basis. Thus, as holders exchange their
Series B Membership Interests for Class A common stock, our interest in Health Plan Intermediaries Holdings, LLC will increase.
We and the exchanging holder will each generally bear our own expenses in connection with an exchange, except that, subject to a limited exception, we are required to pay any transfer taxes, stamp taxes
or duties or other similar taxes in connection with such an exchange.
Exculpation and Indemnification
The amended and restated limited liability company agreement of Health Plan Intermediaries Holdings, LLC contains provisions limiting the
liability of its managing member, members, officers and their respective affiliates to Health Plan Intermediaries Holdings, LLC or any of its members. Moreover, the amended and restated limited liability company agreement contains broad
indemnification provisions for Health Plan Intermediaries Holdings, LLCs managing member, members, officers and their respective affiliates. Because Health Plan Intermediaries Holdings, LLC is a limited liability company, these provisions
are not subject to the limitations on exculpation and indemnification contained in the Delaware General Corporation Law with respect to the indemnification that may be provided by a Delaware corporation to its directors and officers.
Voting Rights of Class A Stockholders and Class B Stockholders
Each share of our Class A common stock and our Class B common stock entitles its holder to one vote.
Tax Consequences
Holders of Membership Interests, including Health Insurance Innovations, Inc., generally will incur U.S. federal, state and local income taxes on their proportionate shares of any net taxable income of
Health Plan Intermediaries Holdings, LLC. Net profits and net losses of Health Plan Intermediaries Holdings, LLC generally will be allocated to its members
pro rata
in proportion to the number of Membership Interests they hold. The
amended and restated limited liability company agreement of Health Plan Intermediaries Holdings, LLC provides for cash distributions to its members in an amount at least equal to the members assumed tax liability attributable to Health Plan
Intermediaries Holdings, LLC. Generally, distributions in respect of the members assumed tax liability
15
will be computed based on our estimate of the net taxable income of Health Plan Intermediaries Holdings, LLC allocable per Membership Interest multiplied by an assumed tax rate. In accordance
with this agreement, Health Plan Intermediaries Holdings, LLC intends to make distributions to its members in respect of such assumed tax liability and to fund dividends, if any, declared by us, as well as any payments we are obligated to make under
the tax receivable agreement, described below.
Health Plan Intermediaries Holdings, LLC intends to make an election under
Section 754 of the Internal Revenue Code of 1986, as amended, which is effective for 2013 and for each taxable year in which occurs an exchange of Series B Membership Interests, together with an equal number of shares of our Class B common
stock, for shares of our Class A common stock. We expect that, as a result of this election, the acquisition of Series B Membership Interests from Health Plan Intermediaries, LLC with the net proceeds of the sale of over-allotment shares,
as well as any future exchanges of Series B Membership Interests, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock, will result in increases in the tax basis in our share of the
tangible and intangible assets of Health Plan Intermediaries Holdings, LLC at the time of such acquisition or exchange, which will increase the tax depreciation and amortization deductions available to us and which could create other tax
benefits. Any such increases in tax basis and tax depreciation and amortization deductions or other tax benefits could reduce the amount of tax that we would otherwise be required to pay in the future. We will be required to pay a portion
of the cash savings we actually realize from such increase (or are deemed to realize in the case of an early termination payment by us, a change in control or a material breach by us of our obligations under the tax receivable agreement, as
described below) to certain holders of Series B Membership Interests pursuant to the tax receivable agreement. Furthermore, payments under the tax receivable agreement, as described below, will give rise to additional tax benefits and therefore
to additional payments under the tax receivable agreement itself. To the extent that we are unable to make payments under the income tax receivable agreement for any reason, such payments will be deferred and will accrue interest until
paid. See Tax Receivable Agreement below.
Tax Receivable Agreement
The IPO is not anticipated to result in an increase in the tax basis in our share of the tangible and intangible assets of Health Plan
Intermediaries Holdings, LLC. However, the purchase of Series B Membership Interests (together with an equal number of shares of our Class B common stock) with the net proceeds of the sale of over-allotment shares, as well as subsequent exchanges of
Series B Membership Interests, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock, are expected to increase our tax basis in our share of Health Plan Intermediaries Holdings, LLCs
tangible and intangible assets. These increases in tax basis are expected to increase our depreciation and amortization deductions and create other tax benefits and therefore may reduce the amount of tax that we would otherwise be required to
pay in the future.
On February 13, 2013, we entered into a tax receivable agreement with the holders of Series B Membership
Interests (currently Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub, LLC, which are beneficially owned by Mr. Kosloske). The agreement requires us to pay to such holders 85% of the cash savings, if any, in U.S. federal,
state and local income tax we realize (or are deemed to realize in the case of an early termination payment, a change in control or a material breach by us of our obligations under the tax receivable agreement, as discussed below) as a result of any
possible future increases in tax basis described above and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement itself. This is our
obligation and not an obligation of Health Plan Intermediaries Holdings, LLC. We will benefit from the remaining 15% of any realized cash savings. For purposes of the tax receivable agreement, cash savings in income tax is computed by comparing
our actual income tax liability with our hypothetical liability had we not been able to utilize the tax benefits subject to the tax receivable agreement itself. The tax receivable agreement became effective upon completion of the IPO and will remain
in effect until all such tax benefits have been used or expired, unless the agreement is terminated early, as described below. Estimating the amount of payments to be made under the tax receivable agreement cannot be done reliably at this time
because any increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending on a number of factors, including:
|
|
|
the timing of exchanges of Series B Membership Interests (together with an equal number of shares of our Class B common stock) for shares of our
Class A common stockfor instance, the increase in any tax deductions will vary depending on the fair market value of the depreciable and amortizable assets of Health Plan Intermediaries Holdings, LLC at the time of the exchanges, and this
value may fluctuate over time;
|
|
|
|
the price of our Class A common stock at the time of exchanges of Series B Membership Interests (together with an equal number of shares of our
Class B common stock) for shares of our Class A common stockthe increase in our share of the basis in the assets of Health Plan Intermediaries Holdings, LLC, as well as the increase in any tax deductions, will be related to the price of
our Class A common stock at the time of these exchanges;
|
16
|
|
|
the tax rates in effect at the time we use the increased amortization and depreciation deductions or realize other tax benefits; and
|
|
|
|
the amount, character and timing of our taxable income. We will be required to pay 85% of the tax savings, as and if realized. Except in
certain circumstances, if we do not have taxable income in a given taxable year, we will not be required to make payments under the tax receivable agreement for that taxable year because no tax savings will have been realized.
|
The payments that we make under the tax receivable agreement could be substantial. Assuming no
material changes in relevant tax law and based on our current operating plan and other assumptions, including our estimate of the tax basis of our assets as of December 31, 2012, if all of the Series B Membership Interests were acquired by us
in taxable transactions for a price of $14.00 per Series B Membership Interest, we estimate that the maximum amount that we would be required to pay under the tax receivable agreement could be approximately $53,001,000. The actual amount may
differ materially from this hypothetical amount as potential future payments will vary depending on a number of factors, including those listed above.
We have the right to terminate the tax receivable agreement at any time. In addition, the tax receivable agreement will terminate early if we (or our successors) breach our obligations under the tax
receivable agreement or upon certain mergers, asset sales, other forms of business combinations or other changes of control. If we exercise our right to terminate the tax receivable agreement, or if the tax receivable agreement is terminated
early in accordance with its terms, our (or our successors) payment obligations under the tax receivable agreement with respect to certain exchanged or acquired Membership Interests would be accelerated and would become due and payable
based on certain assumptions, including that we would have sufficient taxable income to use in full the deductions arising from the increased tax basis and certain other benefits. As a result, we could make payments under the tax receivable
agreement that are substantial and in excess of our actual cash savings in income tax.
Decisions made in the course of
running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments we make under the tax receivable agreement. For example, the
earlier disposition of assets following an exchange or acquisition transaction will generally accelerate payments under the tax receivable agreement and increase the present value of such payments. In these situations, our obligations under the tax
receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.
Payments are generally due under the tax receivable agreement within a specified period of time following the filing of our tax return
for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR from the due date (without extensions) of such tax return. Late payments generally accrue interest
at a rate of LIBOR plus 300 basis points. However, to the extent, based on certain specified reasons, that we do not have available cash to satisfy our payment obligations under the tax receivable agreement, such deferred payments would accrue
interest at a rate of LIBOR.
Were the Internal Revenue Service to challenge successfully the tax basis increases described
above, we would not be reimbursed for any payments previously made under the tax receivable agreement although future payments under the tax receivable agreement, if any, would be adjusted to reflect the result of any such successful challenge
by the Internal Revenue Service. As a result, we could make payments under the tax receivable agreement in excess of our actual cash savings in income tax.
17
Risks Relating to Our
Business and Industry
The market for health insurance in the United States is rapidly evolving, which makes it
difficult to forecast demand for our products.
The market for health insurance in the United States is rapidly
evolving. Accordingly, our future financial performance will depend in part on growth in this market and on our ability to adapt to emerging demands in this market. We believe demand for our products has been driven in large part by recent
regulatory changes, broader use of the Internet and advances in technology. It is difficult to predict with any precision the future growth rate and size of our target market. The rapidly evolving nature of the market in which we operate, as well as
other factors that are beyond our control, reduce our ability to evaluate accurately our long-term outlook and forecast annual performance. A reduction in demand for our products caused by lack of acceptance, technological challenges, competing
offerings or other factors would result in a lower revenue growth rate or decreased revenue, either of which could negatively impact our business and results of operations. In addition, our business, financial condition and results of operations may
be adversely affected if Healthcare Reform is not implemented in accordance with our expectations and we cannot successfully execute our growth strategies. For example, our STM plans are currently classified as short-term limited
duration plans under Healthcare Reform. Accordingly, short-term limited duration plans are exempt under Healthcare Reform from the minimum MLR thresholds and must-carry pre-existing conditions requirements, the
requirements for the extension of dependent coverage, certain documentation, reporting and appeals process requirements and the prohibitions against excessive waiting periods, lifetime or annual limits, rescissions and more generally, discrimination
against individuals and discrimination on the provision of health care. If our STM plans were no longer classified as short-term limited duration plans, or we were not able to take advantage of certain current exemptions for any other reason, our
business could be negatively affected.
If we are unable to retain our members, our business and results of operations
would be harmed.
Our revenue is primarily derived from commissions that insurance carriers pay to us for the health
insurance plans and products that we market and that remain in effect. When one of these plans or products is cancelled, or if we otherwise do not remain the administrator of record on the policy, we no longer receive the related commission revenue.
Members may choose to discontinue their insurance policies for a number of reasons. For example, members may determine that they cannot afford our products or may decide not to renew their policies due to future increases in premiums. In addition,
our members may choose to purchase new plans or products using a different administrator if, for example, they are not satisfied with our customer service or the plans or products that we offer. Further, members may discontinue their policies
because they no longer need STM insurance because, for example, they have received coverage through an employer or spouse. Insurance carriers may also terminate health insurance plans or products
18
purchased by our members for a variety of reasons. Our cost in acquiring a new member is substantially greater than the cost involved in maintaining our relationship with an existing member. If
we are not able to successfully retain existing members and limit member turnover, our revenue and operating margins could be adversely affected.
Our business would be harmed if we lose our relationships with insurance carriers, fail to maintain good relationships with insurance carriers, become dependent upon a limited number of insurance
carriers or fail to develop new relationships with insurance carriers.
We typically enter into contractual agency
relationships with insurance carriers that are non-exclusive and terminable on short notice by either party for any reason. In many cases, insurance carriers also have the ability to amend the terms of our agreements unilaterally on short notice.
Insurance carriers may be unwilling to underwrite our health insurance plans or products or may amend our agreements with them for a variety of reasons, including for competitive or regulatory reasons. Insurance carriers may decide to rely on
their own internal distribution channels, including traditional in-house agents, carrier websites or other sales channels, or to market their own plans or products, and, in turn, could limit or prohibit us from marketing their plans or products.
Insurance carriers may decide not to underwrite insurance plans or products in the individual health insurance market in certain geographies or altogether. The termination or amendment of our relationship with an insurance carrier could reduce the
variety of health insurance plans or products we offer. We also could lose a source of, or be paid reduced commissions for, future sales and could lose renewal commissions for past sales. Our business could also be harmed if we fail to develop new
carrier relationships or are unable to offer members a wide variety of health insurance plans and products.
The private
health insurance industry in the United States has experienced substantial consolidation over the past several years, resulting in a decrease in the number of insurance carriers. For example, for the year ended December 31, 2012, Starr
Indemnity & Liability Company accounted for 46% of our premium equivalents, United States Fire accounted for 25% of our premium equivalents, and Companion Life accounted for 22% of our premium equivalents. In the future, it may become
necessary for us to offer insurance plans and products from a reduced number of insurance carriers or to derive a greater portion of our revenue from a more concentrated number of carriers as our business and the health insurance industry evolve.
Each of these insurance carriers may terminate our agreements with them, and, in some cases, as a result of the termination we may lose our right to receive future commissions for policies we have sold. In addition, one or more of our carrier
companies could experience a failure of its business due to a decline in sales volumes, unavailability of reinsurance, failure of business strategy or otherwise. Should our dependence on a smaller number of insurance carriers increase, whether as a
result of the termination of carrier relationships, further insurance carrier consolidation, business failure, bankruptcy or any other reason, we may become more vulnerable to adverse changes in our relationships with our carriers, particularly in
states where we offer health insurance plans and products from a relatively small number of carriers or where a small number of insurance carriers dominate the market. The termination, amendment or consolidation of our relationships with our
insurance carriers could harm our business, results of operations and financial condition.
Our business would be harmed
if we lose our relationships with distributors, fail to maintain good relationships with distributors, become dependent upon a limited number of distributors or fail to develop new relationships with distributors.
We depend on distributors to sell our products. We typically enter into contractual agency relationships with distributors that are
non-exclusive and terminable on short notice by either party for any reason. In many cases, distributors also have the ability to amend the terms of our agreements unilaterally on short notice. Distributors may be unwilling to sell our health
insurance plans or products or may amend our agreements with them for a variety of reasons, including for competitive or regulatory reasons. For example, distributors may decide to sell plans and products that bring them a higher commission than our
plans and products or may decide not to sell STM plans at all. Because we rely on a diverse distributor network to sell our products, any loss of relationships with distributors or failure to maintain good relationships with distributors could harm
our business, results of operations and financial condition. Further, we believe that we must grow our distributor network in order to achieve our growth plans. If we are unable to grow our distributor network and develop new relationships with
distributors, our revenue could be adversely impacted.
We depend on relationships with third-parties for certain
services that are important to our business. An interruption or cessation of such services by any third party could have a material adverse effect on our business.
We depend on a number of third-party relationships to enhance our business. For instance, state regulations may require that individuals enroll in group programs or associations in order to access certain
insurance products, benefits and services. We have entered into relationships with such associations in order to provide individuals access to our products. For example, we have an agreement with Med-Sense Guaranteed Association, or Med-Sense, a
non-profit association that provides membership benefits to individuals and gives members access to certain of our products. Under the agreement, we primarily market membership in the association and collect certain fees and dues on its behalf.
In return, we have sole access to its membership list, and Med-Sense exclusively endorses the insurance products that we offer. Members of the association are given access to a wide variety of our products that are otherwise unavailable to
non-members. For the year ended December 31, 2012, approximately 80.9% of our business was derived from individuals who became members of Med-Sense. We intend to establish an affiliation with Savers Choice of America, an
association offering similar benefits, as an alternative to Med-Sense. We intend to have several of our carriers issue policies to Savers Choice of America members beginning in the first half of 2013. While we believe we could replace
Med-Sense with other group programs or associations, there can be no assurance we could find such a replacement on a timely basis or at all. If we were to lose our relationship with Med-Sense and were unable to find another group program or
association on a timely basis or at all, this would have a material adverse effect on our business.
19
In addition, we develop and maintain strategic relationships with our partners in order for
them to market our products to their end users. While we have entered into agreements with certain partners pursuant to which our products may be made available to their end-users, such agreements are not exclusive and generally do not obligate the
partner to market or distribute our service. For example, we have entered into an agreement with MasterCard whereby MasterCard, through its approved pre-paid card member networks, will assist us in targeting and acquiring new leads for marketing our
products. Under such agreement, MasterCard will use good-faith efforts to identify prospective leads.
Our ability to offer
our services and operate our business is therefore dependent on maintaining our relationships with third-party partners, particularly Med-Sense, and entering into new relationships to meet the changing needs of our business. Any deterioration
in our relationships with such partners, or our failure to enter into agreements with partners in the future would harm our business, results of operations and financial condition. If our partners are unable or unwilling to provide the services
necessary to support our business, or if our agreements with such partners are terminated, our operations could be significantly disrupted. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to
ourselves or other third-party partners. In addition, third-party partners may not be able to provide the services required in order to meet the changing needs of our business.
Insurance carriers could reduce the commissions paid to us or change their plan pricing practices in ways that reduce the
commissions paid to us, which could harm our revenue and results of operations.
Our commission rates are negotiated
between us and each carrier. Insurance carriers have altered, and may in the future alter, the contractual relationships we have with them, either by renegotiation or unilateral action. Also, insurance carriers may adjust their commission rates to
comply with regulatory guidelines. If these contractual changes result in reduced commissions, our revenue may decline. For example, on June 1, 2011, we entered into a new contract with Starr Indemnity & Liability Company which
replaced a previous contract with Starr Global Accident and Health Insurance Agency, LLC to provide similar services for slightly lower commission rates. The reduced commissions had no material impact on our revenue or results of operations,
however, as the contract also provided for additional administrative fees paid to us to offset the lower commission rates.
In addition, insurance carriers periodically adjust the premiums they charge to individuals for their insurance policies. These premium
changes may cause members to cancel their existing policies and purchase a replacement policy from a different insurance carrier, either through our platform or through another administrator. We may receive a reduced commission or no commission at
all when a member purchases a replacement policy. Also, because insurance rates may vary between insurance carriers, plans and enrollment dates, changes in our enrollment mix may impact our commission revenue. Future changes in carrier pricing
practices could harm our business, results of operations and financial condition.
We face intense competition and
compete with a broad range of market participants within the health insurance industry. If competition increases, our growth and profits may decline.
The market for selling individual health insurance and ancillary products is highly competitive and, except for regulatory considerations, there are limited barriers to entry. Currently, we believe the
cost-effective, high-quality STM solutions that we distribute to the individual health insurance market are somewhat rare among our competitors. However, if we achieve our goal of becoming a leader in the distribution of individual health insurance
products, we believe that competition for our business model will substantially increase. Because the barriers to entry in our markets are not substantial and members have the flexibility to select new health insurance providers, we believe that the
addition of new competitors, or the adoption of our business model by existing competitors, may occur relatively quickly.
We
compete with entities and individuals that offer and sell products similar to ours utilizing traditional distribution channels, including insurance agents and brokers across the United States who sell health insurance products in their communities.
Some local agents use lead aggregator services that use the Internet to find individuals interested in purchasing health insurance and are compensated for referring those individuals to a traditional insurance agent. In addition to
health insurance brokers and agents, many insurance carriers directly market and sell their plans and products to individuals through call centers and their own websites. Although we offer health insurance plans and products for many of these
insurance carriers, they also compete with us by offering their plans and products directly to individuals or may elect to compete with us by offering their plans and products directly to individuals in the future. We may not be able to compete
successfully against our current or future competitors. Some of our current and potential competitors have longer operating histories in the health insurance industry, access to larger customer bases, greater name recognition and significantly
greater financial, technical, marketing and other resources than we do. As compared to us, our current and future competitors may be able to:
|
|
|
undertake more extensive marketing campaigns for their brands and services;
|
|
|
|
devote more resources to website and systems development;
|
|
|
|
negotiate more favorable commission rates; and
|
|
|
|
attract potential employees, marketing partners and third-party service providers.
|
20
Further, there are many alternatives to the individual health insurance products that we
currently provide. We can make no assurances that we will be able to compete effectively with the various individual health insurance products that are currently available or may become available in the future. Competitive pressures may result in
our experiencing increased marketing costs and loss of market share, or may otherwise harm our business, results of operations and financial condition.
Changes and developments in the health insurance system in the United States, in particular the implementation of Healthcare Reform, could harm our business.
Our business depends upon the private sector of the U.S. insurance system, its role in financing healthcare delivery, and insurance
carriers use of, and payment of commissions to, agents, brokers and other organizations to market and sell health insurance plans and products.
Healthcare Reform contains provisions that have changed and will continue to change the industry in which we operate in substantial ways. Many aspects of Healthcare Reform do not take effect until 2014,
although certain provisions currently are effective, such as medical loss ratio requirements for individual, family and small business health insurance and a prohibition against using pre-existing health conditions as a reason to deny health
coverage for children. In addition, state governments have adopted, and will continue to adopt, changes to their existing laws and regulations in light of Healthcare Reform and related regulations. Future changes may not be beneficial to us.
Notwithstanding the recent U.S. Supreme Court decision largely upholding the constitutionality of Healthcare Reform, certain
key members of Congress have expressed a desire to withhold the funding necessary to implement Healthcare Reform as well as the desire to repeal or amend all or a portion of Healthcare Reform. Any partial or complete repeal or amendment or
implementation difficulties, or uncertainty regarding such events, could increase our costs of compliance and adversely affect our results of operations and financial condition. The implementation of Healthcare Reform could have negative effects on
us, including:
|
|
|
increasing our competition;
|
|
|
|
reducing or eliminating the need for health insurance agents and brokers and/or demand for the health insurance that we sell through the manner in
which the federal government and the states implement health insurance exchanges and the process for receiving subsidies and cost-sharing credits;
|
|
|
|
decreasing the number of types of health insurance plans and products that we sell, as well as the number of insurance carriers offering such plans and
products;
|
|
|
|
causing insurance carriers to change the benefits and/or premiums for the plans and products they sell;
|
|
|
|
causing insurance carriers to reduce the amount they pay for our services or change their relationships with us in other ways;
|
|
|
|
causing STM to not qualify as adequate healthcare coverage, resulting in STM policyholders having to pay the government a penalty or tax;
|
|
|
|
causing STM policies to be subject to MLR threshold requirements; or
|
|
|
|
causing STM policies to be subject to must carry pre-existing condition requirements.
|
Any of these effects could materially harm our business, results of operations and financial condition. For example, the manner in which
the federal government and the states implement Healthcare Reform could substantially increase our competition and member turnover and substantially reduce the number of individuals who purchase insurance through us. Various aspects of Healthcare
Reform could cause insurance carriers to limit the type of health insurance plans and products we are able to sell and the geographies in which we are able to sell them. Changes in the law could also cause insurance carriers to exit the business of
selling insurance plans and products in a particular jurisdiction, to eliminate certain categories of products or to attempt to move members into new plans and products for which we receive lower commissions. If insurance carriers decide to limit
our ability to sell their plans and products or determine not to sell individual health insurance plans and products altogether, our business, results of operations and financial condition would be materially harmed.
21
Compliance with the strict regulatory environment applicable to the health insurance
industry and the specific products we sell is difficult and costly. If we fail to comply with the numerous laws and regulations that are applicable to our business, our business and results of operations would be harmed.
The health insurance industry is heavily regulated by each state in the United States. For instance, state regulators require us to
maintain a valid license in each state in which we transact health insurance business and further require that we adhere to sales, documentation and administration practices specific to each state. In addition, each distributor who transacts health
insurance business on our behalf must maintain a valid license in one or more states. Because we do business in the majority of states and the District of Columbia, compliance with health insurance-related laws, rules and regulations is difficult
and imposes significant costs on our business. Each jurisdictions insurance department typically has the power, among other things, to:
|
|
|
grant and revoke licenses to transact insurance business;
|
|
|
|
conduct inquiries into the insurance-related activities and conduct of agents and agencies;
|
|
|
|
require and regulate disclosure in connection with the sale and solicitation of health insurance;
|
|
|
|
authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published and an insurance policy sold;
|
|
|
|
determine which entities can be paid commissions from carriers;
|
|
|
|
regulate the content of insurance-related advertisements, including web pages;
|
|
|
|
approve policy forms, require specific benefits and benefit levels and regulate premium rates;
|
|
|
|
impose fines and other penalties; and
|
|
|
|
impose continuing education requirements on agents and employees.
|
Although we believe we are currently in compliance with applicable insurance laws and regulations, due to the complexity, periodic
modification and differing interpretations of insurance laws and regulations, we may not have always been, and we may not always be, in compliance with such laws and regulations. Failure to comply could result in significant liability, additional
department of insurance licensing requirements or the revocation of licenses in a particular jurisdiction, which could significantly reduce our revenue, increase our operating expenses, prevent us from transacting health insurance business in a
particular jurisdiction and otherwise harm our business, results of operations and financial condition. Moreover, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or reputation in
other jurisdictions due to the requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions. Even if the allegations in any regulatory or other action against us are proven false, any surrounding negative
publicity could harm member, distributor or health insurance carrier confidence in us, which could significantly damage our reputation. Because some members, distributors and health insurance carriers may not be comfortable with the concept of
purchasing health insurance using the Internet, any negative publicity may affect us more than it would others in the health insurance industry and would harm our business, results of operations and financial condition.
In addition, we may in the future receive inquiries from state insurance regulators regarding our marketing and business practices. We
may modify our practices in connection with any such inquiry. Any modification of our marketing or business practices in response to future regulatory inquiries could harm our business, results of operations or financial condition.
Regulation of the sale of health insurance is subject to change, and future regulations could harm our business and results of
operations.
The laws and regulations governing the offer, sale and purchase of health insurance are subject to
change, and future changes may be adverse to our business. For example, once health insurance pricing is set by the carrier and approved by state regulators, it is fixed and not generally subject to negotiation or discounting by insurance companies
or agents. Additionally, state regulations generally prohibit carriers, agents and brokers from providing financial incentives, such as rebates, to their members in connection with the sale of health insurance. As a result, we do not currently
compete with carriers or other agents and brokers on the price of the health insurance products offered on our website. We are also currently allowed to base our revenue structure on various commissions and fees, including commissions from insurance
premiums and enrollment, monthly administrative fees and discount benefit fees. However, future laws and regulations could negatively adjust the commissions and fees we receive. If current laws or regulations change, we could be forced to reduce
prices, commissions and fees or provide rebates or other incentives for the health insurance products sold through our online platform, which would harm our business, results of operations and financial condition.
Because we use the Internet as our distribution platform, we are subject to additional insurance regulatory risks. In many cases, it is
not clear how existing insurance laws and regulations apply to Internet-related health insurance advertisements and transactions. To the extent that new laws or regulations are adopted that conflict with the way we conduct our business, or to the
extent that existing laws and regulations are interpreted adversely to us, our business, results of operations and financial condition would be harmed.
22
Our business may not grow if individuals are not informed about the availability and
accessibility of affordable health insurance.
Numerous health insurance plans and products are available to
individuals in any given market. Most of these plans and products vary by price, benefits and other policy features. Health insurance terminology and provisions are often confusing and difficult to understand. As a result, researching, selecting and
purchasing health insurance can be a complex process. We believe that this complexity has contributed to a perception held by many individuals that individual health insurance is prohibitively expensive and difficult to obtain. If individuals are
not informed about the availability and accessibility of affordable health insurance, our business may not grow and our results of operations and financial condition would be harmed.
Changes in the quality and affordability of the health insurance plans and products that carriers offer to us for sale through our
technology platform could harm our business and results of operations.
The demand for health insurance marketed
through our technology platform is affected by, among other things, the variety, quality and price of the health insurance plans and products we offer. If health insurance carriers do not continue to allow us to sell a variety of high-quality,
affordable health insurance plans and products in our markets, or if their offerings are limited or terminated as a result of consolidation in the health insurance industry, the implementation of Healthcare Reform or otherwise, our sales may
decrease and our business, results of operations and financial condition would be harmed.
If we are not able to
maintain and enhance our name recognition, our business and results of operations will be harmed.
We believe that
maintaining and enhancing our name recognition is critical to our relationships with existing members, distributors and carriers and to our ability to attract new members, distributors and carriers. The promotion of our name may
require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these marketing initiatives may become increasingly difficult and expensive. Our marketing activities may not be successful
or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur and our results of operations could be harmed. If we do not successfully maintain and enhance our
name recognition, our business may not grow and we could lose our relationships with carriers, distributors and/or members, which would harm our business, results of operations and financial condition.
In addition, we cannot be certain of the impact of media coverage on our business. If it were to be reduced, the number of distributors
selling our products could decrease, and our cost of acquiring members could increase, both of which could harm our business, results of operations and financial condition.
If individuals or carriers opt for more traditional or alternative channels for the purchase and sale of health insurance, our business will be harmed.
Our success depends in part upon widespread individual and carrier acceptance of the Internet as a marketplace for the purchase and sale
of health insurance. Individuals and carriers may choose to depend more on traditional sources, such as individual agents, or alternative sources may develop, including as a result of Healthcare Reform. Our future growth, if any, will depend in part
upon:
|
|
|
the growth of the Internet as a commerce medium generally, and as a market for individual health insurance plans and services specifically;
|
|
|
|
individuals willingness to conduct their own health insurance research;
|
|
|
|
our ability to make the process of purchasing health insurance online an attractive alternative to traditional and new means of purchasing health
insurance;
|
|
|
|
our ability to successfully and cost-effectively market our services as superior to traditional or alternative sources for health insurance to a
sufficiently large number of individuals; and
|
|
|
|
carriers willingness to use us and the Internet as a distribution channel for health insurance plans and products.
|
If individuals and carriers determine that other sources of health insurance and health insurance applications are superior, our business
will not grow and our results of operations and financial condition would be harmed.
Any legal liability, regulatory
penalties, or negative publicity for the information on our platform or that we otherwise distribute or provide will likely harm our business and results of operations.
We provide information on our platform, through our call center partners and in other ways regarding health insurance in general and the
health insurance plans and products we market and sell, including information relating to insurance premiums, coverage, benefits, provider networks, exclusions, limitations, availability, plan comparisons and insurance company ratings. A significant
amount of both automated and manual effort is required to maintain the considerable amount of insurance plan information on our platform. We also regularly provide health insurance plan information in the scripts used by our customer call center
partners. If the information we provide on our platform, through our customer call center partners or otherwise is not accurate or is construed as
23
misleading, or if we do not properly assist individuals and businesses in purchasing health insurance, members, carriers and others could attempt to hold us liable for damages, our relationships
with carriers could be terminated and regulators could attempt to subject us to penalties, revoke our licenses to transact health insurance business in a particular jurisdiction, and/or compromise the status of our licenses to transact health
insurance business in other jurisdictions, which could result in our loss of our commission revenue. In the ordinary course of operating our business, we have received complaints that the information we provided was not accurate or was misleading.
Although in the past we have resolved these complaints without significant financial cost, we cannot guarantee that we will be able to do so in the future. In addition, these types of claims could be time-consuming and expensive to defend, could
divert our managements attention and other resources and could cause a loss of confidence in our services. As a result, these claims could harm our business, results of operations and financial condition.
In the ordinary course of our business, we may receive inquiries from state regulators relating to various matters. We may in the future
become involved in litigation in the ordinary course of our business. If we are found to have violated laws or regulations, we could lose our relationship with carriers and be subject to various fines and penalties, including revocation of our
licenses to sell insurance, and our business, results of operations and financial condition would be materially harmed. We would also be harmed to the extent that related publicity damages our reputation as a trusted source of information relating
to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome. As a result, inquiries from regulators or our becoming involved in litigation could adversely affect our business, results of
operations and financial condition.
If we do not continue to attract new individual customers, we may not achieve our
revenue projections, and our results of operations would be harmed.
In order to grow our business, we must
continually attract new distributors and individual customers. Our ability to do so depends in large part on the success of our sales and marketing efforts. Potential individual customers may seek out other options for purchasing insurance.
Therefore, we must demonstrate that our products provide a viable solution for individual customers to obtain high quality coverage at an attractive price and provide a valuable business opportunity to our distributors. If we fail to provide high
quality solutions and convince individual customers and distributors of our value proposition, we may not be able to retain existing customers or attract new individual customers. Additionally, there is no guarantee that the market for our services
will grow as we expect. If the market for our services declines or develops more slowly than we expect, or if the number of individual customers or distributors that use our solutions declines or fails to increase as we expect, our revenue, results
of operations, financial condition, business and prospects could be harmed.
Advanced commission arrangements between us
and some of our distributors expose us to the credit risks of such distributors and may increase our costs and expenses, which could in turn have an adverse effect on our business, financial condition, and results of operations.
We make advanced commission payments to some of our licensed distributors in order to assist them with the cost of lead acquisition. As
of December 31, 2012, we had a prepayment balance for advanced commissions of approximately $297,000 under such contracts. Part of our strategy is to expand the practice of paying advanced commissions, so we expect such balance to increase
significantly in the future. In all such cases where we make advanced commission payments, we receive collateral and personal guarantees. At a minimum, our collateral includes a claim against all future compensation owed to the distributor for all
products sold. As a result, our claims for such payments would rank as secured claims. Depending on the amount of future compensation owed to the distributor, we could be exposed to the credit risks of our distributors in the event of their
insolvency or bankruptcy. Where the amount owed to us exceeds the value of the collateral, our claims against the defaulting distributors would rank below those of other secured creditors, which would undermine our chances of obtaining the return of
our advance commission payments. We may not be able to recover such advanced payments and we may suffer losses should the distributors fail to fulfill their sales obligations under the contracts. Accordingly, any of the above scenarios could harm
our business, results of operations and financial condition.
Seasonality may cause fluctuations in our financial
results.
The number of member enrollments through our technology platform has generally increased in our third fiscal
quarter. Conversely, we have generally experienced a decline in member enrollments in our fourth fiscal quarter. Although we believe that these trends may be influenced by an increase in new enrollments of college graduates in the third quarter and
a decrease in new enrollments due to call center closures and reduced operating hours in the fourth quarter, we believe that the sale of health insurance plans and products through the Internet is still in its early stages, and, therefore, the
reasons for these seasonal patterns are not entirely apparent. As the use of the Internet for the purchase and sale of health insurance becomes more widely accepted, other seasonality trends may develop and the existing seasonality and member
behavior that we experience may change. Any seasonality that we experience may cause fluctuations in our financial results.
24
If we are unable to successfully introduce new technology solutions or services or
fail to keep pace with advances in technology, our business, financial condition and results of operations will be adversely affected.
Our business depends on our ability to adapt to evolving technologies and industry standards and introduce new technology solutions and services accordingly. If we cannot adapt to changing technologies,
our technology solutions and services may become obsolete, and our business would suffer. Because the healthcare insurance market is constantly evolving, our existing technology may become obsolete and fail to meet the requirements of current and
potential members. Our success will depend, in part, on our ability to continue to enhance our existing technology solutions and services, develop new technology that addresses the increasingly sophisticated and varied needs of our members and
respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our online platform entails significant technical and business risks. We may not be successful in developing,
using, marketing, or maintaining new technologies effectively or adapting our technology to evolving customer requirements or emerging industry standards, and, as a result, our business and reputation could suffer. We may not be able to introduce
new technology solutions on schedule, or at all, or such solutions may not achieve market acceptance. We also engage third-party vendors to develop, maintain and enhance our technology solutions, and our ability to develop and implement new
technologies is therefore dependent on our ability to engage suitable vendors. We may also need to license software or technology from third parties in order to maintain, expand or modify our technology platform. However, there is no guarantee we
will be able to enter into such agreements on acceptable terms or at all. Moreover, competitors may develop competitive products that could adversely affect our results of operations. A failure by us to introduce new solutions or to introduce these
solutions on schedule could have an adverse effect on our business, financial condition and results of operations.
Our
failure to obtain, maintain and enforce the intellectual property rights on which our business depends could have a material adverse effect on our business, financial condition and results of operations.
We rely upon intellectual property laws in the United States, and non-disclosure, confidentiality and other types of agreements with our
employees, members and other parties, to establish, maintain and enforce our intellectual property and proprietary rights. However, any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed
or misappropriated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third-parties, or our intellectual property rights may not be sufficient to permit us to take advantage of current market trends
or otherwise to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of certain offerings or other competitive harm. Efforts to enforce our intellectual property rights may be time consuming and
costly, distract managements attention and resources and ultimately be unsuccessful. In addition, such efforts may result in our intellectual property rights being challenged, limited in scope, or declared invalid or unenforceable. Moreover,
our failure to develop and properly manage new intellectual property could adversely affect our market positions and business opportunities.
We may not be able to obtain, maintain and enforce the intellectual property rights that may be necessary to protect and grow our business and to provide us with a meaningful competitive advantage. Also,
some of our business and services may rely on technologies and software developed by or licensed from third-parties, and we may not be able to maintain our relationships with such third-parties or enter into similar relationships in the future on
reasonable terms or at all. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.
Assertions by third-parties that we violate their intellectual property rights could have a material adverse effect on our
business, financial condition and results of operations.
Third-parties may claim that we, our members, our licensees
or parties indemnified by us are infringing upon or otherwise violating their intellectual property rights. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years,
individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. Any claims that we violate a third-partys intellectual
property rights can be time consuming and costly to defend and distract managements attention and resources, even if the claims are without merit. Such claims may also require us to redesign affected products and services, enter into costly
settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. Even if we have an agreement to indemnify us against such costs,
the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology at all, license the technology on reasonable terms or substitute similar technology from another source, our revenue
and earnings could be adversely impacted.
In addition, we may use open source software in connection with our products and
services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software and/or compliance with open source license terms. As a result, we could be subject
to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to
publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for
breach of contract could have a material adverse effect on our business, financial condition and results of operations.
25
Assertions by third-parties that we violate their intellectual property rights could
therefore have a material adverse effect on our business, financial condition and results of operations.
If we fail to
effectively manage our growth, our business and results of operations could be harmed.
We have expanded our
operations significantly since 2008. This has increased the significant demands on our management, our operational and financial systems and infrastructure and other resources. If we do not effectively manage our growth, the quality of our services
could suffer. In order to successfully expand our business, we must effectively integrate, develop and motivate new employees, and we must maintain the beneficial aspects of our corporate culture. We may not be able to hire new employees quickly
enough to meet our needs. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business
and results of operations could be harmed. We also need to continue to improve our existing systems for operational and financial management, including our reporting systems, procedures and controls. These improvements could require significant
capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully manage these
processes, our business and results of operations will be harmed.
If we are unable to maintain a high level of service,
our business and prospects may be harmed.
One of the key attributes of our business is providing high quality service
to our carriers, distributors and members. We may be unable to sustain these levels of service, which would harm our reputation and our business. Alternatively, we may only be able to sustain high levels of service by significantly increasing our
operating costs, which would materially adversely affect our results of operations. The level of service we are able to provide depends on our personnel to a significant extent. Our personnel must be well-trained in our processes and able to handle
customer calls effectively and efficiently. Any inability of our personnel to meet our demand, whether due to absenteeism, training, turnover, disruptions at our facilities, bad weather, power outages or other reasons, could adversely impact our
business. If we are unable to maintain high levels of service performance, our reputation could suffer and our results of operations and prospects would be harmed.
We are subject to privacy and data protection laws governing the transmission, security and privacy of health information, which may impose restrictions on the manner in which we access personal
data and subject us to penalties if we are unable to fully comply with such laws.
Numerous federal, state and
international laws and regulations govern the collection, use, disclosure, storage and transmission of individually identifiable health information. These laws and regulations, including their interpretation by governmental agencies, are subject to
frequent change. These regulations could have a negative impact on our business, for example:
|
|
|
HIPAA and its implementing regulations were enacted to ensure that employees can retain and at times transfer their health insurance when they change
jobs, and to simplify healthcare administrative processes. The enactment of HIPAA also expanded protection of the privacy and security of personal health information and required the adoption of standards for the exchange of electronic health
information. Among the standards that the Department of Health and Human Services has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals,
security, electronic signatures, privacy and enforcement. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on us.
|
|
|
|
The HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009, also known as the Stimulus Bill, effective
February 22, 2010, sets forth health information security breach notification requirements and increased penalties for violation of HIPAA. The HITECH Act requires individual notification for all breaches, media notification of breaches of over
500 individuals and at least annual reporting of all breaches to the Department of Health and Human Services. The HITECH Act also replaced the prior penalty system of one tier of penalties of $100 per violation and an annual maximum of $25,000 with
a four-tier system of sanctions for breaches. Penalties now range from the original $100 per violation and an annual maximum of $25,000 for the first tier to a fourth-tier minimum of $50,000 per violation and an annual maximum of $1.5 million.
Failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.
|
|
|
|
Other federal and state laws restricting the use and protecting the privacy and security of individually identifiable information may apply, many of
which are not preempted by HIPAA.
|
|
|
|
Federal and state consumer protection laws are increasingly being applied by the United States Federal Trade Commission, or FTC, and states
attorneys general to regulate the collection, use, storage and disclosure of personal or individually identifiable information, through websites or otherwise, and to regulate the presentation of website content.
|
26
We are required to comply with federal and state laws governing the transmission, security
and privacy of individually identifiable health information that we may obtain or have access to in connection with the provision of our services. Despite the security measures that we have in place to ensure compliance with privacy and data
protection laws, our facilities and systems, and those of our third-party vendors and subcontractors, are vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and human errors or other
similar events. Due to the recent enactment of the HITECH Act, we are not able to predict the extent of the impact such incidents may have on our business. Our failure to comply may result in criminal and civil liability because the potential for
enforcement action against business associates is now greater. Enforcement actions against us could be costly and could interrupt regular operations, which may adversely affect our business. While we have not received any notices of violation of the
applicable privacy and data protection laws and believe we are in compliance with such laws, there can be no assurance that we will not receive such notices in the future.
Under the HITECH Act, as a business associate we may also be liable for privacy and security breaches and failures of our subcontractors. Even though we provide for appropriate protections through our
agreements with our subcontractors, we still have limited control over their actions and practices. A breach of privacy or security of individually identifiable health information by a subcontractor may result in an enforcement action, including
criminal and civil liability, against us. In addition, numerous other federal and state laws protect the confidentiality of individually identifiable information as well as employee personal information, including state medical privacy laws, state
social security number protection laws, and federal and state consumer protection laws. These various laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies, creating complex
compliance issues for us and our members and potentially exposing us to additional expense, adverse publicity and liability, any of which could adversely affect our business.
Our business is subject to online security risks, and if we are unable to safeguard the security and privacy of confidential data, our reputation and business will be harmed.
Our services involve the collection and storage of confidential information of members and the transmission of this information to
carriers. For example, we collect names, addresses, social security, bank account and credit card numbers, and information regarding the medical history of members in connection with their applications for insurance. In certain cases such
information is provided to third-parties, for example to the service providers who provide hosting services for our technology platform, and we may therefore be unable to control the use of such information or the security protections employed by
such third-parties. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches. Despite our implementation of security measures, techniques used to
obtain unauthorized access or to sabotage systems change frequently. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any compromise or perceived compromise of our security (or the security
of our third-party service providers who have access to our members confidential information) could damage our reputation and our relationship with our members, distributors and carriers, could reduce demand for our services and could subject
us to significant liability as well as regulatory action. In addition, in the event that new data security laws are implemented, or our carrier or other partners determine to impose new requirements on us relating to data security, we may not be
able to timely comply with such requirements, or such requirements may not be compatible with our current processes. Changing our processes could be time consuming and expensive, and failure to timely implement required changes could result in our
inability to sell health insurance plans and products in a particular jurisdiction or for a particular carrier, or subject us to liability for non-compliance.
Our services present the potential for embezzlement, identity theft or other similar illegal behavior by our employees or subcontractors with respect to third-parties.
Among other things, our services involve handling information from members, including credit card information and bank account
information. Our services also involve the use and disclosure of personal information that could be used to impersonate third-parties or otherwise gain access to their data or funds. If any of our employees or subcontractors takes, converts or
misuses such funds, documents or data, we could be liable for damages, and our business reputation could be damaged. In addition, we could be perceived to have facilitated or participated in illegal misappropriation of funds, documents or data and
therefore be subject to civil or criminal liability. Any such illegal activity by our employees or subcontractors could have an adverse effect on our business, financial condition and results of operations.
System failures or capacity constraints could harm our business and results of operations.
The performance, reliability and availability of our technology platform, customer service call center and underlying network
infrastructures are critical to our financial results and our relationship with members, distributors and insurance carriers. Although we regularly attempt to enhance and maintain our technology platform, customer service call center and system
infrastructure, system failures and interruptions may occur if we are unsuccessful in these efforts or experience difficulties with transitioning existing systems to upgraded systems, if we are unable to accurately project the rate or timing of
increases in our platform traffic or customer service call center call volume or for other reasons, some of which are completely outside our control. Significant failures and interruptions, particularly during peak enrollment periods, could harm our
business, results of operations and financial condition.
27
We rely in part upon third-party vendors, including data center and bandwidth providers, to
operate and maintain our technology platform. We cannot predict whether additional network capacity will be available from these vendors as we need it, and our network or our suppliers networks might be unable to achieve or maintain a
sufficiently high capacity of data transmission to allow us to process health insurance applications in a timely manner or effectively download data, especially if our platform traffic increases. Any system failure that causes an interruption in, or
decreases the responsiveness of, our services could impair our revenue-generating capabilities, harm our image and subject us to potential liability. Our database and systems are vulnerable to damage or interruption from human error, earthquakes,
fire, floods, power loss, telecommunications failures, physical or electronic break-ins, computer viruses, acts of terrorism, other attempts to harm our systems and similar events.
We depend upon third-parties, including telephone service providers and third-party software providers, to operate our customer service
call center. Any failure of the systems upon which we rely in the operation of our customer service call center could negatively impact sales as well as our relationship with members, which could harm our business, results of operations and
financial condition.
We rely on third-party vendors to develop, host, maintain, service and enhance our technology
platform.
We rely on third-party vendors to develop, host, maintain, support and enhance our technology platform. In
particular, we are party to an agreement with BimSym pursuant to which BimSym provides various professional services relating to our A.R.I.E.S. technology platform, including hosting, support, maintenance and development services. Our ability to
offer our services and operate our business is therefore dependent on maintaining our relationships with third-party vendors, particularly BimSym, and entering into new relationships to meet the changing needs of our business. Any deterioration
in our relationships with such vendors, or our failure to enter into agreements with vendors in the future would harm our business, results of operations and financial condition. If our vendors are unable or unwilling to provide the services
necessary to support our business, or if our agreements with such vendors are terminated, our operations could be significantly disrupted. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to
ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business.
Carriers and distributors depend upon third-party service providers to access our online platform, and our business and results of operations could be harmed as a result of technical difficulties
experienced by these service providers.
Carriers and distributors using our online platform depend upon Internet and
other service providers for access to our platform. Many of these service providers have experienced significant outages, delays and other difficulties in the past and could experience them in the future. Any significant interruption in access to
our technology platform or increase in our platforms response time as a result of these difficulties could damage our relationship with carriers, distributors and existing and potential members and could harm our business, results of
operations and financial condition.
Economic conditions and other factors beyond our control may negatively impact our
business, results of operations and financial condition.
Our revenue depends upon demand for our insurance products,
which can be influenced by a variety of factors beyond our control. We have no control over the economic and other factors that influence such demand. We cannot be certain of the future impact that the recent recession will have on our business. A
further softening of demand for our products and the services offered by us, whether caused by changes in individual preferences or the regulated environment in which we operate, or by a weak economy, including as a result of recent disruptions in
the global financial markets or a decrease in general consumer confidence, will result in decreased revenue and growth. Members may attempt to reduce expenses by canceling existing plans and products purchased through us, not purchasing new plans
and products through us or purchasing plans with lower premiums for which we receive lower commissions. A continuing negative economic environment could also adversely impact the carriers whose plans and products are offered on our platform, and
they may, among other things, determine to reduce their commission rates, increase premiums or reduce benefits, any of which could negatively impact our business, results of operations and financial condition.
To the extent the economy or other factors adversely impact our member retention, the number or type of insurance applications submitted
through us and that are approved by carriers, or the commissions that we receive from carriers, our rate of growth will decline and our business and results of operations will be harmed.
The loss of any member of our management team and our inability to make up for such loss with a qualified replacement could harm
our business.
Competition for qualified management in our industry is intense. Many of the companies with which we
compete for management personnel have greater financial and other resources than we do or are located in geographic areas which may be considered by some to be more desirable places to live. If we are not able to retain any of our key management
personnel, our business could be harmed.
28
Our acquisitions and other strategic transactions may be difficult to integrate,
divert management resources, result in unanticipated costs or dilute our stockholders.
Part of our continuing
business strategy is to acquire or invest in, companies, products or technologies that complement our current products, enhance our market coverage, technical capabilities or production capacity, or offer growth opportunities or make other strategic
transactions. For example, in March 2013, we completed a transaction with TSG Agency, LLC (TSG) and its principal, Ivan Spinner (Spinner), which is further described in Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital ResourcesGeneral. Such acquisitions could pose numerous risks to our operations, including:
|
|
|
difficulty integrating the purchased operations, technologies or products;
|
|
|
|
incurring substantial unanticipated integration costs;
|
|
|
|
assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt
our ongoing business;
|
|
|
|
acquisitions could result in the loss of key employees, particularly those of the acquired operations;
|
|
|
|
difficulty retaining or developing the acquired businesses customers;
|
|
|
|
acquisitions could adversely affect our existing business relationships with suppliers and members;
|
|
|
|
failing to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and
|
|
|
|
incurring liabilities from the acquired businesses for infringement of intellectual property rights or other claims, and we may not be successful in
seeking indemnification for such liabilities or claims.
|
The TSG transaction poses some of these risks,
including the potential that TSG and Spinner might not generate the revenues that we anticipate and that we might not retain Spinner for a sufficient time period to realize anticipated benefits.
In connection with these acquisitions or investments, we could incur debt, amortization expenses related to intangible assets, large and
immediate write-offs, assume liabilities or issue stock that would dilute our current stockholders percentage of ownership. We may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such
acquisition without a material adverse effect on our business, financial condition and results of operations.
The
requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an emerging growth company.
We are required to comply with various regulatory and reporting requirements, including those required by the Securities and Exchange
Commission (the SEC). Complying with these reporting and other regulatory requirements will be time-consuming and will result in increased costs to us and could have a negative effect on our business, financial condition and results of
operations.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934 (as
amended, the Exchange Act) and the requirements of the Sarbanes-Oxley Act of 2002 (as amended, the Sarbanes-Oxley Act). These requirements may place a strain on our systems and resources. The Exchange Act requires that we
file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To
maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and
processes for the purpose of addressing the standards and requirements applicable to public companies. Sustaining our growth also will require us to commit additional management, operational and financial resources to identify new professionals to
join our company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert managements attention from other business concerns, which could have a material adverse effect on our
business, financial condition and results of operations.
As an emerging growth company as defined in the
Jumpstart Our Business Startups Act of 2012 (the JOBS Act), we intend to take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor
attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. In addition, we have elected under the JOBS Act to delay
adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.
When these exemptions cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of
additional costs we may incur as a result of becoming a public company or the timing of such costs.
Risks Related to Our Structure
We are a holding company and our only material asset is our interest in Health Plan Intermediaries Holdings, LLC
and, accordingly, we are dependent upon distributions from Health Plan Intermediaries Holdings, LLC to pay taxes and other expenses.
We are a holding company and have no material assets other than our ownership of Series A Membership Interests of Health Plan Intermediaries Holdings, LLC. We have no independent means of generating
revenue. Health Plan Intermediaries Holdings, LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not itself be subject to U.S. federal income tax. Instead,
29
its net taxable income is generally allocated to its members, including us,
pro rata
according to the number of membership interests each member owns. Accordingly, we incur income
taxes on our proportionate share of any net taxable income of Health Plan Intermediaries Holdings, LLC and also incur expenses related to our operations. We intend to cause Health Plan Intermediaries Holdings, LLC to distribute cash to its
members, including us, in an amount at least equal to the amount necessary to cover their respective tax liabilities, if any, with respect to their allocable share of the net income of Health Plan Intermediaries Holdings, LLC and to cover dividends,
if any, declared by us, as well as any payments due under the tax receivable agreement, as described below. To the extent that we need funds to pay our tax or other liabilities or to fund our operations, and Health Plan Intermediaries Holdings,
LLC is restricted from making distributions to us under applicable agreements, laws or regulations or does not have sufficient cash to make these distributions, we may have to borrow funds to meet these obligations and operate our business, and our
liquidity and financial condition could be materially adversely affected. To the extent that we are unable to make payments under the income tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid.
We will be required to pay the existing and certain future holders of Series B Membership Interests most of the tax
benefits that we may receive as a result of the purchase of Series B Membership Interests with the net proceeds of the sale of over-allotment shares, future exchanges of Series B Membership Interests for our Class A common stock and payments
made under the tax receivable agreement itself, and the amounts we pay could be substantial.
We expect that the
purchase of Series B Membership Interests (together with an equal number of shares of our Class B common stock) with the net proceeds of the sale of over-allotment shares, as well as any future exchanges of Series B Membership Interests
(together with an equal number of shares of our Class B common stock) for shares of our Class A common stock, will result in increases in the tax basis in our share of the tangible and intangible assets of Health Plan Intermediaries Holdings,
LLC. Any such increases in tax basis could reduce the amount of tax that we would otherwise be required to pay in the future.
We entered into a tax receivable agreement with the members of Health Plan Intermediaries Holdings, LLC (Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub, LLC, which are beneficially
owned by Mr. Kosloske) and certain future members of Health Plan Intermediaries Holdings, LLC, pursuant to which we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we realize (or are
deemed to realize in the case of an early termination payment by us, a change in control or a material breach by us of our obligations under the tax receivable agreement, as discussed below) as a result of these possible increases in tax basis
resulting from our purchases or exchanges of Series B Membership Interests as well as certain other benefits attributable to payments under the tax receivable agreement itself. Any actual increases in tax basis, as well as the amount and timing
of any payments under the tax receivable agreement, cannot be predicted reliably at this time. The amount of any such increases and payments will vary depending upon a number of factors, including the timing of exchanges, the price of our
Class A common stock at the time of the exchanges, the amount, character and timing of our income and the tax rates then applicable. The payments that we may be required to make pursuant to the tax receivable agreement could be substantial
for periods in which we generate taxable income. Assuming no material changes in the relevant tax law and based on our current operating plan and other assumptions, including our estimate of the tax basis of our assets as of December 31,
2012, if we acquired all of the Series B Membership Interests in taxable transactions for a price of $14.00 per Series B Membership Interest, we estimate that the maximum amount that we would be required to pay under the tax receivable
agreement could be approximately $53,001,000. The actual amount may materially differ from this hypothetical amount, as potential future payments will be calculated using the market value of our Class A common stock at the time of relevant
exchange and prevailing tax rates in future years and will be dependent on us generating sufficient future taxable income to realize the benefit. See Item 1. BusinessOur History and the Reorganization of Our Corporate
StructureTax Receivable Agreement.
In addition, the tax receivable agreement provides that in the case that we
exercise our right to early termination of the tax receivable agreement or in the case of a change in control or a material breach by us of our obligations under the tax receivable agreement, the tax receivable agreement will terminate, and we will
be required to make a payment equal to the present value of future payments under the tax receivable agreement, which payment would be based on certain assumptions, including those relating to our future taxable income. In these situations, our
obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other
changes of control. These provisions of the tax receivable agreement may result in situations where Mr. Kosloske may have interests that differ from or are in addition to those of other shareholders. Because we are controlled by
Mr. Kosloske, Mr. Kosloske will have effective control over the outcome of votes on all matters requiring approval by our stockholders and accordingly actions that affect such obligations under the tax receivable agreement
may be taken even if other stockholders oppose them.
If the Internal Revenue Service successfully challenges the tax basis
increases, we will not be reimbursed for any payments made under the tax receivable agreement (although future payments under the tax receivable agreement, if any, would be adjusted to reflect the result of any such successful challenge by the
Internal Revenue Service). As a result, in certain circumstances, we could be required to make payments under the tax receivable agreement in excess of our cash tax savings.
30
We may not be able to realize all or a portion of the tax benefits that are expected
to result from the purchase of Series B Membership Interests with the net proceeds of the sale of over-allotment shares, future exchanges of Series B Membership Interests for our Class A common stock and payments made under the tax receivable
agreement itself.
Our ability to benefit from any depreciation or amortization deductions or to realize other tax
benefits that we currently expect to be available as a result of the increases in tax basis created by the purchase of Series B Membership Interests (together with an equal number of shares of our Class B common stock) with the net proceeds of the
sale of any over-allotment shares, as well as any future exchanges of Series B Membership Interests (together with an equal number of shares of our Class B common stock) for our Class A common stock, and our ability to realize certain other tax
benefits attributable to payments under the tax receivable agreement itself depend on a number of assumptions, including that we earn sufficient taxable income each year during the period over which such deductions are available and that there are
no adverse changes in applicable law or regulations. If our actual taxable income were insufficient and/or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our
cash flows and stockholders equity could be negatively affected.
Risks Related to Ownership of Our Class A Common Stock
There may not be an active, liquid trading market for our Class A common stock.
Prior to February 2013, there was no public market for shares of our Class A common stock. We cannot predict the extent to which
investor interest in our Company will lead to the development of an active trading market on the NASDAQ Global Market or how liquid that market may become. If an active trading market does not develop, you may have difficulty selling any shares of
our Class A common stock that you purchase.
We expect that our stock price will fluctuate significantly, and you
may not be able to resell your shares at or above the purchase price.
The trading price of our Class A common
stock is likely to be volatile and subject to wide price fluctuations in response to various factors, including:
|
|
|
market conditions in the broader stock market in general, or in our industry in particular;
|
|
|
|
actual or anticipated fluctuations in our quarterly financial and results of operations;
|
|
|
|
our ability to satisfy our ongoing capital needs and unanticipated cash requirements, particularly with respect to our advanced commissions structure;
|
|
|
|
additional indebtedness incurred in the future;
|
|
|
|
introduction of new products and services by us or our competitors;
|
|
|
|
issuance of new or changed securities analysts reports or recommendations;
|
|
|
|
sales of large blocks of our stock;
|
|
|
|
additions or departures of key personnel;
|
|
|
|
regulatory developments;
|
|
|
|
litigation and governmental investigations; and
|
|
|
|
economic and political conditions or events.
|
These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of
Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action
litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our
business.
The trading market for our Class A common stock may also be influenced by the research and reports that
industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our stock, or if our results of operations do not meet their expectations, our stock price could decline.
If a substantial number of shares become available for sale and are sold in a short period of time, the market price of our
Class A common stock could decline.
If our existing stockholders sell substantial amounts of our Class A
common stock in the public market, the market price of our Class A common stock could decrease significantly. The perception in the public market that our existing stockholders might sell
31
shares of Class A common stock could also depress our market price. As of March 27, 2013, we have 5,295,167 shares of Class A common stock outstanding. In addition, some of
our employees and directors hold stock options that are subject to lock-up agreements and Rule 144 holding period requirements. The market price of shares of our Class A common stock may drop significantly when the restrictions on resale by our
existing stockholders lapse. A decline in the price of shares of our Class A common stock might impede our ability to raise capital through the issuance of additional shares of our Class A common stock or other equity securities.
We are a controlled company within the meaning of the rules of the NASDAQ Global Market and, as a result,
qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Entities controlled by Michael W. Kosloske, our Chairman, President and Chief Executive Officer, control a majority of the combined
voting power of all classes of our voting stock. As a result, we are a controlled company within the meaning of the corporate governance standards of the NASDAQ Global Market. Under NASDAQ Global Market rules, a company of which
more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including:
|
|
|
the requirement that a majority of the board of directors consist of independent directors;
|
|
|
|
the requirement that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter
addressing the committees purpose and responsibilities;
|
|
|
|
the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the
committees purpose and responsibilities; and
|
|
|
|
the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
|
We intend to utilize these exemptions if we continue to qualify as a controlled company. If we
utilize these exemptions we will not have a majority of independent directors and our nominating and corporate governance and compensation committees will not consist entirely of independent directors and such committees will not be subject to
annual performance evaluations. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Global Market.
We are controlled by entities associated with Mr. Kosloske, whose interests may differ from those of our public stockholders.
We are controlled by entities associated with Mr. Kosloske. Mr. Kosloske beneficially owns in the
aggregate approximately 62.4% of the combined voting power of our common stock. As a result of this ownership, Mr. Kosloske has effective control over the outcome of votes on all matters requiring approval by our stockholders, including the
election of directors, the adoption of amendments to our certificate of incorporation and bylaws and approval of a sale of the company and other significant corporate transactions, including such corporate transactions that may affect our
obligations under the tax receivable agreement. See We will be required to pay the existing and certain future holders of Series B Membership Interests most of the tax benefits that we may receive as a result of the purchase of Series B
Membership Interests with the net proceeds of the sale of over-allotment shares, future exchanges of Series B Membership Interests for our Class A common stock and payments made under the tax receivable agreement itself, and the amounts we pay
could be substantial. Mr. Kosloske can also take actions that have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from
receiving a premium for their shares. These actions may be taken even if other stockholders oppose them.
The market
price of our Class A common stock could decline due to the large number of shares of Class A common stock eligible for future sale upon the exchange of Series B Membership Interests.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A
common stock eligible for future sale upon the exchange of Series B Membership Interests (together with an equal number of shares of our Class B common stock), or the perception that such sales could occur. These sales, or the possibility that these
sales may occur, may also make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.
As of March 27, 2013, 5,295,167 Series A Membership Interests and 8,566,667 Series B Membership Interests of Health Plan Intermediaries Holdings, LLC are outstanding. Each Series B Membership
Interest, together with one share of our Class B common stock, is exchangeable for one share of Class A common stock. We have entered into a registration rights agreement with Health Plan Intermediaries, LLC and Health Plan Intermediaries Sub,
LLC pursuant to which we granted them registration rights with respect to their shares of Class A common stock delivered in exchange for their Series B Membership Interests. See
Item 13. Certain Relationships and Related
Transactions and Director IndependenceExchange Agreement.
32
Some provisions of Delaware law, our amended and restated certificate of incorporation
and amended and restated bylaws and the beneficial ownership of a majority of our shares by one person may deter third-parties from acquiring us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide for, among other things:
|
|
|
restrictions on the ability of our stockholders to fill a vacancy on the board of directors;
|
|
|
|
prohibit stockholder action by written consent after the date on which Mr. Kosloske ceases to beneficially own at least a majority of all of the
outstanding shares of our capital stock entitled to vote;
|
|
|
|
prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
|
|
|
|
provide that special meetings of stockholders may be called only by the board of directors, the chairman of the board of directors or the chief
executive officer; provided, however, if Mr. Kosloske beneficially owns at least a majority of all of the outstanding shares of our capital stock entitled to vote, special meetings of stockholders may be called by the holders of a majority of
the total voting power of our then outstanding capital stock;
|
|
|
|
establish advance notice procedures for the nomination of candidates for election as directors or for proposing matters that can be acted upon at
stockholder meetings;
|
|
|
|
provide that on and after the date Mr. Kosloske collectively ceases to beneficially own a majority of all of the outstanding shares of our capital
stock entitled to vote, (a) directors may be removed only for cause and only upon the affirmative vote of holders of at least 75% of all of the outstanding shares of our capital stock entitled to vote, and (b) certain provisions of our
amended and restated certificate of incorporation may only be amended upon the affirmative vote of holders of at least 75% of all of the outstanding shares of our capital stock entitled to vote; and
|
|
|
|
the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder
approval. As of March 27, 2013, Mr. Kosloske beneficially owned 62.4% of the combined voting power of our common stock.
|
These anti-takeover defenses, the beneficial ownership of a majority of our shares by one person and other factors could discourage, delay or prevent a transaction involving a change in control of our
company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions that you desire.
We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to repay indebtedness and to fund the development
and growth of our business. We do not intend to pay any dividends to holders of our Class A common stock. As a result, capital appreciation in the price of our Class A common stock, if any, will be your only source of gain on an investment
in our Class A common stock.
We have identified a material weakness in our internal control over financial
reporting that, if not corrected, could result in material misstatements in our financial statements.
In connection
with the preparation of our financial statements for the years ended December 31, 2012 and 2011 and for the nine months ended September 30, 2012, we identified a certain matter involving our internal control over financial reporting that
constitutes a material weakness under standards established by the Public Company Accounting Oversight Board (PCAOB). The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of a companys annual or interim financial statements will not be prevented or detected on a timely basis.
We identified a material weakness where we did not have effective controls over the design and operation of the financial statement close
process, which process impacts most of our significant accounts included in the financial statements. The deficiencies in the design and operation of the financial statement close process that resulted in the material weakness included the
following:
|
|
|
lack of a formal process for reviewing period-end cutoff of revenues and expenses to ensure amounts are captured in the period earned or incurred under
the accrual basis of accounting;
|
|
|
|
no process in place to ensure all expenses incurred during the period are accrued as of the month-end date, including expenses for which estimates are
required;
|
|
|
|
absence of a mechanism through which the accounting implications of significant or unusual events and transactions are formally evaluated; and
|
|
|
|
no process to ensure formally executed agreements regarding all significant arrangements with third parties and others are obtained.
|
33
We are taking steps to address this material weakness by hiring additional
personnel with technical accounting expertise and by implementing enhanced training for our finance and accounting personnel to familiarize them with our accounting policies. However, the material weakness will be ongoing until these controls are
fully implemented and we will not be able to confirm that we have remediated this material weakness until our newly implemented procedures have been working for a sufficient period of time. As a result of this and similar activities,
managements attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
If the remedial policies and procedures we implement and resources we hire are insufficient to address the identified material weakness,
or if additional material weaknesses or significant deficiencies in our internal controls are discovered in the future, we may fail to meet our future reporting obligations, our financial statements may contain material misstatements and our
operating results may be adversely affected.
Our internal controls over financial reporting may not be effective and
our independent registered public accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.
We are not currently required to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act and are therefore not
required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. We will be required, pursuant to the Exchange Act, to furnish a report by management on, among other things, the
effectiveness of our internal control over financial reporting for the first fiscal year beginning after February 13, 2013, the effective date of our initial public offering.
When evaluating our internal controls over financial reporting, we may identify material weaknesses that we may not be able to remediate
in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude, on an ongoing basis, that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley
Act. We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our operations. If we are not able to implement the requirements of Section 404 of the Sarbanes-Oxley
Act in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in
the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash
flows.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements
applicable to emerging growth companies will make our Class A common stock less attractive to investors.
We are
an emerging growth company, as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth
companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, which may increase the risk that weaknesses or deficiencies in our internal control
over financial reporting go undetected, and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, which may make it more difficult for investors and securities analysts to evaluate our Company.
In addition, we have elected under the JOBS Act to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As a result of this election, our
financial statements may not be comparable to companies that comply with public company effective dates. We cannot predict if investors will find our Class A common stock less attractive if we rely on these exemptions. If some investors find
our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no
longer an emerging growth company, which in certain circumstances could be up to five years.
We have broad discretion
in using the net proceeds of our recent initial public offering, and we may not effectively expend the proceeds.
We
used the net proceeds of our recent initial public offering to repay all of the outstanding debt, and intend to use the remaining net proceeds to provide the funds necessary to expand our advanced commission structure and for general corporate
purposes, including acquisitions. We have significant flexibility and broad discretion in applying the net proceeds, and we may not apply them effectively. Our management might not be able to yield a significant return, if any, on any investment of
the net proceeds. You do not have the opportunity to influence our decisions on how to use the net proceeds.
Our
business and stock price may suffer as a result of our lack of public company operating experience.
We were a
privately-held company from the beginning of our operations in 2008 until February 2013. Our lack of public company operating experience may make it difficult to forecast and evaluate our future prospects. If we are unable to execute our business
strategy, either as a result of our inability to effectively manage our business in a public company environment or for any other reason, our prospects, financial condition and results of operations may be harmed.
34