ITEM 1ARISK FACTORS
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 government regulations related to healthcare 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 the PPACA. Accordingly, short-term limited duration plans are exempt under PPACA 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 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
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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 three months ended March 31, 2013, Starr Indemnity & Liability Company
accounted for 31% of our premium equivalents, United States Fire accounted for 25% of our premium equivalents, and Companion Life accounted for 33% 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.
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.
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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:
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undertake more extensive marketing campaigns for their brands and services;
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devote more resources to website and systems development;
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negotiate more favorable commission rates; and
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better attract potential employees, marketing partners and third-party service providers.
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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.
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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:
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increasing our competition;
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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;
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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;
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causing insurance carriers to change the benefits and/or premiums for the plans and products they sell;
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causing insurance carriers to reduce the amount they pay for our services or change their relationships with us in other ways;
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causing STM policies to be subject to MLR threshold requirements; or
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causing STM policies to be subject to must carry pre-existing condition requirements.
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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.
Based upon our understanding of the Health Reform rules, many of the health insurance products that we sell will not be deemed qualified
insurance policies under the PPACA requirements. These requirements impose a penalty upon individuals and families that do not purchase qualified policies. However, based upon industry sources and our own analysis, we believe that the cost
of the insurance policies that we sell, together with any penalties that individuals or families may be required to pay, will be less than the cost of the guaranteed-issue health insurance policies that will be available through health exchanges
established in accordance with PPACA.
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:
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grant and revoke licenses to transact insurance business;
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conduct inquiries into the insurance-related activities and conduct of agents and agencies;
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require and regulate disclosure in connection with the sale and solicitation of health insurance;
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authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published and an insurance policy sold;
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determine which entities can be paid commissions from carriers;
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regulate the content of insurance-related advertisements, including web pages;
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approve policy forms, require specific benefits and benefit levels and regulate premium rates;
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impose fines and other penalties; and
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impose continuing education requirements on agents and employees.
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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.
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.
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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:
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the growth of the Internet as a commerce medium generally, and as a market for individual health insurance plans and services specifically;
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individuals willingness to conduct their own health insurance research;
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our ability to make the process of purchasing health insurance online an attractive alternative to traditional and new means of purchasing health
insurance;
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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
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carriers willingness to use us and the Internet as a distribution channel for health insurance plans and products.
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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 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.
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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 March 31, 2013, we had a prepayment balance for advanced
commissions of approximately $539,000 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.
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
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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.
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.
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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:
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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 and its principal, Ivan Spinner, which is further described above in Item 2. Managements Discussion and Analysis of Financial Condition and Results
of OperationsLiquidity and Capital ResourcesGeneral. Such acquisitions and other strategic transactions could pose numerous risks to our operations, including:
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difficulty integrating the purchased operations, technologies or products;
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incurring substantial unanticipated integration costs;
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assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt
our ongoing business;
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acquisitions could result in the loss of key employees, particularly those of the acquired operations;
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difficulty retaining or developing the acquired businesses customers;
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acquisitions could adversely affect our existing business relationships with suppliers and members;
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failing to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and
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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.
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The TSG transaction poses some of these risks,
including the potential that TSG and Mr. 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 other strategic transactions, 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.
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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, 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. See notes 1 and 10 of the accompanying consolidated financial statements for further information on the tax 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
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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.
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:
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market conditions in the broader stock market in general, or in our industry in particular;
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actual or anticipated fluctuations in our quarterly financial and results of operations;
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our ability to satisfy our ongoing capital needs and unanticipated cash requirements, particularly with respect to our advanced commissions structure;
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additional indebtedness incurred in the future;
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introduction of new products and services by us or our competitors;
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issuance of new or changed securities analysts reports or recommendations;
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sales of large blocks of our stock;
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a relatively small number and percentage of shares available for active trading;
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additions or departures of key personnel;
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regulatory developments;
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litigation and governmental investigations; and
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economic and political conditions or events.
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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
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affect the liquidity of our Class A common stock. In addition, when the market price of a stock has been volatile, holders of that stock have at times 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 shares of Class A common stock could also depress
our market price. As of May 10, 2013, we have 5,295,167 shares of Class A common stock outstanding of which 4,766,667 shares are available for active trading. 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:
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the requirement that a majority of the board of directors consist of independent directors;
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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;
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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
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the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
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We intend to utilize these exemptions if we continue to qualify as a controlled company.
Although we currently have a majority of independent directors, our nominating and corporate governance and compensation committees do 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 61.8% of the combined voting power of our common stock based on the number of shares of Class A common stock outstanding as of March 31, 2013. 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
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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
May 10, 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.
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:
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restrictions on the ability of our stockholders to fill a vacancy on the board of directors;
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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;
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prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;
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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;
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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;
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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
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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 May 10, 2013, Mr. Kosloske beneficially owned 61.8% of the combined voting power of our common stock.
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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.
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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 and the three months ended March 31, 2013, 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:
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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;
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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;
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absence of a mechanism through which the accounting implications of significant, unusual or non-routine events and transactions are formally evaluated;
and
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no process to ensure formally executed agreements regarding all significant arrangements with third parties and others are obtained.
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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(b) 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
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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.