Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “expect,” “anticipate,” “believe,” “estimate,” “target,” “goal,” “project,” “hope,” “intend,” “plan,” “seek,” “continue,” “may,” “could,” “should,” “might,” “forecast,” and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements include, among other things, statements regarding our expectations relating to approved members, new paying members and estimated membership; our estimates regarding the constrained lifetime value of commissions; our expectations relating to revenue, operating costs, cash flows and profitability; our expectations regarding our strategy and investments, including investments in our e-commerce and call center capabilities, agent training and quality assurance efforts; our expectations regarding our Medicare business, including market opportunity, consumer demand and our competitive advantage; our expectations regarding our individual and family business, including anticipated trends and our ability to enroll individuals and families into qualified health plans; the impact of future and existing healthcare laws and regulations on our business; the expected impact of the COVID-19 on our business; our expectations regarding commission rates, payment rates, conversion rates, plan termination rates and duration, membership retention rates and membership acquisition costs; our expectations regarding health insurance agents licensing and productivity; our expectations relating to the seasonality of our business; expected competition from government-run health insurance exchanges and other sources; our expectations relating to marketing and advertising expense and expected contributions from our marketing and strategic partnership channels; the timing of our receipt of commission and other payments; our critical accounting policies and related estimates; liquidity and capital needs; political, legislative, regulatory and legal challenges; the merits or potential impact of any lawsuits filed against us; as well as other statements regarding our future operations, financial condition, prospects and business strategies.
We have based these forward-looking statements on our current expectations about future events. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including our ability to retain existing members and enroll new members during the annual healthcare open enrollment period, the Medicare annual enrollment period and other special enrollment period; changes in laws, regulations and guidelines, including in connection with healthcare reform or with respect to the marketing and sale of Medicare plans; competition, including competition from government-run health insurance exchanges and other sources; the seasonality of our business and the fluctuation of our operating results; our ability to accurately estimate membership, lifetime value of commissions and commissions receivable; changes in product offerings among carriers on our ecommerce platform and the resulting impact on our commission revenue; our ability to execute on our growth strategy in the Medicare market; the continued impact of the COVID-19 pandemic on our operations, business, financial condition and growth prospects, as well as on the general economy; changes in our management and key employees; exposure to security risks and our ability to safeguard the security and privacy of confidential data; our relationships with health insurance carriers; customer concentration and consolidation of the health insurance industry; our success in marketing and selling health insurance plans and our unit cost of acquisition; our ability to hire, train, retain and ensure the productivity of licensed health insurance agents and other employees; the need for health insurance carrier and regulatory approvals in connection with the marketing of Medicare-related insurance products; changes in the market for private health insurance; consumer satisfaction of our service and actions we take to improve the quality of enrollments; changes in member conversion rates; changes in commission rates; our ability to sell qualified health insurance plans to subsidy-eligible individuals and to enroll subsidy-eligible individuals through government-run health insurance exchanges; our ability to maintain and enhance our brand identity; our ability to derive desired benefits from investments in our business, including membership growth and retention initiatives; reliance on marketing partners; the impact of our direct-to-consumer email, telephone and television marketing efforts; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; dependence on our operations in China; the restrictions in our debt obligations; the restrictions in our investment agreement with H.I.G; compliance with insurance and other laws and regulations; the outcome of litigation in which we are involved; and the performance, reliability and availability of our information technology systems, ecommerce platform and underlying network infrastructure and those identified under the heading “Risk Factors” in Part II, Item 1A. of this report and those discussed in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. Except as required by applicable law, we do not undertake, and specifically decline, any obligation to update any of these statements or to publicly announce the results of any revisions to any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. The following discussion should be read in conjunction with our Annual Report on Form
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10-K as filed with the Securities and Exchange Commission in February 2021 and amended in April 2021, and the audited consolidated financial statements and related notes contained therein.
Overview
We are a leading private health insurance marketplace with a technology and service platform that provides consumer engagement, education and health insurance enrollment solutions. Our mission is to connect every person with the highest quality, most affordable health insurance and Medicare plans for their life circumstances. Our platform integrates proprietary and third-party developed educational content regarding health insurance plans with decision support tools to aid consumers in what has traditionally been a confusing and opaque health insurance purchasing process, and to help them obtain the health insurance products that meet their individual health and economic needs. Our omnichannel consumer engagement platform enables consumers to use our services online, through interactive chat, or by telephone with a licensed insurance agent. We have created a marketplace that offers consumers a broad choice of insurance products that include thousands of Medicare Advantage, Medicare Supplement, Medicare Part D prescription drug, individual and family, small business and other ancillary health insurance products from over 200 health insurance carriers across all fifty states and the District of Columbia.
COVID-19 Impact Updates
As of June 30, 2021, all of our offices have reopened with additional safety and social distancing measures. eHealth currently plans to operate with a combination of remote and in-office work in the United States until the end of 2021. All of our U.S. offices are currently open with reduced capacity as we continue to monitor the status of COVID-19. We currently plan to increase the number of in-office employees later this year depending upon the COVID-19 vaccination status of our employees as we intend to have only vaccinated employees in the office to promote the health and safety of our employees. The extent of the impact of the COVID-19 pandemic on our operational and financial performance will depend on future developments, including the duration, spread and severity of the pandemic, the availability, effectiveness and uptake of vaccines for COVID-19, the emergence of new variants of COVID-19 and whether existing vaccines are effective with respect to such variants, the actions to contain the disease or mitigate its impact, and the duration, timing and severity of the impact on consumer behavior, including any recession resulting from the pandemic, all of which are unpredictable. The recent surge in the COVID-19 cases caused by the COVID-19 Delta variant is already having an impact as employees in our California offices are now required by county order to wear masks while in our offices regardless of vaccination status. The emergence of Delta and other variants could cause us to alter our operations and plans for in-office and remote work. See Risk Factors in Part II, Item 1A of this Quarterly Report on Form 10-Q for a discussion of risks related to the COVID-19 pandemic.
Current Business Initiatives
During the second quarter of 2021, we made progress expanding and enhancing our telesales organization and continued to scale our digital business. With our experience in launching a remote agent model in 2020, we continued to grow our agent workforce to include remote workers, which provides us with better geographic hiring flexibility as we grow our telesales capacity.
Enrollment quality has been a focus in our organization since the launch of our retention program a year ago, and we are seeking additional ways to improve customer experience, enhance accuracy of plan recommendations and reduce rapid disenrollment. Starting in the third quarter of 2021, we introduced mandatory additional training for our agents, added a new customer care function to verify certain Medicare enrollments prior to submission to the carrier, and are expanding other quality assurance efforts. The recent migration of our call center technology to a cloud-based contact center is expected to provide new robust capabilities to train agents and monitor their performance in real time. While we expect these initiatives will enhance the quality of our enrollments generally, the introduction of these efforts to date has resulted in lower conversion rates and longer average talk times for telephonic enrollments. We also expect to incur additional expense as we expand our quality initiatives.
We believe that our ongoing investments in our telesales operations, technology and quality assurance will present a significant barrier to entry into the Medicare distribution market as carriers place an increasing value on enrollment quality and reduction in beneficiary complaints.
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H.I.G. Investment
On April 30, 2021, upon the terms and subject to the conditions set forth in our investment agreement with Echelon Health SPV, LP, or H.I.G., we issued and sold 2,250,000 shares of newly designated Series A preferred stock to H.I.G. in a private placement at an aggregate purchase price of $225 million, at a price of $100 per share. See Note 6 – Convertible Preferred Stock in our Notes to Condensed Consolidated Financial Statements for details.
Summary of Selected Metrics
We rely upon certain metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate strategic planning. Our commission revenue is influenced by a number of factors including but not limited to:
• the number of individuals on applications for Medicare-related, individual and family, small business and ancillary health insurance plans that are approved by the relevant health insurance carriers;
• the number of approved members for Medicare-related, individual and family, small business and ancillary health insurance plans from whom we have received an initial commission payment; and
• the constrained lifetime value, or LTV, of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell, as well as the estimated annual value of approved members for small business plans we sell.
Approved Members
Approved members represent the number of individuals on submitted applications that were approved by the relevant insurance carrier for the identified product during the current period. The applications may be submitted in either the current period or prior periods. Not all approved members ultimately become paying members.
The following table shows approved members by product for the period presented:
Three Months Ended June 30, % Change Six Months Ended June 30, % Change
2021 2020 2021 2020
Medicare:
Medicare Advantage 78,569 60,477 30 % 185,453 125,375 48 %
Medicare Supplement 6,130 8,794 (30) % 13,912 19,632 (29) %
Medicare Part D 6,976 7,603 (8) % 14,987 16,569 (10) %
Total Medicare 91,675 76,874 19 % 214,352 161,576 33 %
Individual and Family:
Non-Qualified Health Plans 4,120 2,798 47 % 9,729 7,618 28 %
Qualified Health Plans 5,353 2,512 113 % 11,058 7,057 57 %
Total Individual and Family 9,473 5,310 78 % 20,787 14,675 42 %
Ancillaries:
Short-term 6,462 9,446 (32) % 14,338 21,584 (34) %
Dental 10,406 7,722 35 % 21,576 17,432 24 %
Vision 4,566 3,764 21 % 9,628 8,265 16 %
Other 2,614 3,946 (34) % 5,017 8,271 (39) %
Total Ancillaries 24,048 24,878 (3) % 50,559 55,552 (9) %
Small Business 2,588 3,118 (17) % 5,536 6,721 (18) %
Total Approved Members 127,784 110,180 16 % 291,234 238,524 22 %
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Three Months Ended June 30, 2021 and 2020 – Medicare approved members increased 19% in the three months ended June 30, 2021 compared to the same period in 2020. The increase in total Medicare approved members was primarily attributable to a 30% growth in Medicare Advantage plan members, partially offset by a 30% decline in Medicare Supplement plan members and an 8% decline in Medicare Part D prescription drug plan members in the three months ended June 30, 2021 compared to the same period in 2020. Medicare Advantage enrollment growth in the three months ended June 30, 2021 slowed down compared to the same period in 2020 due to the COVID-related special enrollment period which drove higher growth last year.
Individual and family plan approved members grew 78% in the three months ended June 30, 2021 compared to the same period in 2020 due to favorable market environment, which drove a 113% increase in approved members for qualified health plans and a 47% increase in approved members in non-qualified health plans. The individual and family health insurance market is benefiting from the passage of the American Rescue Plan Act in March 2021. This legislation expanded access to premium credits making individual and family major medical plans more affordable, which allows a larger population to get the coverage that our major medical plans offer.
Ancillary plan approved members decreased 3% in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to a 32% decline in approved members for short-term health plans and a 34% decline in approved members for other ancillary plans, partially offset by an increase in approved members for dental and vision insurance. Small business group health insurance approved members declined 17% in the three months ended June 30, 2021 compared to the same period in 2020 mainly due to the shift of our focus away from the sale of small business products.
Six Months Ended June 30, 2021 and 2020 – Medicare approved members increased 33% in the six months ended June 30, 2021 compared to the same period in 2020. The increase in total Medicare approved members was primarily attributable to a 48% growth in Medicare Advantage plan members, partially offset by a 29% decline in Medicare Supplement plan members and a 10% decline in Medicare Part D prescription drug plan members in the six months ended June 30, 2021 compared to the same period in 2020. The increase in approved Medicare Advantage members was primarily driven by strong consumer demand, online enrollment growth, and an increase in our internal agent productivity during the Medicare Advantage open enrollment period.
Individual and Family Plan approved members grew 42% in the six months ended June 30, 2021 compared to the same period in 2020 partially due to favorable market environment resulting from the recent legislation mentioned above, driven by a 57% increase in approved members for qualified health plans and a 28% increase in approved members in non-qualified health plans.
Ancillary plan approved members declined 9% in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to a 34% decline in approved members for short-term health plans and a 39% decrease in approved members for other ancillary plans, partially offset by an increase in approved members for dental and vision insurance. Small business group health insurance approved members declined 18% in the six months ended June 30, 2021 compared to the same period in 2020 mainly due to the shift of our focus away from the sale of small business products.
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New Paying Members
New Paying Members consist of approved members from the period presented and any periods prior to the period presented from whom we have received an initial commission payment during the period presented. The following table shows our new paying members by product for the periods presented below:
Three Months Ended June 30, % Change Six Months Ended June 30, % Change
2021 2020 2021 2020
Medicare:
Medicare Advantage 77,710 57,232 36 % 218,707 143,531 52 %
Medicare Supplement 5,317 7,914 (33) % 15,313 19,474 (21) %
Medicare Part D 6,880 7,505 (8) % 36,019 71,210 (49) %
Total Medicare 89,907 72,651 24 % 270,039 234,215 15 %
Individual and Family:
Non-Qualified Health Plans 4,607 3,817 21 % 15,575 13,370 16 %
Qualified Health Plans 4,604 3,095 49 % 11,243 9,052 24 %
Total Individual and Family 9,211 6,912 33 % 26,818 22,422 20 %
Ancillaries:
Short-term 6,963 9,572 (27) % 18,206 21,832 (17) %
Dental 9,430 6,935 36 % 20,903 17,348 20 %
Vision 4,283 3,646 17 % 10,409 9,217 13 %
Other 2,427 3,474 (30) % 5,176 7,787 (34) %
Total Ancillaries 23,103 23,627 (2) % 54,694 56,184 (3) %
Small Business 2,391 3,138 (24) % 6,516 8,294 (21) %
Total New Paying Members 124,612 106,328 17 % 358,067 321,115 12 %
Three Months Ended June 30, 2021 and 2020 – Medicare total new paying members grew 24% in the three months ended June 30, 2021 compared to the same period in 2020, primarily driven by a 36% increase in Medicare Advantage plan new paying members, partially offset by a 33% decline in Medicare Supplement plan new paying members and an 8% decline in Medicare Part D prescription drug plan new paying members . Individual and family plan new paying members grew 33% in the three months ended June 30, 2021 compared to the same period in 2020 due to increases in new paying members for both non-qualified plans and qualified health plans. Ancillary new paying members declined 2% in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to a decline in approved members for short-term and other health plans. Small business new paying members declined 24% in the three months ended June 30, 2021 compared to the same period in 2020 primarily due to a decrease in approved members .
Six Months Ended June 30, 2021 and 2020 – Medicare total new paying members grew 15% in the six months ended June 30, 2021 compared to the same period in 2020, primarily driven by a 52% increase Medicare Advantage plan new paying members, partially offset by a 49% decrease in Medicare Part D prescription drug plan and a 21% decrease in Medicare Supplement plan new paying members . Individual and family plan new paying members grew 20% in the six months ended June 30, 2021 compared to the same period in 2020 due to increases in new paying members for non-qualified plans and new paying members for qualified plans. Ancillary new paying members declined 3% in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to a decline in approved members for short-term and other health plans. Small business new paying members declined 21% in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to a decrease in approved members .
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Estimated Constrained Lifetime Value of Commissions Per Approved Member
The following table shows our estimated constrained LTV of commissions per approved member by product for the periods presented below:
Three Months Ended June 30, % Change
2021 2020
Medicare
Medicare Advantage (1)
$ 908 $ 945 (4) %
Medicare Supplement (1)
938 1,134 (17) %
Medicare Part D (1)
216 244 (11) %
Individual and Family
Non-Qualified Health Plans (1)
243 184 32 %
Qualified Health Plans (1)
286 258 11 %
Ancillaries
Short-term (1)
165 163 1 %
Dental (1)
88 60 47 %
Vision (1)
56 44 27 %
Small Business (2)
184 149 23 %
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(1) Constrained LTV of commissions per approved member represents commissions estimated to be collected over the estimated life of an approved member’s plan after applying constraints in accordance with our revenue recognition policy. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, estimated average plan duration, the regulatory environment, and cancellations of insurance plans offered by health insurance carriers with which we have a relationship. These factors may result in varying values from period to period. For additional information on constrained LTV, see Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2020.
(2) For small business, the amount represents the estimated commissions we expect to collect from the plan over the following twelve months. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, estimated average plan duration, the regulatory environment, and cancellations of insurance plans offered by health insurance carriers with which we have a relationship and applied constraints. These factors may result in varying values from period to period.
Medicare
The constrained LTV of commissions per approved member for Medicare Supplement, Medicare Part D prescription drug, and Medicare Advantage plans declined by 17%, 11%, and 4%, respectively, during the three months ended June 30, 2021 compared to the same period in 2020. The decline in constrained LTV of commissions per approved member for Medicare Advantage and Medicare Supplement plans was partially driven by a shorter average plan duration for telephonic enrollments. The shorter estimated average plan duration was partially attributable to additional opportunities for Medicare Advantage plan members to switch plans during the Medicare Advantage open enrollment period and the COVID-19 related special enrollment period in 2020. The negative impact of these factors was partially offset by an increase in broker commission rates and higher commission rates for new Medicare Advantage enrollments compared to the commissions for enrollments of existing members changing their plans. The decline in constrained LTV for Medicare Part D prescription drug plans was due in part to a shift in consumer demand away from these plans and towards Medicare Advantage plans with prescription drug coverage.
Individual and Family and Ancillaries
The constrained LTV of commissions per non-qualified health plan approved member and qualified health plan approved member increased 32% and 11%, respectively, during the three months ended June 30, 2021 compared with the same period in 2020 mostly due to increased estimates of average plan duration.
The constrained LTV of commissions per short-term health insurance approved member remained relatively flat during the three months ended June 30, 2021 compared to the same period in 2020.
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The constrained LTV of commissions per approved member for dental and vision plans increased by 47% and 27%, respectively, during the three months ended June 30, 2021 compared with the same period in 2020 primarily due to an increase in estimated average plan duration and lower constraints as a result of reduced volatility based on historical trends.
The constraints applied to the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application in order to derive the constrained LTV of commissions for approved members recognized for the periods presented below are summarized as follows:
Three Months Ended June 30,
2021 2020
Medicare
Medicare Advantage 7 % 7 %
Medicare Supplement 9 % 5 %
Medicare Part D 7 % 5 %
Individual and Family
Non-Qualified Health Plans 7 % 15 %
Qualified Health Plans 4 % 4 %
Ancillaries
Short-term 20 % 20 %
Dental 5 % 10 %
Vision 5 % 10 %
Other 10 % 10 %
Small Business 5 % — %
The constraints for Medicare Supplement and Medicare Part D prescription drug plans increased during the three months ended June 30, 2021, as compared to the same period in the prior year, due to an increase in volatility and the observed declining LTV trends. The constraints for non-qualified health plans decreased during the three months ended June 30, 2021, as compared to the same period in the prior year, due to stabilization of market conditions and reduced volatility. The constraints for dental and vision plans decreased during the three months ended June 30, 2021, as compared to the same period in the prior year, due to reduced volatility and improved LTV trends. The constraints for small business plans increased during the three months ended June 30, 2021, as compared to the same period in the prior year, due to an increase in volatility.
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Estimated Membership
Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the period of estimation. The following table shows estimated membership by product for the periods presented below:
As of June 30, % Change
2021 2020
Medicare (1)
Medicare Advantage 562,905 407,243 38 %
Medicare Supplement 99,306 94,838 5 %
Medicare Part D 214,744 213,949 — %
Total Medicare 876,955 716,030 22 %
Individual and Family (2)
107,466 115,832 (7) %
Ancillaries (3)
Short-term 18,032 23,203 (22) %
Dental 115,990 118,198 (2) %
Vision 69,062 68,666 1 %
Other 33,015 35,404 (7) %
Total Ancillaries 236,099 245,471 (4) %
Small Business (4)
46,450 40,090 16 %
Total Estimated Membership 1,266,970 1,117,423 13 %
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(1) To estimate the number of members on Medicare-related health insurance plans, we take the sum of (i) the number of members for whom we have applied or expected to receive a commission payment for a month that may be up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation.
(2) To estimate the number of members on Individual and Family health insurance plans (“IFP”), we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for a month that may be up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation.
(3) To estimate the number of members on ancillary health insurance plans (such as short-term, dental and vision insurance), we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that may be up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers.
(4) To estimate the number of members on small business health insurance plans, we use the number of initial members at the time the group was approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported.
A member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members.
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Health insurance carriers bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their plans do so by discontinuing their premium payments to the carrier or notifying the carrier directly and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date.
After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. If we experience a significant variance in historical membership as compared to our initial estimates, we keep the prior period data consistent with previously reported amounts, while we may provide the updated information in other communications or disclosures. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Various circumstances could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.
Historically, our membership estimates in a particular quarter have not been significantly different when compared to membership data received from carriers in a subsequent quarter. However, we experienced a larger deviation in the actual Medicare Advantage membership, which was lower than our initial estimate, for the first quarter of 2020. This deviation was primarily due to the time delay in receiving information from our carriers and a higher level of plan cancellations than expected.
Medicare-related plan estimated membership as of June 30, 2021 grew 22% compared to estimated membership as of June 30, 2020 due to a 38% growth in Medicare Advantage estimated membership and a 5% growth in Medicare Supplement plan estimated membership. The overall growth in Medicare estimated membership was due to increased sales of Medicare Advantage plans.
Individual and family plan estimated membership as of June 30, 2021 declined 7% compared to estimated membership as of June 30, 2020 due to overall market conditions in the individual and family plan market, despite the recent stabilization and improvement, and the shift of our investment towards Medicare. Ancillary plan estimated membership as of June 30, 2021 declined 4% compared to estimated membership as of June 30, 2020 primarily as a result of the decline in dental and short-term health plans estimated membership.
Member Acquisition
Marketing initiatives are an important component of our strategy to increase revenue and are primarily designed to encourage consumers to complete an application for health insurance. Variable marketing cost represents direct costs incurred in member acquisition from our direct, marketing partners and online advertising channels. In addition, we incur customer care and enrollment (“CC&E”) expenses in assisting applicants during the enrollment process. Variable marketing costs exclude fixed overhead costs, such as personnel related costs, consulting expenses, facilities and other operating costs allocated to the marketing and advertising department.
The following table shows the estimated variable marketing cost per approved member and the estimated customer care and enrollment expense per approved member metrics for the periods presented below. The numerator used to calculate each metric is the portion of the respective operating expenses for marketing and advertising and customer care and enrollment that is directly related to member acquisition for our sale of Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans (collectively, “Medicare Plans”) and for all individual and family major medical plans and short-term
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health insurance (collectively, “IFP Plans”), respectively. The denominator used to calculate each metric is based on a derived metric that represents the relative value of the new members acquired. For Medicare Plans, we call this derived metric Medicare Advantage (“MA”)-equivalent members, and for IFP Plans, we call this derived metric IFP-equivalent members. The calculations for MA-equivalent members and for IFP-equivalent members are based on the weighted number of approved members for Medicare Plans and IFP Plans during the period, with the number of approved members adjusted based on the relative LTV of the product they are purchasing. Since the LTV for any product fluctuates from period to period, the weight given to each product was determined based on their relative LTVs at the time of our adoption of Accounting Standards Codification 606 – Revenue from Contracts with Customers ("ASC 606").
Three Months Ended June 30, % Change
2021 2020
Medicare:
Estimated CC&E cost per approved MA-equivalent approved member (1)
$ 418 $ 354 18 %
Estimated variable marketing cost per MA-equivalent approved member (1)
412 334 23 %
Total Medicare estimated cost per approved member $ 830 $ 688 21 %
Individual and Family Plan:
Estimated CC&E cost per IFP-equivalent approved member (2)
$ 103 $ 105 (2) %
Estimated variable marketing cost per IFP-equivalent approved member (2)
65 60 8 %
Total IFP estimated cost per approved member $ 168 $ 165 2 %
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(1) MA-equivalent approved members is a derived metric with a Medicare Part D approved member being weighted at 25% of a Medicare Advantage member and a Medicare Supplement member based on their relative LTVs at the time of our adoption of ASC 606. We calculate the number of approved MA-equivalent members by adding the total number of approved Medicare Advantage and Medicare Supplement members and 25% of the total number of approved Medicare Part D members during the period presented.
(2) IFP-equivalent approved members is a derived metric with a short-term approved member being weighted at 33% of a major medical individual and family health insurance plan member based on their relative LTVs at the time of our adoption of ASC 606. We calculate the number of approved IFP-equivalent members by adding the total number of approved qualified and non-qualified health plan members and 33% of the total number of short-term approved members during the period presented.
Estimated CC&E cost per approved MA-equivalent member increased 18% in the three months ended June 30, 2021 compared to the same period in 2020 due to an earlier start in our increase in internal agent headcount with the goal of staffing our telesales capacity with at least 90% of internal agents for the Medicare annual enrollment period this year. We believe this investment in internal telesales capacity will better position us for enrollment growth in the fourth quarter annual enrollment period and to improve enrollment quality. Estimated variable marketing cost per MA-equivalent member increased 23% partially due to the COVID-related special enrollment period that occurred primarily in 2020 benefiting our conversion rates both online and in our call centers, as a significantly higher proportion of inbound website visitors and callers were eligible to switch plans. The increase in marketing cost per MA-equivalent member was also driven by an ongoing shift away from the traditional channels and focus more on our online advertising channel which carries higher per enrollment marketing costs but lower customer care and enrollment costs.
Estimated CC&E cost per approved IFP-equivalent member decreased 2% in the three months ended June 30, 2021 compared to the same period in 2020 due primarily to an increase in agent productivity. Estimated variable marketing cost per IFP-equivalent member increased 8% in the three months ended June 30, 2021 compared to the same period in 2020 due to an increase in marketing costs to drive enrollment growth.
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income may be affected.
An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions and are most critical to understanding and evaluating our reported financial results are as follows:
• Revenue Recognition and contract assets - commission receivable;
• Stock-Based Compensation; and
• Accounting for Income Taxes.
There have been no changes to our critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021 and amended on April 29, 2021, that have had a significant impact on our condensed consolidated financial statements and related notes. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, for a complete discussion of our other critical accounting policies and estimates.
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Results of Operations
Our operating results and related percentage of total revenue are summarized below for the periods presented (dollars in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Revenue:
Commission $ 89,823 93 % $ 80,773 91 % $ 216,875 94 % $ 180,442 92 %
Other 6,734 7 % 7,993 9 % 13,896 6 % 14,732 8 %
Total revenue 96,557 100 % 88,766 100 % 230,771 100 % 195,174 100 %
Operating costs and expenses (1)
Cost of revenue 246 — % 540 1 % 1,242 1 % 1,678 1 %
Marketing and advertising 44,581 46 % 32,873 37 % 95,455 41 % 70,637 36 %
Customer care and enrollment 38,362 40 % 27,148 31 % 72,524 31 % 57,683 30 %
Technology and content 20,464 21 % 13,373 15 % 43,627 19 % 29,113 15 %
General and administrative 18,118 19 % 20,713 23 % 41,172 18 % 40,366 21 %
Amortization of intangible assets 119 — % 373 — % 295 — % 920 — %
Restructuring charges — — % — — % 2,431 1 % — — %
Total operating costs and expenses 121,890 126 % 95,020 107 % 256,746 111 % 200,397 103 %
Loss from operations (25,333) (26) % (6,254) (7) % (25,975) (11) % (5,223) (3) %
Other income, net 172 — % 452 1 % 322 — % 825 — %
Loss before benefit from income taxes (25,161) (26) % (5,802) (7) % (25,653) (11) % (4,398) (2) %
Benefit from income taxes (6,752) (7) % (2,432) (3) % (6,444) (3) % (4,480) (2) %
Net income (loss) $ (18,409) (19) % $ (3,370) (4) % $ (19,209) (8) % $ 82 — %
____________
(1) Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Marketing and advertising $ 2,140 $ 1,539 $ 4,625 $ 3,269
Customer care and enrollment 692 573 1,161 1,235
Technology and content 2,360 (82) 5,103 1,535
General and administrative 3,053 4,646 8,758 9,351
Total stock-based compensation expense $ 8,245 $ 6,676 $ 19,647 $ 15,390
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Revenue
Our commission revenue, other revenue and total revenue are summarized as (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Commission $ 89,823 $ 80,773 $ 9,050 11 % $ 216,875 $ 180,442 $ 36,433 20 %
% of total revenue 93 % 91 % 94 % 92 %
Other 6,734 7,993 (1,259) (16) % 13,896 14,732 (836) (6) %
% of total revenue 7 % 9 % 6 % 8 %
Total revenue $ 96,557 $ 88,766 $ 7,791 9 % $ 230,771 $ 195,174 $ 35,597 18 %
Three Months Ended June 30, 2021 and 2020 – Commission revenue increased $9.1 million, or 11%, during the three months ended June 30, 2021 compared to the same period in 2020 due to a $14.9 million increase in commission revenue from the Individual, Family and Small Business segment, partially offset by a $5.8 million decrease in commission revenue from the Medicare segment.
The decrease in commission revenue from the Medicare segment was primarily due to lower LTVs and a decrease in net commission revenue from Medicare members approved in prior periods, or negative adjustment revenue, which was primarily attributable due to Medicare Part D prescription drug plans. The increase in commission revenue from the Individual, Family and Small Business segment was primarily driven by a $13.8 million increase in net adjustment revenue, 78% increase in individual and family major medical plan approved members, 35% increase in dental plan approved members and 21% increase in vision plan approved members. The increase in net adjustment revenue from the Individual, Family and Small Business segment was attributable to increase in LTV and higher demand of individual and family plans, dental and vision products. See Segment Information below for further discussion.
Other revenue declined $1.3 million, or 16%, during the three months ended June 30, 2021 compared to the same period in 2020 due to a decrease in sponsorship and advertising revenue.
Six Months Ended June 30, 2021 and 2020 – Commission revenue increased $36.4 million, or 20%, during the six months ended June 30, 2021 compared to the same period in 2020 due to a $18.8 million increase in commission revenue from the Medicare segment and a $17.6 million increase in commission revenue from the Individual, Family and Small Business segment.
The increase in commission revenue from the Medicare segment was driven by a 33% increase in Medicare plan approved members, primarily attributable to a 48% growth in Medicare Advantage plan approved members compared to 2020, partially offset by lower LTVs and a decrease in net commission revenue from Medicare members approved in prior periods which was primarily attributable to Medicare Part D prescription drug plans. The increase in commission revenue from the Individual, Family and Small Business segment was primarily driven by a $15.7 million increase in net adjustment revenue, 42% increase in individual and family major medical plan approved members, 24% increase in dental plan approved members and 16% increase in vision plan approved members. See Segment Information below for further discussion.
Other revenue decreased $0.8 million, or 6%, during the six months ended June 30, 2021 compared to the same period in 2020 due to a decrease in sponsorship and advertising revenue.
Cost of Revenue
Cost of revenue consists of payments related to health insurance plans sold to members who were referred to our website by marketing partners with whom we have revenue-sharing arrangements. In order to enter into a revenue-sharing arrangement, marketing partners must be licensed to sell health insurance in the state where the policy is sold. Costs related to revenue-sharing arrangements are expensed as the related revenue is recognized.
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Additionally, cost of revenue includes the amortization of consideration we paid to certain broker partners in connection with the transfer of their health insurance members to us as the new broker of record on the underlying plans. These transfers include primarily Medicare plan members. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.
Our cost of revenue is summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Cost of revenue $ 246 $ 540 $ (294) (54) % $ 1,242 $ 1,678 $ (436) (26) %
% of total revenue 1 % — % 1 % 1 %
Three Months Ended June 30, 2021 and 2020 – Cost of revenue decreased by $0.3 million during the three months ended June 30, 2021, compared to the same period in 2020, primarily due to decreased activity from our revenue sharing arrangements.
Six Months Ended June 30, 2021 and 2020 – Cost of revenue decreased by $0.4 million during the three months ended June 30, 2021, compared to the same period in 2020, primarily due to decreased activity from our revenue sharing arrangements.
Marketing and Advertising
Marketing and advertising expenses consist primarily of member acquisition expenses associated with our direct, marketing partner and online advertising member acquisition channels, in addition to compensation and other expenses related to marketing, business development, partner management, public relations and carrier relations personnel who support our offerings.
Our marketing and advertising expenses are summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Marketing and advertising $ 44,581 $ 32,873 $ 11,708 36 % $ 95,455 $ 70,637 $ 24,818 35 %
% of total revenue 46 % 37 % 41 % 36 %
Three Months Ended June 30, 2021 and 2020 – Marketing and advertising expenses increased $11.7 million, or 36%, during the three months ended June 30, 2021 compared to the same period in 2020, primarily driven by an $11.9 million increase in Medicare plan related variable advertising and $0.6 million in stock-based compensation expenses, partially offset by decreases of $0.5 million in consulting expenses and $0.5 million in personnel and compensation costs. The increase in variable advertising expenses was due to an increase in our advertising expense through our partner and online channels.
Six Months Ended June 30, 2021 and 2020 – Marketing and advertising expenses increased $24.8 million, or 35%, during the six months ended June 30, 2021 compared to the same period in 2020, primarily driven by a $25.9 million increase in Medicare plan related variable advertising and $1.3 million in stock-based compensation expenses, partially offset by decreases of $1.6 million in consulting expenses and $1.2 million in personnel and compensation costs. The increase in variable advertising expenses was due to an increase in our advertising expense through our partner and online channels.
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Customer Care and Enrollment
Customer care and enrollment expenses primarily consist of compensation, benefits, and licensing costs for personnel engaged in assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the enrollment process. Our customer care and enrollment expenses also include third-party call center costs.
Our customer care and enrollment expenses are summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Customer care and enrollment $ 38,362 $ 27,148 $ 11,214 41 % $ 72,524 $ 57,683 $ 14,841 26 %
% of total revenue 40 % 31 % 31 % 30 %
Three Months Ended June 30, 2021 and 2020 – Customer care and enrollment expenses increased $11.2 million, or 41%, during the three months ended June 30, 2021 compared to the same period in 2020, primarily due to increases of $7.5 million in personnel costs associated with an increase in customer care and enrollment headcount as we focus on the expansion of our internal telesales team to strengthen our resources in advance of the AEP as noted below, $2.4 million in consulting expenses, and $0.6 million in licensing costs.
Six Months Ended June 30, 2021 and 2020 – Customer care and enrollment expenses increased $14.8 million, or 26%, during the six months ended June 30, 2021 compared to the same period in 2020, primarily due to an increase of $13.6 million in personnel costs associated with an increase in customer care and enrollment headcount as noted below, $1.4 million in consulting expenses, and $0.6 in facilities and other costs, partially offset by decreases of $1.1 million in licensing costs. The decrease in licensing costs was primarily due to previously over-recognized licensing costs that were adjusted during the first quarter of 2021.
We have shifted to a predominantly internal agent model and intend to employ and maintain the majority of our health insurance agent force year-round. In 2021, we started internal agent hiring and training earlier in the year compared to 2020, with the largest headcount increase planned for the second and third quarters. During the three months ended June 30, 2021, we made progress expanding and enhancing our telesales organization and continued to scale our digital business. We anticipate additional spend on agent training and the expansion of our customer service team in the third and fourth quarters, including the addition of a new customer care role to verify Medicare enrollments prior to submission and expanding our quality assurance efforts. Over time, we expect for these initiatives to result in improved agent efficiency, higher LTVs, as well as stronger consumer awareness of our choice platform.
Technology and Content
Technology and content expenses consist primarily of compensation and benefits costs for personnel associated with developing and enhancing our website technology as well as maintaining our website. A portion of our technology and content group is located at our wholly-owned subsidiary in China, where technology development costs are generally lower than in the United States.
Our technology and content expenses are summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Technology and content $ 20,464 $ 13,373 $ 7,091 53 % $ 43,627 $ 29,113 $ 14,514 50 %
% of total revenue 21 % 15 % 19 % 15 %
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Three Months Ended June 30, 2021 and 2020 – Technology and content expenses increased $7.1 million, or 53%, during the three months ended June 30, 2021 compared to the same period in 2020 primarily driven by increases of $2.6 million in personnel and compensation costs due to higher headcount, $2.4 million in stock-based compensation expense, and $1.2 million in amortization of internal software development costs.
Six Months Ended June 30, 2021 and 2020 – Technology and content expenses increased $14.5 million, or 50%, during the six months ended June 30, 2021 compared to the same period in 2020 primarily driven by increases of $5.8 million in personnel and compensation costs due to higher headcount, $3.6 million in stock-based compensation expense, $2.5 million in amortization of internal software development costs, $1.8 million in facilities and other operating costs.
General and Administrative
General and administrative expenses include compensation and benefits costs for personnel working in our executive, finance, investor relations, government affairs, legal, human resources, internal audit, facilities and internal information technology departments. These expenses also include fees paid for outside professional services, including audit, tax, legal, government affairs and information technology fees.
Our general and administrative expenses are summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
General and administrative $ 18,118 $ 20,713 $ (2,595) (13) % $ 41,172 $ 40,366 $ 806 2 %
% of total revenue 19 % 23 % 18 % 21 %
Three Months Ended June 30, 2021 and 2020 – General and administrative expenses decreased $2.6 million, or 13%, during the three months ended June 30, 2021 compared to the same period in 2020, primarily driven by decreases of $1.6 million stock-based compensation expenses, $1.5 million in personnel and compensation costs, and $1.1 million in consulting expenses, partially offset by an increase of $1.0 million in shareholder engagement costs.
Six Months Ended June 30, 2021 and 2020 – General and administrative expenses increased $0.8 million, or 2%, during the six months ended June 30, 2021 compared to the same period in 2020, primarily driven by increases of $0.7 million in consulting expenses, $0.6 million stock-based compensation expenses, and $0.6 million in personnel and compensation costs, partially offset by an increase of $1.0 million in shareholder engagement costs.
Amortization of Intangible Assets
Our intangible asset amortization expense is summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Amortization of intangible assets $ 119 $ 373 $ (254) (68) % $ 295 $ 920 $ (625) (68) %
% of total revenue — % — % — % — %
Amortization expense was primarily related to intangible assets purchased through our acquisitions. Amortization expense decreased during the three and six months ended June 30, 2021 compared to the same periods in 2020 due to certain intangible assets being fully amortized during the three and six months ended June 30, 2021.
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Restructuring Charges
In February 2021, our board of directors approved a plan to terminate the employment of certain employees in certain locations. As part of this plan, we eliminated approximately 89 full-time positions, primarily in the United States, representing approximately 5% of our workforce primarily within customer care and enrollment groups, and to a lesser extent, in our marketing and advertising and general and administrative groups.
Our restructuring charges is summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Restructuring charges $ — $ — $ — * $ 2,431 $ — $ 2,431 *
% of total revenue — % — % 1 % — %
Our restructuring charges primarily consist of severance and other termination benefits provided to employees as part of the restructuring plan.
_______
* Percentage calculated is not meaningful.
Other Income, Net
Other income, net, primarily consisted of interest income, sublease income and margin earned on commissions received from Medicare plan members transferred to us in 2010 through 2012 by a broker partner, partially offset by interest expense on finance leases and debt and other bank fees.
Our other income, net is summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Other income, net $ 172 $ 452 $ (280) (62) % $ 322 $ 825 $ (503) (61) %
% of total revenue — % 1 % — % — %
Three Months Ended June 30, 2021 and 2020 – Other income, net decreased $0.3 million during the three months ended June 30, 2021 compared to the same period in 2020 due primarily to a decrease in interest income.
Six Months Ended June 30, 2021 and 2020 – Other income, net decreased $0.5 million during the six months ended June 30, 2021 compared to the same period in 2020 due primarily to a decrease in interest income.
Benefit from Income Taxes
Our benefit from income taxes are summarized as follows (dollars in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Benefit from income taxes $ (6,752) $ (2,432) $ (4,320) 178 % $ (6,444) $ (4,480) $ (1,964) 44 %
Effective tax rate 26.8 % 41.9 % 25.1 % 101.9 %
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Three Months Ended June 30, 2021 and 2020 – Our effective tax rate of 26.8% for the three months ended June 30, 2021 was lower compared to 41.9% for the three months ended June 30, 2020 primarily due to a decrease in excess tax benefits associated with stock-based compensation. Our effective tax rate for the three months ended June 30, 2021 and 2020 were higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, and non-deductible lobbying expenses and state taxes, partially offset by research and development credits.
Six Months Ended June 30, 2021 and 2020 – Our effective tax rate of 25.1% for the six months ended June 30, 2021 was lower compared to 101.9% for the six months ended June 30, 2020 primarily due to a decrease in excess tax benefits associated with stock-based compensation. Our effective tax rate for the six months ended June 30, 2021 and 2020 were higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, and non-deductible lobbying expenses and state taxes, partially offset by research and development credits.
Segment Information
We report segment information based on how our chief executive officer, who is our CODM, regularly reviews our operating results, allocates resources and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit. Our business structure is comprised of two operating segments:
• Medicare; and
• Individual, Family and Small Business.
Our CODM does not separately evaluate assets by segment, with the exception of commissions receivable, and therefore assets by segment are not presented.
The Medicare segment consists primarily of commissions earned from our sale of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans, and to a lesser extent, ancillary products sold to our Medicare-eligible applicants, including but not limited to, dental and vision plans, as well as our advertising program that allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us and to purchase other marketing and advertising services, as well as our delivery and sale to third parties of Medicare-related health insurance leads generated by our ecommerce platforms and our marketing activities.
The Individual, Family and Small Business segment consists primarily of commissions earned from our sale of individual, family and small business health insurance plans and ancillary products sold to our non-Medicare-eligible applicants, including but not limited to, dental, vision, and short-term health insurance. To a lesser extent, the Individual, Family and Small Business segment consists of amounts earned from our online sponsorship program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website, our licensing to third parties the use of our health insurance ecommerce technology, and our delivery and sale to third parties of individual and family health insurance leads generated by our ecommerce platforms and our marketing activities.
Marketing and advertising, customer care and enrollment, technology and content, and general and administrative operating expenses that are directly attributable to a segment are reported within the applicable segment. Indirect marketing and advertising, customer care and enrollment, and technology and content operating expenses are allocated to each segment based on usage. Other indirect general and administrative operating expenses are managed in a corporate shared services environment and, since they are not the responsibility of segment operating management, are not allocated to the operating segments and instead reported within Corporate.
Segment profit is calculated as total revenue for the applicable segment less direct and allocated marketing and advertising, customer care and enrollment, technology and content, and general and administrative operating expenses, excluding stock-based compensation expense, change in fair value of earnout liability, depreciation and amortization expense, and amortization of intangible assets. During the first quarter of 2021, we modified the calculation of segment profit to exclude the amortization of capitalized software development cost to enhance comparability of our financial metrics with peer companies.
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Our operating segment revenue and profit are summarized as follows (in thousands):
Three Months Ended June 30, Change Six Months Ended June 30, Change
2021 2020 $ % 2021 2020 $ %
Revenue:
Medicare $ 73,231 $ 80,379 $ (7,148) (9) % $ 194,252 $ 176,530 $ 17,722 10 %
Individual, Family and Small Business 23,326 8,387 14,939 178 % 36,519 18,644 17,875 96 %
Total revenue $ 96,557 $ 88,766 $ 7,791 9 % $ 230,771 $ 195,174 $ 35,597 18 %
Segment profit:
Medicare segment profit (loss) (1)
$ (17,804) $ 14,996 $ (32,800) (219) % $ 6,741 $ 38,132 $ (31,391) (82) %
Individual, Family and Small Business segment profit (1)
17,925 2,738 15,187 555 % 25,977 5,666 20,311 358 %
Total segment profit 121 17,734 (17,613) (99) % 32,718 43,798 (11,080) (25) %
Corporate (13,093) (14,347) 1,254 (9) % (28,379) (27,795) (584) 2 %
Stock-based compensation expense (8,245) (6,676) (1,569) 24 % (19,647) (15,390) (4,257) 28 %
Depreciation and amortization (2)
(3,997) (2,592) (1,405) 54 % (7,941) (4,916) (3,025) 62 %
Amortization of intangible assets (119) (373) 254 (68) % (295) (920) 625 (68) %
Restructuring charges — — — * (2,431) — (2,431) *
Other income, net 172 452 (280) (62) % 322 825 (503) (61) %
Loss before benefit from income taxes $ (25,161) $ (5,802) $ (19,359) 334 % $ (25,653) $ (4,398) $ (21,255) 483 %
_______
* Percentage calculated is not meaningful.
(1) During the first quarter of 2021, we revised the calculation of segment profit by excluding amortization of capitalized software development costs to enhance comparability of our financial metrics with peer companies. The amortization of capitalized software development costs were $2.9 million and $1.7 million for the three months ended June 30, 2021 and 2020, respectively, and were $5.7 million and $3.2 million for the six months ended June 30, 2021 and 2020.
(2) Depreciation and amortization has been adjusted to include amortization of software development costs.
Revenue
Three Months Ended June 30, 2021 and 2020 – Revenue from our Medicare segment declined $7.1 million, or 9%, during the three months ended June 30, 2021 compared to the same period in 2020, primary attributable to a decrease in net adjustment revenue, partially offset by an increase in commission revenue from members approved during the period. The decrease in net adjustment revenue was largely attributable to our Medicare Part D prescription drug plans.
Revenue from our Individual, Family and Small Business segment grew $14.9 million, or 178%, during the three months ended June 30, 2021 compared to the same period in 2020, primarily attributable to a $13.8 million increase in net adjustment revenue. Despite the extension of the special enrollment period through August 15, 2021 combined with greater government incentives, we continued to observe stronger member retention rates in our LTV assessments for the majority of the earlier period cohorts of certain products in our Individual, Family and Small Business segment. Based on our evaluation of the updated LTV models and retention trends, we recognized $15.8 million in net adjustment revenue during the three months ended June 30, 2021.
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Six Months Ended June 30, 2021 and 2020 – Revenue from our Medicare segment grew $17.7 million, or 10%, during the six months ended June 30, 2021 compared to the same period in 2020, primary attributable to an increase in Medicare Advantage plan related commission revenue of $45.7 million, partially offset by lower LTVs and a $21.2 million decrease in net adjustment revenue which was largely attributable to our Medicare Part D prescription drug plans. The increase in Medicare Advantage commission revenue was driven by 48% growth in Medicare Advantage plan approved members.
Revenue from our Individual, Family and Small Business segment grew $17.9 million, or 96%, during the six months ended June 30, 2021 compared to the same period in 2020, primarily attributable to a $17.6 million increase in commission revenue. Despite the extension of the special enrollment period through August 15, 2021 combined with greater government incentives, we continued to observe stronger member retention rates in our LTV assessments for the majority of the earlier period cohorts of certain products in our Individual, Family and Small Business segment. Based on our evaluation of the updated LTV models and retention trends, we recognized $19.1 million in net adjustment revenue, an increase of $15.7 million during the six months ended June 30, 2021 compared to the same period in 2020. Our Individual, Family and Small Business segment is benefiting from the passage of the American Rescue Plan Act in March 2021. This legislation expanded access to premium credits making individual and family health plans more affordable, which allows a larger population to get quality coverage that our major medical plans offer.
Segment Profit
Three Months Ended June 30, 2021 and 2020 – Our Medicare segment loss was $17.8 million during the three months ended June 30, 2021, a decrease of $32.8 million, or 219%, compared to segment profit of $15.0 million for the same period in 2020. This was primarily due to a $7.1 million decrease in revenue and a $25.7 million increase in operating expenses, excluding stock-based compensation expense, depreciation and amortization expenses, and amortization of intangible assets. The increase in operating expenses was mostly attributable to increases in marketing costs and customer care and enrollment costs as we continued to invest in telesales capacity, internal agent counts, agent productivity tools and incentives, customer engagement and retention initiatives, and enhancements to our technology platform.
Our Individual, Family and Small Business segment profit was $17.9 million during the three months ended June 30, 2021, an increase of $15.2 million, or 555% compared to the same period in 2020. The increase was primarily driven by a $14.9 million increase in revenue and a $0.2 million decrease in operating expenses, excluding stock-based compensation expense, depreciation and amortization expenses, and amortization of intangible assets.
Six Months Ended June 30, 2021 and 2020 – Our Medicare segment profit was $6.7 million during the six months ended June 30, 2021, a decrease of $31.4 million, or 82%, compared to the same period in 2020. This was primarily due to a $49.1 million increase in operating expenses, excluding stock-based compensation expense, depreciation and amortization expenses, and amortization of intangible assets, partially offset by a $17.7 million increase in revenue. The increase in operating expenses was mostly attributable to increases in marketing costs and customer care and enrollment costs as we continued to invest in telesales capacity, internal agent counts, agent productivity tools and incentives, customer engagement and retention initiatives, and enhancements to our technology platform.
Our Individual, Family and Small Business segment profit was $26.0 million during the six months ended June 30, 2021, an increase of $20.3 million, or 358% compared to the same period in 2020. The increase was primarily driven by a $17.9 million increase in revenue and a $2.4 million decrease in operating expenses, excluding stock-based compensation expense, depreciation and amortization expenses, and amortization of intangible assets.
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term marketable securities are summarized as follows (in thousands):
June 30, 2021 December 31, 2020
Cash and cash equivalents $ 229,260 $ 43,759
Short-term marketable securities 75,830 49,620
Total cash, cash equivalents, and short-term marketable securities $ 305,090 $ 93,379
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We believe our current cash and cash equivalents, credit facility and expected cash collections will be sufficient to fund our operations for at least twelve months after the filing date of this Quarterly Report on Form 10-Q. Our future capital requirements will depend on many factors, including our expected membership, retention rates and our level of investment in technology, marketing and advertising and our customer care initiatives. In addition, our cash position could be impacted by further acquisitions and investments we make to pursue our growth strategy.
While we recognize constrained LTV as revenue at the time applications are approved, our collection of the cash commissions resulting from approved applications generally occurs over a number of years. The expense associated with approved applications, however, is generally incurred at the time of enrollment. As a result, the net cash flow resulting from approved applications is generally negative in the period of revenue recognition and generally becomes positive over the lifetime of the member. In periods of membership growth, cash receipts associated with new and continuing members may be less than the cash outlays to acquire new members. We expect a reduction in cash and cash equivalents in the future resulting from our continued investments to grow our business. To the extent that available funds are insufficient to fund our future activities or to execute our financial strategy, we may raise additional capital through bank debt, or public or private equity or debt financing to the extent such funding sources are available.
As of June 30, 2021, our cash and cash equivalents totaled $229.3 million. Cash equivalents, which are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily consist of money market funds and commercial paper. The increase in cash and cash equivalents reflects $10.7 million of net cash provided by operating activities and $211.1 million of net cash provided by financing activities, partially offset by $36.3 million of net cash used in investing activities. We also maintained $3.4 million in restricted cash as of June 30, 2021 and December 31, 2020.
The following table presents a summary of our cash flows for the six months ended June 30, 2021 (in thousands):
Six Months Ended June 30,
2021 2020
Net cash provided by (used in) operating activities $ 10,726 $ (12,398)
Net cash used in investing activities (36,344) (146,569)
Net cash provided by financing activities
211,093 212,344
Operating Activities
Net cash provided by (used in) operating activities primarily consists of net income (loss), adjusted for certain non-cash items, including, deferred income taxes, stock-based compensation expense, depreciation and amortization, amortization of intangible assets and internally developed software, other non-cash items, and the effect of changes in working capital and other activities.
Collection of commissions receivable depends upon the timing of our receipt of commission payments and associated commission reports from health insurance carriers. If we were to experience a delay in receiving a commission payment from a health insurance carrier within a quarter, our operating cash flows for that quarter could be adversely impacted.
A significant portion of our marketing and advertising expense is driven by the number of health insurance applications submitted on our ecommerce platforms. Since our marketing and advertising costs are expensed and generally paid as incurred, and since commission revenue is recognized upon approval of a member but commission payments are paid to us over time, our operating cash flows could be adversely impacted by a substantial increase in the volume of applications submitted during a quarter or positively impacted by a substantial decline in the volume of applications submitted during a quarter. During the Medicare annual enrollment period that takes place during the last quarter of each year and the reintroduced Medicare Advantage open enrollment period in the first quarter of the year, we experience an increase in the number of submitted Medicare-related health insurance applications and marketing and advertising expenses compared to outside of these enrollment periods. Similarly, during the open enrollment period for individual and family health insurance plans which typically takes place during the fourth quarter of each year, we experience an increase in the number of submitted individual and family plan health insurance applications and marketing and advertising expenses compared to outside of open enrollment periods. The timing of enrollment periods for individual and family health insurance plans, the Medicare annual enrollment
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period and the open enrollment period for Medicare-related health insurance can positively or negatively affect our cash flows during each quarter.
Six Months Ended June 30, 2021 – Net cash provided by operating activities was $10.7 million during the six months ended June 30, 2021, primarily driven by changes in net operating assets and liabilities of $8.7 million and adjustments for non-cash items of $21.3 million, partially offset by a net loss of $19.2 million. Adjustments for non-cash items primarily consisted of $19.6 million of stock-based compensation expense, $6.0 million of amortization of intangible assets and internally-developed software, and $2.2 million of depreciation and amortization, partially offset by a $7.4 million decrease due to the change in deferred income taxes. Cash used from changes in net operating assets and liabilities during the six months ended June 30, 2021 primarily consisted of decreases of $37.0 million in contract assets – commissions receivable and $4.3 million in prepaid expenses and other current asset, partially offset by decreases of $21.4 million in accounts payable, $7.6 million in accrued marketing expense, and $3.7 million in accrued compensation and benefits.
Six Months Ended June 30, 2020 – Net cash provided by operating activities was $12.4 million during the six months ended June 30, 2020, primarily driven by changes in net operating assets and liabilities of $29.4 million, partially offset by adjustments for non-cash items totaling $17.0 million. Adjustments for non-cash items primarily consisted of $15.4 million of stock-based compensation expense, $4.2 million of amortization of intangible assets and internally developed software, and $1.7 million of depreciation and amortization, partially offset by a $4.5 million decrease due to the change in deferred income taxes. Cash used from changes in net operating assets and liabilities during the six months ended June 30, 2020 primarily consisted of decreases of $17.5 million in accounts payable, $7.8 million in accrued compensation and benefits, $7.3 million in accrued marketing expenses, $2.5 million in deferred revenue, and a $1.0 million increase in prepaid expenses and other assets, partially offset by a decrease of $4.8 million in contract assets – commissions receivable and an increase of $2.2 million in accrued expenses and other liabilities.
Investing Activities
Our investing activities primarily consist of purchases, maturities, and redemptions of marketable securities as well as purchases of computer hardware and software to enhance our website and customer care operations, leasehold improvements related to facilities expansion, capitalized internal-use software and website development costs and security deposit payments.
Six Months Ended June 30, 2021 – Net cash used in investing activities of $36.3 million for the six months ended June 30, 2021 mainly consisted $67.8 million used to purchase marketable securities, $7.3 million in capitalized internal-use software and website development costs and $2.7 million used to purchase property and equipment and other assets, partially offset by $41.5 million proceeds from the maturities and redemptions of marketable securities.
Six Months Ended June 30, 2020 – Net cash used in investing activities of $146.6 million for the six months ended June 30, 2020 was due to $147.5 million in purchases of marketable securities, $7.6 million in capitalized internal-use software and website development costs and $4.7 million used to purchase property and equipment and other assets, partially offset by $13.3 million proceeds from the maturities and redemptions of marketable securities.
Financing Activities
Six Months Ended June 30, 2021 – Net cash provided by financing activities of $211.1 million for the six months ended June 30, 2021 was primarily due to $214.0 million net proceeds from issuance of convertible preferred stock and $3.1 million net proceeds from exercise of common stock options, partially offset by $5.9 million repurchase of shares to satisfy employee tax withholding obligation.
Six Months Ended June 30, 2020 – Net cash provided by financing activities of $212.3 million for the six months ended June 30, 2020 was primarily due to $228.0 million net proceeds from the issuance of common stock in a public equity offering and $1.3 million of net proceeds from the exercise of common stock options, partially offset by $8.8 million of
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acquisition-related contingent payments and $8.2 million repurchase of shares to satisfying employee tax withholding obligations.
Convertible Preferred Stock
On April 30, 2021 (the “Closing Date”), we issued and sold 2,250,000 shares of our newly designated Series A convertible preferred stock at an aggregate purchase price of $225.0 million, at a price of $100 (the “Stated Value” per share of Series A preferred stock) per share. We received $214.0 million net proceeds from the private placement with H.I.G., net of sales commissions and certain transaction fees.
Dividends on our outstanding shares of Series A preferred stock accrue daily at 8% per annum on the Stated Value per share and compound semiannually, payable in kind until April 30, 2023, which is the second anniversary of the Closing date of the private placement, on June 30 and December 31 of each year, beginning on June 30, 2021, and will thereafter become 6% payable in kind and 2% payable in cash in arrears on June 30 and December 31 of each year, beginning on June 30, 2023 (each, a “Cash Dividend Payment Date”). Dividends payable in kind will be cumulative. The Series A preferred stock also participates, on an as-converted basis (without regard to conversion limitations) in all dividends paid to the holders of our common stock. If we fail to declare and pay full cash dividend payments as required by the certificate of designations for the Series A preferred stock for two consecutive Cash Dividend Payment Dates, the cash dividend rate then in effect shall increase one time by 2%, retroactive to the first day of the semiannual period immediately preceding the first Cash Dividend Payment Date at which we failed to pay such accrued cash dividends, until such failure to pay full cash dividends is cured (at which time the dividend rate shall return to the rate prior to such increase). The dividend rights of the Series A preferred stock are senior to all of our other equity securities.
Beginning on April 30, 2027, which is the sixth anniversary of the Closing date of the private placement, each holder of Series A preferred stock will have the right to require us to redeem all or any portion of the Series A preferred stock for cash at a price calculated as set forth in the certificate of designations. In addition, upon certain change of control events, holders of Series A preferred stock can require us, subject to certain exceptions, to repurchase any or all of their Series A preferred stock.
As of June 30, 2021, no shares of the Series A preferred stock have been converted and the balance of our Series A preferred stock was $218.5 million, including a change in the redemption value of $1.4 million and the accrued paid-in-kind dividends of $3.1 million, which was equivalent to 2.9 million shares of common stock on an as-converted basis. See Note 6 – Convertible Preferred Stock in our Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
Credit Agreement
We entered into a credit agreement with Royal Bank of Canada, or RBC, as administrative agent and collateral agent, (the “Credit Agreement”) in September 2018. The Credit Agreement provides for a $40.0 million secured asset-backed revolving credit facility with a $5 million letter of credit sub-facility. On December 20, 2019, we amended our revolving credit facility agreement with RBC (the “Amendment”) and increased the maximum borrowing amount to $75.0 million and extended the expiration to December 20, 2022.
The borrowing base under the Credit Agreement is comprised of an amount equal to (a) the lesser of (i) eighty percent (80%) of Eligible Commissions Receivables (as defined in the Credit Agreement) we actually collected during the immediately preceding period of three months or (ii) eighty percent (80%) of our Eligible Commission Receivables for the immediately succeeding period of three months, plus (b) fifty percent (50%) of our Eligible Commission Receivables for the immediately succeeding period of six months (excluding the immediately succeeding period of three months), in each case subject to reserves established by RBC, or the Borrowing Base. The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes. We have the right to prepay the loans under the Credit Agreement in whole or in part at any time without penalty. Subject to availability under the Borrowing Base, amounts repaid may be reborrowed. Amounts not borrowed under the Credit Agreement are subject to a commitment fee of 0.5% per annum on the daily unused portion of the credit facility, to be paid in arrears on the first business day of each calendar quarter. At closing of the Credit Agreement, we paid a one-time facility fee of 1.75% of the total commitments of $40 million. We also paid a one-time closing
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fee of 0.5% of the new commitment of $75.0 million in connection with the Amendment. We are also obligated to pay other customary administration fees for a credit facility of this size and type.
As of June 30, 2021, we had no outstanding principal amount under our revolving credit facility. See Note 12 – Debt of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding this credit agreement and subsequent amendment.
Common Stock Issuance
Pursuant to an effective registration statement that was filed on December 17, 2018, and amended on January 22, 2019 and March 2, 2020, we entered into an underwriting agreement in March 2020 to issue a total of 2,070,000 shares of common stock, which included the exercise in full of the underwriters’ option to purchase 270,000 additional shares of common stock, at a price to the public of $115.00 per share. Net proceeds from the offering were approximately $228.0 million after deducting underwriting discounts, commissions and expenses of the offering.
Contractual Obligations and Commitments
Our material contractual obligation generally include operating lease liabilities and non-cancellable contractual service and licensing obligations. See Note 10 – Leases in the Notes to Condensed Consolidated Financial Statements for information about our operating lease obligations. See Note 8 – Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements for the information about our non-cancellable contractual service and licensing obligations .
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Recent Accounting Pronouncements
See Note 1 – Summary of Business and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for recently issued accounting standards that could have an effect on us.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.