As of December 31, 2016, we leased facilities in four different cities throughout the U.S. All properties are leased with various expiration dates. Our locations are summarized as follows:
Health Insurance Innovations, Inc. is a Delaware corporation incorporated on October 26, 2012. In this annual report, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer (1) prior to the February 13, 2013 closing of an initial public offering (“IPO”) of the Class A common stock of Health Insurance Innovations, Inc. and related transactions, to Health Plan Intermediaries, LLC (“HPI”) and its consolidated subsidiaries and (2) after the IPO and related transactions, to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The terms “HII”, “HPIH”, and “ICE” refer to the following entities on a stand-alone basis: Health Insurance Innovations, Inc., Health Plan Intermediaries Holdings, LLC, and Insurance Center for Excellence, LLC, respectively. The term “Secured” refers to (a) prior to or at the time of their July 17, 2013 acquisition by us, Sunrise Health Plans, Inc., Sunrise Group Marketing, Inc. and Secured Software Solutions, Inc., collectively, and (b) following our July 17, 2013 acquisition, the entities described in (a) and the limited liability companies into which such entities were converted shortly following such acquisition. The terms “HealthPocket” or “HP” refer to HealthPocket, Inc., our wholly owned subsidiary which was acquired by HPIH on July 14, 2014. The term “ASIA” refers to American Service Insurance Agency LLC, a wholly owned subsidiary which was acquired by HPIH on August 8, 2014. HPIH, ICE, Secured, HP and ASIA are consolidated subsidiaries of HII.
We are a developer, distributor, and cloud-based administrator of affordable individual health and family insurance plans and supplemental products. In May 2015, we launched www.AgileHealthInsurance.com, an online direct-to-consumer website, primarily using internal resources at HealthPocket.
STM plans feature a streamlined underwriting process offering immediate coverage options. STM plans generally offer qualifying individuals insurance benefits for fixed short-term durations. Generally, our IFP premiums are substantially more affordable than the premiums of individual major medical (“IMM”) plans which offer lifetime renewable coverage. Through 2016, STM plans provided up to six months, eleven months, or 364 days of health insurance coverage with a wide range of deductible and copay levels. On October 31, 2016, the Internal Revenue Service, the Employee Benefits Security Administration, and the U.S Department of Health and Human Services, collectively “HHS,” published a rule limiting the duration of STM plans as further described below.
Hospital indemnity plans are insurance products which include both guaranteed-issue and underwritten plans that pay fixed cash benefits for covered procedures and services for individuals under the age of 65. These highly customizable products are on an open provider network without copayments or deductibles and do not have defined policy term lengths.
On June 10, 2016, HHS proposed rule 2016-13583, that impacts STM insurance. On October 31, 2016, HHS published rule, Internal Revenue Bulletin 2016-47, substantially as proposed despite opposition from significant stakeholders during the open comment period. The rule limits STM duration to periods of less than three months but allows for re-applications with the same or different health insurance carrier. The rule also requires notification of non-compliance with the minimum essential coverage standards set forth in the Affordable Care Act. The rule goes into effect on January 1, 2017 however neither HHS nor the states will enforce the rule regarding duration or renewal of STM plans until April 1, 2017. This rule will likely have a material impact on revenues generated from the sale of STM products beginning with our 2017 fiscal year but we are not yet able to determine the impact on total revenues, if any, as we will seek to mitigate revenue losses, if any, by offering new products, by growing our already strong distribution channels and by continuing our direct-to-consumer emphasis while simultaneously increasing operating leverage.
As of December 31, 2016, we had 290,117 total plans in force, compared to 195,132 on December 31, 2015. For the year ended December 31, 2016, our premium equivalents and revenues were $311.6 million and $184.5 million, respectively, representing increases of 77.2% and 76.2% when compared to the year ended December 31, 2015. For more detail about the use of total plans in force and premium equivalents as business metrics and a reconciliation of premium equivalents to revenues, see “Key Business Metrics” below.
The following table presents the number of policies in force by product type as of December 31, 2016 and 2015:
EBITDA. We define this metric as net income (loss) before interest expense, income taxes and depreciation and amortization. We have included EBITDA in this report because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating EBITDA can provide a useful measure for period-to-period comparisons of our business. However, EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. Other companies may calculate EBITDA differently than we do. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
Adjusted net income. To calculate adjusted net income, we calculate net income then add back amortization (but not depreciation), interest, tax expense and other items that are not part of regular operating activities, including acquisition costs, restructuring costs, contract termination costs, tax receivable agreement liability adjustments, and other non-cash items such as non-cash stock-based compensation and fair value adjustment to contingent consideration. From adjusted pre-tax net income we apply a pro forma tax expense calculated at an assumed rate of 38%. We believe that when measuring Company and executive performance against the adjusted net income measure, applying a pro forma tax rate better reflects the performance of the Company without regard to the Company’s organizational tax structure. We have included adjusted net income in this report because it is a key performance measure used by our management to understand and evaluate our core operating performance and trends and because we believe it is frequently used by analysts, investors and other interested parties in their evaluation of our Company. Other companies may calculate this measure differently than we do. Adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or substitution for earnings per share as reported under GAAP.
The following table presents a reconciliation of S, G & A to Core S, G & A for the years ended December 31, 2016 and 2015 ($ in thousands):
Commission rates for our products are agreed to in advance with the relevant insurance carrier and vary by carrier and policy type. Under our carrier compensation arrangements, the commission rate schedule that is in effect on the policy effective date governs the commissions over the life of the policy. In addition, we earn enrollment and administration fees on policies issued. All amounts due to insurance carriers and discount benefit vendors are reported and paid to them according to the procedures provided for in the contractual agreements between the individual carrier or vendor and us.
Credit card and ACH fees for the year ended December 31, 2016 were $4.0 million, an increase of $1.7 million, or 73.9%, compared to 2015. The increase in credit card and ACH fees was in line with the increase in premium equivalents.
Our selling, general and administrative (“S, G & A”) expenses primarily consist of personnel costs, which include salaries, bonuses, commissions, stock-based compensation, payroll taxes and benefits. S, G & A expenses also include selling and marketing expenses and travel costs associated with obtaining new distributor relationships. In addition, these expenses also include expenses for outside professional services and technology expenses, including legal, audit and financial services and the maintenance of our administrative technology platform and marketing costs for online advertising. In addition, the insurance brokerage operating expenses of Secured, ASIA and ICE are included in this category for the first eleven months of 2015 but only include ASIA through the year ended December 31, 2016 because of the restructuring that occurred in 2015. See Note 8 of the accompanying consolidated financial statements for further information on the restructuring.
S, G & A expense represented 27.9% and 16.5% of revenues and premium equivalents, respectively, for the year ended December 31, 2016 as compared to 45.2% and 26.9% of revenues and premium equivalents for 2015.
The decrease in S, G & A expenses as a percentage of revenues for the year ended December 31, 2016 compared to the same period 2015 was attributable to our scalable technology platform and the restructuring of ICE and Secured in December of 2015 which reduced duplicative processes and consequently S, G & A expenses incurred at those entities. Such decreases in SG&A were offset by our up-front cost of acquisition at AgileHealthInsurance.com, increased stock-based compensation, and accelerated product development and implementation expenses.
Depreciation and amortization expenses for 2016 were $3.2 million, an increase of $200,000, or 6.7% compared to 2015. The increase in depreciation and amortization was primarily driven by depreciation of internal-use software.
There was no restructuring expense incurred for the year ended December 31, 2016. For the year ended December 31, 2015, $2.6 million is included in the consolidated statement of operations in S, G & A expense. The Company has a $3,000 remaining liability associated with the restructuring at December 31, 2016. The Company recorded a liability at December 31, 2015 of $1.3 million which is included in the consolidated balance sheet as accounts payable and accrued expenses.
We are the sole managing member of HPIH and have 100% of the voting rights and control. As of December 31, 2016, we had a 54.0% economic interest in HPIH, and HPI and HPIS had a 46.0% economic interest in HPIH. HPI and HPIS’s interest in HPIH is reflected as a noncontrolling interest on our accompanying consolidated financial statements contained elsewhere in this report.
Net income attributable to HII for 2016 included HII’s share of its consolidated entities’ net income and loss and a benefit for income taxes of $4.8 million. Net loss attributable to HII for 2015 included HII’s share of its consolidated entities’ net loss and a benefit for income taxes of $1.9 million.
On August 15, 2014, we entered into an underwriting agreement with Raymond James & Associates, Inc., as the underwriter, and HPI and HPIS, as selling stockholders (the “Selling Stockholders”). Pursuant to the underwriting agreement and an exchange agreement between the Company and Selling Stockholders (the “Exchange Agreement”) under which holders of Series B Membership Interests may exchange Series B Membership Interests, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, we issued 1,725,000 shares of Class A common stock to the Selling Stockholders. We immediately acquired the Series B Membership Interests, together with an equal number of shares of our Class B common stock from the Selling Stockholders. These Series B Membership Interests were immediately recapitalized into Series A Membership Interests in HPIH. The Selling Stockholders agreed to immediately after the exchange sell to the underwriter for resale all 1,725,000 shares of Class A common stock at a public offering price of $12.15 per share ($11.54 per share, net of underwriting discounts), for net proceeds of $19.9 million. No shares were sold by the Company in this offering. The sale by the Selling Stockholders was made pursuant to a registration statement on Form S-3. No other shares of Class A common stock have been sold pursuant to the registration statement on Form S-3. See Note 9 of the accompanying consolidated financial statements for more information on this transaction and the Exchange Agreement.
As of December 31, 2016, we had $12.2 million of cash and cash equivalents.
On December 15, 2014, we entered into a three-year revolving line of credit (“RLOC”) for $15.0 million with a bank. The purpose of the RLOC is to provide working capital, expand the advanced commissions program, and to help us maintain adequate liquidity. Borrowings under this facility are secured by all of our and our subsidiaries’ assets, including, but not limited to, cash, accounts receivable, and property and equipment. While the Company does not expect to continue the same degree of historic expansion with the advanced commission program, the Company is evaluating alternative sources of funding to complement the program should additional growth be appropriate. As of December 31, 2016, we have no outstanding balance from draws on the RLOC and $15.0 million was available to be drawn upon.
Cash provided by operating activities for the year ended December 31, 2016 of $18.0 million was primarily the result of consolidated net income, before noncontrolling interests, of $13.1 million. Adjustments to reconcile net income to net cash provided by operating activities consisted of $3.2 million of depreciation and amortization of property and equipment and intangible assets and $3.8 million of stock-based compensation. The primary drivers of the net change in operating assets and liabilities were $12.5 million increase in advanced commission loans to our distributors, an increase in accounts payable, accrued expenses and other liabilities by $12.0 million, and an increase in due to member of $9.2 million. These were offset by an increase in restricted cash of $4.0 million and a decrease in accounts receivable, prepaid expenses and other current assets of $1.1 million. The increase in advanced commissions was the result of increased sales by our third-party distributors, driven by continued demand for our affordable healthcare products. The $9.2 million increase in due to member was the impact of recording the corresponding TRA liability associated with the release of the valuation allowance against our deferred tax assets.
The RLOC agreements also contain customary representations and warranties and events of default. The payment of outstanding principal under the RLOC and accrued interest thereon may be accelerated and become immediately due and payable upon default of payment or other performance obligations or failure to comply with financial or other covenants in the RLOC agreements, subject to applicable notice requirements and cure periods as provided in the RLOC agreements.
Under the terms of the RLOC, we incurred and capitalized certain costs related to acquiring the RLOC of $23,000. These costs consisted primarily of consulting and legal fees directly related to the bank loan. As of December 31, 2016 there was no balance of deferred financing costs. At December 31, 2015, the capitalized balance of the deferred financing costs of $15,000 were included in Accounts receivable, net, prepaid expenses and other current assets.
Through December 31, 2016, we had not entered into any off-balance sheet arrangements, other than the operating leases discussed in Note 15 of the accompanying consolidated financial statements.
A qualitative assessment will require judgments involving relevant factors, including but not limited to, changes in the general economic environment, industry and regulatory considerations, current economic performance compared to historical economic performance and other relevant company-specific events such as changes in management, key personnel or business strategy, where applicable.
If actual results differ substantially from the assumptions used in performing the impairment test, the fair value of the reporting units may be significantly lower, causing the carrying value to exceed the fair value and indicating an impairment has occurred. Absent offsetting changes in other factors, a 1% increase in the discount rate would decrease the estimated fair value of our reporting unit by approximately $5.0 million, but would not indicate impairment.
Historical sales returns may not be an accurate representation of current sales return trends. Management monitors these returns regularly to identify trends however additional factors that impact sales returns may not be included within the analysis which could materially impact the net reported revenues.
As of December 31, 2016 and 2015, our allowance accounts were $1.2 million, respectively. As a measure of sensitivity, a 1% change in the allowance calculation would have a $313,000 net effect on pre-tax earnings.
Write-offs are charged against the allowance account only after we have exhausted all collection efforts. Actual write-offs and adjustments could differ from the allowance estimates due to unanticipated changes in the business environment as well as factors and risks associated with specific distributors.
As of December 31, 2016 and 2015, our allowance accounts were $454,000 and $327,000, respectively. There were no receivable balances written off in 2016 or 2015.
The resulting compensation expense is recognized over the requisite service period. The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the vesting period. Compensation expense is recognized only for those awards expected to vest. In accordance with GAAP, compensation expense is not recognized for awards with performance vesting conditions until it is deemed probable that the underlying performance events will occur. All stock-based compensation expense is classified within S, G & A expense in the condensed consolidated statements of operations.
As a measure of sensitivity, a 1% change to our estimated forfeiture rate would have had an approximate $15,000 impact on our 2016 operating income. Our estimated forfeiture rates as of December 31, 2016 and 2015, were 7%. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense.