Except for the historical information contained herein, this report and other written and oral statements that the Company makes from time to time contain forward-looking statements, which involve substantial known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of results to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. See the section of this annual report entitled "Special Note Regarding Forward-Looking Statements." Among the factors that could cause actual results to differ materially are those discussed in "Risk Factors" in Item 1A of this report. In addition, the following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in connection with the information presented in the Company's consolidated financial statements and the related notes to its consolidated financial statements included in Part IV, Item 15, of this report.
Health Insurance Innovations, Inc. is a Delaware corporation incorporated on October 26, 2012. In this management's discussion and analysis, 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 Health Plan Intermediaries Sub, LLC ("HPIS"), its consolidated subsidiary, and (2) after the IPO and related transactions, to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The term "HPIH" refers to the stand-alone entity Health Plan Intermediaries Holdings, LLC. The terms "HealthPocket" or "HP" refer to HealthPocket, Inc., which was acquired by HPIH on July 14, 2014 (and is now wholly owned by Health Insurance Innovations Holdings, LLC, or "HIIH," a wholly owned subsidiary of HPIH formed on December 17, 2018). The term "Benefytt Reinsurance" refers to Benefytt, LLC, a wholly owned subsidiary of HIIH which was formed on May 1, 2019. The term "TogetherHealth" collectively refers to the three subsidiaries TogetherHealth PAP, LLC, TogetherHealth Insurance, LLC, and Rx Helpline, LLC, which were acquired by HPIH on June 5, 2019, and are all wholly owned subsidiaries of HPIH. The term "TIB" refers to Total Insurance Brokers, LLC which was acquired on August 5, 2019 and is wholly owned by HPIH. The term "ASIA" refers to American Service Insurance Agency LLC, a wholly owned subsidiary which was acquired by HPIH on August 8, 2014. HP, HIIH, Benefytt Reinsurance, TogetherHealth, TIB, and ASIA are consolidated subsidiaries of HPIH, which is a consolidated subsidiary of HIIQ.
On June 5, 2019, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with RxHelpline, LLC ("RXH"), TogetherHealth PAP, LLC ("THP"), TogetherHealth Insurance, LLC ("THI" and, collectively with RXH and THP, "TogetherHealth"), TogetherHealth Soup, L.P. ("Seller") and certain principals of TogetherHealth, pursuant to which HPIH purchased 100% of the outstanding limited liability company interests of TogetherHealth (the "Interests"). The closing of the transactions contemplated by the Purchase Agreement occurred on June 5, 2019, simultaneous with the signing of the Purchase Agreement.
On August 5, 2019, the Company entered into a Membership Interest Purchase Agreement with TIB, a captive Medicare and IFP distribution company, to acquire 100% of the outstanding limited liability company interests. The $22.3 million purchase price of the distribution company was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value with the excess purchase price recorded as goodwill.
We expect for this change in strategy to have a negative impact on total revenue and profitability in 2020 when compared to 2019. In years following 2020, we expect a positive impact to both revenue growth and total profitability of our business as a result of this change.
On February 12, 2020, the holders of our Class B common stock notified the Company that have elected to exchange all remaining shares of Class B common stock, together with an equal number of Series B Membership Interests in HPIH, into an aggregate of 1,016,667 shares of our Class A common stock (the “Final Class B Exchange”) pursuant to the Exchange Agreement, dated February 13, 2013, among the Company, HPIH, and the holders of the Class B common stock (the “Exchange Agreement”). Under the terms of the Exchange Agreement, the closing of the Final Class B Exchange is scheduled to occur on April 7, 2020 unless the Company elects to effectuate the Final Class B Exchange on an earlier date. Upon the closing of the Final Class B Exchange, the Company will cease to have any shares of Class B common stock outstanding and will own 100% of the equity interest in HPIH.
On March 3, 2020, the Company announced that the Company will file a Certificate of Amendment to its Certificate of Incorporation to change the Company’s name to “Benefytt Technologies, Inc.” effective as of March 6, 2020, and the Company’s trading symbol on the Nasdaq Global Market will also be changed from “HIIQ” to “BFYT” effective as of March 6, 2020.
Our key metrics and financial results for 2019 are as follows:
Fourth quarter profit for the IFP segment was $22.2 million, an increase of 17.2%.
Expected duration units of submitted IFPs were 4.8 million and 5.1 million, respectively for the years ended December 31, 2019 and 2018, a decrease of 5.8%.
Revenue was $381.8 million, compared to revenue of $351.1 million in 2018, an increase of 8.7%.
GAAP diluted earnings per share was $2.47, compared to $0.97 in 2018, an increase of 154.6%.
We rely upon the following key business metrics to evaluate our business performance and facilitate long-term strategic planning:
Approved applications represent the number of submitted applications that were approved by the relevant insurance carrier for the identified product during the relevant period. Medicare approved applications are calculated assuming a 92% conversion of submitted applications.
Constrained Lifetime Value per Approved Application ("CLTV"). We have included CLTV in this report because it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget and to develop short- and long-term operational plans. CLTV is the constrained lifetime value of both the sales and marketing, and member management performance obligations, expected to be recognized over the life of the products, divided by the number of approved applications received during the reporting period. Total CLTV excludes the fulfillment-only applications that represent low margin products where the Company outsourced all sales and marketing obligations and some of its member management services. We believe that excluding these fulfillment-only applications from CLTV provides greater insight into our core operations. The inclusion of CLTV can provide a useful measure for period-to-period comparisons of our business. CLTV has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP.
Prior to the adoption of CLTV, the Company used Constrained Lifetime Value per Submitted Application ("LVSA") as a key metric. While there is little distinction between submitted and approved applications for IFP, approved applications are a more useful metric for management with respect to Medicare products and therefore now uses CLTV as a substitute for LVSA.
The following tables present the Constrained Lifetime Value ("CLTV") per approved application, by product type ($ in thousands):
The following tables present expense metrics per approved application, by product type ($ in thousands):
Medicare variable marketing cost per approved application includes direct costs incurred in member acquisition for all Medicare products from our direct marketing partners and online advertising channels divided by Medicare approved applications in each period.
EBITDA. We define this metric as net income before interest, 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 EBITDA. To calculate adjusted EBITDA, we calculate EBITDA, which is then further adjusted for items such as stock-based compensation and related costs, and items that are not part of regular operating activities, including tax receivable adjustments, fair value adjustments to contingent consideration, indemnity and other related legal costs, and severance, restructuring, and acquisition costs. Adjusted 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. We have presented adjusted EBITDA because we consider it an important supplemental measure of our performance and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate adjusted EBITDA differently than we do. Adjusted 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, items such as stock-based compensation and related costs, and other items that are not part of regular operating activities, including, tax receivable adjustments, indemnity and other related legal costs, severance, restructuring, and acquisition costs. From adjusted pre-tax net income, we apply a pro forma tax expense calculated at an assumed rate of 24%, which consists of the maximum federal corporate rate of 21%, with an assumed 3% state tax rate. Prior to the implementation of H.R.1, commonly known as the Tax Cuts and Jobs Act, signed into law on December 22, 2017, we applied an assumed pro forma tax 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 the 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.
Adjusted net income per share. Adjusted net income per share is computed by dividing adjusted net income by the total number of weighted-average diluted Class A and weighted-average Class B shares of our common stock for each period. We have included adjusted net income per share in this report because it is a key 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 the evaluation of companies. Other companies may calculate this measure differently than we do. Adjusted net income per share has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for earnings per share as reported under GAAP.
The following table presents a reconciliation of net income to adjusted net income and adjusted net income per share (in thousands, except per share data):
Adjusted SG&A. We determined that Adjusted SG&A was no longer a key business metric that we use to evaluate our business performance and facilitate long-term strategic planning. Accordingly, we no longer present Adjusted SG&A as a key business metric in our Management's Discussion and Analysis of Financial Condition and Results of Operations.
Our SG&A expenses primarily consist of personnel costs, which include salaries, bonuses, commissions, stock-based compensation, payroll taxes and benefits. SG&A expenses also include certain 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.
The increase in marketing and advertising expenses was primarily attributable to the Company's entrance into Medicare and the up-front investment in preparation for the Medicare open enrollment period.
For 2019, we recorded a provision for income tax expense of $10.1 million, reflecting an effective tax rate of 21.6%. For 2018, we recorded a provision for income tax expense of $10.7 million, reflecting an effective tax rate of 36.0%. The amount of income tax expense and the effective tax rate decreased primarily due to the release of the valuation allowance attributable to HPIH from the adoption of Section 451(b) proposed regulations. The decrease in the effective tax rate for the year ended December 31, 2019 is also lower than prior year due to an adjustment of the Company’s valuation allowance related to its investment in HPIH, as discussed in Note 13 to the financial statements.
The following table presents summary results of our operating segments ($ in thousands):
We believe that our available cash and cash flows expected to be generated from operations will be adequate to satisfy our current and planned operations for at least the next 12 months, although we can give no assurances concerning future liquidity.
As of December 31, 2019, we had a $180.3 million outstanding balance from draws on the Senior Credit Facility (as defined below) and $31.0 million was available to be drawn upon. As of December 31, 2018, we had $15.0 million outstanding balance from draws on our previous credit facility. The Company was in compliance with all covenants for all periods. See Note 9 to the consolidated financial statements for additional details on our Senior Credit Facility.
On May 5, 2017, the Company filed a registration statement on Form S-3 to offer and sell, from time to time, up to $150.0 million of any combination of debt securities, Class A common stock, preferred stock, warrants, subscription rights, units, or purchase contracts as described in the related prospectus. At December 31, 2019 the Company had not sold any securities under this Registration Statement, and the Registration Statement will expire in May 2020. See Note 10 to the consolidated financial statements for additional details on our registration statement.
Net cash provided by operating activities during the fiscal year ended December 31, 2019 decreased compared to 2018 primarily due to a $17.4 million increase in advanced commissions, a $16.8 million increase in accounts payable, accrued expenses and other and a decrease of $10.1 million in commissions. Changes in operating assets and liabilities were largely driven by the expansion into the Medicare segment which required additional selling, general and administrative costs and significant marketing and advertising costs.
Net cash used in investing activities during the fiscal year ended December 31, 2019 increased compared to 2018 and was primarily the result of business acquisitions of $49.9 million, the purchase of a domain name for $8.1 million, capitalized internal-use software costs of $1.6 million and $1.2 million of purchases of property and equipment.
Through December 31, 2019, we had not entered into any off-balance sheet arrangements.
We calculated interest based on payment terms that existed at December 31, 2019. Refer to Note 9 in Part IV Item 15 of this Annual Report for the weighted-average interest rates used.
Operating leases include total future minimum rent payments under non-cancelable operating lease agreements.
Contingent consideration represents the additional payments that are contingent on the future performance of certain acquired businesses. We have included the fair value of the total expected payments as of December 31, 2019 as noted in Note 15 in Part IV Item 15 of this Annual Report. As of December 31, 2019, estimated future, undiscounted earnout payments could range as high as $131.5 million.
Our primary revenue sources are from the distribution of Medicare and IFP products. Our contracts with customers often include promises to transfer multiple services to a customer. In determining how revenue should be recognized, a five-step process is used, which requires management judgment and estimates within the revenue recognition process. These judgments and estimates include (i) determining the standalone sales price ("SSP") for each distinct performance obligation; and (ii) estimating the amount of variable consideration to include in the transaction price.
Significant judgment is required to determine the SSP for each distinct performance obligation. The Company rarely offers the individual performance obligations identified on a stand-alone basis, so the Company is required to estimate the SSPs for each performance obligation. In instances where the SSP is not directly observable because the Company does not sell the product or service separately, the Company determines the SSP using information that may include market conditions and other observable inputs. In making these judgments, the Company primarily uses a cost-plus-margin approach but analyzes various factors, including its pricing methodology, size of the arrangement, length of term, and overall market and economic conditions. Based on these results, the estimated SSP is set for each performance obligation promised to our customer.
The Company has significant historical data surrounding persistency, or how long a block of products will remain in force, by product type and by month sold. Significant management judgment is required in selecting appropriate durations for blocks of policies and for products such as HBIP which do not have stated policy terms where coverage continues until a member cancels.
If we were to change any of these judgments or estimates, it could cause a material increase or decrease in the amount of revenue we report in a particular period. For additional information, see "Revenue Recognition" in Part IV, Item 15, Note 1 of this Annual Report.
With the adoption of ASC 606, the Company applied guidance under ASC 340 and was required to record the estimated lifetime commissions expected to be paid to distributors. Duration estimates used in revenue recognition have a significant impact on the amount of commissions expense we recognize, and the related liability recorded for the estimated lifetime commission payments not yet made. The duration estimates applied to revenue are similar to those applied to the associated commissions.
We believe that the amount or estimable range of reasonably possible loss, will not, either individually or in the aggregate, have a material adverse effect on our business or consolidated financial statements with respect to loss contingencies for legal and other contingencies as of December 31, 2019. However, the outcome of litigation is inherently uncertain. Therefore, if one or more
of these legal matters were resolved against us for amounts in excess of management's expectations, our results of operations and financial condition, including in a particular reporting period, could be materially adversely affected.
We accounted for the tax effects of the Tax Act, enacted on December 22, 2017, on a provisional basis in our 2017 consolidated financial statements. We completed our accounting in the fourth quarter of 2018, within the one year measurement period from the enactment date.
A significant decline in either projected revenues, projected cash flows or increased discount rates used to determine fair value could result in an impairment charge.
The Company allocates the purchase price, including contingent consideration, of our acquisitions to the assets and liabilities acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. Such fair market value assessments are primarily based on assumptions developed by management that require significant judgments and estimates that can change materially as additional information becomes available. The purchase price allocated to intangibles is based on unobservable factors, including but not limited to, projected revenues, expenses, customer attrition rates, royalty rates, and WACC, among others. The WACC requires assumptions and judgments as described above for goodwill and indefinite lived impairment analysis.
Based upon these assumptions, the initial contingent consideration is then valued using a Monte Carlo simulation. The Company finalizes the purchase price allocation once certain initial accounting valuation estimates are finalized, and no later than 12 months following the acquisition date.
For the year ended December 31, 2019, three carriers accounted for 43% of our revenues compared to three carriers who accounted for 54% of our revenues at December 31, 2018. The Company anticipates that revenues in 2020 will continue to be concentrated among a small number of carriers, although as a part of the Company's strategy of improving and increasing its product mix by seeking to add innovative new products, the Company anticipates that its carrier concentration may decrease. See Note 17 "Concentrations of Credit Risk and Significant Customers" of the accompanying consolidated financial statements for further information.