As of December 31, 2018, 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:
We believe that our properties are generally in good condition, well maintained and suitable and adequate to carry out our business at expected capacity for the foreseeable future. Should additional capacity become necessary in the future, we believe that suitable additional or alternative space will be available on commercially reasonable terms to accommodate our foreseeable future expansion.
Consolidated Statements of Operation Data ($ in thousands, except per share amounts):
Cash and cash equivalents reported for the years ended December 31, 2014 through 2017 reflect the reclassification of credit card deposits in transit as described in Note 1 of Part IV, Item 15, of this Annual Report on Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations below presents the Company’s operating results for each of the three years in the period ended December 31, 2018, and its financial condition as of December 31, 2018 and 2017. 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 our February 13, 2013 initial public offering (“IPO”) of the Class A common stock of Health Insurance Innovations, Inc., to Health Plan Intermediaries, LLC (“HPI”) and Health Plan Intermediaries Sub, LLC (“HPIS”), its consolidated subsidiary, and (2) after the IPO, to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The terms “HIIQ” and “HPIH” refer to the stand-alone entities Health Insurance Innovations, Inc., and Health Plan Intermediaries Holdings, LLC, respectively. 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, HP, and ASIA, are consolidated subsidiaries of HIIQ.
We are a cloud-based technology platform and distributor of affordable health and life insurance products that meet the demands and needs of our consumers. These products include individual and family health insurance plans (“IFP”) which include short-term medical (“STM”) insurance plans and health benefit insurance plans ("HBIP"). We also offer supplemental products which include a variety of additional insurance and non-insurance products that are frequently purchased as supplements to IFPs. We work in concert with carriers to help them develop products for our target markets. We are not an insurer and do not process or pay claims. The health insurance products we help develop are underwritten by third-party insurance carriers with whom we have no affiliation apart from our contractual relationships. We assume no underwriting, insurance or reimbursement risk.
On December 31, 2018, the Company adopted the new revenue recognition standard ASC 606 using the modified retrospective approach which had a material impact on our consolidated balance sheet at January 1, 2018.
Expected duration units of submitted IFPs were 2.9 million for each of the years ended December 31, 2018 and 2017.
In 2018, we continued to focus on our top initiatives: (i) improving the lifetime value of policies sold, (ii) new product development, (iii) expanding compliant distribution, (iv) improving the member experience, and (v) enhancing technology.
The following table presents a reconciliation of premium equivalents to revenues ($ in thousands):
Submitted Applications. Our submitted applications are an important input of our expected revenues. A member may be enrolled in more than one policy or discount benefit plan simultaneously. We have included submitted applications in this report because in conjunction with duration units (see below), 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. In particular, the inclusion of submitted applications can provide a useful measure for period-to-period comparisons of our business. Submitted applications is a non-GAAP financial measure not recognized under GAAP and should not be used as, and is not an alternative to, comparable GAAP results. Other companies may calculate this measure differently than we do. Submitted applications 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.
The following table presents expected duration units for IFP by distribution source:
The following table presents expected duration units for IFP by eCommerce source:
Represents low margin products where the Company outsourced all sales and marketing obligations and some of our member management services.
Constrained Lifetime Value per Submitted Application ("LVSA"). We have included LVSA 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. In particular, the inclusion of LVSA can provide a useful measure for period-to-period comparisons of our business. LVSA is a non-GAAP financial measure not recognized under GAAP and should not be used as, and is not an alternative to, comparable GAAP results. Other companies may calculate this measure differently than we do. LVSA 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.
The following table presents the LVSA, by product type ($, except submitted applications):
The following table presents the number of policies in force by product type:
Adjusted EBITDA. To calculate adjusted EBITDA, we calculate EBITDA, which is then further adjusted for items such as stock-based compensation and related costs, and items that are not generally a part of regular operating activities, including tax receivable adjustments, indemnity and other related legal costs, and severance, restructuring, and acquisition costs. Adjusted EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. We have presented adjusted EBITDA because we consider it an important supplemental measure of our performance and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate adjusted EBITDA differently than we do. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA ($ in thousands):
Indemnity and other related legal costs were previously reported in severance, restructuring and other and are now presented as its own line-item.
The 2017/2016 year-over-year increase in non-GAAP weighted average diluted share count was driven by an increase in issued shares related to the exercise of stock appreciation rights by the Company's former Chief Executive Officer.
Adjusted SG&A. Previously referred to as Core SG&A, we define this metric as total GAAP selling, general, and administrative ("SG&A") expenses adjusted for stock-based compensation and related costs, transaction costs, indemnity and other related legal costs, severance, restructuring and other costs. The Company previously reduced SG&A by marketing and advertising expenses to arrive at Adjusted SG&A because of the disproportionately high up-front costs relative to the revenue it generated over the short-term under ASC 605. With the adoption of ASC 606 and the point-in-time recognition of 95% of revenues, these marketing and advertising activities are more comparable and meaningful when comparing SG&A against revenue and is therefore no longer subtracted from total SG&A to arrive at Adjusted SG&A. Prior periods have been adjusted to reflect this change and have been updated herein. We have included Adjusted SG&A in this report because it is a key measure used by our management to understand and evaluate our core operating performance and trends. Other companies may calculate this measure differently than we do. Adjusted SG&A has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for SG&A as reported under GAAP.
Third-party commissions for the year ended December 31, 2018 were $234.8 million, an increase of $89.5 million, or 61.6%, compared to 2017. The increase in third-party commissions was due to the impact of adopting ASC 606 and recording, at the time a policy is sold, 100% of the estimated lifetime commissions expense that is expected to be paid over the estimated duration of the policy, and due to an increase in sales from independent third-party distributors.
SG&A expense for the year ended December 31, 2018 was $74.4 million. This represents an increase of $9.9 million, or 15.4%, for the year ended December 31, 2018 compared to 2017.
For 2016, we recorded a benefit for income taxes of $4.8 million, reflecting an effective tax rate of (56.8)%. During 2016, the effective tax rate was significantly impacted by release of the valuation allowance provided against much of our deferred tax assets. The deferred tax asset is a result of obligations under the TRA. We recorded and maintained a full valuation allowance on all of the related deferred tax assets of HIIQ until December 31, 2016 when there was sufficient evidence to support a partial reversal. The reversal of the valuation allowance resulted in the recognition of $8.1 million of deferred tax assets at December 31, 2016. See Note 11 of the accompanying audited financial statements for further information on income taxes and the effective tax rates.
Adjustments to arrive at adjusted pre-tax net income reflect amounts as reported, in summarized form, in Part I, Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," in the respective quarterly reports on Form 10-Q.
As of December 31, 2018, we had $9.3 million of cash and cash equivalents, excluding restricted cash.
As of December 31, 2018, we had a $15.0 million outstanding balance from draws on the Credit Facility and $15.0 million was available to be drawn upon. As of December 31, 2017, we had no outstanding balance from draws on the revolving line of credit. The Company was in compliance with all covenants for all periods. See Notes 7 and 16 to the consolidated financial statements for additional details on our Credit Facility.
Net Cash provided by operating activities during the fiscal year ended December 31, 2017 increased compared to 2016 primarily due to changes in net income before noncontrolling interest and less advanced commission payments made in 2017 compared to 2016. Changes in operating assets and liabilities were largely driven by the Tax Act in 2017 which significantly impacted deferred income taxes and future amounts due to member under the TRA agreement.
Net cash used in investing activities during the fiscal year ended December 31, 2017 increased slightly compared to 2016 and was primarily the result of increased purchases of property, plant and equipment. Capitalized internal-use software expenditures remained consistent between the two periods.
Through December 31, 2018, we had not entered into any material off-balance sheet arrangements, other than the operating leases discussed in Note 14 of the accompanying consolidated financial statements.
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 is subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. The Company accrues losses associated with legal claims when such losses are probable and reasonably estimable. If the Company determines that a loss is probable and cannot estimate a specific amount for that loss, but can estimate a range of loss, the best estimate within the range is accrued. If no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. Estimates are adjusted as additional information becomes available or circumstances change. Legal defense costs associated with loss contingencies are expensed in the period incurred. For detailed discussion surrounding legal and other contingencies, see Note 14 in the accompanying consolidated financial statements.