Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549
 ___________________________________________________
FORM 10-K
 ___________________________________________________

[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2019
 
[  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to ____________
 
COMMISSION FILE NUMBER 001-35811
 ___________________________________________________

https://cdn.kscope.io/6919a7b648daea8af48a4c806458c3d3-hiilogoa04.jpg 
Health Insurance Innovations, Inc.
(Exact name of registrant as specified in its charter)
 ___________________________________________________ 
Delaware
 
46-1282634
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
15438 North Florida Avenue, Suite 201, Tampa, Florida
 
33613
(Address of principal executive offices)
 
 (zip code)

Registrant's telephone number, including area code:
(813) 397-1187
 ___________________________________________________
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A common stock, par value $0.001 per share
 
HIIQ
 
NASDAQ Global Market
 
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
 ___________________________________________________
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [  ] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [  ] No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X] No [  ]
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes [X] No [  ]
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company," in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[  ]
Emerging growth company           
[  ]
Accelerated filer
[X]
Non-accelerated filer
[  ]
(Do not check if a smaller reporting company)
 
Smaller reporting company
[  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [  ] No [X]
 
The aggregate market value of the registrant's Class A and Class B common stock held by non-affiliates of the registrant, as of June 30, 2019, was approximately $276.4 million. Such aggregate market value was computed by reference to the closing price of the Class A common stock as reported on the NASDAQ Global Market on June 28, 2019.
 
As of February 28, 2020, there were 12,238,049 shares of the registrant's Class A common stock, $0.001 par value per share, outstanding and 1,016,667 shares of the registrant's Class B common stock, $0.001 par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2020 Annual Meeting of Stockholders of the Registrant to be filed subsequently with the SEC are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent indicated herein.

 





TABLE OF CONTENTS
 
 
 
ITEM 1.
 
ITEM 1A.
 
ITEM 1B.
 
ITEM 2.
 
ITEM 3.
 
ITEM 4.
 
 
ITEM 5.
 
ITEM 6.
 
ITEM 7.
 
ITEM 7A.
 
ITEM 8.
 
ITEM 9.
 
ITEM 9A.
 
ITEM 9B.
 
 
ITEM 10.
 
ITEM 11.
 
ITEM 12.
 
ITEM 13.
 
ITEM 14.
 
 
ITEM 15.
 
ITEM 16.
 
 
 

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INTRODUCTION
 
Health Insurance Innovations, Inc. ("HIIQ") 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 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.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
We have made statements in "Item 1. Business," "Item 1A. Risk Factors," "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and in other sections of this report that are forward-looking statements. All statements other than statements of historical fact included in this report are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue," the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies, anticipated trends in our business and other future events or circumstances. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements and other future events or circumstances to differ materially from the results, level of activity, performance or achievements, events or circumstances expressed or implied by the forward-looking statements, including those factors discussed "Item 1A. Risk Factors."
 
We cannot guarantee future results, level of activity, performance, achievements, events or circumstances. We are under no duty to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations.


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PART I
 
ITEM 1. BUSINESS
 
Overview

We are a technology driven distributor of Medicare, health and life insurance products that meet the demands and needs of our consumers. Our business is comprised of two operating segments: our Medicare Segment, which includes our offering of Medicare-related health insurance plans, and our IFP Segment which includes individual and family health insurance plans ("IFP"), short-term medical ("STM") insurance plans, health benefit insurance plans ("HBIP") and supplemental products which include a variety of additional insurance and non-insurance products. We actively market products to individuals through televised commercials, e-commerce platforms and digital marketing campaigns, strategic marketing partner relationships, and other licensed-agent distribution channels, consisting of both our internal distribution network, and an external distribution network of independently owned and operated distributors.

The health insurance products we sell are underwritten by third-party insurance carriers with whom we have no affiliation apart from our contractual relationships. Other than with respect to the activities of Benefytt Reinsurance, which is described further below, we are not an insurer, we assume no underwriting, insurance or reimbursement risk.

Medicare Segment

Our Medicare segment is centered around two activities: consumer engagement and Medicare insurance distribution. The consumer engagement business operates through a direct-to-consumer platform which connects individuals with licensed insurance agents serving the Medicare insurance market through inbound live telephone calls via a third-party telephony platform which transfers inbound calls in real time. In the Medicare insurance business, we route inbound calls to both our internal captive distribution channel as well as to our business process outsourcing partners ("BPO") distribution channel, who distribute Medicare-related health insurance plans on our behalf. Medicare products offered include Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans.

The Company's entrance into the Medicare distribution and consumer engagement business was marked by the purchase of TogetherHealth on June 5, 2019. This acquisition marked the beginning of the Company's strategic shift toward Medicare as the core product line and during the fourth quarter of 2019, the Company concluded that the Company's chief operating decision maker required a two-segment reporting view to better measure performance and profitability of the two lines of business. The Company has previously announced a de-emphasis of the IFP segment, allowing continued new product distribution only with select e-commerce focused distributors, so the Company can focus on accelerating growth of the Medicare segment.

The Company has also acquired a premier domain name and has complemented that investment with the development of powerful online shopping and comparison tools for Medicare-related insurance plans as well as educational resources specific to the Medicare segment. The domain will serve as an industry-defining private e-commerce marketplace for Medicare insurance products where consumers can shop, compare, and purchase plans online. We also expect the domain to generate a significant amount of consumer demand which will flow through to all distribution channels.

IFP Segment

We partner with e-commerce distributors to provide affordable IFP plans to individuals and families. We also market IFP through licensed-agent distribution channels, consisting of both our internal distribution network and an external distribution network of independently owned and operated distributors. STM plans feature a streamlined underwriting process offering immediate purchase options. STM plans offer qualifying individuals, under the age of 65, fixed duration insurance benefits. STM plans generally provide health insurance coverage with an open-provider network and a wide range of deductible and copay levels.

HBIPs are insurance products with undefined policy term lengths that include both guaranteed-issue and underwritten plans that pay fixed cash benefits, and additional benefits for certain plans, for covered procedures and services for individuals under the age of 65.

Supplemental insurance and non-insurance products include life insurance policies, dental plans, vision plans, cancer/critical illness plans, deductible and gap protection plans, and pharmacy benefit cards, that are frequently purchased as supplements to IFPs. These supplemental products typically do not have defined policy term lengths and are not affected by regulations relating to maximum duration or renewal of STM products.


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Through our website, HealthPocket.com, we provide consumers with access to health insurance information search and comparison technology. This website allows consumers to easily and clearly compare and rank health insurance plans available for an individual, family or small business, empowering consumers to make informed health plan decisions. The Company also has a direct-to-consumer insurance website that allows consumers to research health insurance trends, comparison shop, and purchase IFPs under the AgileHealthInsurance® brand ("Agile").

In May 2019, the Company formed Benefytt Reinsurance, a captive reinsurance company which only engages in the reinsurance of certain insurers' IFP business that was provided and administered by HIIQ. The current operations of Benefytt Reinsurance have not been material to the Company's financial statements.

We are a Delaware corporation, and we were incorporated on October 26, 2012.

Recent Developments

Acquisition of TogetherHealth and Entrance into Medicare Business

On June 5, 2019, the Company purchased TogetherHealth, which marked the beginning of the Company's strategic shift toward Medicare as the core product line.

Exploration of Strategic Alternatives

On July 26, 2019, we announced that our Board of Directors commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing shareholder value. These alternatives could include, among other things, a sale of the Company or a portion thereof, a strategic business combination, changes in the Company’s operations or strategy, or continuing to execute on the Company’s current business plan. On March 3, 2020, the Company announced that the review of potential strategic alternatives was ongoing.

Change in Business Strategy

On December 20, 2019, we announced a change in our overall business strategy to accelerate growth within the Medicare segment. The IFP segment will be de-emphasized moving forward and our focus for IFP will be to maximize cash flows and enhance e-commerce capabilities. By decreasing emphasis on new business within the IFP segment, we will be able to use cashflows from the IFP segment to invest in accelerating growth of the Medicare segment.

Exchange of Remaining Class B Common Stock

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.

Corporate Name Change and Ticker Symbol Change

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 “

Health Insurance Industry and Market Opportunity
 
Medicare is a federal program that provides persons 65 years of age and over, and some persons under the age of 65 who meet certain conditions, with hospital and medical insurance benefits. Medicare beneficiaries generally have a choice between Medicare Fee-For-Service and Medicare Advantage plans. Medicare Fee-For-Service is a government health insurance plan where the consumer is responsible for select health care related payments with no limit on out-of-pocket expenses. To increase coverage, Medicare Fee-For-Service beneficiaries can purchase commercially offered Medicare Supplement plans. Medicare Advantage is an alternative to Medicare Fee-For-Service. Under Medicare Advantage Plans, the Centers for Medicare and Medicaid Services

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("CMS") contracts with private health insurance carriers under the Medicare Advantage program and Medicare Part D prescription drug plans. Under these programs, the government generally pays insurers a fixed amount of money each year per enrollee to cover healthcare expenses rather than making payments directly to providers under Medicare Fee-For-Service. Medicare Advantage plans are required to cover the same services as Medicare Fee-For-Service and usually cover a variety of other health care services and include a cap on out-of-pocket spending for the consumer.

In recent years there have been major changes to health insurance laws. Some of these changes were implemented under the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 ("HCERA"), which we collectively refer to as "Healthcare Reform." Healthcare Reform imposed requirements on a broad segment of the population, including, through December 31, 2018, a mandate that most individuals carry health insurance or face tax penalties (the "Individual Mandate Penalty"); tax credits and subsidies for the policy premium costs of individual major medical plans ("IMM") for qualifying individuals; the establishment of a mandatory set of ten Essential Health Benefits for IMM plans; a mandate that certain employers offer most of their employees group health insurance coverage or face tax penalties; prohibitions against insurance companies that offer IMM insurance plans using pre-existing health conditions as a reason to deny an application for health insurance; and medical loss ratio ("MLR") requirements that require each health insurance carrier to spend a certain percentage of its IMM premium revenue on reimbursement for clinical services and activities that improve healthcare quality.
 
Healthcare Reform has, among other things, contributed to a dramatic increase in the unsubsidized average premium for IMM plans, caused carriers to narrow networks available under IMM plans and restricted the availability (except in limited circumstances) of open enrollment periods. Our IFP plans' affordable premium prices, wide acceptance among healthcare providers and year-round availability provide value to the consumer that may not be available under PPACA health plans. Our IFP products are not subject to narrow networks and are exempt from the minimum MLR thresholds, pre-existing condition provision restrictions, and Essential Health Benefits requirements under Healthcare Reform, allowing us to provide health insurance products with average premium cost typically more affordable than unsubsidized PPACA health plans. We believe that these dynamics in the health insurance industry present an opportunity to increase our market share in the individual health insurance market.

Ongoing changes in the health insurance industry have expanded and reshaped our target market and we believe the market will continue to evolve. We intend to continue to pursue opportunities to help meet consumers' needs for affordable health insurance. We believe that our technology platform, product focus, and industry expertise will allow us to gain an increasing share of this dynamic market.
 
Our Strategy
 
Our objective is to increase shareholder value by increasing our demand generation capabilities, expanding capacity of our Medicare distribution channels, leveraging our technology to serve our existing consumer base and continuing to provide an outstanding member experience. Our principal strategies to meet these objectives are:

Medicare Market. With the strategic acquisition of TogetherHealth and our expanded captive distribution, the Company positioned itself for a strong entrance into the Medicare space prior to the 2019 Medicare annual open enrollment period. Continued investment in technology, distribution, compliance, and marketing is expected to drive continued growth.

Data-Driven Product Innovation. We will continue to utilize vast amounts of data to constantly enhance and diversify our product portfolio to provide consumers with more robust choices for their health insurance needs.

Outstanding Member Experience. We have invested significant resources and strive to be market leaders in our member services. We continue to invest in technologies that improve the member experience and increase member retention.

Maximize e-Commerce Opportunity. We believe that e-commerce is an efficient and compliant distribution channel that we see as a continued investment opportunity. We will continue to expand our direct to consumer web presence with continued focus on its profitability.

Expand Compliant Distribution. The traditional distribution network we access includes independently owned and operated internet distributors and licensed-agent call centers to sell insurance products. The technology platform and other support that we provide, and the terms on which we trade with our distribution network, motivates distributors to work with us. We provide distributors with training, audit and other support, and monitoring, and we continue to improve our distributor compliance.


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Increased Consumer Awareness. We believe that increased consumer awareness will enhance consumer choice and increase understanding of products that are available in the health insurance market. Through our enhanced member experience, e-commerce platforms, targeted marketing campaigns, and collaboration with regulatory and government entities, we will continue to drive awareness and education in the market.

Focus on Scalability and Leverage. We believe that continuing to invest in technology will improve our scalability and on a per-policy basis, reduces the costs associated with marketing, selling, and other obligations.

Strategic Acquisitions and Other Transactions. We may acquire, or invest in, companies, products or technologies that complement our current products, enhance our market coverage, technical capabilities or production capacity, or offer growth opportunities.
 
Our Competitive Strengths
 
Proprietary, Web-Based, Direct-to-Consumer Technology Platforms

Our business utilizes a unique and scalable proprietary, web-based technology platform for products offered in our IFP segment. Our technology represents a distinct competitive advantage as it reduces the need for member support agents, the time associated with quoting, billing, underwriting, fulfillment, sale and marketing, and provides significant operating leverage as we add members and product offerings.
 
Our Core Technology
 
Our core technology platform processes and combines data that is used in insurance plan and product design, sales and distribution of insurance products, member services, business and regulatory compliance, and general reporting. Key elements of our core technology platform include:

Quote-Buy-Print. Individuals access our technology platform through our distribution channels and can quote products and buy and print their policy documents and identification cards at any time.

Automated Underwriting. The entire underwriting process is handled by our core technology platform through the use of health questionnaires approved by the insurance carriers. Underwriting for IFP products is an immediate accept or reject decision based on a prospective member's answers to an abbreviated online health-related questionnaire.

Payment. Through our online platform, we receive credit card and Automated Clearing House ("ACH") payments directly from members at the time of sale and automatically process recurring payments.

Member Services. Members have the ability to log-in and change payment information and print new identification cards, all without the need of a customer service representative.

Verification and Compliance. We incorporate eSign technology from Adobe Sign, part of Adobe Inc., on our platform to streamline compliance by providing real-time verification to our members' mobile devices. This technology has allowed us to further automate our compliance program, enhancing quality while minimizing overhead.

Adaptability. Our core technology platform is highly adaptable and can support a wide range of insurance products. This allows us to be product agnostic and quickly add or remove products as required by shifting market dynamics.

MyBenefitsKeeper® ("MBK")

The addition of MBK has further enhanced our technological advantage by simplifying and improving the member experience by allowing members to manage benefits and purchase products via our online member portal. MBK will continue to be an integral component of our strategic advantage and value proposition, regardless of product mix, helping to increase retention as well as revenue per member.

Established Long-Standing Insurance Carrier Relationships
 
Our management team has developed close relationships with the senior management teams of many of our insurance carriers. We believe that the nature of our relationships with our insurance carriers, combined with our product knowledge and

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technology platform, allow us to provide value-added products to our members. We also continue to develop relationships with new carriers to help us expand our Medicare product portfolio.
 
Long-Term Relationships with Licensed Insurance Distributors
 
Our scalable technology platforms, our relationships with multiple insurance carriers, our focus on compliance, and our product expertise make us a partner of choice for our distributors. We leverage our long-standing insurance carrier relationships to access highly competitive products which are desirable to distributors. Our management team has built a broad network of e-commerce focused distribution partners and is continuously vetting new, highly compliant, third-party licensed independent distributors.

Seasoned Management Team
 
Our management team has substantial experience and long-standing relationships developed over long periods in the insurance and risk management industries. Our management team draws on its broad industry experience to identify opportunities to expand our business and collaborate with insurance carriers and distributors to help develop products and respond to market trends.
 
Sales and Marketing
 
Our commercial sales and marketing initiatives primarily consist of hiring experienced sales professionals to strengthen our relationships with existing and potential third-party distributors, implementing marketing campaigns, attending industry-sponsored events, and direct-to-consumer via the internet.
 
We derive a significant portion of our website traffic through contractual marketing relationships with online businesses. These marketing relationships include online advertisers, content providers and insurance lead aggregators. We also attract website traffic from consumers who search for health insurance through internet search engines. A critical factor in attracting consumers to our website is whether we are prominently displayed in response to internet searches broadly relating to health insurance topics. As part of this marketing strategy, we employ both algorithmic listings and paid advertisements to attract consumers to our website.
 
Seasonality
 
The distribution of Medicare-related insurance plans is impacted by Healthcare Reform and the majority of Medicare policies are sold during the fourth quarter's annual Medicare open enrollment period. During these periods, Medicare eligible individuals can enroll or change their Medicare Advantage and Medicare Part D coverage.

During the times that these open enrollment periods are closed, consumers continue to age into Medicare throughout the year and are able to enroll in plans through an initial enrollment period. We also have the ability to sell our IFP and supplemental products as health insurance to consumers who are unable to enroll in plans under PPACA. Other seasonality trends may develop and the existing seasonality and consumer behavior that we have experienced to date may change as legislative and/or regulatory changes to Healthcare Reform continue and our markets change.

The marketing and sale of IFP and supplemental plans is also subject to seasonal fluctuations. The open enrollment period was open in the fourth quarter of 2019, at which time individuals could enroll in PPACA compliant individual insurance programs. During the times that the open enrollment period is closed, we have the ability to sell our IFP products as an alternative health insurance option for consumers who are ineligible for plans offered by PPACA.
 
Competition
 
The market for selling insurance products is highly competitive and the sale of health insurance over the internet is rapidly evolving. We compete with individuals and entities that offer and sell health insurance products utilizing traditional distribution channels, as well as the internet. Our current and potential competitors include:
 
Exchanges. Government and privately administered exchanges ("Exchanges") have been established under Healthcare Reform where individuals can select and purchase health insurance plans. With respect to Medicare, we compete with the federal government’s original Medicare program. CMS also offers Medicare plan online enrollment, information and comparison tools and has established call centers for the sale of Medicare Advantage and Medicare Part D prescription drug plans. CMS has regulatory authority over the Medicare Advantage program and can influence the competitiveness of Medicare Advantage and Medicare Part

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D prescription drug plans compared to the original Medicare program, as well as the compensation that health insurance carriers are allowed to pay us.

Traditional Local Insurance Agents. There are thousands of local insurance agents across the United States who sell health insurance products in their communities. We believe that the vast majority of these local agents offer health insurance without significantly utilizing the internet or technology other than simple desktop applications such as word processing and spreadsheet programs. Some traditional insurance agents, however, utilize general agents that offer online quoting services and other tools to obtain quotes from multiple carriers and prepare electronic benefit proposals to share with their potential members. These general agents typically offer their services only for the small and mid-sized group markets (not the individual and family markets) and operate in only a limited geographic region. Additionally, some local agents use the internet to acquire new consumer referrals from companies that have expertise in internet marketing. These "lead aggregator" companies utilize keyword search, primarily paid keyword search listings on various online search engines and other forms of internet advertising, to drive internet traffic to the lead aggregator's website. The lead aggregator then collects and sells consumer information to agents and, to a lesser extent, to carriers, both of whom endeavor to close the referrals through traditional offline sales methods.
 
Health Insurance Carriers' "Direct-to-Member" Sales. Some carriers directly market and sell their plans and products to consumers through call centers and their own websites. Although we offer health insurance plans and products for many of these carriers, they also can compete with us by offering their products directly to consumers. Most of these carriers have brand recognition, extensive marketing budgets and significant financial resources to influence consumer preferences for searching and buying health insurance online.
 
Online Agents. There are a number of agents that operate websites and provide an online shopping experience for consumers interested in purchasing health insurance (e.g., online quoting of health insurance product prices). Some online agents also sell non-health insurance products such as auto insurance, life insurance and home insurance.
 
We believe the principal factors that determine our competitive advantage in the online distribution of health insurance include the following:

direct-to-consumer engagement platform;

proprietary, web-based technology platform;

powerful shopping and comparison tools;

strength of carrier relationships and depth of technology integration with carriers;

data-driven product strategy;

highly automated compliance program;

strength of distribution relationships; and

seasoned management.
 
 Intellectual Property
 
Our success depends, in part, on our ability to protect our intellectual property and proprietary technology, and to operate our business without infringing or violating the intellectual property or proprietary rights of others. We rely on a combination of copyrights, trademarks, domain names, trade secrets, intellectual property licenses and other contractual rights (including confidentiality and non-disclosure agreements), including our proprietary technology. However, these intellectual property rights may not prevent others from creating a competitive online platform or otherwise competing with us.
 
For more information see Item 1A. Risk Factors—"We rely on third-party vendors to develop, host, maintain, support and enhance our technology platform" and Item 1A. Risk Factors—"Our failure to obtain, maintain and enforce the intellectual property rights on which our business depends could have a material adverse effect on our business, financial condition and results of operations."
 

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Healthcare Laws and Regulations
 
Our business is subject to extensive, complex and rapidly changing federal and state laws and regulations. Various federal and state agencies have discretion to issue regulations and interpret and enforce healthcare laws. While we believe we comply in all material respects with applicable healthcare laws and regulations, these regulations can vary significantly from jurisdiction to jurisdiction, and interpretation of existing laws and regulations may change. Federal and state legislatures may also enact various legislative proposals that could materially impact certain aspects of our business.

In addition to federal and state healthcare laws, we are also subject to regulations and guidelines issued by CMS that place a number of requirements on health insurance carriers and agents and brokers in connection with the marketing and sale of Medicare Advantage and Medicare Part D prescription drug plans. We are subject to similar requirements of state insurance departments with respect to our marketing and distribution of Medicare Supplement plans. CMS and state insurance department regulations and guidelines include a number of prohibitions regarding the ability to contact Medicare-eligible individuals and place many restrictions on the marketing of Medicare-related plans. For example, our health insurance carrier partners are required to file with CMS and state departments of insurance certain of our platforms, our call center scripts and other marketing materials we use to market Medicare-related plans. In some instances, CMS or state departments of insurance must approve the material before we use it. In addition, the laws and regulations applicable to the marketing and distribution of Medicare-related plans are ambiguous, complex and, particularly with respect to regulations and guidance issued by CMS for Medicare Advantage and Medicare Part D prescription drug plans, change frequently.
 
Healthcare Reform
 
In March 2010, Healthcare Reform was signed into law. Healthcare Reform contains provisions that have changed and will continue to change the health insurance industry in substantial ways. For example, Healthcare Reform includes a mandate that employers with over 50 employees offer their employees group health insurance coverage or face tax penalties; prohibitions against insurance companies that offer IMM plans using pre-existing health conditions as a reason to deny an application for health insurance; MLR requirements that require each health insurance carrier to spend a certain percentage of their premium revenue on reimbursement for clinical services and activities that improve healthcare quality; establishment of Exchanges to facilitate access to, and the purchase of, health insurance; and subsidies and cost-sharing credits to make health insurance more affordable for those below certain income levels.
 
Healthcare Reform amended various provisions in many federal laws, including the Internal Revenue Code, the Employee Retirement Income Security Act of 1974 and the Public Health Services Act. Healthcare Reform has been implemented by the Department of Health and Human Services, the Department of Labor and the Department of Treasury. Many of the PPACA regulations became effective on or before January 1, 2014, but regulatory changes continue. Through these regulations, the federal government and its implementing agencies may regulate or otherwise impose restrictions upon all types of health insurance including the IFP products that we sell. Although the U.S. Supreme Court upheld Healthcare Reform's mandate requiring individuals to purchase health insurance in 2012, the Tax Cuts and Jobs Act (the "Tax Act") has eliminated the Individual Mandate Penalty for individuals who do not purchase such health insurance beginning in 2019, and there is continuing uncertainty about whether other parts of Healthcare Reform or PPACA regulations will remain in effect or be further amended, with the possibility of future litigation with respect to certain provisions as well as legislative efforts to repeal and defund portions of Healthcare Reform or Healthcare Reform in its entirety. We cannot predict the outcome of any future legislation or litigation related to Healthcare Reform. As described under "Item 1. Business—Health Insurance Industry and Market Opportunity," Healthcare Reform has resulted in profound changes to the individual health insurance market and our business, and we expect these changes to continue.
 
Short-Term, Limited-Duration Insurance: Final Rule
 
The Departments of Health and Human Services, Labor, and Treasury, effective October 2, 2018, published a rule that changed the way that short-term, limited duration insurance coverage is regulated. The new rule extended the maximum duration of these plans allowing for renewal or extensions for up to 36 months, subject to state law. The new rule included updated notice requirements and made STM a more practical and flexible form of coverage than it had been previously. Additionally, as of January 1, 2019, the tax penalty for individuals not maintaining minimum essential coverage was reduced to $0. This removed another obstacle that may have prevented certain consumers from previously purchasing STM.
 
Anti-Kickback Laws
 
In the United States, there are federal and state anti-kickback laws that generally prohibit the payment or receipt of kickbacks, bribes or other remuneration given with the intent to induce the referral of patients or other health-care program related business. The federal Anti-Kickback Statute makes it a crime for individuals or entities to, among other things, knowingly and willfully

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offer, pay, solicit, or receive any remuneration, directly or indirectly, to induce or reward referrals of items or services reimbursable by a federal healthcare program. Where remuneration is paid knowingly and willfully to induce or reward referrals of items or services payable by a federal healthcare program, the Anti-Kickback Statue is violated. For purposes of the Anti-Kickback Statute, "remuneration" includes the transfer of anything of value, directly or indirectly, overtly or covertly, in cash or in kind. There are also state law corollaries to the federal Anti-Kickback Statute. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment, and possible exclusion from federal healthcare programs. While federal and state Anti-Kickback Statutes are drafted broadly, there are also extensive safe harbors that can protect arrangements that may otherwise implicate and violate the law if the arrangements are structured to fit within an applicable safe harbor. Our future activities relating to the manner in which we sell and market our services may be subject to scrutiny under these laws and we will need to carefully structure our operations to comply with these laws which may limit how we conduct business.
 
Federal Civil False Claims Act and State False Claims Laws
 
The federal civil False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The "qui tam" or "whistleblower" provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. There are also state law corollaries to the federal False Claims Act. Our future activities relating to the manner in which we sell and market our services may be subject to scrutiny under these laws, and we will need to carefully structure our operations to comply with these laws which may limit how we conduct business.
 
HIPAA, Privacy Laws and Data Security Regulations
 
By processing data on behalf of our clients and members, we are subject to specific compliance obligations under privacy and data security-related laws, including the Health Insurance Portability and Accountability Act ("HIPAA"), the Health Information Technology for Economic and Clinical Health Act (the "HITECH Act"), and related state laws. We are also subject to federal and state security breach notification laws, as well as state laws regulating the processing of protected personal information, including laws governing the collection, use and disclosure of social security numbers and related identifiers.
 
The regulations that implement HIPAA and the HITECH Act establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans, and healthcare clearinghouses, all of which are referred to as "covered entities," and their "business associates" (which includes anyone who performs a service on behalf of a covered entity involving the use or disclosure of protected health information and is not a member of the covered entity's workforce). Our carrier companies' and our clients' health plans generally will be covered entities, and as their business associate, we will be subject to many of the same laws and may be asked to contractually comply with certain additional aspects of these standards by entering into requisite business associate agreements with the covered entities. Under the HIPAA implementing regulations, business associates and covered entities can each be held individually responsible for privacy and data security breaches.
 
State Privacy Laws

In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations, or "State Privacy Laws," that govern the use and disclosure of a person's medical information or records and, in some cases, are more stringent than those issued under HIPAA. These State Privacy Laws include regulation of health insurance providers and agents, regulation of organizations that perform certain administrative functions such as utilization review or third-party administration, issuance of notices of privacy practices, and reporting and providing access to law enforcement authorities. In those cases, it may be necessary to modify our operations and procedures to comply with these more stringent State Privacy Laws. If we fail to comply with applicable State Privacy Laws, we could be subject to additional sanctions.
 
Consumer Protection Laws
 
Federal and state consumer protection laws are being increasingly enforced by the United States Federal Trade Commission ("FTC"), the Federal Communications Commission ("FCC"), and the various states' attorneys general to regulate the collection, use, storage and disclosure of personal or patient information, through websites or otherwise, and to regulate the presentation of website content and to regulate direct marketing, including telemarketing and telephonic communication. Courts may also adopt the standards for fair information practices promulgated by the FTC, concerning consumer notice, choice, security and access.

Certain laws, such as the Telephone Consumer Protection Act, give the FTC, FCC and state attorneys general the ability to regulate, and bring enforcement actions relating to, telemarketing practices and certain automated outbound contacts such as phone

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calls, texts or emails. Under certain circumstances, these laws may provide consumers with a private right of action. Violations of these laws could result in substantial statutory penalties and other sanctions.
 
As part of the payment-related aspects of our business, we may also undertake security-related obligations arising out of the USA Patriot Act, Gramm-Leach-Bliley Act and the Payment Card Industry guidelines applicable to card systems. These requirements generally require safeguards for the protection of personal and other payment related information.
 
State Insurance Laws
 
Some of the states in which we operate have laws prohibiting unlicensed persons or business entities, including corporations, from making certain direct and indirect payments or fee-splitting arrangements with licensed insurance agents and brokers. Possible sanctions for violation of these restrictions include loss of license and civil penalties. These statutes vary from state to state, are often vague, and have seldom been interpreted by the courts or regulatory agencies.
 
State insurance laws also require us to maintain any combination of insurance agency, broker, and third-party administrator licenses in each state in which we transact health insurance business and adhere to sales, documentation and administration practices specific to that state. Where there is any ambiguity or uncertainty in statutes as to whether we require a particular type of license in a state, we seek to obtain that license. In addition, each of our employees who solicits, negotiates, sells or transacts health insurance business for us must maintain an individual insurance agent or broker license in one or more states. Because we transact business in the majority of states, compliance with health insurance-related laws, rules and regulations is difficult and imposes significant costs on our business.
 
In certain states, some of our products may only be available as a group association plan. In these states, members must enroll in group programs or associations in order to access certain of our insurance products, benefits and services. We have entered into relationships with such associations in order to provide individuals access to our products. For example, we have an agreement with Med-Sense Guaranteed Association ("Med-Sense"), a non-profit association that provides membership benefits to individuals and gives members access to certain of our products. Under the agreement, we primarily market membership in the association and collect certain fees and dues on its behalf. In return, we have sole access to its membership list, Med-Sense exclusively endorses the insurance products that we offer, and we receive compensation for our services. Our agreement with Med-Sense is automatically renewable for one-year terms, unless terminated on 120 days written notice by either party. The agreement is also terminable on 15 days' written notice by either party under certain circumstances, such as in the case of a breach.
 
Employees
 
As of December 31, 2019, we had 345 employees, of which 342 were full-time employees. We have not experienced any work stoppages and consider our employee relations to be good. None of our employees are represented by a labor union.

Available Information

We file with, or submit to the SEC, annual, quarterly and current periodic reports, proxy statements, codes of business conduct, and other information meeting the informational requirements of the 1934 Act. The SEC maintains an internet site that contains reports, proxy and information statements, and other information filed electronically by us with the SEC which are available at http://www.sec.gov.

Our internet address is http://www.hiiq.com. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K, and you should not consider information contained on our website to be part of this Annual Report on Form 10-K, unless specifically noted otherwise.
 
ITEM 1A. RISK FACTORS
 
In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks described below are not exhaustive and are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.


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Risks Relating to Our Business and Industry

The marketing and distribution of Medicare plans are subject to numerous, complex and frequently changing laws and regulations, and non-compliance or changes in laws and regulations could harm our business, operating results and financial condition.

The marketing and distribution of Medicare plans are subject to numerous laws, regulations and guidelines at the federal and state level. The marketing and distribution of Medicare Advantage and Medicare Part D prescription drug plans are principally regulated by the Centers for Medicare and Medicaid Services, or CMS. The marketing and distribution of Medicare Supplement plans are principally regulated on a state-by-state basis by state departments of insurance. The laws and regulations applicable to the marketing and distribution of Medicare plans are numerous, ambiguous and complex, and, particularly with respect to regulations and guidance issued by CMS for Medicare Advantage and Medicare Part D prescription drug plans, change frequently. The telephone calls on which we enroll individuals into Medicare Advantage and Medicare Part D prescription drug plans are required to be recorded. Health insurance carriers audit these recordings for compliance and listen to them in connection with their investigation of complaints. In addition, Medicare eligible individuals may receive a special election period and the ability to change Medicare Advantage and Part D prescription drug plans outside the Medicare annual enrollment period in the event the sale of the plan was not in accordance with CMS rules and guidelines. Given CMS’s scrutiny of Medicare product health insurance carriers and the responsibility of the health insurance carriers for actions that we take, health insurance carriers may terminate our relationship with them or take other corrective action if our Medicare product distribution, marketing and operations are not in compliance or give rise to too many complaints. The termination of our relationship with health insurance carriers for this reason would reduce the products we are able to offer, could result in the loss of revenue for past and future sales and would otherwise harm our business, operating results and financial condition.

As a result of the laws, regulations and guidelines relating to the distribution of Medicare plans, we have altered, and likely will have to continue to alter, our websites and sales process to comply with several requirements that are not applicable to our sale of IFP plans. For instance, many aspects of our online platforms and our marketing material and processes, as well as changes to these platforms, materials and processes, including call center scripts, must be filed on a regular basis with CMS and reviewed and approved by health insurance carriers in light of CMS requirements. In addition, certain aspects of our Medicare plan marketing partner relationships have been in the past, and will be in the future, subjected to CMS and health insurance carrier review. Changes to the laws, regulations and guidelines relating to Medicare plans, their interpretation or the manner in which they are enforced could be incompatible with these relationships, our platforms or our distribution of Medicare plans, which could harm our business, operating results and financial condition.

Due to changes in CMS guidance or enforcement or interpretation of existing guidance applicable to our marketing and distribution of Medicare products, or as a result of new laws, regulations and guidelines, CMS, state departments of insurance or health insurance carriers may object to or not to approve aspects of our online platforms or marketing material and processes and may determine that certain existing aspects of our Medicare-related business are not in compliance. As a result, the progress of our Medicare operations could be slowed or we could be prevented from operating aspects of our Medicare revenue generating activities altogether, which would harm our business, operating results and financial condition, particularly if it occurred during the Medicare annual enrollment period.

Our ability to enroll individuals during open enrollment periods will materially affect our business.

During the Medicare annual open enrollment period and the Health Care Reform annual enrollment period, our agents and distributors will be required to handle an increased volume of health insurance transactions in a short period of time. We will contract with outsourced call centers and hire additional employees on a temporary or seasonal basis in a limited period of time to address the expected increase in the volume of health insurance transactions during the Medicare annual enrollment period. We must ensure that our employee health insurance agents and the health insurance agent employees of outsourced call centers are timely licensed, trained and certified and have the appropriate authority to sell health insurance in a number of states and for a number of different health insurance carriers. We depend upon our own employees, state departments of insurance, government exchanges and health insurance carriers for licensing, certification and appointment. If our ability to market and sell Medicare-related health insurance and individual and family health insurance is constrained during an enrollment period for any reason, such as technology failures, reduced allocation of resources, any inability to timely employ, license, train, certify and retain our employees and our contractors and their health insurance agents to sell health insurance, interruptions in the operation of our website or systems, or issues with government-run health insurance exchanges, we could acquire fewer members, suffer a reduction in our membership and our business, operating results and financial condition could be harmed.
 

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Our business practices and the business practices of our third-party licensed distributors and carriers are currently being reviewed by various state insurance regulators and the results of such reviews may adversely affect our business and results of operations.
 
Our business practices and the business practices of our third-party licensed distributors and carriers are heavily regulated by each state in the United States and various federal agencies. State regulators require that we and our third-party licensed distributors adhere to sales, documentation, and administration practices specific to each state. As a result, we are currently subject to state regulatory examinations and actions as further described in Note 17 "Commitments and Contingencies" in Part IV, Item 15 of this report. As of the date of this Annual Report on Form 10-K, these examinations included, but are not limited to, a civil investigative demand from the Massachusetts Attorney General's Office, as further described in Item 15 of this report. An adverse finding or result in one or more of these matters could result in significant liability, additional state insurance licensing requirements or the revocation of licenses in a particular jurisdiction, which could significantly reduce our revenues, increase our operating expenses, prevent us from transacting health insurance business in a particular jurisdiction and otherwise harm our business, results of operations and financial condition. Moreover, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or reputation in other jurisdictions due to the requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions. Even if the allegations in any regulatory or other action against us are proven false, any surrounding negative publicity could harm member, distributor or health insurance carrier confidence in us, which could significantly damage our reputation.

Our exploration of strategic alternatives may not be successful.

On July 26, 2019, we announced that our Board of Directors commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing shareholder value. These alternatives could include, among other things, a sale of the Company or a portion thereof, a strategic business combination, changes in the Company’s operations or strategy, or continuing to execute on the Company’s current business plan. The process of exploring and executing strategic alternatives may be time consuming and disruptive to our business operations, and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. Any potential transaction and the related valuation would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms. There can be no assurance that the Board’s exploration of strategic alternatives will result in any change of strategy or transaction being entered into or consummated or, if a transaction is undertaken, as to its terms, structure or timing.

The market for health insurance in the United States is rapidly evolving, which makes it difficult to forecast demand for our products.
 
The market for health insurance in the United States is rapidly evolving. Accordingly, our future financial performance will depend in part on growth in this market and on our ability to adapt to emerging demands in this market. We believe demand for our products has been driven in large part by regulatory changes, broader use of the internet and advances in technology. It is difficult to predict with any precision the future growth rate and size of our target market. The rapidly evolving nature of the market in which we operate, as well as other factors that are beyond our control, reduce our ability to evaluate accurately our long-term outlook and forecast performance or other operating results. A reduction in demand for our products caused by lack of acceptance, technological challenges, competing offerings or other factors would result in a lower revenue growth rate or decreased revenue, either of which could negatively impact our business and results of operations.

Changes and developments in the health insurance system in the United States, in particular Healthcare Reform, could harm our business.
 
Our business depends upon the private sector of the U.S. insurance system, its role in financing healthcare delivery, and insurance carriers' use of, and payment of commissions to, agents, brokers and other organizations for the marketing and sale of health insurance plans and products.
 
Healthcare Reform contains provisions that have changed and will continue to change the industry in which we operate in substantial ways. In addition, state governments have adopted, and will continue to adopt, changes to their existing laws and regulations in light of Healthcare Reform and related regulations. Future changes may, or may not, be beneficial to us, and may differ in significant ways from current Federal and state rules.
 
Certain key members of Congress continue to express a desire to withhold the funding necessary for Healthcare Reform or the desire to repeal or amend all or a portion of Healthcare Reform. Any partial or complete repeal or amendment of Healthcare Reform, or uncertainty regarding such events, could increase our costs of compliance and adversely affect our results of operations

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and financial condition. Conversely, the enforcement of Healthcare Reform and regulations promulgated thereunder could have negative effects on us, including:

increasing our competition;

reducing or eliminating the need for health insurance agents and brokers and/or demand for the health insurance that we sell;

decreasing the number of types of health insurance plans and products available for us to sell and/or the number of insurance carriers offering such plans and products;

causing insurance carriers to change the benefits and/or premiums for the plans and products they sell; or

causing insurance carriers to reduce the amount they pay for our services or change their relationships with us in other ways.

Any of these changes, or others, could materially harm our business, results of operations and financial condition. For example, the manner in which the federal government and the states enforce Healthcare Reform could substantially increase our competition and member turnover and substantially reduce the number of individuals who purchase insurance through us. Various aspects of Healthcare Reform could cause insurance carriers to limit the type of health insurance plans and products we are able to sell and the geographies in which we are able to sell them. Changes in the law could also cause insurance carriers to exit the business of selling insurance plans and products in a particular jurisdiction, to eliminate certain categories of products that we currently sell or to attempt to move members into new plans and products for which we receive lower commissions. If insurance carriers decide to limit our ability to sell their plans and products or determine not to sell individual health insurance plans and products altogether, our business, results of operations and financial condition could be materially harmed.
 
A substantial portion of our business is concentrated in a small number of carriers, and such concentration could make our business more vulnerable to adverse changes in our relationships with carriers.
 
We typically enter into contractual agency relationships with insurance carriers that are non-exclusive and terminable on notice by either party for any reason. Insurance carriers may be unwilling to underwrite the health insurance plans or products we help design, or may amend our agreements with them for a variety of reasons, including for competitive or regulatory reasons. Insurance carriers may decide to rely on their own internal distribution channels, including traditional in-house agents, insurance carrier websites or other sales channels, or to market their own plans or products, and, in turn, could limit or prohibit us from marketing their plans or products. Insurance carriers may decide not to underwrite insurance plans or products in the individual health insurance market in certain geographies or altogether. Our carrier relationship could also be affected by lawsuits and regulatory actions against our carriers relating to the products sold by us, as such carriers may seek indemnification or reimbursement from us or may seek to otherwise adversely change their relationship with us. Carriers can be, and at least two of our carriers have been, subject to lawsuits and regulatory actions of which we could, and have been, named parties based on our relationship with the carrier. The termination or amendment of our relationship with an insurance carrier could reduce the variety of health insurance plans or products we offer. We also could lose a source of, or be paid reduced commissions for, future sales. Our business could also be harmed if we fail to develop new insurance carrier relationships or are unable to offer members a wide variety of health insurance plans and products.
 
The private health insurance industry in the United States has experienced substantial consolidation over the past several years. As a result of this trend, it may become necessary for us to offer insurance plans and products from a reduced number of insurance carriers or to derive a greater portion of our revenue from a more concentrated number of insurance carriers as our business and the health insurance industry evolve. Each of these insurance carriers may terminate our agreements with them. In addition, one or more of our insurance carriers could experience a failure of its business due to a decline in sales volumes, unavailability of reinsurance, and failure of business strategy or otherwise. Should our dependence on a smaller number of insurance carriers increase, whether as a result of the termination of insurance carrier relationships, further insurance carrier consolidation, business failure, bankruptcy or any other reason, we may become more vulnerable to adverse changes in our relationships with our insurance carriers, particularly in states where we offer health insurance plans and products from a relatively small number of insurance carriers or where a small number of insurance carriers dominate the market. The termination, amendment or consolidation of our relationships with our insurance carriers could harm our business, results of operations and financial condition.


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Our business may be harmed if we lose our relationship with health insurance carriers whose Medicare-related health insurance products we distribute or if our relationship with those carriers changes.

Our Medicare plan-related revenue is concentrated in a small number of health insurance carriers. The success of our Medicare-related health insurance business depends upon our ability to enter into new and maintain existing relationships with health insurance carriers on favorable economic terms. The concentration of our Medicare plan sales in a limited number of health insurance carriers makes us vulnerable to changes in carrier commission rates and changes in the competitiveness of our carriers’ Medicare products. If our Medicare carriers reduce our commission rates, reduce the amount they pay us for advertising services, or the competitiveness of their products declines compared to original Medicare or the products of Medicare carriers with which we do not have a relationship, our business, operating results and financial condition would be harmed. 

We may also temporarily or permanently lose the ability to market and distribute Medicare plans for our Medicare plan carriers. The regulations for distributing health insurance is complex and frequently changes. We or the health insurance agents we employ may, in the future, violate one or more of the many requirements imposed by CMS or state laws and regulations. A carrier may terminate our relationship for that or other reasons, or CMS may penalize health insurance carriers for certain regulatory violations by suspending or terminating the carrier's ability to market and sell Medicare plans for significant periods of time. CMS also may require the carrier to terminate its membership and allow its members to move to other plans. Given the concentration of our Medicare plan sales in a small number of carriers, if we lose a relationship with a health insurance carrier to market their Medicare plans temporarily or permanently or if the health insurance carrier loses its Medicare product membership, our business, operating results and financial condition would be harmed. The agreements that we have with health insurance carriers to distribute Medicare plans may be unilaterally amended or terminated by the carrier on short notice and the amendment or termination could adversely impact, or cause the termination of, the commission payments that we receive for selling their Medicare plans, including commissions on plans that we have already sold, which could materially harm our business operating results and financial condition.

Our business could be harmed if we lose our relationships with independent distributors, fail to maintain good relationships with independent distributors, become dependent upon a limited number of third-party distributors or fail to develop new relationships with third-party distributors.

We depend upon licensed third-party independent distributors, in addition to our internal distribution network, to sell our products. We typically enter into contractual agency relationships with independent distributors that are non-exclusive and terminable on short notice by either party for any reason. In many cases, these distributors also have the ability to amend the terms of our agreements unilaterally on short notice. Third-party distributors may be unwilling to sell our health insurance plans or products or may amend our agreements with them for a variety of reasons, including for competitive or regulatory reasons. For example, these independent distributors may decide to sell plans and products that bring them a higher commission than our plans and products or may decide not to sell IFP plans at all. We rely on a diverse distributor network to sell the products we offer, but any loss of relationships with independent distributors or failure to maintain good relationships with independent distributors could nevertheless harm our business, results of operations and financial condition. We have terminated, and could continue to terminate relationships, with distributors for their failure to follow our compliance standards or their otherwise engaging in problematic business practices.
 
We depend on relationships with third-parties for certain services that are important to our business. An interruption or cessation of such services by any third-party could have a material adverse effect on our business.

We depend on a number of third-party relationships to enhance our business. Our ability to offer our services and operate our business is therefore dependent on maintaining our relationships with third-party partners and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such partners, or our failure to enter into agreements with partners in the future could harm our business, results of operations and financial condition. If our partners are unable or unwilling to provide the services necessary to support our business, or if our agreements with such partners are terminated, our operations could be significantly disrupted. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party partners. In addition, third-party partners may not be able to provide the services required in order to meet the changing needs of our business.
 
For example, state regulations may require that individuals enroll in group programs or associations in order to access certain insurance products, benefits and services. We have entered into relationships with certain associations in order to provide individuals access to our products. For example, we have an agreement with a non-profit association that provides membership benefits to individuals and gives members access to certain of our products. This non-profit has the right to cancel its agreement with us at any time by providing 120 days' prior written notice. While we believe we could replace this non-profit with other group programs or associations, there can be no assurance that any of our other association affiliations could do so. If we were to lose our relationship

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with our non-profit associations and were unable to find another group program or association on a timely basis or at all, this would have a material adverse effect on our business.
  
We rely on third-party vendors to develop, host, maintain, support and enhance our technology platform.
 
We are party to agreements with BimSym pursuant to which BimSym provides various professional services relating to our core technology platform, including hosting, support, maintenance and development services. Our ability to offer our services and operate our business is therefore dependent on maintaining our relationships with third-party vendors, particularly BimSym, and entering into new relationships to meet the changing needs of our business. Any deterioration in our relationships with such vendors, or our failure to enter into agreements with vendors in the future could harm our business, results of operations and financial condition. If our vendors are unable or unwilling to provide the services necessary to support our business, or if our agreements with such vendors are terminated, our operations could be significantly disrupted. We may also incur substantial costs, delays and disruptions to our business in transitioning such services to ourselves or other third-party vendors. In addition, third-party vendors may not be able to provide the services required in order to meet the changing needs of our business.
  
If we or our independent distributors fail to comply with the numerous laws and regulations that are applicable to our business, our business and results of operations could be harmed.
 
The health insurance industry is heavily regulated by each state in the United States. For instance, state regulators require us to maintain a valid license in each state in which we transact health insurance business and further require that we adhere to sales, documentation and administration practices specific to each state. In addition, each distributor who transacts health insurance business on our behalf must maintain a valid license in each state in which it negotiates, sells or solicits the sale of insurance. As we do business in the majority of states and the District of Columbia, compliance with health insurance-related laws, rules and regulations is difficult and imposes significant costs on our business. Each jurisdiction's insurance department typically has the power, among other things, to:

grant, suspend, and revoke licenses to transact insurance business;

issue provisional or conditional licenses for probationary periods;

conduct inquiries into the insurance-related activities and conduct of agents and agencies;

require and regulate disclosure in connection with the negotiation, sale or solicitation of health insurance;

authorize how, by which personnel and under what circumstances insurance premiums can be quoted and published and an insurance policy can be sold;

determine under what circumstances entities can be paid commissions from carriers;

regulate the content of insurance-related advertisements, including web pages;

approve policy forms, require specific benefits and benefit levels and regulate premium rates;

impose fines and other penalties;

otherwise require changes to, or impose conditions, on how we or our distributors conduct business in their respective jurisdictions.
 
Due to the complexity, periodic modification and differing interpretations of insurance laws and regulations and the number of third-parties with which we have relationships, we may not have always been, and we and/or our independent distributors may not always be, in compliance with such laws and regulations. Failure to comply could result in significant liability, additional state insurance licensing requirements or the revocation of licenses in a particular jurisdiction, which could significantly reduce our revenue, increase our operating expenses, prevent us from transacting health insurance business in a particular jurisdiction and otherwise harm our business, results of operations and financial condition. Moreover, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or reputation in other jurisdictions due to the requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions. Even if the allegations in any regulatory or other action against us are proven false, any surrounding negative publicity could harm member, distributor or health insurance carrier confidence in us, which could significantly damage our reputation. Because some members, distributors and health insurance carriers may not be comfortable with the concept of purchasing health insurance using the internet, any negative publicity may

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affect us more than it would others in the health insurance industry and could harm our business, results of operations and financial condition.

We depend, in part, on independent third-party distributors for the sale of our products. The failure of any of our independent third-party distributors to comply with applicable laws and regulations could have an adverse effect on our business. For example, while we believe that we are not legally culpable for the actions or omissions of our independent third-party distributors, their actions or omissions could result in additional investigations or regulatory actions or civil litigation against our Company. A proposed class action, but not yet certified, styled as Belin et. al. v. Health Insurance Innovations, Inc., et. al., Case No. 19-cv-61430, was filed in the U.S. District Court for the Southern District of Florida on June 7, 2019, alleging that the Company conspired with Simple Health using a theory of the Racketeer Influenced and Corrupt Organizations Act along with other claims and seeks unspecified damages. This and other material legal matters are described in Note 17 "Commitments and Contingencies" in Part IV, Item 15 of this report.
 
In addition, we have received and may receive in the future inquiries from state insurance regulators regarding our marketing and business practices, the practices of our independent third-party distributors and our insurance carriers. We may modify our practices in connection with any such inquiry, and we may require our distributors to change their practices, or we may be forced to terminate distributors based on such practices. In 2016 we terminated two of our largest independent third-party distributors. Again in 2018, we terminated one of our largest independent third-party distributors for failure to comply with our compliance standards. Any modification, or penalty for noncompliance based on our marketing or business practices in response to regulatory inquiries could harm our business, results of operations or financial condition.
 
For additional information regarding our current state insurance regulatory matters, see Note 17 "Commitments and Contingencies" in Part IV, Item 15 of this report.

Changes in the quality and affordability of the health insurance plans and products that insurance carriers offer to us for sale through our technology platform could harm our business and results of operations.
 
The demand for health insurance marketed through our technology platform is affected by, among other things, the variety, quality and price of the health insurance plans and products we offer. If health insurance carriers do not continue to allow us to sell a variety of high-quality, affordable health insurance plans and products in our markets, or if their offerings are limited or terminated as a result of consolidation in the health insurance industry, changes in Healthcare Reform or otherwise, our sales may decrease and our business, results of operations and financial condition could be harmed.
 
If individuals or insurance carriers opt for more traditional or alternative channels for the purchase and sale of health insurance, our business could be harmed.
 
Our success depends, in part, upon continued growth in the use of the internet as a source of research on health insurance products and pricing, as well as willingness for individuals to use the internet to request further information or contact the distributors directly or indirectly that sell the products we offer. Individuals and insurance carriers may choose to depend more on traditional sources, such as individual agents, or alternative sources may develop, including as a result of Healthcare Reform. Our future growth, if any, will depend in part upon:

the growth of the internet as a commerce medium generally, and as a market for individual health insurance plans and services specifically;

individuals' willingness and ability to conduct their own health insurance research;

our ability to make the process of purchasing health insurance online an attractive alternative to traditional and new means of purchasing health insurance;

our ability to successfully and cost-effectively market our services as superior to traditional or alternative sources for health insurance to a sufficiently large number of individuals; and

insurance carriers' willingness to use us and the internet as a distribution channel for health insurance plans and products.
 
If individuals and carriers determine that other sources of health insurance and health insurance applications are superior, our business will not grow, and our results of operations and financial condition could be harmed.
 

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Any legal liability, regulatory penalties, or negative publicity for the information on our platform or that we otherwise distribute or provide could likely harm our business and results of operations.
 
We provide information on our platform, through our independent third-party distributors, and in other ways, regarding health insurance in general and the health insurance plans and products we market and sell. Such information includes insurance premiums, coverage, benefits, provider networks, exclusions, limitations, availability, plan and premium comparisons, and insurance company ratings. A significant amount of both automated and manual effort is required to maintain the considerable amount of insurance plan information contained on our platform. We regularly provide health insurance plan information in the scripts used by our independent third-party distributors. The information we provide on our platform, through our independent third-party distributors, and otherwise may be construed as not accurate or misleading. If it is construed that we have not properly assisted individuals and businesses in purchasing health insurance, consumers, insurance carriers and others could attempt to hold us liable for damages. If such is the case, our relationships with insurance carriers could be terminated. Regulators also could attempt to subject us to penalties, revoke our licenses to transact health insurance business in a particular jurisdiction, and/or compromise the status of our licenses to transact health insurance business in other jurisdictions. Such action could result in loss of our commission revenue. In the ordinary course of operating our business, we have received complaints that the information we provided was not accurate or was misleading. We cannot guarantee that we will be able to resolve these complaints without significant financial cost. In addition, these types of claims could be time-consuming and expensive to defend, could divert our management's attention and other resources and could cause a loss of confidence in our services. As a result, these types of claims could harm our business, results of operations and financial condition.

Additionally, we are subject to various federal and state telemarketing regulations, including the Telephone Consumer Protection Act ("TCPA") and the FCC's implementing regulations, as well as various state telemarketing laws and regulations. We, our independent third-party distributors, and our insurance carriers have been, and continue to be, the subject of allegations of TCPA violations. We could be responsible for some of the costs incurred by these independent third-party distributors and/or carriers who are the subject of allegations of TCPA violations. Any violation of these regulations could expose us to damages for monetary loss, statutory damages, fines, penalties and/or regulatory inquiries. The Company has received a number of private-party TCPA claims relating to independently owned and operated third-party licensed-agent distributors, alleging that their marketing activities were potentially unlawful. The Company has been named as a defendant in multiple lawsuits relating to alleged TCPA matters, including claims styled, but not yet certified, as class actions.
 
In the ordinary course of our business, we have received, and may continue to receive, inquiries from state regulators relating to various matters or in the future become involved in litigation. Also, from time to time, we may be a party to litigation and subject to civil claims incident to the ordinary course of business, including claims from consumers alleging misrepresentation and material omissions in connection with their purchase of our products. For information regarding our current regulatory matters, see Note 17 "Commitments and Contingencies" in Part IV, Item 15 of this report. If we are found to have violated laws or regulations, we could lose our relationship with insurance carriers and be subject to various fines and penalties, including revocation of our licenses to sell insurance, and our business, results of operations and financial condition would be materially harmed. We could also be harmed to the extent that related publicity damages our reputation as a trusted source of information relating to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome. As a result, inquiries from regulators or our becoming involved in litigation could adversely affect our business, results of operations and financial condition.

Short-term limited duration health insurance ("STLDI") plans have come under increasing scrutiny by certain members of Congress and other members of legislative bodies. This scrutiny may result in actions that have the effect of reducing our revenue or harming our business or reputation.

STLDI plans have recently been subject to enhanced scrutiny by certain members of the U.S. Congress and other members of legislative bodies. Over the last two years, certain members of Congress and other state and federal public officials have publicly voiced concerns regarding STLDI plans, including concerns relating to sales practices and benefit disclosures for some consumers who enroll in STLDI plans. On March 13, 2019, twelve companies, including us, received a letter from the House of Representatives Committee on Energy and Commerce requesting documents and information intended to aid such committee in investigating the STLDI market. The letter principally requested copies of the Company's underwriting documents, marketing materials and health questionnaires that applicants are required to fill out, as well as information regarding the amounts paid to brokers and agents and any complaints that the Company has received from consumers who enrolled in STLDI plans through the Company's agents and brokers. We are cooperating with these voluntary requests for information. We could incur significant expense and experience reputational harm because of this or other similar future inquiries, as well as reduced market acceptance and demand for our STLDI products and other IFP products, which could harm our ability to market our products in the future. Additionally, these matters could also divert the attention of our management from operating our business.
 

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Advance commission arrangements between us and some of our third-party distributors could expose us to the credit risks of such distributors, which could in turn have an adverse effect on our business, financial condition, and results of operations.
 
We make advance commission payments to many of our independent distributors in order to assist them with the cost of lead acquisition and provide working capital. As of December 31, 2019, we had outstanding advanced commissions of approximately $45.3 million under such arrangements of which approximately $25.0 million is with three distributors. In most cases where we make advance commission payments, we receive security interests in collateral, as well as personal and entity-level guarantees. At a minimum, our collateral includes a claim against all future compensation owed to the distributor for all products sold. As a result, our claims for such payments would usually be considered secured claims. Depending on the amount of future compensation owed to the distributor, we could be exposed to the credit risks of our third-party distributors in the event of their insolvency or bankruptcy. Where the amount owed to us exceeds the value of the collateral, our claims against the defaulting distributors would rank below those of certain other secured creditors, which could undermine our chances of obtaining the return of our advance commission payments. We may not be able to recover such advance payments and we may suffer losses should the independent distributors fail to fulfill their sales obligations under the contracts. Accordingly, any of the above scenarios could harm our business, results of operations and financial condition.

Seasonality could cause fluctuations in our financial results.
 
The Medicare annual enrollment period occurs from October 15 to December 7 each year, and we experience an increase in the number of submitted Medicare-related applications during the fourth quarter and an increase in Medicare plan related expense during the third and fourth quarters.

The marketing and sale of IFP and supplemental plans is also subject to seasonal fluctuations. The open enrollment period was open in the fourth quarter of 2019, at which time individuals could enroll in PPACA compliant individual insurance programs. During the times that the open enrollment period is closed, we have the ability to sell our IFP products as an alternative health insurance option for consumers who are ineligible for plans offered by PPACA or Medicare.

Other seasonality trends may develop and the existing seasonality and consumer behavior that we have experienced may change as the enforcement of Healthcare Reform continues and our markets continue to change. Any seasonality that we experience could cause fluctuations in our financial results.
 
If we are unable to successfully introduce new technology solutions or services or fail to keep pace with advances in technology, our business, financial condition and results of operations could be adversely affected.
 
Our business depends on our ability to adapt to evolving technologies and industry standards and introduce new technology solutions and services accordingly. If we cannot adapt to changing technologies, our technology solutions and services may become obsolete, and our business would suffer. Because the healthcare insurance market is constantly evolving, our existing technology may become obsolete and fail to meet the requirements of current and potential members. Our success will depend, in part, on our ability to continue to enhance our existing technology solutions and services, develop new technology that addresses the increasingly sophisticated and varied needs of our members, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our online platform entails significant technical and business risks. We may not be successful in developing, using, marketing, or maintaining new technologies effectively or adapting our technology to evolving customer requirements or emerging industry standards, and, as a result, our business and reputation could suffer. We may not be able to introduce new technology solutions on schedule, or at all, or such solutions may not achieve market acceptance. We also engage third-party vendors to develop, maintain, and enhance our technology solutions, and our ability to develop and implement new technologies is therefore dependent on our ability to engage suitable vendors. We may also need to license software or technology from third-parties in order to maintain, expand or modify our technology platform. However, there is no guarantee we will be able to enter into such agreements on acceptable terms, or at all. Moreover, competitors may develop competitive products that could adversely affect our results of operations. A failure by us to introduce new solutions or to introduce these solutions on schedule could have an adverse effect on our business, financial condition and results of operations.
 

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Our failure to obtain, maintain and enforce the intellectual property rights on which our business depends, could have a material adverse effect on our business, financial condition and results of operations.
 
We rely upon intellectual property laws in the United States, and although we do not have any patents protecting our business model or technology, we rely on non-disclosure, confidentiality and other types of agreements with our employees, members and other parties, to establish, maintain and enforce our intellectual property and proprietary rights. However, any of our owned or licensed intellectual property rights could be challenged, invalidated, circumvented, infringed or misappropriated, our trade secrets and other confidential information could be disclosed in an unauthorized manner to third-parties, or our intellectual property rights may not be sufficient to permit us to take advantage of current market trends or otherwise to provide us with competitive advantages, which could result in costly redesign efforts, discontinuance of certain offerings or other competitive harm. Efforts to enforce our intellectual property rights may be time consuming and costly, distract management's attention and resources and ultimately be unsuccessful. In addition, such efforts may result in our intellectual property rights being challenged, limited in scope, or declared invalid or unenforceable. Moreover, our failure to develop and properly manage new intellectual property could adversely affect our market positions and business opportunities. Our intellectual property rights may not prevent others from creating a competitive online platform or otherwise competing with us.
 
We may not be able to obtain, maintain and enforce the intellectual property rights that may be necessary to protect and grow our business and to provide us with a meaningful competitive advantage. Also, some of our business and services may rely on technologies and software developed by or licensed from third-parties, and we may not be able to maintain our relationships with such third-parties or enter into similar relationships in the future on reasonable terms or at all. Our failure to obtain, maintain and enforce our intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.
 
Assertions by third-parties that we violate their intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
 
Third-parties may claim that we, our members, or parties indemnified by us are infringing upon or otherwise violating their intellectual property rights. Such claims may be made by competitors seeking to obtain a competitive advantage or by other parties. Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies like ours. Any claims that we violate a third-party's intellectual property rights can be time consuming and costly to defend and distract management's attention and resources, even if the claims are without merit. Such claims may also require us to redesign affected products and services, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or providing the affected products and services. Even if we have an agreement entitling us to indemnity against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology at all, license the technology on reasonable terms or substitute similar technology from another source, our revenue and earnings could be adversely impacted.
 
In addition, we may use open source software in connection with our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations.
 
Assertions by third-parties that we violate their intellectual property rights could therefore have a material adverse effect on our business, financial condition and results of operations.


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We are subject to privacy and data protection laws governing the transmission, security and privacy of health information, which may impose restrictions on the manner in which we access personal data and subject us to penalties if we are unable to fully comply with such laws.
 
Numerous federal, state and international laws and regulations govern the collection, use, disclosure, storage and transmission of individually identifiable health information. These laws and regulations, including their interpretation by governmental agencies, are subject to frequent change. These regulations could have a negative impact on our business, for example:

HIPAA and its implementing regulations were enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs, and to simplify healthcare administrative processes. The enactment of HIPAA also expanded protection of the privacy and security of personal health information and required the adoption of standards for the exchange of electronic health information. Among the standards that the Department of Health and Human Services has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security, electronic signatures, privacy and enforcement. Failure to comply with HIPAA could result in fines and penalties that could have a material adverse effect on us.

The HITECH Act sets forth health information security breach notification requirements and increased penalties for violation of HIPAA. The HITECH Act requires individual notification for all breaches, media notification of breaches of over 500 individuals and at least annual reporting of all breaches to the Department of Health and Human Services. The HITECH Act also replaced the prior penalty system of one tier of penalties of $100 per violation and an annual maximum of $25,000 with a four-tier system of sanctions for breaches. Penalties now range from the original $100 per violation and an annual maximum of $25,000 for the first tier to a fourth-tier minimum of $50,000 per violation and an annual maximum of $1.5 million. Failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.

Other federal and state laws restricting the use and protecting the privacy and security of individually identifiable information may apply, many of which are not preempted by HIPAA.

Federal and state consumer protection laws are increasingly being applied by the FTC, and states' attorneys general to regulate the collection, use, storage and disclosure of personal or individually identifiable information, through websites or otherwise, and to regulate the presentation of website content.
 
We are required to comply with federal and state laws governing the transmission, security and privacy of individually identifiable health information that we may obtain or have access to in connection with the provision of our services. Despite the security measures that we have in place to ensure compliance with privacy and data protection laws, our facilities and systems, and those of our third-party vendors and subcontractors, are vulnerable to security breaches, acts of vandalism or theft, computer viruses, misplaced or lost data, programming and human errors or other similar events. Due to the enactment of the HITECH Act, we are not able to predict the extent of the impact such incidents may have on our business. Our failure to comply may result in criminal and civil liability because the potential for enforcement action against business associates is now greater. Enforcement actions against us could be costly and could interrupt regular operations, which may adversely affect our business. While we have received inquiries relating to our compliance with various privacy acts, including inquiries originating from allegations of a potential breach, to date none have been found or determined to be actual violations by our Company.
 
Under the HITECH Act, as a business associate we may also be directly or independently liable for privacy and security breaches and failures of our subcontractors. Even though we provide for appropriate protections through our agreements with our subcontractors, we still have limited control over their actions and practices. A breach of privacy or security of individually identifiable health information by a subcontractor may result in an enforcement action, including criminal and civil liability, against us. In addition, numerous other federal and state laws protect the confidentiality of individually identifiable information as well as employee personal information, including state medical privacy laws, state social security number protection laws, and federal and state consumer protection laws. These various laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by the courts and government agencies, creating complex compliance issues for us and our members and potentially exposing us to additional expense, adverse publicity and liability, any of which could adversely affect our business.
 

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Our business is subject to online security risks, and if we are unable to safeguard the security and privacy of confidential data, our reputation and business could be harmed.
 
Our services involve the collection and storage of confidential information of members and the transmission of this information to insurance carriers. For example, we collect names, addresses, and social security, bank account and credit card numbers, as well as information regarding the medical history of members in connection with their applications for insurance. In certain cases, such information is provided to third-parties, such as to the service providers who provide hosting services for our technology platform, and we may therefore be unable to control the use of such information or the security protections employed by such third-parties. We may be required to expend significant capital and other resources to protect against security breaches or to alleviate problems caused by security breaches. Despite our implementation of security measures, techniques used to obtain unauthorized access or to sabotage systems change frequently, and our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any compromise or perceived compromise of our security (or the security of our third-party service providers who have access to our members' confidential information) could damage our reputation and our relationship with members, third-party distributors and insurance carriers, could reduce demand for our services and could subject us to significant liability as well as regulatory action. In addition, in the event that new data security laws are implemented, or our insurance carriers or other partners determine to impose new requirements on us relating to data security, we may not be able to timely comply with such requirements, or such requirements may not be compatible with our current processes. Changing our processes could be time consuming and expensive, and failure to timely implement required changes could result in our inability to sell health insurance plans and products in a particular jurisdiction or for a particular insurance carrier, or subject us to liability for non-compliance.

Our services present the potential for embezzlement, identity theft or other similar illegal behavior by our employees or subcontractors with respect to third-parties.
 
Among other things, our services involve handling information from members, including credit card information and bank account information. Our services also involve the use and disclosure of personal information that could be used to impersonate third-parties or otherwise gain access to their data or funds. If any of our employees or subcontractors takes, converts or misuses such funds, documents or data, we could be liable for damages, and our business reputation could be damaged. In addition, we could be perceived to have facilitated or participated in illegal misappropriation of funds, documents or data and therefore be subject to civil or criminal liability. Any such illegal activity by our employees or subcontractors could have an adverse effect on our business, financial condition and results of operations.
 
System failures or capacity constraints could harm our business and results of operations.
 
The performance, reliability and availability of our technology platform, customer service call center and underlying network infrastructures are critical to our financial results and our relationship with members, independent distributors and insurance carriers. Although we regularly attempt to enhance and maintain our technology platform, customer service call center and system infrastructure, system failures and interruptions may occur if we are unsuccessful in these efforts. We may further experience difficulties with transitioning existing systems to upgraded systems, if we are unable to accurately project the rate or timing of increases in our platform traffic or customer service call center call volume or for other reasons, some of which are completely outside our control. Significant failures and interruptions, particularly during peak enrollment periods, could harm our business, results of operations and financial condition.
 
We rely in part upon third-party vendors, including data center and bandwidth providers, to operate and maintain our technology platform. We cannot predict whether additional network capacity will be available from these vendors as we need it, and our network or our suppliers' networks might be unable to achieve or maintain a sufficiently high capacity of data transmission to allow us to process health insurance applications in a timely manner or effectively download data, especially if our platform traffic increases. Any system failure that causes an interruption in, or decreases the responsiveness of, our services could impair our revenue-generating capabilities, harm our image and subject us to potential liability. Our database and systems are vulnerable to damage or interruption from human error, earthquakes, fire, floods or other weather events, power loss, telecommunications failures, physical or electronic break-ins, computer viruses, acts of terrorism, other attempts to harm our systems and similar events.
 
We depend upon third-parties, including telephone service providers, third-party software providers and business process outsourcing providers, to operate our customer service call center. Any failure of the systems upon which we rely in the operation of our customer service call center could negatively impact sales as well as our relationship with members, which could harm our business, results of operations and financial condition.
 

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Our acquisitions and other strategic transactions may be difficult to integrate, divert management resources, result in unanticipated costs or dilute our stockholders.
 
Part of our continuing business strategy is to acquire or invest in, companies, products or technologies that complement our current products, enhance our market coverage, technical capabilities or production capacity, or offer growth opportunities or make other strategic transactions. Such transactions could pose numerous risks to our operations, including:

difficulty integrating the purchased operations, technologies or products;

incurring substantial unanticipated integration costs;

assimilating the acquired businesses may divert significant management attention and financial resources from our other operations and could disrupt our ongoing business;

acquisitions could result in the loss of key employees, particularly those of the acquired operations;

difficulty retaining or developing the acquired businesses' customers;

acquisitions could adversely affect our existing business relationships with suppliers and members;

failing to realize the potential cost savings or other financial benefits and/or the strategic benefits of the acquisitions; and

incurring liabilities from the acquired businesses for infringement of intellectual property rights or other claims, and we may not be successful in seeking indemnification for such liabilities or claims.

In connection with these acquisitions or investments, we could incur debt, amortization expenses related to intangible assets, large and immediate write-offs, assume liabilities or issue stock that would dilute our current stockholders' percentage of ownership. We may not be able to complete acquisitions or integrate the operations, products or personnel gained through any such acquisition without a material adverse effect on our business, financial condition and results of operations.
 
AgileHealthInsurance® depends upon marketing partnerships to attract a significant portion of the consumers who visit our website, and Agile's success is dependent on our ability to maintain effective relationships with our existing marketing partners and establish successful relationships with new marketing partners.
 
We enter into contractual marketing relationships with online and offline businesses that promote AgileHealthInsurance® to its customers and users. These marketing partners include online advertisers, content providers, and insurance lead aggregators, and we typically compensate our marketing partners for their online referrals (clickthroughs) on a performance basis (CPA or CPC). If we are unable to maintain successful relationships with our existing marketing partners or fail to establish successful relationships with new marketing partners, our business, results of operations and financial condition could be harmed. Additionally, if competition increases with respect to marketing partner relationships, this would increase the cost of compensation agreements with marketing partners and increase the marketing expenses associated with these partners.
 
AgileHealthInsurance® depends upon internet search engines to attract a significant portion of the consumers who visit our direct to consumer website.
 
We derive a significant portion of our AgileHealthInsurance® website traffic from consumers who search for health insurance through internet search engines. A critical factor in attracting consumers to our website is whether we are prominently displayed in response to internet searches broadly relating to health insurance topics. Search engines typically provide two types of search results, algorithmic listings and paid advertisements. We rely on both algorithmic listings and paid advertisements to attract consumers to our website.
 
Algorithmic search result listings are determined and displayed in accordance with a set of formulas or algorithms developed by the particular internet search engine. The algorithms determine the order of the listing of results in response to the consumer's internet search. From time to time, search engines update these algorithms. In some instances, these modifications have caused our AgileHealthInsurance® website to be listed less prominently in algorithmic search results, which has resulted in decreased traffic to our website. We may also be listed less prominently as a result of new websites or changes to existing websites that result in these websites receiving higher algorithmic rankings with the search engine. For example, during PPACA open enrollment, health insurance exchange websites may appear more prominently in algorithmic search results. In addition, our

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AgileHealthInsurance® website may become listed less prominently in algorithmic search results for other reasons, such as search engine technical difficulties, search engine technical changes, and changes we make to our website. In addition, search engines have deemed the practices of some companies to be inconsistent with search engine guidelines and decided not to list their website in search result listings at all. If we are listed less prominently in, or removed altogether from, search result listings for any reason, the traffic to our website could decline and we may not be able to replace this traffic, which in turn could harm our business, operating results and financial condition. If we decide to attempt to replace this traffic, we may be required to increase our marketing expenditures, which would also increase our cost of acquisition and harm our business, results of operations and financial condition.
 
We purchase paid advertisements on search engines in order to attract consumers to our website. We typically pay a search engine for prominent placement of the Agile name and website when particular health insurance-related terms are searched for on the search engine, regardless of the algorithmic search result listings. In some circumstances, the prominence of the placement of our advertisement is determined by a combination of factors, including the amount we are willing to pay and algorithms designed to determine the relevance of our paid advertisement to a particular search term. As with algorithmic search result listings, search engines may revise the algorithms relevant to paid advertisements and websites other than our platform may become more optimized for the algorithms. These changes may result in our having to pay increased amounts to maintain our paid advertisement placement in response to a particular search term. We could also have to pay increased amounts should the market share of major search engines continue to become more concentrated with a single search engine. Additionally, we bid against our competitors and others for the display of these paid search engine advertisements. Many of our competitors, including many health insurance carriers and government-run health insurance exchanges, have greater resources with which to bid, and have better brand recognition than we do. We have experienced increased competition from health insurance carriers and some of our marketing partners for both algorithmic search result listings and for paid advertisements, which has increased our marketing and advertising expenses. If this competition increases further, or if the fees associated with paid search advertisements increase as a result of algorithm changes or other factors, our advertising expenses could rise significantly, or we could reduce or discontinue our paid search advertisements, either of which could harm our business, results of operations and financial condition.

We may not be able to successfully recognize anticipated synergies between TogetherHealth and the Company or retain key TogetherHealth employees.

We anticipate that our TogetherHealth business, which we acquired in June 2019, will become an increasingly significant part of our Company's consolidated revenues and business over time. The success of the TogetherHealth acquisition depends on our ability to leverage the assets and business of TogetherHealth to expand our business, develop new products, and grow our Company's consolidated revenues and net income. This will place significant demands on our management, our operational and financial systems, our infrastructure, and our other resources. In order to successfully leverage the TogetherHealth acquisition and expand our business, we will need to integrate, motivate, and retain current and new TogetherHealth employees. If we do not effectively integrate TogetherHealth, retain its key employees, and manage any resulting anticipated growth, our ability to develop new products and grow the consolidated business in the manner anticipated by the acquisition will suffer.  

Our business may be harmed if we are not successful in executing on our strategic investments and initiatives.

As a part of our ongoing strategic review of our business operations, we have examined potential areas of investment and strategic emphasis. As a result of this review, we have determined to invest in initiatives to accelerate growth in our Medicare product distribution, including Medicare Advantage and Medicare Supplement plans. Pursuing and investing in these initiatives will require significant investments in marketing and advertising, technology and product offerings, and customer care and enrollment, among other things.

Our pursuit of and investment in these initiatives involves risks and uncertainties including risks resulting in insufficient revenue to offset any expenses associated with these new investments, inadequate return of capital on our investments, legal and regulatory compliance risks, and issues not discovered in our strategic review that could cause us to fail to realize the anticipated benefits of our investments and incur unanticipated liabilities. Our pursuit of these strategic initiatives may not be successful. If we are not successful in executing our business strategy, our future profitability would be negatively impacted and our business, operating results, and financial condition would be harmed.


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Our business may be harmed if we do not market Medicare plans effectively or if our marketing materials are not timely approved.

Health insurance carriers whose Medicare plans we distribute through third-party partners approve much of our marketing material, and our partner's call center's scripts. We must receive these approvals in order for us to be able to generate Medicare plan demand for the sale of Medicare plans to Medicare-eligible individuals. Many of these materials also must be filed with CMS. In addition, we use Medicare plan cost and benefit data collected and made publicly available by CMS. In the event that CMS or a health insurance carrier requires change to, disapproves, or delays approval of our marketing material, or partner's call center scripts, or if CMS does not timely release Medicare plan cost and benefit data for the following year's Medicare plans prior to the annual enrollment period, we could lose a significant source of Medicare plan demand and our ability to distribute Medicare plans would be adversely impacted, each of which would harm our business, operating results and financial condition.

Our reinsurance subsidiary is highly regulated, and changes in these regulations could negatively affect our business.

Benefytt Reinsurance, a reinsurance subsidiary of the Company we formed in May 2019, is subject to government regulation in each of the jurisdictions in which it is licensed or authorized to do business. Governmental agencies have broad administrative power to regulate many aspects of the insurance business, which may include premium rates, marketing practices, advertising, policy forms, and capital adequacy. These agencies are concerned primarily with the protection of policyholders rather than shareholders or holders of debt securities. Moreover, insurance laws and regulations, among other things, establish minimum capital requirements and limit the amount of dividends, tax distributions, and other payments Benefytt Reinsurance can make without prior regulatory approval, and impose restrictions on the amount and type of investments we may hold.

If actual losses exceed our estimated loss reserves, our net income and capital position will be reduced.

Our success depends upon our ability to accurately assess the risks associated with the businesses that we reinsure. We establish loss reserves to cover our estimated liability for the payment of all losses and loss expenses incurred with respect to premiums earned on the contracts that we write. Loss reserves are estimates involving actuarial and statistical projections at a given time to reflect our expectation of the costs of the ultimate settlement and administration of claims. Losses for casualty and liability lines often take a long time to be reported, and frequently can be impacted by lengthy, unpredictable litigation and by the inflation of loss costs over time. As a consequence, actual losses and loss expenses paid may deviate substantially from the reserve estimates reflected in our financial statements.

The requirements of being a public company impose costs and demands upon our management, which could make it difficult to manage our business.
 
Complying with the reporting and other regulatory requirements of the Securities Exchange Act of 1934 (as amended, the "Exchange Act") and the requirements of the Sarbanes-Oxley Act of 2002 (as amended, the "Sarbanes-Oxley Act") is time-consuming and costly and could have a negative effect on our business, financial condition and results of operations. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we have committed significant resources, hired additional staff and provided additional management oversight. We expect these resources and management oversight requirements to continue. These activities may divert management's attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations.
 
The implementation by us of the new revenue recognition standard on December 31, 2018 (ASC 606) required substantial preparation and expenditures, and our failure to properly implement this standard could result in inaccurate revenue recognition and disclosure and cause us to fail to meet our financial reporting obligations.

In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance under ASC 606 which became effective for us beginning December 31, 2018, the date on which our emerging growth company status expired. Under this guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue that is recognized.

In order to comply with the requirements of ASC 606, we have updated and are continuing to update and enhance our internal accounting systems, processes, and our internal controls over financial reporting. This has required, and will continue to require, additional investments by us, and may require incremental resources and system configurations that could increase our operating costs in future periods. If we are not successful in updating our policies, procedures, information systems and internal controls

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over financial reporting, the revenue that we recognize and the related disclosures that we provide under ASC 606 may not be complete or accurate, which could harm our operating results or cause us to fail to meet our reporting obligations and adversely affect our stock price.

Our operating results will be impacted by factors that impact our estimate of the constrained lifetime value of commissions revenue per approved member.

The adoption of ASC 606 had a material impact on our consolidated financial statements. The most significant impact of the standard was on our commission revenue. We recognize revenue for Medicare approved members based upon the total expected commissions we expect to receive over the life of the underlying polices, net of a constraint. We recognize commission revenue at the time the application for the plan is approved by the carrier and when it renews each year thereafter, equal to the estimated commissions we expect to collect over the following 12-months. The constrained lifetime value for each product line is an estimate and is based on a number of assumptions, which include, but are not limited to, estimates of the conversion rates of approved members into paying members, estimated member cancellations and forecasted commission amounts we expect to receive per approved member. These assumptions incorporate management’s judgment. Changes in our historical trends will result in changes to our constrained lifetime value estimates in future periods and therefore could adversely affect our revenue and financial results in those future periods. As a result, negative changes in the factors upon which we estimate constrained lifetime values, such as reduced conversion of approved members to paying members, increased member cancellations or a reduction in the lifetime commission amounts we expect to receive for selling the plan to a member, or other changes outside our control, would harm our business, operating results and financial condition. In addition, if we ultimately receive commission payments that are less than the amount we estimated when we recognized commission revenue, we would need to write-off of the remaining commission receivable balance, which would harm our business, operating results, cash flows and financial condition.

The restrictions and obligations under our credit agreement could impact our business and expose us to risks that could affect our liquidity and financial condition.

On June 5, 2019, we entered into a Credit Agreement with Bank of America, N.A., as administrative agent for a syndicate of lenders, through our HPIH subsidiary. The Credit Agreement provides for an aggregate principal borrowing amount of up to $215.0 million, which consists of: (i) a $65.0 million, three-year revolving credit facility and (ii) a $150.0 million term loan facility. At December 31, 2019, the entire amount of the term loan facility had been drawn down upon, approximately $34 million of the revolving credit facility was outstanding. The Credit Agreement contains various customary covenants and restrictions, including, but not limited to, (i) a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio and (ii) restrictions on the incurrence of debt, investments, fundamental changes, sale and leaseback transactions, transactions with affiliates, hedging transactions, restrictive agreements, mergers, consolidations, and sales of assets.

If we experience a decline in cash flow due to any of the factors described in this “Risk Factors” section or otherwise, we could have difficulty paying interest and principal amounts due on our indebtedness and meeting the financial covenants set forth in the Credit Agreement, and we could accordingly default under the Credit Agreement. Any such default that is not cured or waived could result in, among other remedies, the acceleration of the obligations under the credit facility and would permit our lenders to exercise rights and remedies with respect to all of the collateral secures the credit facility, which includes substantially all of our assets. Any such default could materially adversely affect our liquidity and financial condition. In addition, the restrictions on the conduct of our business set forth in the Credit Agreement could materially adversely affect our business by, among other things, limiting our ability to take advantage of financings, mergers, acquisitions and other corporate opportunities that may be beneficial to the business.


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Risks Related to Our Structure
 
We are a holding company and our only material asset is our interest in HPIH and, accordingly, we are dependent upon distributions from HPIH to pay taxes and other expenses.
 
We are a holding company and have no material assets other than our ownership of Series A Membership Interests of HPIH. We have no independent means of generating revenue. Until the Final Class B Exchange, HPIH will be treated as a partnership for U.S. federal income tax purposes and, as such, will not itself subject to U.S. federal income tax. Instead, its net taxable income is generally allocated to its members, including us, pro rata according to the number of Membership Interests each member owns. Accordingly, we incur income taxes on our proportionate share of any net taxable income of HPIH and also incur expenses related to our operations. We cause HPIH to distribute cash to its members, including us, in an amount at least equal to the amount necessary to cover their respective tax liabilities, if any, with respect to their allocable share of the net income of HPIH and to cover dividends, if any, declared by us, as well as any payments due under the tax receivable agreement, as described below. To the extent that we need funds to pay our tax or other liabilities or to fund our operations, and HPIH is restricted from making distributions to us under applicable agreements, laws or regulations or does not have sufficient cash to make these distributions, we may have to borrow funds to meet these obligations and operate our business, and our liquidity and financial condition could be materially adversely affected. To the extent that we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid.
 
We will be required to pay the holders of Series B Membership Interests of HPIH most of the tax benefits that we may receive as a result of any future exchanges of Series B Membership Interests for our Class A common stock and payments made under the tax receivable agreement itself, and the amounts we pay could be substantial.
 
Exchanges of Series B Membership Interests (together with an equal number of shares of our Class B common stock) for shares of our Class A common stock results in increases in the tax basis in our share of the tangible and intangible assets of HPIH. Any such increases in tax basis could reduce the amount of tax that we would otherwise be required to pay in the future.
 
We have entered into a tax receivable agreement with entities that hold Series B Membership Interests that are beneficially owned by Michael W. Kosloske, our founder, pursuant to which we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we realize (or are deemed to realize in the case of an early termination payment by us, a change in control or a material breach by us of our obligations under the tax receivable agreement, as discussed below) as a result of these possible increases in tax basis resulting from exchanges of Series B Membership Interests (including the Final Class B Exchange) as well as certain other benefits attributable to payments under the tax receivable agreement itself. Any actual increases in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, cannot be predicted reliably at this time. The amount of any such increases and payments will vary depending upon a number of factors, including the timing of exchanges (including the Final Class B Exchange), the price of our Class A common stock at the time of the exchanges, the amount, character and timing of our income and the tax rates then applicable. The payments that we may be required to make pursuant to the tax receivable agreement could be substantial for periods in which we generate taxable income. Changes in factors such as the corporate income tax rate or our ability to generate taxable income in the future could impact our valuation allowance for the deferred tax asset resulting in a benefit or a charge during the period.
 
In addition, the tax receivable agreement provides that in the case that we exercise our right to early termination of the tax receivable agreement or in the case of a change in control, or a material breach by us of our obligations under the tax receivable agreement, the tax receivable agreement will terminate, and we will be required to make a payment equal to the present value of future payments under the tax receivable agreement, which payment would be based on certain assumptions, including those relating to our future taxable income. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. These provisions of the tax receivable agreement may result in situations where Mr. Kosloske may have interests that differ from, or are in addition to, those of our stockholders.
 
We may not be able to realize all or a portion of the tax benefits that are expected to result from future exchanges of Series B Membership Interests for our Class A common stock and payments made under the tax receivable agreement itself.
 
Our ability to benefit from any depreciation or amortization deductions or to realize other tax benefits that we currently expect to be available as a result of the increases in tax basis created by exchanges (including the Final Class B Exchange) of Series B Membership Interests (together with an equal number of shares of our Class B common stock) for our Class A common stock, and our ability to realize certain other tax benefits attributable to payments under the tax receivable agreement itself depend on a number of assumptions, including that we earn sufficient taxable income each year during the period over which such deductions are available and that there are no adverse changes in applicable law or regulations. If our actual taxable income were

29



insufficient and/or there were adverse changes in applicable law or regulations, we may be unable to realize all or a portion of these expected benefits and our cash flows and stockholders' equity could be negatively affected.
 
If the Internal Revenue Service successfully challenges the tax basis increases, we will not be reimbursed for any payments made under the tax receivable agreement (although future payments under the tax receivable agreement, if any, would be adjusted to reflect the result of any such successful challenge by the Internal Revenue Service). As a result, in certain circumstances, we could be required to make payments under the tax receivable agreement in excess of our cash tax savings.
 
Risks Related to Ownership of Our Class A Common Stock
 
We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or above the purchase price.
 
We completed our IPO in February 2013. From that time through December 31, 2019, shares of our Class A common stock have traded between a low of $3.72 per share to a high of $63.13 per share. Several entities have reported owning, as of December 31, 2019, substantial portions of our Class A common stock. An active, liquid and orderly market for our Class A common stock may not be sustained, which could depress the market price of our Class A common stock and cause you to have difficulty selling any shares of our Class A common stock that you purchase at or above the price you paid or at all. In the future, the market price of our Class A common stock may be highly volatile and trading volumes may be low and could be subject to wide price fluctuations in response to various factors, including:

market conditions in the broader stock market in general, or in our industry in particular;

actual or anticipated fluctuations in our quarterly financial and results of operations;

our ability to satisfy our ongoing capital needs and unanticipated cash requirements;

additional indebtedness incurred in the future;

introduction of new products and services by us or our competitors;

issuance of new or changed securities analysts' reports or recommendations;

sales of large blocks of our stock;

additions or departures of key personnel;

regulatory developments;

litigation and governmental investigations; and

economic and political conditions or events.
 
These and other factors may cause the market price and demand for our Class A common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of Class A common stock and may otherwise negatively affect the liquidity of our Class A common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have often instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.
 
The trading market for our Class A common stock may also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our Company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrades our stock, or if our results of operations do not meet their expectations, our stock price could decline.
 

30



The market price of our Class A common stock could decline due to future sales, or expected sales, of converted shares of Class A common stock, whether upon the exchange of Series B Membership Interests by our founder and largest stockholder or upon exercise of stock appreciation rights granted to employees and directors.
 
The market price of our Class A common stock could decline as a result of sales, or the possibility of sales, of a large number of shares of our Class A common stock eligible for future sale as a result of the exchange (including the Final Class B Exchange) of Series B Membership Interests of HPIH (together with an equal number of shares of our Class B common stock) or upon the exercise of stock appreciation rights. These sales, or the perception that the sales may occur, may also make it more difficult for us to raise additional capital by selling equity securities in the future at a time and price that we deem appropriate. As of February 28, 2020, there were 1,016,667 Series B Membership Interests outstanding and held by entities owned by Michael Kosloske, our founder, all of which will be subject to the Final Class B Exchange. As required by a registration rights agreement between the Company and Mr. Kosloske's affiliate entities, there is an effective registration statement covering the resale of Class A common stock that is issuable in exchange for the Series B Membership Interests owned by Mr. Kosloske's affiliates, although the holders of the interests are under no obligation to effectuate exchanges and resell the shares they receive. Under the registration rights agreement, Mr. Kosloske has the right, among other things, to sell the shares covered by the effective registration statement in an underwritten offering and to require the Company to provide assistance in connection with any such offering, such as by filing one or more prospectus supplements. In addition to the shares held by Mr. Kosloske's affiliated entities, as of February 28, 2020, there were approximately 588,000 outstanding stock appreciation rights held by our directors and executive officers that are exercisable for shares of our Class A common stock.

Our share price may be adversely affected by short sellers and other third-parties who raise questions about the Company.

Short sellers and others who raise questions about the Company, some of whom are positioned to profit if our share price declines, can negatively affect the price and volatility of our shares. Short sellers make a profit when our common shares decline in value, and their actions and public statements, together with the resulting publicity, may cause further volatility in our share price. The volatility of our stock may cause the value of a shareholder's investment to decline rapidly. These short seller publications are not regulated by any governmental, self-regulatory organization, or other official authority in the U.S., are not subject to certification requirements imposed by the Securities and Exchange Commission and, accordingly, the opinions they express may be based on distortions or omissions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information and the significant profit that can be made from running just one successful short attack (together with the adverse financial consequences to short sellers of an increase in our stock price), short sellers may continue to issue reports in the future with respect to the Company.

We are currently subject to securities lawsuits and we may be subject to similar or other litigation in the future, which may divert management's attention and have a material adverse effect on our business, financial condition and results of operations.

We are a defendant in two putative securities class action lawsuits that were filed against the Company and certain of its current and former executive officers in September 2017 and February 2019, respectively. These actions allege, among other things, that the Company made materially false or misleading statements or omissions regarding regulatory compliance matters, the Company’s relationship with certain third party distributors (including Health Benefits One/Simple Health), and certain other matters. The plaintiffs in each of these actions are seeking an undetermined amount of damages, interest, attorneys' fees and costs on behalf of a putative class of individuals and entities that acquired shares of the Company's common stock during specified periods. In addition, most of the Company's officers and directors are defendants in two derivative actions filed in April 2018 and a derivative action filed in June 2019 alleging breach of fiduciary duty, among other matters. The derivative actions have been stayed pending the resolution of the consolidated securities class action. These putative securities class action lawsuits and derivative actions are described in Note 17 "Commitments and Contingencies" in Part IV, Item 15 of this report.

We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of legal fees of present and former officers under indemnification obligations. The expense of continuing to defend such litigation may be significant. We intend to defend these lawsuits vigorously, but there can be no assurance that we will be successful in any defense. If any of the lawsuits are adversely decided, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations and cash flows. Further, the amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management's attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

We cannot predict the outcome of these lawsuits and we may be subject to other similar securities litigation in the future, including other legal actions relating to the Company's public disclosures and filings. Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, we may incur substantial legal fees and costs in connection with litigation. Although

31



we have insurance, coverage could be denied or prove to be insufficient, and our insurance coverage may not cover all types of claims and actions that may be brought against the Company. We are not currently able to estimate the possible cost to us from the currently pending lawsuits, and we cannot be certain how long it may take to resolve these matters or the possible amount of any damages that we may be required to pay. We have not established any reserves for any potential liability relating to these or future lawsuits. It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages. A decision adverse to our interests on these actions could result in the payment of substantial damages and could have a material adverse effect on our business, results of operations and financial condition. In addition, the uncertainty of the currently pending lawsuits could lead to more volatility in our stock price. The ultimate outcome of litigation could have a material adverse effect on our business and the trading price for our securities.
 
Some provisions of Delaware law, our amended and restated certificate of incorporation and amended and restated bylaws may deter third-parties from acquiring us.
 
Our amended and restated certificate of incorporation and amended and restated bylaws provide for, among other things:

restrictions on the ability of our stockholders to fill a vacancy on the board of directors;

prohibit stockholder action by written consent;

prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;

provide that special meetings of stockholders may be called only by the board of directors, the chairman of the board of directors or the chief executive officer;

establish advance notice procedures for the nomination of candidates for election as directors or for proposing matters that can be acted upon at stockholder meetings;

directors may be removed only for cause and only upon the affirmative vote of holders of at least 75% of all of the outstanding shares of our capital stock entitled to vote;

certain provisions of our amended and restated certificate of incorporation may only be amended upon the affirmative vote of holders of at least 75% of all of the outstanding shares of our capital stock entitled to vote; and

the authorization of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval.
 
These anti-takeover defenses and other factors could discourage, delay or prevent a transaction involving a change in control of our Company. These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors of their choosing and cause us to take other corporate actions that our stockholders desire.

We do not anticipate paying any cash dividends in the foreseeable future.
 
We currently intend to retain our future earnings, if any, for the foreseeable future to fund the development and growth of our business. We do not intend to pay any dividends to holders of our Class A common stock. As a result, capital appreciation in the price of our Class A common stock, if any, will be your only source of gain on an investment in our Class A common stock.
 
Our internal control over financial reporting may not be effective in the future, and our independent registered public accounting firm may not be able to certify as to its effectiveness, which could have a significant and adverse effect on our business and reputation.
 
We have a complex business organization. We cannot assure that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price and potential lawsuits against us.


32



If we fail in the future to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we or our auditors, may not be able to conclude, on an ongoing basis, that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results of operations and cash flows.

ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2. PROPERTIES
 
As of December 31, 2019, 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:
Location
 
Segment
 
Approximate Square Footage
 
Type of Interest
 
Expiration of lease
Tampa, FL
 
Medicare and IFP
 
60,200
 
Leased
 
June 2027
Mountain View, CA
 
IFP
 
2,400
 
Leased
 
January 2023
Waxahachie, TX
 
IFP
 
2,000
 
Leased
 
Month-to-month
Suwanee, GA
 
IFP
 
2,000
 
Leased
 
July 2022

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.
 
ITEM 3. LEGAL PROCEEDINGS

Legal Proceedings are set forth under Note 17 "Commitments and Contingencies" included in Part IV, Item 15 of this Annual Report on Form 10-K, is incorporated herein by reference. For an additional discussion of certain risks associated with legal proceedings, see "Risk Factors" in Item 1A. above.

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.

PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  
Our Class A common stock is listed on the NASDAQ Global Market under the symbol "HIIQ." Our shares of Class A common stock have been publicly traded since February 8, 2013. Prior to that time there was no public market for our Class A common stock.
 
There is no public trading market for our Class B common stock.
 

33



HOLDERS
 
As of February 28, 2020, there were 12,238,049 shares of our Class A common stock and 1,016,667 shares of our Class B common stock issued. As of February 28, 2020, there were seventeen Class A common stockholders of record and two Class B stockholders of record. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
 
DIVIDEND POLICY
 
We have never paid dividends on our Class A common stock. We currently anticipate that we will retain all available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future. Class B common stock is not entitled to any dividend payments under our amended and restated certificate of incorporation.
 
UNREGISTERED SALES OF EQUITY SECURITIES
 
There were no unregistered sales of equity securities during the year ended December 31, 2019.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The information required by this Item is incorporated herein by reference to the information provided in our definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 31, 2019 (the "2020 Proxy Statement").
 
ISSUER PURCHASES OF EQUITY SECURITIES
 
Shares Repurchase Plan

On October 13, 2017, the Company's Board of Directors authorized a share repurchase program for up to $50.0 million of the Company's outstanding Class A Common Stock, which was increased to $200.0 million by the Board of Directors on March 14, 2019. The share repurchase authorization permits the Company to periodically repurchase shares for cash through October 2020 in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. The actual timing, number and value of shares repurchased under the program will be determined by the Company's management at its discretion and will depend on a number of factors, including the market price of the Company's common stock, general market and economic conditions, regulatory requirements, capital availability and compliance with the terms of the Company's credit facility. Repurchases under the program will be funded from one or a combination of existing cash balances, future free cash flow, and indebtedness. There is no guarantee as to the number of shares that will be repurchased, and the repurchase program may be extended, suspended or discontinued at any time without notice at the Company's discretion.

Under the stock repurchase program, the Company elected to adopt a Rule 10b5-1 share repurchase plan under the Securities Exchange Act of 1934, as amended (a "10b5-1 Plan"). A 10b5-1 Plan allows the Company to repurchase its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Because repurchases under a 10b5-1 Plan are expected to be subject to certain pricing parameters, there is no guarantee as to the exact number of shares that would be repurchased under a 10b5-1 Plan.

During the year ended December 31, 2019, we repurchased, in open-market transactions (including sales under a 10b5-1 plan), 1,981,241 shares of our registered Class A common stock under the repurchase program at an average price per share of $32.23. No shares were repurchased under the share repurchase plan during the last three months of 2019.

Employee Awards
 
Pursuant to certain restricted stock award agreements, we allow the surrender of restricted shares by certain employees to satisfy statutory tax withholding obligations on vested restricted stock awards.
 

34



The following table sets forth information with respect to repurchases of our registered Class A common stock during the fiscal quarter ended December 31, 2019
Period
 
Total Number of Shares Purchased(1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Dollar Value of Shares That May Yet Be Purchased Under the Plan
October 1, 2019 through October 31, 2019
 

 
$

 

 
$
75,277,082

November 1, 2019 through November 30, 2019
 
21,765

 
$
23.86

 

 
$
75,277,082

December 1, 2019 through December 31, 2019
 
10,762

 
$
19.34

 

 
$
75,277,082

Total
 
32,527

 
 
 

 
 
 
(1) 
All shares reported represent shares surrendered by employees in order to satisfy statutory tax withholding obligations in connection with the vesting of stock-based compensation awards.

Stock Performance Graph

This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Health Insurance Innovations, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.

The following graph shows a comparison from December 31, 2014 through December 31, 2019 of the cumulative total return for our Class A common stock, the NASDAQ Composite Index (NASDAQ Composite), and the RDG Internet Composite. The graph assumes that $100 was invested at the market close on December 31, 2014 in the Class A common stock of Health Insurance Innovations, Inc., the NASDAQ Composite, and the RDG Internet Composite. The data for the NASDAQ Composite and RDG Internet Composite assumes reinvestments of gross dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
https://cdn.kscope.io/6919a7b648daea8af48a4c806458c3d3-chart-6aaa8681894d5a6a94e.jpg
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
 
12/31/2018
 
12/31/2019
Health Insurance Innovations, Inc.
$100.00
 
$93.58
 
$249.30
 
$348.46
 
$373.32
 
$269.41
NASDAQ Composite
$100.00
 
$106.96
 
$116.45
 
$150.96
 
$146.67
 
$200.49
RDG Internet Composite
$100.00
 
$128.89
 
$135.45
 
$203.48
 
$197.34
 
$262.03

35




ITEM 6. SELECTED FINANCIAL DATA
 
You should read the following selected consolidated financial data in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements and the related notes included in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K.

The consolidated statements of income data for each of the years ended December 31, 20192018, and 2017 and the consolidated balance sheets data as of December 31, 2019 and 2018 are derived from our audited consolidated financial statements included in Part IV, Item 15, "Exhibits and Financial Statement Schedules" of this Annual Report on Form 10-K. The consolidated statements of income data for the years ended December 31, 2016, and 2015, and the consolidated balance sheets data as of December 31, 20172016, and 2015 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period.

Consolidated Statements of Operation Data ($ in thousands, except per share amounts):
 
Year Ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Revenues(1)
$
381,808

 
$
351,097

 
$
250,476

 
$
184,516

 
$
104,704

Income (loss) from operations
48,785

 
31,262

 
31,559

 
18,117

 
(1,561
)
Net income attributable to HIIQ(2)
29,614

 
12,994

 
17,885

 
4,513

 
601

Net income per share
 
 
 
 
 
 
 
 
 
Basic
$
2.67

 
$
1.07

 
$
1.63

 
$
0.59

 
$
0.08

Diluted
2.47

 
0.97

 
1.50

 
0.57

 
0.08


Consolidated Balance Sheets Data ($ in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
 
2016
 
2015
Cash and cash equivalents
$
3,771

 
$
9,321

 
$
39,345

 
$
12,214

 
$
7,695

Working capital(3)
111,664

 
60,477

 
54,649

 
28,329

 
23,193

Contract asset
184,474

 
165,494

 

 

 

Long-term contract asset
209,239

 
132,566

 

 

 

Total Assets
651,858

 
432,489

 
165,085

 
125,347

 
95,784

Non-current liabilities
351,144

 
126,030

 
15,130

 
9,630

 
8,422

Retained earnings (accumulated deficit)
110,418

 
80,804

 
19,305

 
1,420

 
(3,093
)
Total stockholders' equity
139,974

 
143,468

 
84,205

 
48,162

 
39,971


(1) 
ASC 606 was adopted using the modified retrospective transition method as further detailed in Notes 1 and 11 of Part IV, Item 15, of this Annual Report on Form 10-K. Accordingly, amounts presented prior to 2018 reflect revenue recognition under ASC 605.

(2) 
Net income attributable to HIIQ for 2017 was significantly impacted by the changes in tax law further detailed in Note 13 of Part IV, Item 15, of this Annual Report on Form 10-K.

(3) 
Working capital is defined as current assets minus current liabilities.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management's Discussion and Analysis of Financial Condition and Results of Operations below presents the Company's operating results and its financial condition as of and for the period ended December 31, 2019, and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included herein can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

36




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.
 
Overview

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.

We are a technology driven distributor of Medicare and affordable health and life insurance products that meet the demands and needs of our consumers. We market products to individuals through televised commercials, e-commerce and other licensed-agent distribution channels, consisting of both our internal distribution network, and an external distribution network of independently owned and operated distributors.

Operating Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM"), or decision-making group, in deciding how to allocate resources and in assessing performance. Our President and Chief Executive Officer is our named CODM. As of December 31, 2019, the Company determined that we have two reportable segments within our operating platform, Medicare and IFP. The Company periodically reviews the structure of our organization and CODM communications to assess the continued appropriateness of our segment reporting. The CODM reviews our financial information in a manner substantially similar to the accompanying consolidated financial statements with emphasis on Medicare and IFP as two distinct operating segments. The Medicare and IFP segments are described further below:
 
Medicare - The Medicare segment consists of consumer engagement activities which generate leads that we both sell to third-parties and feed to our business process outsourcing partners ("BPO") and captive distribution channels to support the distribution of a range of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans.

IFP - The IFP segment focuses on the sale and service of individual and family health insurance plans ("IFP") which encompasses 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.

The adoption of the revenue recognition standard (ASC 606) highlighted the seasonality of our revenues. We generally expect to recognize greater revenue in the first and fourth quarters of each year as a result of the increase in submitted policies during these quarters due to the annual Medicare open enrollment period and the Patient Protection and Affordable Care Act open enrollment period.

37




Recent Developments

Acquisition of TogetherHealth and Entrance into Medicare Business

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 July 29, 2019, the Company entered into a Stock Purchase Agreement to acquire the interests of a corporation which owned and operated a domain name in the insurance industry. The acquisition was accounted for as a purchase of an asset and classified as an intangible asset on the balance sheet.

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.

These acquisitions marked the beginning of the Company's strategic shift toward Medicare as the core product line.

Exploration of Strategic Alternatives

On July 26, 2019, we announced that our Board of Directors commenced a process to explore, review and evaluate a range of potential strategic alternatives focused on maximizing shareholder value. These alternatives could include, among other things, a sale of the Company or a portion thereof, a strategic business combination, changes in the Company’s operations or strategy, or continuing to execute on the Company’s current business plan. On March 3, 2020, the Company announced that the review of potential strategic alternatives was ongoing.

Change in Business Strategy

On December 20, 2019, we announced a change in our overall business strategy to accelerate growth within the Medicare segment. The IFP segment will be de-emphasized moving forward and our focus for IFP will be to maximize cash flows and enhance e-commerce capabilities. By decreasing emphasis on new business within the IFP segment, we will be able to use cashflows from the IFP segment to invest in accelerating growth of the Medicare segment.

As a result of these strategic plans to emphasize the Medicare segment, we expect for margins and profitability of our overall business to change over time. Our Medicare segment consists of significantly higher margin business than that of IFP. So, we currently expect for our overall profitability to improve as Medicare becomes a larger percentage of total revenue.

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.

Exchange of Remaining Class B Common Stock

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.


38



Corporate Name Change and Ticker Symbol Change

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.

Executive Overview of Fourth Quarter and Full Year 2019 Results

Our key metrics and financial results for 2019 are as follows:

Medicare Distribution

Full year revenue from our Medicare segment was $67.8 million.

Fourth quarter revenue from our Medicare segment was $55.9 million.

Full year profit for the Medicare segment was $32.1 million.

Fourth quarter profit for the Medicare segment was $29.7 million.

Expected Duration Units

Expected duration units submitted for Medicare were 2.3 million for the year ended December 31, 2019.

IFP Sales

Full year revenue from our IFP segment was $314.0 million, a decrease of 10.6%.

Fourth quarter revenue from our IFP segment was $105.0 million, a decrease of 20.4%.

Full year profit for the IFP segment was $66.8 million, an increase of 12.4%.

Fourth quarter profit for the IFP segment was $22.2 million, an increase of 17.2%.
Expected Duration Units

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%.

Policy in Force Growth

Policies in force as of December 31, 2019, totaled 498,047, compared to 387,000 as of December 31, 2018, an increase of 28.7%.

Financial Results

Revenue was $381.8 million, compared to revenue of $351.1 million in 2018, an increase of 8.7%.

Net income was $36.7 million, compared to net income of $19.0 million in 2018, an increase of 93.2%.

Adjusted EBITDA was $82.1 million, compared to $59.4 million in 2018, an increase of 38.2%.

GAAP diluted earnings per share was $2.47, compared to $0.97 in 2018, an increase of 154.6%.

Adjusted earnings per share, also referred to as adjusted net income per share, or adjusted EPS, was $4.24 compared to $2.60 in 2018, an increase of 63.1%.

In 2019, we continued to focus on our top initiatives: (i) expanding our entrance into the Medicare space, (ii) improving the lifetime value of policies sold, (iii) new product development, (iv) expanding compliant distribution, (v) improving the member experience, and (vi) enhancing technology.

39




Key Business Metrics
 
We rely upon the following key business metrics to evaluate our business performance and facilitate long-term strategic planning:

Revenues. Our revenues primarily consist of commissions and fees earned for Medicare and IFP products issued to members, referral fees, and fees for discount benefit plans paid by members as a direct result of our enrollment services, brokerage services, member management, or referral sales. Revenues reported by the Company are net of risk premiums remitted to insurance carriers and fees paid for discount benefit plans.

Commission rates that we receive for the sale of products are agreed to in advance with the relevant contracted party and vary between contract and policy type. Under our compensation arrangements, the commission rate schedule that is in effect on the policy effective date governs the commissions over the life of the policy. We continue to receive a commission payment as a member renews their policy, or until a plan expires or is terminated.

Expected Duration Units. An expected duration unit represents the cumulative number of months the Company expects to collect from each policy submitted during the period. This metric is important because the vast majority of our revenues are recognized up front at the time the policy is sold. This portion of revenue represents the total amount of commissions we expect to collect over the life of each policy sold. Our expected duration units are an important indicator of our revenues. We have included expected duration units 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 expected duration units can provide a useful measure for period-to-period comparisons of our business. Expected duration units 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.

The following table presents expected duration units by product type:
 
Expected Duration Units by Product Type
 
Year Ended December 31,
 
2019
 
2018
 
Change (%)
Medicare
 
 
 
 
 
Medicare Advantage
2,091,400

 

 

Medicare Supplement
49,300

 

 

Medicare Part D
115,900

 

 

Supplementals
11,700

 

 

Total Medicare
2,268,300

 

 

IFP
 
 
 
 
 
STM <12 Months
151,300

 
462,200

 
(67.3
)%
STM ≥ 12 Months
1,109,000

 
338,200

 
227.9
 %
Total STM
1,260,300

 
800,400

 
57.5
 %
Health Benefit Plans
1,192,500

 
1,754,600

 
(32.0
)%
Supplementals
2,325,700

 
2,518,200

 
(7.6
)%
Total IFP
4,778,500

 
5,073,200

 
(5.8
)%
Total Expected Duration Units
7,046,800

 
5,073,200

 
38.9
 %

Submitted Applications. Our submitted applications are an important input of our expected revenues when included in context with the corresponding expected average duration of the submitted application. A member may be enrolled in more than one policy or discount benefit plan simultaneously. Submitted applications will differ from the amount of approved applications. We have included submitted applications in this report because in conjunction with expected duration units, 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.


40



The following table presents submitted applications by product type:
 
Submitted Applications by Product Type
 
Year Ended December 31,
 
2019
 
2018
 
Change (%)
Medicare
 
 
 
 
 
Medicare Advantage
53,900

 

 

Medicare Supplement
1,200

 

 

Medicare Part D
3,000

 

 

Supplementals
300

 

 

Total Medicare
58,400

 

 

IFP
 
 
 
 
 
STM <12 Months
38,000

 
117,200

 
(67.6
)%
STM ≥ 12 Months
105,800

 
35,600

 
197.2
 %
Total STM
143,800

 
152,800

 
(5.9
)%
Health Benefit Plans
126,400

 
190,100

 
(33.5
)%
Supplementals
257,400

 
278,700

 
(7.6
)%
Total IFP
527,600

 
621,600

 
(15.1
)%
Total Submitted Applications
586,000

 
621,600

 
(5.7
)%

The following table presents approved applications by product type:
 
Approved Applications by Product Type
 
Year Ended December 31,
 
2019
 
2018
 
Change (%)
Medicare
 
 
 
 
 
Medicare Advantage
49,600

 

 

Medicare Supplement
1,100

 

 

Medicare Part D
2,800

 

 

Supplementals
300

 

 

Total Medicare
53,800

 

 

IFP
 
 
 
 
 
STM <12 Months
38,000

 
117,200

 
(67.6
)%
STM ≥ 12 Months
105,800

 
35,600

 
197.2
 %
Total STM
143,800

 
152,800

 
(5.9
)%
Health Benefit Plans
126,400

 
190,100

 
(33.5
)%
Supplementals
257,400

 
278,700

 
(7.6
)%
Total IFP
527,600

 
621,600

 
(15.1
)%
Total Approved Applications
581,400

 
621,600

 
(6.5
)%

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.

41



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):
 
Year Ended December 31,
 
2019
 
2018
 
Change (%)
Medicare(1)
$
1,155

 
$

 
 %
Short Term Medical<12 months
342

 
437

 
(21.7
)%
Short Term Medical ≥12 months
934

 
1,203

 
(22.4
)%
Total STM
787

 
625

 
25.9
 %
Health Benefit Plans
759

 
829

 
(8.4
)%
Supplemental
350

 
340

 
2.9
 %

(1) 
CLTV per approved application for Medicare is presented gross of customer care and enrollment expenses ("CC&E"). Including CC&E, Medicare CLTV per submitted application for the year ended December 31, 2019 was $996.

The following tables present expense metrics per approved application, by product type ($ in thousands):
 
Year Ended December 31, 2019
Medicare variable marketing cost per approved application(1)
$
374

Medicare variable CC&E cost per approved application(2)
246

Total Medicare cost per approved member
$
620


(1) 
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.
(2) 
Medicare CC&E cost per approved application includes compensation and benefits costs for personnel engaged in assistance to applicants during the enrollment process divided by Medicare approved applications in each period. CC&E costs include amounts netted against revenue for certain Medicare BPO relationships.
 
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.


42



The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA ($ in thousands):
 
Year Ended December 31,
 
2019
 
2018

2017
Net income
$
36,730

 
$
18,964

 
$
26,491

Interest expense (income)
5,646

 
25

 
(19
)
Depreciation and amortization
11,842

 
4,799

 
4,044

Provision for income taxes
10,093

 
10,672

 
16,818

EBITDA
64,311

 
34,460

 
47,334

Stock-based compensation and related costs
10,731

 
12,878

 
7,890

Fair value adjustment to contingent consideration
(3,472
)
 

 

Transaction costs
1,986

 
321

 
745

Tax receivable agreement liability adjustment
(212
)
 
1,471

 
(11,835
)
Indemnity and other related legal costs
7,721

 
6,614

 
1,557

Severance, restructuring and other
1,043

 
3,687

 
248

Adjusted EBITDA
$
82,108

 
$
59,431

 
$
45,939


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.


43



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):
 
Year Ended December 31,
 
2019

2018

2017
Net income
$
36,730

 
$
18,964

 
$
26,491

Interest expense (income)
5,646

 
25

 
(19
)
Amortization
8,704

 
1,725

 
1,965

Provision for income taxes
10,093

 
10,672

 
16,818

Stock-based compensation and related costs
10,731

 
12,878

 
7,890

Fair value adjustment to contingent consideration
(3,472
)
 

 

Transaction costs
1,986

 
321

 
745

Tax receivable agreement liability adjustment
(212
)
 
1,471

 
(11,835
)
Indemnity and other related legal costs
7,721

 
6,614

 
1,557

Severance, restructuring and other charges
1,043

 
3,687

 
248

Adjusted pre-tax income
78,970

 
56,357

 
43,860

Pro forma income taxes
(18,953
)
 
(13,526
)
 
(16,667
)
Adjusted net income
$
60,017

 
$
42,831

 
$
27,193

Total weighted average diluted share count
14,161

 
16,477

 
16,322

Adjusted net income per share
$
4.24

 
$
2.60

 
$
1.67

 
Premium Equivalents. During the fourth quarter of 2019, we determined that Premium Equivalents 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 Premium Equivalents as a key business metric in our Management's Discussion and Analysis of Financial Condition and Results of Operations.

Policies in Force. During the fourth quarter 2019, we determined that Policies in Force 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 Policies in Force as a key business metric in our Management's Discussion and Analysis of Financial Condition and Results of Operations.

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.

Results of Operations

Revenues

2019 Compared to 2018

Revenues for the year ended December 31, 2019 were $381.8 million, an increase of $30.7 million, compared to 2018. Revenue increased compared to the same period in 2018 primarily due the diversification of our revenue mix towards Medicare. IFP revenue decreased approximately $37.1 million, or 10.6%, compared to the prior year consistent with the increased focus on Medicare and the de-emphasis of IFP. Medicare contributed approximately $67.8 million as a result of the acquisitions.

Third-party Commissions
 
Our third-party commissions consist of fees and commissions paid to third-party distributors for selling our products to members. Third-party commissions, as a percentage of revenue, will vary based on the mix of sales between AgileHealthInsurance.com and our third-party distributors.
 

44



2019 Compared to 2018

Third-party commissions for the year ended December 31, 2019 were $188.7 million, a decrease of $46.0 million, or 19.6%, compared to 2018. Third-party commissions, as a percentage of revenue, decreased due in part to the continued planned diversification of our revenue mix towards Medicare, which do not have an associated commissions expense. The Company also had a change in estimate in connection with a reassessment of variable consideration during the year ended December 31, 2019 primarily related to a change in distribution and product mix within the supplemental category. During the year ended December 31, 2019 the Company also had reassessments of estimates relating to a favorable negotiation of a distributor's contract, a reassessment of certain commission arrangements, and cancellation of a portion of the in-force policies sold by Simple Health.

Selling, General and Administrative Expense
 
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.
 
2019 Compared to 2018

SG&A expense for the year ended December 31, 2019 was $88.4 million, an increase of $20.4 million, or 29.9%, compared to 2018.
 
The increase in SG&A expenses for the year ended December 31, 2019 compared to the same period 2018 was primarily attributable to increased spending to build out capacity for the open enrollment activity as well as the inclusion of TogetherHealth SG&A expense. This investment included staffing, training, and professional fees. The increase in SG&A for the year ended December 31, 2019 also included transaction costs relating to our investment in TogetherHealth and other acquisitions.

Marketing and Advertising Expense

Marketing and advertising expense for the year ended December 31, 2019 was $37.9 million. This represents an increase of $31.6 million, or 500.9%, compared to 2018, which in 2018, marketing and advertising was presented as a component of SG&A. 
    
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.

Tax Receivable Agreement Income

2019 Compared to 2018

For the year ended December 31, 2019, there was $212,000 of income recorded under the Tax Receivable Agreement ("TRA") primarily due to a revised estimate of future payments. TRA income for the year ended December 31, 2018 was $1.5 million, primarily due to changes in the Tax Cuts and Jobs Act. See Note 13 for further information.

Provision for Income Taxes

2019 Compared to 2018

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.


45



Noncontrolling Interest
 
2019 Compared to 2018

We are the sole managing member of HPIH and have 100% of the voting rights and control. As of December 31, 2019, we had an 86.5% economic interest in HPIH, whereas HPI and HPIS collectively held the remaining 13.5%. As of December 31, 2018, we had a 83.0% economic interest in HPIH, whereas HPI and HPIS collectively held the remaining 17.0%. HPI and HPIS's interest in HPIH is reflected as a noncontrolling interest on our accompanying consolidated financial statements contained elsewhere in this report. The decrease in economic interest for HPI and HPIS in 2019 was due to the exchange of 125,000 and 500,000 shares of our Class B common stock for and equal number of shares of our Class A common stock on March 22, 2019 and July 3, 2019, respectively.

Reportable Segments

We have two reportable operating segments within our operating platform: Medicare and IFP.

Our President and Chief Executive Officer is our named CODM. To determine the Company's reportable operating segments, we consider the nature of operating activities, economic characteristics, existence of separate senior management teams and the type of information used by the CODM to evaluate the results of operations. Subsidiaries with similar economic characteristics, products and services, customers, distribution methods and operational processes that operate in a similar regulatory environment are combined.

The accounting policies of the segments are the same as those described in Note 1 included within Part IV, Item 15, of this Annual Report. The Company evaluates the performance of its reportable segments based on segment sales and segment operating income. Operating income for each segment includes sales to third parties and related operating expenses directly attributable to the segment. SG&A expenses are included in the segment in which the expenditures are incurred. Operating income for each segment excludes certain expenses managed outside the reportable segments which include various expenses such as corporate expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes. Our CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.


46



The following table presents summary results of our operating segments ($ in thousands):
 
Year Ended December 31, 2019
Revenue
 
Medicare revenue
$
67,770

IFP revenue
314,038

Total revenue
$
381,808

 
 
Segment profit
 
Medicare profit
$
32,078

IFP profit
66,784

Total segment profit
98,862

 
 
Corporate
$
(16,754
)
Interest expense
(5,646
)
Depreciation and amortization
(11,842
)
Provision for income taxes
(10,093
)
Stock-based compensation and related costs
(10,731
)
Fair value adjustment to contingent consideration
3,472

Transaction costs
(1,986
)
Tax receivable agreement liability adjustment
212

Indemnity and other related legal costs
(7,721
)
Severance, restructuring and other
(1,043
)
Net income
$
36,730


Quarterly Results of Operations Data

The following tables set forth our unaudited quarterly consolidated statements of income data for each of the eight quarters in the period ended December 31, 2019. We have prepared the quarterly consolidated statements of income data on a basis consistent with the audited consolidated financial statements included in Part IV, Item 15, "Exhibits and Financial Statement Schedules" in this Annual Report on Form 10-K.

In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments which we consider necessary for a fair presentation of this data. This information should be read in conjunction with the audited consolidated financial statements and related notes included in Part IV, Item 15, "Exhibits and Financial Statement Schedules" in this Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results of operations for any future period (in thousands, except per share data):
For the Year Ended December 31, 2019
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenue
$
87,326

 
$
58,356

 
$
75,272

 
$
160,854

Income from operations
5,341

 
6,852

 
3,042

 
33,550

Net income
2,182

 
3,230

 
4,839

 
26,479

Net income attributable to Health Insurance Innovations, Inc.
1,331

 
2,287

 
4,800

 
21,196

Net income per share attributable to Health Insurance Innovations, Inc.
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.22

 
$
0.43

 
$
1.89

Diluted
$
0.11

 
$
0.20

 
$
0.40

 
$
1.77



47



For the Year Ended December 31, 2018
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
Revenue
$
75,931

 
$
71,782

 
$
71,467

 
$
131,917

Income from operations
11,671

 
3,809

 
1,698

 
14,084

Net income
6,652

 
2,527

 
1,492

 
8,293

Net income attributable to Health Insurance Innovations, Inc.
4,608

 
1,799

 
1,139

 
5,448

Net income per share attributable to Health Insurance Innovations, Inc.
 
 
 
 
 
 
 
Basic
$
0.40

 
$
0.15

 
$
0.09

 
$
0.44

Diluted
$
0.37

 
$
0.14

 
$
0.08

 
$
0.40


Liquidity and Capital Resources
 
General
 
As of December 31, 2019, we had $3.8 million of cash and cash equivalents, excluding restricted cash.
 
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.
 
Our Indebtedness

 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.

Registration Statement on Form S-3

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.

Cash Flows

The following table presents a summary of cash flows ($ in thousands):
 
Year Ended December 31,
 
2019
 
2018
 
2017
Net cash (used in) provided by:
 
 
 
 
 
Operating activities
$
(37,657
)
 
$
21,772

 
$
45,227

Investing activities
(60,804
)
 
(2,214
)
 
(3,465
)
Financing activities
94,021

 
(49,386
)
 
(11,305
)
Net (decrease) increase in cash and cash equivalents, and restricted cash
$
(4,440
)
 
$
(29,828
)
 
$
30,457



48



Cash Flows from Operating Activities

2019 Compared to 2018

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.
 
Cash Flows from Investing Activities

2019 Compared to 2018

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.

Cash Flows from Financing Activities

2019 Compared to 2018
Net cash used in financing activities during the fiscal year ended December 31, 2019, increased significantly over 2018 primarily due to net cash inflows from use of the Senior Credit Facility and previous credit facility of $163.6 million. This was offset by cash outflows of $63.9 million for purchases of Class A common stock pursuant to our share repurchase plan, up approximately $8.0 million over 2018. Distributions to member were $2.6 million, down approximately $1.5 million over 2018. Payments associated with the net settlement of employee tax liabilities related to restricted share vesting were $2.8 million, down approximately $1.6 million from 2018. See Notes 9 and 10 for further information on our Senior Credit Facility and our share repurchase program, respectively.

Off-Balance Sheet Arrangements
 
Through December 31, 2019, we had not entered into any off-balance sheet arrangements.
 
Contractual Obligations

The following table represents future contractual obligation payments as of December 31, 2019:
 
Payments Due by Period
Contractual Obligations
Total
 
Less than 1 year

1 to 3 years

3 to 5 years

Over 5 years
Term loan at face value
$
146,250

 
$
9,375

 
$
136,875

 
$

 
$

Interest on term loan(1)
13,109

 
5,741

 
7,368

 

 

Line of credit
34,000

 
2,000

 
32,000

 

 

Interest on line of credit(1)
3,104

 
1,285

 
1,819

 

 

Operating leases(2)
494

 
252

 
226

 
16

 

Contingent consideration(3)
65,171

 

 
25,650

 
28,168

 
11,353

Total
$
262,128

 
$
18,653

 
$
203,938

 
$
28,184

 
$
11,353


(1) 
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.
(2) 
Operating leases include total future minimum rent payments under non‑cancelable operating lease agreements.
(3) 
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.


49



Critical Accounting Policies and Estimates
 
Our significant accounting policies are outlined in Note 1 to the consolidated financial statements included in this Form 10-K. Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. We base our estimates, assumptions and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments could change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions and judgments on an ongoing basis. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below.
 
Revenue Recognition

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.

SSP

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.

Variable Consideration - Duration

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.

Commissions Payable and Expense

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.
 
Loss contingencies
 
We are involved in various lawsuits, claims, investigations, and proceedings that arise in the ordinary course of business. Certain of these matters include speculative claims for substantial or indeterminate amounts of damages. We record a liability when we believe that it is both probable that a loss has been incurred and the amount can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. We review these provisions at least quarterly and adjust these provisions accordingly to reflect the impact of negotiations, settlements, rulings, updates from legal counsel, and other updated information.
 
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

50



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.

Income taxes

Our annual tax rate is based on our income, statutory tax rates and various tax laws applicable to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. We review our tax positions quarterly and adjust the balances as new information becomes available.

Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We have considered projected future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. If we determine that a valuation allowance is required, such adjustment to the deferred tax assets would increase our tax expense in the period in which such determination is made. Conversely, if we determine that a valuation allowance exceeds our requirement, such adjustment to the deferred tax assets would decrease tax expense in the period in which such determination is made.

In evaluating the exposure associated with various tax filing positions, we accrue an income tax liability when such positions do not meet the more-likely-than-not threshold for recognition. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. We recognize potential liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes, interest and penalties will be due. If our estimate of income tax liabilities proves to be less than the actual amount ultimately assessed, a further charge to tax expense would be required. If the payment of these amounts ultimately proves to be unnecessary, the reversal of the accrued liabilities would result in tax benefits being recognized in the period when we determine the liabilities no longer exist. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

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.
 
Goodwill and Intangible Assets

On an annual basis and at interim periods when circumstances require as a result of a triggering event, we test the recoverability of our goodwill and indefinite-lived intangible assets by performing an impairment analysis. An impairment is deemed to exist if the carrying value of goodwill or indefinite-lived intangible assets exceed their fair value as determined using level 3 inputs under the GAAP fair value hierarchy. The reviews of fair value involve judgment and estimates, including projected revenues, volatility rates, and discount rates. We believe our valuation techniques and assumptions are reasonable for this purpose.

For goodwill, we determine the fair value using a weighting of the income approach and the market capitalization approach. The income approach is based on the discounted cash flows of each operating segment and the market capitalization method utilizing our publicly available trading data. Components are aggregated due to their similar economic characteristics. The Company has two operating segments: Medicare and IFP. Key assumptions used in the discounted cash flow valuation model include discount rates, growth rates, cash flow projections, tax rates and terminal value rates. Discount rates are set by using the Weighted-Average Cost of Capital (“WACC”) methodology. The WACC considers market and industry data as well as Company specific risk factors for each segment in determining the appropriate discount rates to be used. The discount rate utilized for each segment is indicative of the return an investor would expect to receive for investing in such a business. Our cash flow projections represent management's most recent planning assumptions, which are based on a combination of industry outlooks, views on general economic conditions, our expected growth, and expected future savings. Terminal value rates are determined using a common methodology of capturing the present value of perpetual cash flow estimates beyond the last projected period assuming a constant WACC and long-term growth rates.

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.

Business Combinations

We include in our operating results the results of operations of acquired businesses prospectively from the acquisition date. We allocate the fair value of the purchase consideration of our acquired businesses to the tangible and intangible assets acquired

51



and liabilities assumed based on their estimated fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.   

When determining the fair values of assets acquired and liabilities assumed, we make significant estimates and assumptions. When provisional amounts are recorded in the reporting period in which a business combination occurs, adjustments to the provisional amounts may be subsequently recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date that would have affected the measurement of the amounts recognized at the acquisition date. Adjustments to the provisional amounts identified during the measurement period, which is a period not to exceed one year from the acquisition date, are reported in the period the adjustment is identified by means of an adjustment to goodwill, with the effect on earnings measured as if the provisional amounts had been completed at the acquisition date. Adjustments to amounts recognized in a business combination that occur after the end of the measurement period are recognized in current period operations.

Purchase Accounting and Related Fair Value Measurements

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. 

The approach to valuing the initial contingent consideration associated with an acquisition uses unobservable factors such as Company specific volatility rates, and projected revenues and expenses over the term of the contingent earn-out period discounted for the period over which the contingent consideration is measured.

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.

Recent Accounting Pronouncements
 
Note 1 to the consolidated financial statements contains a summary of the Company's significant accounting policies, including a discussion of recently issued accounting pronouncements and their impact or potential future impact on the Company's financial results, if determinable, under the sub-heading "Recent Accounting Pronouncements."

Carrier Concentration
 
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.
 
Legal and Other Contingencies
 
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 17 in the accompanying consolidated financial statements.
 

52



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Cash Risk

We have significant amounts of cash at financial institutions that are in excess of federally insured limits. We cannot be assured that we will not experience losses on our deposits. We mitigate this risk by maintaining bank accounts with a group of credit worthy financial institutions.

Advanced Commissions Risk

We make advance commission payments to many of our independent distributors to assist them with the cost of lead acquisition and provide working capital. The arrangements with our distributors expose us to credit risk that a financial loss could be incurred if the counterparty does not fulfill its financial obligation. We mitigate this risk by generally dealing with established distributors and, receiving a security interest in collateral, including expected future commissions, as well as personal and/or entity-level guarantees.

Interest Rate Risk

The Company is potentially exposed to market risk in the form of interest rate risk with regard to its Credit Agreement. At December 31, 2019, the Company had a balance of $180.3 million outstanding under the Credit Agreement. This balance is subject to an interest rate equal to, at our option, (i) the Base Rate (which is the highest of the Bank of America prime rate, the federal funds rate plus 0.50%, and LIBOR index rate plus 1.00%) plus the Applicable Margin, or (ii) LIBOR (as defined in the Credit Agreement) plus the Applicable Margin. The "Applicable Margin" as defined under the Credit Agreement means, (a) until receipt by the Administrative Agent of the compliance certificate for the fiscal quarter ending September 30, 2019, 2.00% per annum, in the case of LIBOR loans, and 1.00% per annum, in the case of Base Rate loans, and (b) thereafter, a percentage determined based upon HPIH's Consolidated Total Leverage Ratio (as defined in the Credit Agreement) ranging from 1.50% to 2.00%, in the case of LIBOR loans, and .50% to 1.00%, in the case of Base Rate loans. A 1% increase in interest rates would not have had a material impact on the Company's interest expense for the year ended December 31, 2019. See Part IV, Item 15, Note 9 of this Annual Report for further information on the Credit Agreement.

The above only incorporates those exposures that exist as of December 31, 2019 and does not consider those exposures or positions which could arise after that date.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Financial statements and exhibits filed under this item are listed in the index appearing in Part IV, Item 15 of this report and the supplementary financial information required by this Item 8 is included in Part II, Item 7 under the caption "Quarterly Results of Operations Data," which is incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.

ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company's management has evaluated, under the supervision of the Company's principal executive officer and principal financial officer, the effectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2019.
 
Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the design and operation of the Company's disclosure controls and procedures were effective as of December 31, 2019.


53



Management's Report on Internal Control over Financial Reporting
 
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

The Company's management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In making its assessment of our internal control over financial reporting, management used Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission (2013 Framework).

During 2019, the Company acquired RxHelpline, LLC, TogetherHealth PAP, LLC, TogetherHealth Insurance, LLC (collectively, "TogetherHealth") and Total Insurance Brokers, LLC ("TIB"). Management excluded from its assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, TogetherHealth and TIB's internal control over financial reporting. These acquisitions represent 11.6% of total assets and 17.8% of total revenue included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Management did not assess the effectiveness of internal control over financial reporting of these acquisitions due to the complexity associated with assessing internal controls during integration efforts.

Based on management's assessment and the criteria in the COSO framework, management has concluded that as of December 31, 2019 the Company's internal control over financial reporting was effective.

Remediation of Previously Reported Material Weaknesses

To remediate the previously identified material weaknesses related to the implementation of ASC 606, the Company executed a plan which included, but was not limited to, the engagement of independent external consultants to review and evaluate the revenue accounting model, implemented enhanced training on policies, procedures, controls, and technical accounting guidance for contract reviews for revenue accounting, hired additional staff, and implemented a recurring review process for all adjustments to contract assets and liabilities. The Company appropriately remediated the material weaknesses as of June 30, 2019.

Changes in Internal Control over Financial Reporting
 
Except as noted above regarding the enhancements of internal controls in connection with the remediation of the previously identified material weaknesses, there were no other changes in the Company's internal control over financial reporting during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Attestation Report of the Registered Public Accounting Firm

The Company's internal control over financial reporting as of December 31, 2019 has been audited by Grant Thornton LLP, an independent registered public accounting firm. Their report is included below. Grant Thornton, LLP has audited, and issued an unqualified opinion with respect to our consolidated financial statements for 2019, which opinion is included in Part IV, Item 15, of this Annual Report on Form 10-K.

Inherent Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

54



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Health Insurance Innovations, Inc.

Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Health Insurance Innovations, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated March 4, 2020 expressed an unqualified opinion on those financial statements.

Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of TogetherHealth PAP, LLC, TogetherHealth Insurance LLC, RxHelpline, LLC, (collectively, “TogetherHealth”) and Total Insurance Brokers, LLC, wholly-owned subsidiaries, whose financial statements reflect total assets and revenues constituting 11.6% and 17.8% percent, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2019. As indicated in Management’s Report, TogetherHealth and Total Insurance Brokers, LLC were acquired during 2019. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of TogetherHealth and Total Insurance Brokers, LLC.

Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Tampa, Florida
March 4, 2020 

55



ITEM 9B. OTHER INFORMATION
 
None.

PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this Item is incorporated herein by reference to the information provided in our definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 31, 2019 (the "2020 Proxy Statement").
 
We have adopted a Code of Business Conduct and Ethics, which is applicable to all of our directors, employees and officers, including our principal executive officer, principal financial officer and principal accounting officer. A copy of the Code of Business Conduct and Ethics can be found at our website at www.hiiq.com. Any amendments to or waivers from the Code of Business Conduct and Ethics will be posted on our website.
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information required by this Item is incorporated herein by reference to the information provided in our definitive proxy statement to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 31, 2019 (the "2020 Proxy Statement").
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this Item is incorporated herein by reference to the information provided in the 2020 Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 31, 2019.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this Item is incorporated herein by reference to the information provided in 2020 Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 31, 2019.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this Item is incorporated herein by reference to the information provided in 2020 Proxy Statement to be filed with the Securities and Exchange Commission not later than 120 days after the fiscal year ended December 31, 2019.


56



PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
INDEX TO FINANCIAL STATEMENTS
 
Health Insurance Innovations, Inc.
 
 
Page
Audited Consolidated Financial Statements
 


57



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Shareholders
Health Insurance Innovations, Inc.
 
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Health Insurance Innovations, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 4, 2020 expressed an unqualified opinion.

Change in accounting principle
As discussed in Note 11 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition in the years ended December 31, 2019 and 2018 due to the adoption of FASB Accounting Standards Codification (Topic 606), Revenue from Contracts with Customers.

Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

We have served as the Company's auditor since 2014.

Tampa, Florida
March 4, 2020


58



HEALTH INSURANCE INNOVATIONS, INC.
Consolidated Balance Sheets
($ in thousands, except share and per share data)
 
December 31,
 
2019
 
2018
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
3,771


$
9,321

Restricted cash
17,788


16,678

Accounts receivable, net, prepaid expenses and other current assets
2,911


2,108

Income taxes receivable
18,210

 

Advanced commissions, net
45,250


29,867

Contract asset
184,474

 
165,494

Total current assets
272,404


223,468

Long-term contract asset
209,239


132,566

Property and equipment, net
5,415


5,134

Goodwill
135,182


41,076

Intangible assets, net
28,963


4,217

Deferred tax assets, net


25,967

Other assets
655


61

Total assets
$
651,858


$
432,489

Liabilities and stockholders' equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
51,477


$
32,397

Commissions payable
97,785

 
106,608

Income taxes payable, net


15,586

Short-term debt
10,684

 

Due to member


7,978

Other current liabilities
794


422

Total current liabilities
160,740


162,991

Long-term commissions payable
82,369

 
84,716

Long-term contingent consideration
65,171

 

Long-term debt, net
167,947

 
15,000

Due to member
29,121


25,693

Deferred tax liability, net
5,722

 

Other liabilities
814


621

Total liabilities
511,884


289,021

Stockholders' equity:
 

 
 

Class A common stock (par value $0.001 per share, 100,000,000 shares authorized; 16,219,217 and 14,425,824 shares issued as of December 31, 2019 and 2018, respectively; 12,273,630 and 12,387,349 shares outstanding as of December 31, 2019 and 2018, respectively)
16


14

Class B common stock (par value $0.001 per share, 20,000,000 shares authorized; 1,916,667 and 2,541,667 shares issued and outstanding as of December 31, 2019 and 2018, respectively)
2


3

Preferred stock (par value $0.001 per share, 5,000,000 shares authorized; no shares issued and outstanding as of December 31, 2019 and 2018, respectively)



Additional paid-in capital
118,465


94,194

Treasury stock, at cost (3,945,587 and 2,038,475 shares as of December 31, 2019 and 2018, respectively)
(127,400
)

(67,185
)
Retained earnings
110,418


80,804

Total Health Insurance Innovations, Inc. stockholders' equity
101,501


107,830

Noncontrolling interests
38,473


35,638

Total stockholders' equity
139,974


143,468

Total liabilities and stockholders' equity
$
651,858


$
432,489


The accompanying notes are an integral part of the consolidated financial statements
59



HEALTH INSURANCE INNOVATIONS, INC.
Consolidated Statements of Income
($ in thousands, except share and per share data)
 
Year Ended December 31,
 
2019
 
2018
 
2017
Revenues
$
381,808

 
$
351,097


$
250,476

Operating expenses:
 
 
 


 

Third-party commissions
188,742

 
234,777


145,300

Selling, general and administrative
88,393

 
68,043


55,994

Marketing and advertising
37,896

 
6,307

 
8,452

Credit card and ACH fees
6,150

 
5,909

 
5,127

Depreciation and amortization
11,842

 
4,799


4,044

Total operating expenses
333,023

 
319,835


218,917

Income from operations
48,785

 
31,262


31,559

 
 
 





Other expense (income):
 
 
 


 

Interest expense (income)
5,646

 
25


(19
)
Fair value adjustment to contingent acquisition consideration
(3,472
)
 



TRA (income) expense
(212
)
 
1,471


(11,835
)
Other expense

 
130


104

Net income before income taxes
46,823

 
29,636


43,309

 Provision for income taxes
10,093

 
10,672


16,818

Net income
36,730

 
18,964


26,491

Net income attributable to noncontrolling interests
7,116

 
5,970


8,606

Net income attributable to Health Insurance Innovations, Inc.
$
29,614

 
$
12,994


$
17,885