BENEFYTT TECHNOLOGIES, INC. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations below and in other sections of this report
that are forward-looking statements. All statements other than statements of
historical fact included in this quarterly 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, future and continued regulatory matters and compliance, 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 in "Part I. - Item 1A. Risk Factors" in our
Annual Report on Form 10-K for the year ended
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.
Overview
We are a health insurance technology company that primarily engages in the development and operation of private e-commerce health insurance marketplaces, consumer engagement platforms, agency technology systems, and insurance policy administration platforms.
By leveraging existing and emerging platforms and technologies,
COVID-19 Update
Although COVID-19 is currently not material to our results of operations, there is uncertainty relating to the potential future impact on our business. The extent to which COVID-19 impacts our operations, or our ability to obtain financing should we require it, will depend on future developments which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken by governments and private businesses to contain COVID-19, among
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others. If the disruptions posed by COVID-19 continue for an extended period of time, financial markets may not be available to the Company for raising capital in order to fund future growth or to refinance its existing credit facility currently due in May of 2022. Should the company not be able to obtain financing when required, in the amounts necessary or under terms which are economically feasible, we may be required to reduce planned future growth and/or the scope of our operations.
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
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 quarter of each year as a result of the increase in submitted policies
during the open enrollment period established by the Patient Protection and
Affordable Care Act ("PPACA") and continued seasonal increases in revenue during
the fourth quarter due to the Medicare annual election period and PPACA open
enrollment period. However, with the de-emphasis of IFP, revenue for the three
months ended
Executive Overview of First Quarter 2020 Results
Our key metrics and financial results for 2020 are as follows:
Medicare Distribution
• First quarter revenue from our Medicare segment was
• First quarter loss for the Medicare segment was
Expected Duration Units
• Expected duration units submitted for Medicare were 826,100 for the three
months ended March 31, 2020 .
IFP Sales
• First quarter revenue from our IFP segment was$52.7 million , a decrease of 39.7%. • First quarter profit for the IFP segment was$8.3 million , a decrease of 10.1%. Expected Duration Units • Expected duration units of submitted IFPs were 867,900 and 1.3 million, respectively for the three months endedMarch 31, 2020 and 2019, a decrease of 33.0%. 29
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Financial Results
• Revenue was$71.6 million , compared to revenue of$87.3 million in 2019, a decrease of 18.1%. • Net loss was$44.3 million , compared to net income of$1.3 million in 2019, a decrease of 3,426%. • Adjusted EBITDA was$933,000 , compared to$9.3 million in 2019, a decrease of 89.9%. • GAAP diluted loss per share was$3.68 , compared to earnings per share of$0.11 in 2019, a decrease of 3,445%. • Adjusted earnings per share was$0.01 compared to adjusted earnings per share of$0.43 in 2019, a decrease of 97.7%.
We continue to focus on our top initiatives: (i) expanding our entrance into the Medicare space, (ii) improving the lifetime value of policies sold, (iii) new carrier relationships, (iv) expanding compliant distribution, (v) improving the member experience, and (vi) enhancing technology.
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 the lifetime value of 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, lead sales, 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.
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The following table presents expected duration units by product type:
Expected Duration Units by Product Type
Three Months Ended March 31,
2020 2019 Change (%)
Medicare(1)
Medicare Advantage 774,600 - -
Medicare Supplement 15,400 - -
Medicare Part D 9,100 - -
Supplementals 27,000 - -
Total Medicare 826,100 - -
IFP
STM <12 Months 22,100 45,000 (50.9 )%
STM ? 12 Months 243,000 298,300 (18.5 )%
Total STM 265,100 343,300 (22.8 )%
Health Benefit Plans 171,200 336,700 (49.2 )%
Supplementals 431,600 615,500 (29.9 )%
Total IFP 867,900 1,295,500 (33.0 )%
Total Expected Duration Units 1,694,000 1,295,500 30.8 %
(1) The Company did not begin selling Medicare products until the second quarter
of 2019 which was marked by the acquisition of TogetherHealth on June 5,
2019 .
Submitted and Approved 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. 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. We have included submitted and approved applications in this report because in conjunction with expected duration units, they are key measures 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 and approved applications can provide as useful measures for period-to-period comparisons of our business.
The following table presents submitted applications by product type:
Submitted Applications by Product Type
Three Months Ended March 31,
2020 2019 Change (%)
Medicare
Medicare Advantage 20,000 - -
Medicare Supplement 400 - -
Medicare Part D 200 - -
Supplementals 700 - -
Total Medicare 21,300 - -
IFP
STM <12 Months 5,300 11,200 (52.7 )%
STM ? 12 Months 23,100 29,200 (20.9 )%
Total STM 28,400 40,400 (29.7 )%
Health Benefit Plans 17,800 35,300 (49.6 )%
Supplementals 47,400 67,700 (30.0 )%
Total IFP 93,600 143,400 (34.7 )%
Total Submitted Applications 114,900 143,400 (19.9 )%
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The following table presents approved applications by product type:
Approved Applications by Product Type
Three Months Ended March 31,
2020 2019 Change (%)
Medicare
Medicare Advantage 18,400 - -
Medicare Supplement 400 - -
Medicare Part D 200 - -
Supplementals 600 - -
Total Medicare 19,600 - -
IFP
STM <12 Months 5,300 11,200 (52.7 )%
STM ? 12 Months 23,100 29,200 (20.9 )%
Total STM 28,400 40,400 (29.7 )%
Health Benefit Plans 17,800 35,300 (49.6 )%
Supplementals 47,400 67,700 (30.0 )%
Total IFP 93,600 143,400 (34.7 )%
Total Approved Applications 113,200 143,400 (21.1 )%
Constrained Lifetime Value per Approved Application ("CLTV"). We have included CLTV in this report because it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget, and to develop short- and long-term operational plans. CLTV is the constrained lifetime value of both the sales and marketing, and member management performance obligations, expected to be recognized over the life of the products, divided by the number of approved applications received during the reporting period. Total CLTV excludes the fulfillment-only applications that represent low margin products where the Company outsourced all sales and marketing obligations and some of its member management services. We believe that excluding these fulfillment-only applications from CLTV provides greater insight into our core operations. The inclusion of CLTV can provide a useful measure for period-to-period comparisons of our business. CLTV has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. Prior to the adoption of CLTV, the Company used Constrained Lifetime Value per Submitted Application ("LVSA") as a key metric. While there is little distinction between submitted and approved applications for IFP, approved applications are a more useful metric for management with respect to Medicare products and therefore now uses CLTV as a substitute for LVSA.
The following tables present the Constrained Lifetime Value ("CLTV") per approved application, by product type ($ in thousands):
Three Months Ended March 31,
2020 2019 Change (%)
Medicare(1) $ 1,065 $ - - %
Short Term Medical<12 months 352 354 (0.6 )%
Short Term Medical ?12 months 832 1,019 (18.4 )%
Total STM 746 843 (11.5 )%
Health Benefit Plans 908 865 5.0 %
Supplemental 329 329 - %
(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 three months ended March 31, 2020 was $893 .
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The following tables present expense metrics per approved application, by product type ($ in thousands):
Three Months Ended March 31,
2020
Medicare variable marketing cost per approved application(1) $ 672
Medicare variable CC&E cost per approved application(2) 305
Total Medicare cost per approved member $ 977
(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 legal costs, and severance, restructuring, and acquisition costs. Adjusted EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. We have presented adjusted EBITDA because we consider it an important supplemental measure of our performance and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate adjusted EBITDA differently than we do. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA ($ in thousands):
Three Months Ended March 31,
2020 2019
Net (loss) income $ (49,815 ) $ 2,182
Interest expense 2,094 345
Depreciation and amortization 4,345 1,132
(Benefit) provision for income taxes (9,606 ) 2,797
EBITDA (52,982 ) 6,456
Loss on impairment 41,076 -
Stock-based compensation and related costs 2,707 1,861
Fair value adjustment to contingent consideration 2,881 -
Transaction costs 129 273
Indemnity and other legal costs 7,092 672
Severance, restructuring and other 30 3
Adjusted EBITDA $ 933 $ 9,265 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, fair value adjustments to contingent consideration, indemnity and other 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. We have included adjusted net income in this report because it is a key performance measure used by our
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management to understand and evaluate our core operating performance and trends and because we believe it is frequently used by analysts, investors, and other interested parties in their evaluation of the Company. Other companies may calculate this measure differently than we do. Adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or substitution for earnings per share as reported under GAAP.
Adjusted Net Income per Share. Adjusted net income per share is computed by dividing adjusted net income by the total number of weighted-average diluted Class A and weighted-average Class B shares of our common stock for each period. We have included adjusted net income per share in this report because it is a key measure used by our management to understand and evaluate our core operating performance and trends and because we believe it is frequently used by analysts, investors, and other interested parties in the evaluation of companies. Other companies may calculate this measure differently than we do. Adjusted net income per share has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for earnings per share as reported under GAAP.
The following table presents a reconciliation of net income to adjusted net income and adjusted net income per share (in thousands, except per share data):
Three Months Ended March 31,
2020 2019
Net (loss) income $ (49,815 ) $ 2,182
Interest expense 2,094 345
Amortization 3,505 335
(Benefit) provision for income taxes (9,606 ) 2,797
Loss on impairment 41,076 -
Stock-based compensation and related costs 2,707 1,861
Fair value adjustment to contingent consideration 2,881 -
Transaction costs 129 273
Indemnity and other legal costs 7,092 672
Severance, restructuring and other charges 30 3
Adjusted pre-tax income 93 8,468
Pro forma income taxes (22 ) (2,032 )
Adjusted net income $ 71 $ 6,436
Total weighted average diluted share count 13,247 15,000
Adjusted net income per share $ 0.01 $ 0.43 Results of Operations
Comparison of Three Months Ended
Revenues
Revenues for the three months ended
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.
Third-party commissions for the three months ended
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in third-party commissions was primarily due to the continued planned diversification of our revenue mix towards Medicare, which do not have an associated commissions expense.
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.
SG&A expense for the three months ended
SG&A expense represented 39.1% of revenues for the three months ended
Marketing and Advertising Expense
Marketing and advertising expense for the three months ended
The increase in marketing and advertising expenses was primarily attributable to the Company's Medicare segment and the up-front expense of lead generation.
Provision for Income Taxes
For the three months ended
Noncontrolling Interest
We are the sole managing member of HPIH and have 100% of the voting rights and
control. As of
Net loss/income attributable to BFYT for the three months ended
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Liquidity and Capital Resources
General
As of
Our Indebtedness
As of
Cash Flows
The following summary of cash flows for the periods indicated has been derived
from our condensed consolidated financial statements included elsewhere in this
report:
Three Months Ended March 31,
2020 2019
Cash (used in) provided by:
Operating activities $ (11,235 ) $ (5,744 )
Investing activities (1,930 ) (424 )
Financing activities 12,687 3,133
Cash Flows from Operating Activities
Cash flows from operating activities during the three months ended
Cash Flows from Investing Activities
Our cash outflows from investing activities for the three months ended
Cash Flows from Financing Activities
Cash provided by financing activities during the three months ended
Off-Balance Sheet Arrangements
Through
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Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements require 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 in
Note 1 to the accompanying condensed consolidated financial statements, the
Notes to the Consolidated Financial Statements included in Part IV, Item 15 and
Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended
Recent Accounting Pronouncements
Note 1 to the condensed consolidated financial statements contains 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."
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 for 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 a further detailed discussion surrounding legal and other contingencies, see Note 14 "Commitments and Contingencies."
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