S-1/A 1 d211158ds1a.htm AMENDMENT NO. 3 TO FORM S-1 AMENDMENT NO. 3 TO FORM S-1
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As filed with the Securities and Exchange Commission on April 30, 2012

Registration No. 333-178910

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

AMENDMENT NO. 3

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

EXTEND HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware   6411   26-0775680

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2929 Campus Drive, Suite 400

San Mateo, California 94403

(650) 288-4800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Bryce A. Williams

President and Chief Executive Officer

2929 Campus Drive, Suite 400

San Mateo, California 94403

(650) 288-4800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Steven E. Bochner

Jon C. Avina

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, California 94304

(650) 493-9300

  

Thomas J. Smith

General Counsel

2929 Campus Drive, Suite 400

San Mateo, California 94403

(650) 288-4800

  

Richard A. Kline

Anthony J. McCusker

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, California 94025

(650) 752-3100

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨     Accelerated filer  ¨
Non-accelerated filer  x   (do not check if a smaller reporting company)   Smaller reporting company  ¨

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PROSPECTUS (Subject to Completion)

Issued April 30, 2012

 

             Shares

 

LOGO

 

COMMON STOCK

 

 

 

Extend Health, Inc. is offering             shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $         and $         per share.

 

 

 

We have applied to list our common stock on The NASDAQ Global Market under the symbol “XH.”

 

 

 

We are an “emerging growth company” under applicable federal securities laws and will be subject to reduced public company reporting requirements.

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.

 

 

 

PRICE $             A SHARE

 

 

 

      

Price to

Public

    

Underwriting

Discounts

and

Commissions

     Proceeds to
Extend  Health

Per Share

     $               $               $         

Total

     $                          $                          $                    

 

We have granted the underwriters the right to purchase up to an additional         shares of common stock to cover over-allotments, exercisable at any time until 30 days after the date of this prospectus.

 

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on                     , 2012.

 

 

 

MORGAN STANLEY   BARCLAYS

 

 

 

WELLS FARGO SECURITIES

 

                    , 2012


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Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

The Offering

     7   

Summary Consolidated Financial Data

     8   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements and Industry Data

     34   

Use of Proceeds

     36   

Dividend Policy

     36   

Capitalization

     37   

Dilution

     39   

Selected Consolidated Financial Data

     40   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Business

     72   
 

 

 

 

You should rely only on the information contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us. Neither we nor the underwriters have authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the shares offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of its delivery. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Through and including                     , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information appearing elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

EXTEND HEALTH, INC.

 

Overview

 

Extend Health is a leading provider of health benefit management services and operates the largest private Medicare exchange in the United States. As a technology leader in the health insurance industry, we are redefining the manner in which health benefits are offered and delivered. Our solutions create cost savings for our employer clients and provide our individual customers with improved choice and control over their health benefits. Our core solution, ExtendRetiree, enables our employer clients to transition their retirees to individual, defined contribution health plans that provide individuals with a tax-free allowance or “contribution” to spend on their healthcare at an annual cost that the employer controls versus group-based, defined benefit health plans that provide groups of individuals with defined healthcare benefits such as doctor visits, hospitalization and prescription drugs at an uncertain annual cost. ExtendRetiree allows our clients to provide their post-65 retirees with the same or better healthcare benefits at a lower cost to our clients. To date, we have provided an effective alternative to traditional group Medicare health plans for over 150 private and public sector clients, including over 30 Fortune 500 companies such as Caterpillar, General Motors, Honeywell and Whirlpool, and we have helped hundreds of thousands of retirees and their dependents navigate to, evaluate and choose a health plan using our proprietary exchange platform and decision support tools. In addition, we are developing and expanding our solutions to address the pre-65 retiree, or early retiree, and active employee exchange opportunities for our existing and prospective clients.

 

We provide our solutions through our proprietary technology platform, which integrates our patented call-routing technology, efficient Medicare quoting and enrollment engine, custom-developed CRM system and comprehensive insurance carrier connectivity. We deliver our solutions by:

 

   

analyzing and optimizing employer healthcare benefit subsidies and developing healthcare coverage strategies so that our clients can predict their future healthcare liabilities and realize immediate and significant cost savings by transitioning their retirees to defined contribution plans;

 

   

managing an exchange of over 75 national and regional insurance carriers offering thousands of health plans that compete on price, coverage and quality;

 

   

simplifying the complexities of Medicare by helping individuals navigate through a meaningful choice of health plans using our proprietary software to analyze employer subsidies, health plan details and individuals’ doctor, hospital and prescription drug needs;

 

   

offering retirees and employees unbiased guidance about their expanded healthcare options and our enrollment services that match their individual health status and financial resources to a specific plan; and

 

   

providing lifelong advocacy and support services for each individual as they engage with insurance carriers beginning with their initial enrollment and continuing as their healthcare needs evolve.

 

 

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While we have provided health benefit management services to hundreds of thousands of retirees and their dependents, our core market opportunity remains largely unaddressed, with an estimated 12 million Medicare-eligible retirees currently receiving some form of employer-sponsored group Medicare coverage. Moreover, we believe that this market will grow significantly as the number of Americans over age 65 continues to grow.

 

We believe there are significant opportunities to further penetrate our core market and expand into new target markets. For instance, we are broadening our presence among public sector employers, such as through our engagement with the State of Nevada to transition its 10,000 retirees to individual Medicare plans. In addition, we are developing and expanding our solutions to address the early retiree and active employee markets.

 

We generate most of our revenue from the commissions that we receive from insurance carriers for enrolling individuals into their health plans. These commissions result in increasing recurring revenue as our number of active members grows. The vast majority of our revenue is currently derived from Medicare-related plans, including Medicare supplement, Medicare Advantage and Medicare Part D prescription drug plans. As of March 31, 2012, we had 213,900 active core members enrolled in a Medicare supplement or Medicare Advantage plan. Our revenue has grown from $12.4 million in the fiscal year ended June 30, 2008 to $51.1 million in the fiscal year ended June 30, 2011.

 

Healthcare Trends Driving Demand for our Health Benefit Management Solutions

 

We expect that several trends will continue to expand our market opportunities, including:

 

   

Increasing healthcare costs. Healthcare-related costs have become one of the largest benefit-related expenses for employers. The Centers for Medicare and Medicaid Services, or CMS, estimates that in 2009 private and public sector employers spent $548 billion on healthcare coverage, nearly doubling over the previous 10 years. According to a 2011 Towers Watson report, the cost of insuring employees is projected to have increased by 38% from 2006 to 2011.

 

   

Increasing individual responsibility for healthcare costs. In response to rising healthcare costs, many group-based health plans have reduced benefits, shifted costs to retirees and employees, or both. CMS estimates that private health insurance expenditures increased by 91% from 1999 to 2009. According to a 2011 Towers Watson report, the average individual’s share of their total healthcare premium was estimated to have reached 24% in 2011. Furthermore, while healthcare costs have become a top household expense, there has not been a corresponding increase in control and choice over individual healthcare options.

 

   

Aging population. According to the U.S. Census, from 2011 through 2030 an estimated 10,000 individuals per day will reach the age of 65 and become eligible for Medicare. The number of individuals who are over the age of 65 is expected to increase from approximately 40.2 million individuals in 2010, or 13% of the U.S. population, to approximately 54.8 million individuals by 2020, or 16% of the U.S. population. Moreover, post-65 individuals are becoming increasingly comfortable using technology to research personal healthcare information.

 

   

Increasing incentives for employers to eliminate group retiree drug benefits. In 2013, employers’ tax deduction for the Retiree Drug Subsidy, or the RDS, will be eliminated, thereby increasing employers’ cost of providing prescription drug coverage to retirees using group-based health plans. In addition, while there has historically been a gap in Medicare’s prescription drug coverage, upcoming changes to Medicare Part D will gradually eliminate this gap by 2020. We believe that the elimination of the tax-deductibility of the RDS together with the closing of the gap in Medicare Part D prescription drug coverage will make individual Medicare plans more attractive to employers and retirees.

 

   

Healthcare reform. Over the past decade, certain Federal legislation in the United States, such as the Medicare Modernization Act and the Medicare Improvement for Patients and Providers Act, has

 

 

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strengthened the foundation on which we have built our business model. More recent healthcare reform legislation requires that states establish health insurance exchanges where individuals can select and purchase health plans. In addition, just as private Medicare plans are required to do today, healthcare reform will require insurance carriers to offer standardized plan designs and accept all pre-65 individuals, regardless of their age or health status, which is referred to as “guaranteed issue.” While healthcare reform involves uncertainty and may be modified or repealed, we believe that these healthcare reform measures will accelerate the adoption of exchanges, further enabling the transition of healthcare in the United States from group-based coverage to individual plans.

 

Our Solutions

 

We believe our solutions offer employers and retirees a new experience with managing healthcare benefits. Our proprietary technology platform delivers our integrated solutions to our clients, customers and carrier partners through a multi-step process that starts with an actuarial assessment for a prospective employer client to determine the financial benefits of transitioning their retirees to ExtendRetiree. This analysis determines the optimal subsidy levels needed from the employer to support the transition of its retirees from their existing group-based health plan to individual health plans and enables employers to accurately quantify the expected reduction in their long-term healthcare financial obligations.

 

Once our employer clients have determined optimal subsidy levels, our proprietary software securely gathers and assimilates personal healthcare data from our clients and their retirees, as well as health plan information from our insurance carrier partners to ensure a smooth enrollment process. Concurrently, we work with our employer clients to design a communication campaign to educate their retirees about the transition from their current group health plan to individual health plans.

 

With the client and customer data integrated into our system, our patented call-routing technology provides our licensed benefit advisors with immediate access to a retiree’s profile that includes personalized information about the retiree’s healthcare needs and available subsidy. Our proprietary decision support tools then present the benefit advisor with a selection of health plans that has been optimized for the retiree’s unique healthcare needs. The benefit advisor then helps the retiree select and enroll in a plan by guiding the retiree through our streamlined application process.

 

The retiree’s application is then transmitted through our efficient and secure electronic exchange to the selected insurance carrier, allowing our customers to monitor the status of their application throughout the enrollment process. Our comprehensive platform also provides our clients with regular reports with which they can track their retiree enrollment metrics.

 

Our solutions enable our employer clients to:

 

   

move to a more sustainable economic model by capping and controlling the costs associated with offering healthcare benefits to their retirees while continuing to honor their healthcare commitments;

 

   

eliminate the burden of procuring and administering inefficient group health plans for geographically dispersed retirees; and

 

   

ensure a smooth transition for their retirees from group-based to individual health plans by providing access to a health insurance exchange and a dedicated implementation team that delivers a complete suite of services, communication materials and education.

 

Our solutions enable our individual customers to:

 

   

compare a broad selection of insurance carriers, health plans and related provider networks unavailable from any single group plan;

 

 

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optimize their employer subsidy and choose a health plan that best meets their needs, using our plan comparison and selection tools to obtain quotes by plan type; and

 

   

receive ongoing unbiased guidance, enrollment services, advocacy and support from our trained and licensed benefit advisors.

 

Our Strengths

 

We believe that we have the following key competitive strengths:

 

   

Proprietary exchange platform. Our proprietary exchange platform integrates our patented call-routing technology, proprietary Medicare quoting and enrollment engine, custom-developed CRM system and comprehensive insurance carrier connectivity. We believe that our technology platform has enabled us to become the largest private Medicare exchange in the United States.

 

   

Attractive, proven business model and trusted brand name. Our high customer retention rate and commission-based revenue model produces a stable and recurring revenue stream. We have extensive experience having transitioned hundreds of thousands of retirees from more than 150 private and public sector employers and unions, including large employers such as General Motors and the State of Nevada. Our historical client retention rate exceeds 95% with our core solution, ExtendRetiree, which is a testament to our trusted brand name and exceptional service and support.

 

   

Strong relationships with a large number of insurance carriers. We offer our customers access to a broad selection of health plans from insurance carriers with which we have developed relationships over the past seven years. Our solutions are integrated with the information systems of our insurance carrier partners, which we believe results in a better customer experience, reduced customer turnover and greater efficiency for the insurance carriers.

 

   

Experienced management team. Our management team has significant experience in the health insurance and healthcare technology industries, and with using new business models to deliver healthcare benefits more efficiently. Our leadership efforts have resulted in a reputation for the development of innovative solutions that meet the future needs of the dynamic, evolving U.S. healthcare system.

 

Our Growth Strategies

 

Our objective is to become the health benefit manager of choice for private and public sector employers, post-65 and early retirees and active employees. Our principal strategies to meet our objective are:

 

   

Expand market share within the private sector in our core market. With an estimated 6.2 million retirees who have a health plan sponsored by their private sector employer, we believe there is a large opportunity to expand our market share in the private sector employer market. We intend to aggressively pursue opportunities to help private sector employers transition their retirees to individual health plans using our proprietary exchange platform.

 

   

Increase our presence in the public sector. With an estimated 5.8 million retirees who have a health plan sponsored by their public sector employer, we believe there is a significant opportunity to expand our market share in the public sector employer market. We are leveraging our private sector experience and initial public sector engagements to capture the growing demand by public sector employers for solutions to their state budget shortfalls and growing unfunded retiree liabilities.

 

   

Extend our technology leadership position. Our proprietary technology platform is a key competitive advantage that allows us to address our clients’ and customers’ healthcare benefit needs. We continue to innovate and invest in our software platform, call-routing technology, Medicare quoting and

 

 

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enrollment engine, CRM system and insurance carrier connectivity, as we believe these investments will allow us to extend our technology leadership position.

 

   

Maximize our existing channel partner strategy and add new channel partners. We have established partnerships with leading health and welfare benefit consultants and brokers, including Gallagher, Lockton, Mercer, Towers Watson, Wells Fargo Insurance Services and Willis. We intend to leverage our existing channel partners and add additional channel partners to gain deeper and broader access to potential clients in both the private and public sectors.

 

   

Cultivate a retail sales channel. There are approximately 32 million retirees participating in the Medicare program with no employer subsidy. We have begun to adapt our sales and marketing strategy to target these retail customers directly through a variety of consumer-centric media. We believe that this retail sales channel will continue to grow as more Americans turn age 65, affording us direct access to a broader base of potential customers.

 

   

Expand into new markets. We expect the demand for individual, defined contribution plans to grow beyond the Medicare market and are targeting these new opportunities. Initially, we are expanding our solution to help control employers’ early retiree healthcare costs. By building on our solutions for retirees, we also intend to offer solutions for our clients’ active employees. Finally, we are actively pursuing opportunities to work with various states to help them implement the state exchanges mandated by healthcare reform.

 

Risks Affecting Us

 

Our business is subject to numerous risks and uncertainties. Please see “Risk Factors” immediately following this prospectus summary, which describes all of the significant risks of which we are aware. These risks include, but are not limited to, the following:

 

   

We have a limited operating history in a new and rapidly evolving industry, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

 

   

The marketing and sale of Medicare plans are subject to numerous, complex and frequently changing laws and regulations, and the impact of changes in laws related to Medicare or any failure to comply with them could harm our business, results of operations and financial condition.

 

   

If we are unable to retain our members, our business and results of operations would be harmed.

 

   

Our business may be harmed if we lose our relationships with insurance carriers, fail to maintain good relationships with insurance carriers, become dependent upon a limited number of insurance carriers or fail to develop new insurance carrier relationships.

 

   

Insurance carriers could reduce the commissions paid to us or change their plan pricing practices in ways that reduce the commissions paid to us, which could harm our revenue and results of operations.

 

   

Changes and developments in the health insurance system in the United States could harm our business.

 

   

Our results of operations fluctuate depending upon insurance carrier payment and reporting practices and the timing of our receipt of commission payments from insurance carriers.

 

   

Our two largest stockholders, Psilos Group and Revolution Extend Holdings, LLC, collectively will own     % of our outstanding capital stock and will continue to have effective control over our management and affairs and other matters requiring stockholder approval after the completion of this offering.

 

 

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If we are unable to adequately address these and other risks we face, our business, financial condition, results of operations and prospects may be harmed. In addition, there are numerous risks related to an investment in our common stock. You should carefully consider the risks described in “Risk Factors” and elsewhere in this prospectus.

 

Corporate History and Information

 

We were incorporated in April 2002 as a Delaware limited liability company. In July 2007, we became Extend Health, Inc., a Delaware corporation. Our principal executive offices are located at 2929 Campus Drive, Suite 400, San Mateo, California 94403, and our telephone number is (650) 288-4800. Our website address is www.extendhealth.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase shares of our common stock.

 

“ExtendRetiree,” “ExtendAccess,” “ExtendExchange” and “Extend University” are registered or common law trademarks or service marks of Extend Health, Inc. This prospectus also contains additional trade names, trademarks, and service marks of ours and of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

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THE OFFERING

 

Common stock offered by us

  

                              shares

Common stock to be outstanding after this offering

  

                              shares

Over-allotment option to be offered by us

  

                              shares

Use of proceeds

  

We intend to use the net proceeds from this offering for working capital and general corporate purposes, including expansion of our sales and marketing activities and capital expenditures. We also intend to use a portion of the net proceeds to repay some or all of our debt obligations. In addition, we may use a portion of the net proceeds to acquire complementary businesses, products, services or technologies. See “Use of Proceeds.”

Risk factors

  

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

Proposed NASDAQ symbol

  

“XH”

 

The number of shares of our common stock to be outstanding after this offering is based on 16,296,745 shares of our common stock outstanding as of March 31, 2012, and excludes:

 

   

3,050,438 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2012, with a weighted-average exercise price of $1.43 per share;

 

   

948,011 shares of common stock that may be issuable upon the exercise of an outstanding warrant to purchase common stock, with an exercise price of $10.00 per share;

 

   

13,750 shares of common stock issuable upon the exercise of options granted subsequent to March 31, 2012, with an exercise price of $9.15 per share; and

 

   

1,939,059 unallocated shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 139,059 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan (not including the options to purchase 13,750 shares of common stock granted subsequent to March 31, 2012) and (ii) 1,800,000 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering, and shares that become available under our 2012 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under this plan each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

Unless otherwise noted, the information in this prospectus reflects and assumes the following:

 

   

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 14,749,992 shares of common stock immediately prior to the completion of this offering;

 

   

the filing of our amended and restated certificate of incorporation in connection with the completion of this offering;

 

   

the adjustment of outstanding stock options as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Dividend-Related Option Adjustments”; and

 

   

no exercise of the underwriters’ over-allotment option.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

 

The following tables summarize our consolidated financial data for the periods presented. We derived the consolidated statements of operations data for the years ended June 30, 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated statements of operations data for the nine months ended March 31, 2011 and 2012, and the unaudited consolidated balance sheet data as of March 31, 2012, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. You should read this summary consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

    Year Ended June 30,     Nine Months Ended
March 31,
 
    2009     2010     2011     2011     2012  
    (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

         

Revenue:

         

Commissions

  $ 16,933      $ 43,646      $ 50,451      $ 35,716      $ 48,411   

Other

    779        370        676        442        468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    17,712        44,016        51,127        36,158        48,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Service center

    18,117        14,994        18,551        15,050        19,955   

Sales and marketing

    6,768        7,290        10,134        6,346        10,856   

Technology

    2,096        3,060        3,195        2,242        3,264   

General and administrative

    5,072        5,464        6,728        5,043        5,974   

Restructuring expense

           314                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    32,053        31,122        38,608        28,681        40,049   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (14,341     12,894        12,519        7,477        8,830   

Interest income

    58        28        53        35        30   

Interest expense

    (80     (69     (110     (81     (323
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (14,363     12,853        12,462        7,431        8,537   

Provision for income taxes

    2        346        2,505        575        3,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (14,365   $ 12,507      $ 9,957      $ 6,856      $ 5,224   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(1)(2):

         

Basic

  $ (14,365   $ 280      $ 676      $ 395      $ (30,345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (14,365   $ 821      $ 1,139      $ 635      $ (30,345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(1):

         

Basic

  $ (72.01   $ 0.67      $ 0.47      $ 0.28      $ (19.95
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (72.01   $ 0.64      $ 0.44      $ 0.27      $ (19.95
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Year Ended June 30,     Nine Months Ended
March 31,
 
          2009                 2010           2011           2011           2012  
    (in thousands, except share and per share amounts)  

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(1):

         

Basic

    199,495        414,615        1,424,511        1,394,005        1,521,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

       199,495        1,288,140        2,569,722        2,378,444        1,521,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividend declared per common share

  $      $      $      $      $ 2.25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share attributable to common stockholders (unaudited)(1):

         

Basic

      $          $     
     

 

 

     

 

 

 

Diluted

      $          $     
     

 

 

     

 

 

 

Pro forma weighted-average shares used to compute pro forma net income per share attributable to common stockholders (unaudited)(1):

         

Basic

         
     

 

 

     

 

 

 

Diluted

         
     

 

 

     

 

 

 

Other Financial and Operational Data:

         

Active core members (end of period)(3)

    97,600        126,000        161,700        163,000        213,900   

Pending core members (end of period)(3)

    800        2,000        10,500        1,500        7,900   

Core applications submitted(3)

    73,600        50,000        60,700        49,800        61,800   

Adjusted EBITDA(4)

  $ (13,259   $ 14,819      $ 14,913      $ 9,270      $ 11,206   

 

(1)   See Note 13 to our consolidated financial statements for further details on the calculation of basic and diluted net income (loss) per share attributable to common stockholders and for a discussion and reconciliation of pro forma net income per share attributable to common stockholders.
(2)   The net income (loss) attributable to common stockholders for the nine months ended March 31, 2012 includes a $35.6 million adjustment for dividends distributed to preferred stockholders during the period. See Note 13 to our consolidated financial statements for further details regarding the adjustments applied in the calculation of basic and diluted net income (loss) per share attributable to common stockholders.
(3)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for a discussion of active and pending core members and core applications submitted.
(4)   See “Adjusted EBITDA” below for a discussion regarding the use of adjusted EBITDA as a financial measure and for a reconciliation to net income (loss), the most directly comparable GAAP financial measure.

 

     As of March 31, 2012  
     Actual     Pro Forma(1)     Pro Forma As
Adjusted(2)(3)
 
        

Consolidated Balance Sheet Data:

      

Cash and cash equivalents and short-term investments

   $ 13,261      $ 13,261      $                    

Working capital (deficit)

     (8,994     (8,994  

Total assets

     21,492        21,492     

Total indebtedness(4)

     10,168        10,168     

Convertible preferred stock

     22,539            

Total stockholders’ deficit

     (35,322     (12,783  

 

(1)   The pro forma balance sheet data in the table above reflects the automatic conversion of all outstanding shares of convertible preferred stock into common stock prior to the completion of this offering.
(2)  

The pro forma as adjusted balance sheet data in the table above reflects (i) the automatic conversion of convertible preferred stock described immediately above plus (ii) the sale of              shares of our common stock in this offering at an assumed initial public offering

 

 

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  price of $             per share, the midpoint of the range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(3)   A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) cash and cash equivalents, and working capital, total assets and total stockholders’ equity (deficit) by $         million, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. The pro forma as adjusted information discussed above is only illustrative and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.
(4)   Total indebtedness includes $9.8 million in term loans, $0.3 million in an equipment loan and $47,000 in capital lease obligations.

 

Adjusted EBITDA

 

To provide investors with additional information regarding our financial results, we have disclosed in the table above and within this prospectus adjusted EBITDA, a non-U.S. generally accepted accounting principle, or GAAP, financial measure. We have provided a reconciliation below of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

 

We have included adjusted EBITDA in this prospectus 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 adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors.

 

Our use of 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. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

 

   

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to net income (loss) for each of the periods indicated:

 

     Year Ended June 30,     Nine Months Ended
March 31,
 
     2009       2010     2011     2011     2012  
    

(in thousands)

 

Reconciliation of Adjusted EBITDA:

          

Net income (loss)

   $ (14,365   $  12,507      $    9,957      $    6,856      $    5,224   

Adjustments:

          

Depreciation and amortization

     1,013        1,831        2,144        1,636        1,384   

Provision for income taxes

     2        346        2,505        575        3,313   

Stock-based compensation

     69        94        250        157        992   

Interest income

     (58     (28     (53     (35     (30

Interest expense

     80        69        110        81        323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (13,259   $ 14,819      $ 14,913      $ 9,270      $ 11,206   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

 

Investing in our common stock is highly speculative and involves a significant degree of risk. You should consider carefully all the risks and uncertainties described below, together with all of the other information contained in this prospectus and the other documents attached or summarized herein, including, but not limited to, our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. Many of the following risks and uncertainties relate to factors that are not within our control. If any of the following risks is realized, our business, financial condition, results of operations and prospects could be harmed. In that event, the price of our common stock could decline and you could lose part or all of your investment. Actual results could differ materially from those anticipated in the forward-looking statements as a result of any number of factors, including the risks and uncertainties described below and elsewhere in this prospectus. You should consult with your own counsel, financial advisors and accountants for advice concerning the various legal, regulatory, accounting, tax and economic considerations relating to a potential investment in our common stock.

 

Risks Related to Our Business

 

We have a limited operating history, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

 

We have a limited operating history. Because of our limited operating history and because the health insurance industry is rapidly evolving, we have limited insight into trends that may emerge and affect our business. We may make errors in predicting and reacting to relevant business trends, which could harm our business. In addition, since we have only been offering our products and services since 2004, we have limited historical financial data. As a result of these factors, the revenue and income potential of our business is unproven, and we have only a limited operating history upon which to base an evaluation of our current business and future prospects. You should consider our business and prospects in light of the risks and difficulties we encounter in this rapidly evolving market. These risks and difficulties include our ability to, among other things:

 

   

establish new or maintain existing relationships with employer clients, individual customers and insurance carriers;

 

   

increase sales of health insurance plans;

 

   

maintain compliance with applicable laws and regulations;

 

   

successfully compete with other companies that are currently in, or may in the future enter, the Medicare exchange space;

 

   

hire, integrate and retain qualified personnel; and

 

   

successfully expand our business.

 

If the market for individual Medicare plans does not develop as we expect, or if we fail to address the needs of this market, our business will be harmed. Any potential opportunities that we may have to expand our business beyond post-65 retirees or into other markets may not develop. If these opportunities do not materialize or if we are not able to capture such opportunities, our business could be harmed. We may not be able to successfully address these risks and difficulties or others, including those described elsewhere in these risk factors. Failure to adequately address these risks and difficulties could materially harm our business and cause our financial condition, results of operations and prospects to suffer.

 

The market for insurance exchanges in the United States is relatively undeveloped and rapidly evolving, which makes it difficult to forecast adoption rates and demand for our solutions.

 

The market for insurance exchanges in the United States is relatively undeveloped and rapidly evolving. Accordingly, our future financial performance will depend in part on growth in this market and on our ability to

 

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adapt to emerging demands in this market. Demand for our solutions has been driven in large part by employer cost-saving efforts, recent regulatory changes, broader use of the Internet and advances in technology. It is difficult to predict with any precision employer and individual adoption rates or 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, reduces our ability to accurately evaluate our long-term outlook and forecast annual performance. A reduction in demand for insurance exchanges caused by lack of employer and individual acceptance, technological challenges, competing offerings or otherwise would result in a lower revenue growth rate or decreased revenue, either of which could negatively impact our business and results of operations.

 

The marketing and sale of Medicare plans are subject to numerous, complex and frequently changing laws and regulations, and the impact of changes in laws related to Medicare or any failure to comply with them could harm our business, results of operations and financial condition.

 

The marketing and sale of Medicare plans are subject to numerous laws, regulations and guidelines at both the Federal and state level. The marketing and sale of Medicare Advantage and Medicare Part D prescription drug plans are principally regulated by the Centers for Medicare and Medicaid Services, or CMS, which is a division of the U.S. Department of Health and Human Services, and the marketing and sale of Medicare supplement plans is principally regulated on a state-by-state basis by state departments of insurance. The laws and regulations applicable to the marketing and sale of Medicare plans lack clarity, are numerous and complex, were not drafted to contemplate health insurance exchanges, and change frequently, particularly with respect to regulations and guidance issued by CMS for Medicare Advantage and Medicare Part D prescription drug plans and by the various state departments of insurance for Medicare supplement plans.

 

As a result of these laws, regulations and guidelines, we have altered, and will need to continue to alter, our business operations and procedures, including without limitation, our call center operations, website and sales process to comply with these changing requirements. For instance, many aspects of, and changes to, our website content and marketing materials and processes, including call center scripts, must be approved by CMS and by insurance carriers in light of CMS requirements. Changes to the laws, regulations and guidelines relating to Medicare plans, the scope of their application to our business, their interpretation or the manner in which they are enforced could be incompatible with our business model. Due to changes in CMS guidance or enforcement of existing guidance, or as a result of new regulations and guidelines, CMS, state departments of insurance or insurance carriers may determine not to approve aspects of our website content or marketing materials and processes and may determine that certain existing aspects of our business are not compliant. As a result, our business could be slowed or we could be prevented from operating portions of our business altogether, either of which would materially harm our results of operations and financial condition, particularly if this occurred during the Medicare annual enrollment period, which is when the vast majority of Medicare plans are sold.

 

In March 2010, the Federal government enacted significant reforms to healthcare legislation through the Patient Protection and Affordable Care Act, or PPACA, and the Healthcare and Education Reconciliation Act of 2010, or HCERA, which we refer to collectively as Healthcare Reform. In addition, one of the elements of the recently passed Budget Control Act of 2011 is the creation of a joint select committee on deficit reduction to develop recommendations, including changes to entitlement programs such as Medicare, to reduce the national debt by at least $1.2 trillion over 10 years. In connection with the U.S. Congress’s failure to agree on a proposal to lower the national deficit, the Budget Control Act mandates automatic cuts to domestic and defense spending, including a significant reduction in Medicare spending. The impact that Healthcare Reform and the Budget Control Act will have on the market for Medicare plans could change the demand for Medicare plans, the way these plans are delivered, or the commissions that insurance carriers pay to us in connection with their sale or otherwise adversely impact us.

 

In the event that these laws and regulations or changes in these laws and regulations, or other laws and regulations that impact the marketing and sale of Medicare plans, adversely impact our ability to market any type of Medicare plan on our exchange platform or the commissions that we receive for selling these plans, our business, results of operations and financial condition would be harmed.

 

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If we are unable to retain our members, our business and results of operations would be harmed.

 

Our revenue is primarily derived from commissions that insurance carriers pay to us for the health insurance plans that we market. When one of these plans is cancelled, or if we otherwise do not remain the agent of record on the policy, we no longer receive the related commission revenue. Individuals may choose to discontinue their insurance policies for a number of reasons. For example, members may determine that they cannot afford supplemental Medicare coverage or may receive increases in premiums from insurance carriers that force them to cancel their coverage. In addition, our members may choose to purchase new plans using a different agent if, for example, they are not satisfied with our customer service or the health insurance plans that we offer. Insurance carriers may also terminate health insurance plans purchased by our members for a variety of reasons. Our cost in acquiring a new member is substantially greater than the cost involved in maintaining our relationship with an existing member. If we are not able to successfully retain existing members and limit member turnover, our revenue and operating margins could be adversely impacted.

 

Our business may be harmed if we lose our relationships with insurance carriers, fail to maintain good relationships with insurance carriers, become dependent upon a limited number of insurance carriers or fail to develop new carrier relationships.

 

We typically enter into contractual agency relationships with insurance carriers that are non-exclusive and terminable on short notice by either party for any reason. In many cases, insurance carriers also have the ability to amend the terms of our agreements unilaterally on short notice. Insurance carriers may be unwilling to allow us to sell their existing or new health insurance plans or may amend our agreements with them, for a variety of reasons, including for competitive or regulatory reasons or because of a reluctance to distribute their products through our exchange platform. Insurance carriers may decide to rely on their own internal distribution channels, including traditional in-house agents, carrier websites or other sales channels, or to market their own plans, and, in turn, could limit or prohibit us from marketing their plans. For example, in August 2011, one of our largest insurance carrier partners discontinued the indirect distribution of Medicare supplement policies through all of their distribution vendors. As a result, our new Medicare supplement enrollments have shifted to other insurance carriers that pay us lower commission rates on average. Insurance carriers may also choose to exclude us from their most profitable or popular plans or may determine not to distribute insurance plans in individual markets in certain geographies or altogether. Additionally, if one of the insurance carriers with which we are associated violates the law or comes under scrutiny by CMS, CMS may impose sanctions on such carriers, resulting in a loss of supply of insurance plans that we are able to sell. The termination or amendment of our relationship with an insurance carrier could reduce the variety of health insurance plans we offer. We also could lose a source of, or be paid reduced commissions for, future sales and could lose renewal commissions for past sales. Our business could also be harmed if we fail to develop new carrier relationships or are unable to offer customers a wide variety of health insurance plans.

 

The private health insurance industry in the United States has experienced a substantial amount of consolidation over the past several years, resulting in a decrease in the number of insurance carriers. In the future, it may become necessary for us to offer insurance plans from a reduced number of insurance carriers or to derive a greater portion of our revenue from a more concentrated number of carriers as our business and the health insurance industry evolve. For example, in fiscal 2011, our top two carriers, Mutual of Omaha and UnitedHealthcare, accounted for an aggregate of 58% of our commission revenue. Each of these insurance carriers may terminate our agreements with them, and, in some cases, as a result of the termination we may lose our right to receive future commissions for policies we have sold. Should our dependence on a smaller number of insurance carriers increase, whether as a result of the termination of carrier relationships, further insurance carrier consolidation or otherwise, we may become more vulnerable to adverse changes in our relationships with our carriers, particularly in states where we offer health insurance plans from a relatively small number of carriers or where a small number of insurance carriers dominate the market. The termination, amendment or consolidation of our relationship with our insurance carriers could harm our business, results of operations and financial condition.

 

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Insurance carriers could reduce the commissions paid to us or change their plan pricing practices in ways that reduce the commissions paid to us, which could harm our revenue and results of operations.

 

Our commission rates are either set by each carrier or negotiated between us and each carrier. Insurance carriers have altered, and may in the future alter, the contractual relationships we have with them, either by renegotiation or unilateral action. Also, insurance carriers may adjust their commission rates to comply with regulatory guidelines, such as those published by CMS with respect to the marketing of Medicare Advantage and Medicare Part D prescription drug plans. If these contractual changes result in reduced commissions, our revenue may decline.

 

In addition, insurance carriers periodically adjust the premiums they charge to individuals for their insurance policies. These premium changes may cause members to cancel their existing policies and purchase a replacement policy from a different insurance carrier, either through our exchange or through another agent. In many cases, we receive a reduced commission when a member purchases a replacement policy. Also, because insurance rates may vary between insurance carriers, plans and enrollment dates, changes in enrollment mix may impact our commission revenue. Future changes in carrier pricing practices could harm our business, results of operations and financial condition.

 

Changes and developments in the health insurance system in the United States could harm our business.

 

Our business depends upon the private sector of the United States insurance system, its role in financing health care delivery, and insurance carriers’ use of, and payment of commissions to, agents, brokers and other organizations to market and sell individual and family health insurance plans. Healthcare Reform contains provisions that have changed and will continue to change the industry in which we operate in substantial ways.

 

Many aspects of Healthcare Reform do not go into effect until 2014, although certain provisions currently are effective, such as medical loss ratio requirements for individual, family and small business health insurance and a prohibition against using pre-existing health conditions as a reason to deny health coverage for children. 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 not be beneficial to us.

 

Legal challenges to the constitutionality of Healthcare Reform have been initiated. Notably, litigation regarding the constitutionality of Healthcare Reform is pending before the United States Supreme Court. Many of the challenges center upon the constitutionality of the mandate requiring individuals to maintain health coverage. Decisions on the issue have been inconsistent. These decisions will be appealed and it is impossible to predict their outcome. More challenges could also be initiated under various other legal theories. If the final outcome of one or more of these legal challenges is adverse to our business interests, our results of operations and financial condition could be harmed.

 

Certain key members of Congress have also expressed a desire to withhold the funding necessary to implement Healthcare Reform as well as the desire to replace or amend all or a portion of Healthcare Reform. Any partial or complete repeal or amendment or implementation difficulties, or uncertainty regarding such events, could increase our costs of compliance, prevent or delay future adoption of our exchange platform, and adversely impact our results of operations and financial condition. The implementation of Healthcare Reform could have negative effects on us, including:

 

   

increase our competition;

 

   

reduce or eliminate the need for health insurance agents and brokers or demand for the health insurance that we sell;

 

   

decrease the number of types of health insurance plans that we sell, as well as the number of insurance carriers offering such plans;

 

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

 

   

cause insurance carriers to reduce the amount they pay for our services or change our relationship with them in other ways.

 

Any of these effects could materially harm our business, results of operations and financial condition. For example, the manner in which the Federal government and the states implement health insurance exchanges and the process for receiving subsidies and cost-sharing credits 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 we are able to sell and the geographies in which we are able to sell them. In addition, the U.S. Congress has been charged with finding spending cuts, and such cuts are expected to include Medicare. If cuts are made to Medicare, there may be substantial changes in the types of health insurance plans we are able to sell. Changes in the law could also cause insurance carriers to exit the business of selling insurance plans in a particular jurisdiction, to eliminate certain categories of products or to attempt to move members into new plans for which we receive lower commissions. If insurance carriers decide to limit our ability to sell their plans or determine not to sell individual health insurance plans altogether, our business, results of operations and financial condition would be materially harmed.

 

Our results of operations fluctuate depending upon the timing of our receipt of commission payments from insurance carriers.

 

The timing of our revenue recognition is dependent upon the receipt of commission payments from insurance carriers. There have been instances where commission payments from insurance carriers have been delayed. Any delay could impact our financial results for a given quarter as we would not be able to recognize the related commission revenue in that quarter if payments are pushed beyond the quarter. In addition, receipt of past due payments at a later date could result in a large amount of commission revenue from a carrier being recorded in a given quarter that is not indicative of the amount of revenue we may receive from that carrier in subsequent quarters, causing fluctuations in our quarterly or annual results of operations. We could report revenue below the expectations in any particular period if a large payment from an insurance carrier is delayed or not received within the time frame required for revenue recognition.

 

We rely on insurance carriers to provide membership and commission reporting to us, and if these reports are inaccurate or not delivered to us in a timely manner, they could impact our ability to report our operating metrics accurately or on a timely basis.

 

We are dependent on insurance carriers for providing data to us related to membership and commission payments. For example, some insurance carriers do not directly report member cancellations to us or report cancellations in a delayed manner, resulting in the need for us to determine cancellations using the commission payment data. We infer cancellations from this payment data by analyzing whether payments from members have ceased for a period of time, and we may not learn of a cancellation for several months, given that some of our members pay on a schedule less frequently than monthly. After we have estimated membership for a period, we may receive information from insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation, which would cause our member data to be inaccurate. Our estimate regarding the average amount of time our members maintain their health insurance plans also could be inaccurate as it is dependent upon the accuracy of our membership estimates.

 

Our revenue growth rate may decline, and, as our costs increase, we may not be able to generate sufficient revenue to sustain our profitability.

 

Our revenue has grown from $12.4 million in fiscal year 2008 to $51.1 million in fiscal year 2011. We expect that, in the future, as our revenue increases to higher levels our revenue growth rate will decline over time.

 

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Our future revenue growth will depend in large part upon our ability to continue to attract new individuals to purchase health insurance through our exchange platform. To the extent that the rate of growth of our new customers slows or our customer retention rates decrease, our revenue growth will also slow, and we may not be able to generate sufficient revenue to sustain our profitability. We also expect our costs to increase in future periods, which could negatively affect our future results of operations. We expect to continue to expend substantial financial and other resources on:

 

   

sales and marketing, including a significant expansion of our direct and partner channel sales organizations;

 

   

technology development, including investments in the scalability of our exchange platform and the development of new features; and

 

   

general administration, including legal and accounting expenses related to being a public company.

 

These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and increase our profitability, our results of operations would be harmed and our stock price would decline.

 

If we do not continue to attract new employer clients or individual customers, we may not achieve our revenue projections, and our results of operations would be harmed.

 

In order to grow our business, we must continually attract new employer clients and individual customers. Our ability to do so depends in large part on the success of our sales and marketing efforts. Potential employer clients may not see the value in our solution and potential individual customers may seek out other options for purchasing Medicare insurance. Therefore, we must demonstrate that our Medicare exchange provides a viable solution for our employer clients to reduce healthcare costs and for individual customers to obtain high quality coverage at an attractive price. If we fail to provide high quality solutions and convince employer clients and individual customers of our value proposition, we may not be able to retain existing customers or attract new individual customers. Moreover, employer clients may decide not to transition their retirees and employees to our platform or these retirees and employees may choose not to enroll with us after we have already incurred operating overhead. Additionally, there is no guarantee that the market for our services will grow as we expect. If the market for our services declines or develops more slowly than we expect, or the number of potential employer clients or individual customers that use our solutions declines or fails to increase as we expect, our revenue, results of operations, financial condition, business and prospects could be harmed.

 

We expect our results of operations to fluctuate on a quarterly and annual basis.

 

Our revenue and results of operations could vary significantly from quarter to quarter and year to year and may fail to match our past performance due to a variety of factors, some of which are outside of our control. Any of these events could cause the market price of our common stock to fluctuate. Factors that may contribute to the variability of our results of operations include:

 

   

seasonality of our business related to the timing of enrollment in employer-sponsored health plans;

 

   

the extent to which we retain existing members;

 

   

the size of new employer clients that we engage in any particular period;

 

   

the timing of commission payments from insurance carriers;

 

   

changes in the commission rates we receive from insurance carriers;

 

   

the utilization and mix of channel partners;

 

   

the timing of retail marketing campaigns;

 

   

our ability to increase the number of health insurance plans we are able to sell;

 

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the entrance of new competitors to our market;

 

   

our ability to establish and maintain relationships with insurance carriers; and

 

   

general industry and macroeconomic conditions.

 

Given these factors, our short operating history, and the current changes and developments in the health insurance industry, our historical results of operations may not be useful to you in predicting our future results of operations. If we fail to meet or exceed expectations for our business for these or any other reasons, the market price of our shares could fall substantially, and we could face costly lawsuits, including securities class action suits. Furthermore, fluctuations in our results of operations related to these factors and industry developments could adversely impact our ability to meet our earnings forecasts or the expectations of market analysts, which could cause declines in our stock price.

 

Seasonality has caused and will continue to cause fluctuations in our financial results and operational challenges.

 

Our business of marketing Medicare plans is subject to seasonal fluctuations. The benefits enrollment period for a majority of private employers occurs during October through December of each year for a January 1 effective date, and this period also coincides with the timing of the annual enrollment period when Medicare-eligible individuals can make changes to their Medicare Advantage or Medicare Part D prescription drug coverage for the following year. As a result, the majority of our Medicare enrollments have historically occurred in the fourth calendar quarter during the Medicare annual enrollment period. During this period, we need to hire, train and certify a substantial number of seasonal personnel to supplement our employee base. If we are unable to hire, train and certify this seasonal workforce, we could not accommodate the heightened enrollment demand. Failure to meet this demand could negatively impact our business. Additionally, due to the heavy influx of healthcare benefit enrollments we experience at the end of each calendar year, we incur a significant portion of our marketing and enrollment expenses during the fourth calendar quarter, but we typically do not begin to recognize the associated commission revenue until the first calendar quarter of the following year. As our business matures, other seasonality trends may develop and the existing seasonality and consumer behavior that we experience may change. In particular, public sector employers are generally more inclined to opt for transition periods outside of the annual enrollment period, as their benefits effective date typically coincides with the beginning of their fiscal year, which is often not January 1. Any seasonality that we experience may cause fluctuations in our financial results, which could lead to declines in our stock price, and operational challenges such as demand for an increased or decreased short-term workforce.

 

Our estimates of Projected Annual Recurring Revenue, or PARR, may prove inaccurate.

 

As an indication of our estimated future recurring revenue, we report Projected Annual Recurring Revenue, or PARR, which reflects our expected total commission revenue for the subsequent 12 months from all members that are active or pending as of the reporting date. We report PARR as a range as it represents an estimate of our future recurring revenue based on certain member retention assumptions. The PARR metric includes expected commission revenue on all Medicare-related and ancillary policies and is based upon actual contractual commission rates in effect during the forecasted period as well as assumptions regarding future member retention. Our estimates for future member retention are based on our historical experience regarding the extent and timing of policy attrition, along with any known future trends that may be expected to occur during the forecasted period.

 

PARR is a forward-looking metric that is based on our management’s beliefs and assumptions and on information available to our management as of the reporting date. As a result, our ability to recognize the forecasted revenue indicated by the PARR metric over the subsequent 12 months is subject to a number of risks, uncertainties and assumptions, including:

 

   

higher cancellation rates of Medicare-related and ancillary policies by our members than expected;

 

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the inability of our carriers to fulfill their obligations under our members’ Medicare-related and ancillary policies, which could cause a decrease in future member retention rates; and

 

   

delayed payment, non-payment and/or inaccurate payment of commissions by our carriers.

 

We cannot guarantee that we will be able to recognize the revenue associated with the PARR metric due to these risks and uncertainties or if our assumptions turn out to be incorrect. These risks and assumptions are inherently subject to significant business and economic uncertainties and contingencies, many of which are beyond our control. As a result, the PARR that we disclose at any particular time may prove to be an inaccurate indicator of the revenue we actually derive over the subsequent 12 months from active and pending members.

 

If we fail to effectively manage our growth, our business and results of operations could be harmed.

 

We have expanded our operations significantly since 2008 and are in the process of providing the use of our technology and services to governmental entities, all of which results in our continuing to experience rapid growth in our headcount and operations and additional complexities related to providing services to employees of governmental entities. This has increased the significant demands on our management, our operational and financial systems and infrastructure, and other resources. If we do not effectively manage our growth, the quality of our services could suffer. In order to successfully expand our business, we must effectively integrate, develop and motivate a large number of new employees, and we must maintain the beneficial aspects of our corporate culture. We may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, and our business and results of operations could be harmed. We also need to continue to improve our existing systems for operational and financial management, including our reporting systems, procedures and controls. These improvements could require significant capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully manage these processes, our business and results of operations will be harmed.

 

If we are unable to maintain high levels of service our business and prospects may be harmed.

 

One of the key attributes of our business is providing high quality service to our clients and members. We may be unable to sustain these levels of service, which would harm our reputation and our business. Alternatively, we may only be able to sustain high levels of service by significantly increasing our operating costs, which would materially adversely affect our results of operations. The level of service we are able to provide depends on our personnel to a significant extent. Our personnel must be well-trained in our processes and be able to handle customer calls effectively and efficiently. Any inability of our personnel to meet our demand, whether due to absenteeism, training, turnover, disruptions at our facilities, bad weather, power outages or other reasons, could adversely impact our business. For example, we have had disruptions in services at our call center in Utah due to severe snowstorms. If we are unable to maintain high levels of service performance, our brand and reputation could suffer and our results of operations and prospects would be harmed.

 

Our growth relies in part on the success of our strategic relationships with third parties.

 

We anticipate that we will continue to rely on certain relationships with various third parties, including insurance carriers, employers, benefits consultants and brokers, to grow our business. Identifying, negotiating and documenting relationships with third parties requires significant time and resources. Our agreements with third parties are typically non-exclusive and do not prohibit them from working with our competitors or from offering competing services. In addition, these third parties may not perform as expected under our agreements with them, and we may have disagreements or disputes with these parties, which could negatively affect our brand and reputation. It is possible that these third parties may not be able to, or may be unwilling to, devote the resources we expect to the relationship. For example, we have strategic alliances with two vendors that

 

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administer our customers’ health reimbursement accounts. One of these vendors, AON Hewitt, is our primary competitor. If we are unsuccessful in establishing or maintaining our relationships with these third parties, our ability to compete in the marketplace or to grow our business could be impaired, and our results of operations would suffer. Even if we are successful, these relationships may not improve our results of operations.

 

We may be unsuccessful in competing effectively against current and future competitors, which would impact our prospects and results of operations.

 

The market for selling Medicare health insurance plans is highly competitive. We compete with entities and individuals that offer and sell Medicare health insurance plans utilizing traditional distribution channels, including insurance agents and brokers across the United States who sell Medicare health insurance plans in their communities and the original Medicare program. Some local agents use “lead aggregator” services that use the internet to find consumers interested in purchasing health insurance and are compensated for referring those consumers to a traditional insurance agent. In addition to health insurance brokers and agents, many insurance carriers directly market and sell their plans to consumers through call centers and their own websites. Although we offer health insurance plans for many of these insurance carriers, they also compete with us by offering their plans directly to consumers.

 

In addition, CMS offers plan information, comparison tools, an enrollment services center and online enrollment for Medicare Advantage and Medicare Part D prescription drug plans, all of which compete with our programs and plans. We also expect that in licensing our technology to government entities for health insurance exchanges and other purposes, we will continue to compete with these government entities as well as system integrators, software companies, employee benefit service providers, technology consulting companies and others that have more experience providing technology and services to the Federal or state governments.

 

We may not be able to compete successfully against our current or future competitors. Some of our current and potential competitors, including AON Hewitt, have longer operating histories in the health care benefit consulting industry, access to larger customer bases, greater brand recognition and significantly greater financial, technical, marketing and other resources than we do. As compared to us, our current and future competitors may be able to:

 

   

undertake more extensive marketing campaigns for their brands and services;

 

   

devote more resources to website and systems development;

 

   

negotiate more favorable commission rates;

 

   

negotiate more favorable contracts with government entities; and

 

   

make more attractive offers to potential employees, marketing partners and third-party service providers.

 

Competitive pressures may result in our experiencing increased marketing costs and loss of market share, or may otherwise harm our business, results of operations and financial condition.

 

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:

 

   

The Health Insurance Portability and Accountability Act, or 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 health care administrative processes. The enactment of HIPAA also

 

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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 Federal Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, enacted as part of the American Recovery and Reinvestment Act of 2009, also known as the “Stimulus Bill,” effective February 22, 2010, 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 4-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 being applied increasingly by the United States Federal Trade Commission, or 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. For example, on occasion we have experienced minor security incidents involving the social security numbers and protected health information, or PHI, of our members which resulted in us notifying the affected individuals of the security incidents and offering to cover the costs of credit monitoring services for these individuals. Because of the nature of these incidents, we were not required to report them to a governmental authority, and we have not been penalized as a result of these incidents. Due to the recent 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 interrupt regular operations which may adversely affect our business.

 

Under the HITECH Act, as a business associate we may also be 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 customers and potentially exposing us to additional expense, adverse publicity and liability, any of which could adversely affect our business.

 

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Any legal liability, regulatory penalties or negative publicity arising from the information that we distribute or that we provide on our website may harm our business and results of operations.

 

We provide information on our website, through licensed benefit advisors and in other ways regarding Medicare insurance in general and the Medicare insurance plans we market and sell, including information relating to insurance premiums, coverage, benefits, exclusion, limitations, availability, plan comparison and insurance company ratings. A significant amount of both automated and manual effort is required to maintain the considerable amount of insurance policy information on our website and in our databases. If the information we provide on our website or provided by our licensed benefit advisors is not accurate or is construed as misleading, or if we do not properly assist individuals in purchasing Medicare insurance, consumers, insurance carriers and others could attempt to hold us liable for damages, and regulators could attempt to subject us to penalties, revoke our license to transact health insurance business in a particular jurisdiction, and compromise the status of our licenses to transact health insurance businesses in other jurisdictions. In the ordinary course of operating our business, we have received complaints from some customers that third-party information we provided regarding insurance plan or prescription drug pricing was not accurate or was misleading. Although in the past we have resolved these complaints without significant financial cost, typically by offering the customer a reimbursement or enrolling the customer in a new plan, we cannot guarantee that we will be able to do so in the future. 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.

 

In the ordinary course of our business, we have received and may continue to receive inquiries from state regulators relating to compliance with insurance regulations and labor matters. We may become involved in litigation in the ordinary course of business. If any such litigation is resolved in a manner adverse to our business interests, our results of operations and financial condition could be harmed. If we are found to have violated laws or regulations, we could 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 harmed.

 

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 will be harmed.

 

Our services involve the collection and storage of confidential information of consumers and the transmission of this information to their chosen Medicare insurance carriers. For example, we collect names, addresses, social security and credit card numbers, and information regarding the medical history of consumers in connection with their applications for Medicare insurance. 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. 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 could damage our reputation and our relationship with our members, marketing partners and Medicare 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 Medicare insurance carrier 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 in a particular jurisdiction or for a particular insurance carrier or subject us to liability for non-compliance.

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could harm our reputation and cause us to restate our financial statements.

 

As a publicly-traded company, we will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish annual management assessments of the effectiveness of our internal controls over financial reporting.

 

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These assessments will need to include disclosures of any material weaknesses identified by management in our internal controls over financial reporting, and our auditors will also have to issue an opinion on the effectiveness of our internal control over financial reporting.

 

We are in the very early stages of the costly and challenging process of compiling the system and process documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control over financial reporting, our investors could lose confidence in the accuracy and completeness of our financial reports, which could cause the price of our common stock to decline.

 

Our internal resources and personnel may be insufficient in the future to avoid accounting errors, and there can be no assurance that we will not have material weaknesses or significant deficiencies in the future. Any failure to maintain adequate controls or to adequately implement new or improved controls could harm our results of operations or cause us to fail to meet our reporting obligations.

 

Though we will be required to disclose changes made in our internal control and procedures on a quarterly basis, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of December 31 of any year prior to that time, we would cease to be an “emerging growth company” as of the following June 30. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

 

When our independent registered public accounting firm is required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404, it may issue a report that is adverse in the event it is not satisfied with the level at which our internal controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future.

 

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, Section 107 of the JOBS Act provides that an emerging growth company, as defined in the JOBS Act, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act when complying with new or revised accounting standards. In other words, an emerging growth company can

 

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delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

Economic conditions and other factors beyond our control may negatively impact our business, results of operations and financial condition.

 

Our revenue depends upon demand for Medicare insurance plans, which can be influenced by a variety of factors beyond our control. We have no control over the economic and other factors that influence such demand. We believe that demand for Medicare insurance and the services we offer has been adversely impacted by recent macroeconomic conditions. We cannot be certain of the future impact that the recent recession will have on our business. A further softening of demand for Medicare insurance and the services offered by us, whether caused by changes in consumer preferences or the regulated environment in which we operate, or by a weak economy, including as a result of recent disruptions in the global financial markets or a decrease in general consumer confidence, will result in decreased revenue and growth. Employers may attempt to reduce expenses by reducing or eliminating the subsidies that they provide to their retirees for the purchase of Medicare plans. In addition, consumers may attempt to reduce expenses by cancelling existing Medicare plans purchased through us, determine not to purchase new Medicare plans through us, or purchase Medicare plans with lower premiums for which we receive lower commissions. A continuing negative economic environment could also adversely impact the Medicare insurance carriers whose plans are offered on our exchange, and they may, among other things, determine to reduce their commission rates, increase premiums or reduce benefits, any of which could negatively impact our business, results of operations and financial condition.

 

To the extent the economy or other factors adversely impact our customer retention, the number or type of Medicare insurance applications submitted through us and that are approved by insurance carriers, or the commissions that we receive from Medicare insurance carriers, our rate of growth will decline and our business and results of operations will be harmed.

 

We may not be able to adequately protect our intellectual property, which could harm our business and results of operations.

 

We rely on a combination of patent, copyright, trademark and trade secret laws as well as confidentiality procedures and contractual provisions to establish and protect our intellectual property rights in the United States. We have not filed for protection of our intellectual property in any foreign jurisdiction. Any United States or other patents issued to us may not be sufficiently broad to protect our proprietary technologies, and given the costs of patent protection and for various other reasons, we may choose not to seek patent protection for certain of our proprietary technologies. These intellectual property rights will not prevent competitors from creating a competitive exchange platform and competing with us. We may not be effective in policing unauthorized use of our intellectual property, trade secrets and other confidential information, and even if we do detect violations, litigation may be necessary to enforce our intellectual property rights. Any enforcement efforts we undertake, including litigation, could be time-consuming and expensive, could divert our management’s attention and may result in a court determining that our intellectual property or other rights are unenforceable. If we are not successful in cost-effectively protecting our intellectual property rights, trade secrets and confidential information, our business, results of operations and financial condition could be harmed. Furthermore, if we cannot license or develop technology for key aspects of our business, we would be forced to limit our services and may be unable to compete effectively, which would harm our business, results of operations and financial condition.

 

If we are not able to maintain and enhance our brand, our business and results of operations will be harmed.

 

We believe that maintaining and enhancing our brand identity is critical to our relationships with existing members, marketing partners and insurance carriers and to our ability to attract new employer clients, members,

 

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marketing partners and insurance carriers. The promotion of our brand may require us to make substantial investments and we anticipate that, as our market becomes increasingly competitive, these branding initiatives may become increasingly difficult and expensive. The successful promotion of our brand will depend largely upon our marketing and public relations efforts and our ability to continue to offer high-quality products and services in an understandable and objective manner. Our brand promotion activities may not be successful or yield increased revenue, and to the extent that these activities yield increased revenue, the increased revenue may not offset the expenses we incur. In addition, we may take actions that have the unintended consequence of harming our brand. If we do not successfully maintain and enhance our brand, our business may not grow and we could lose marketing partners and members, which could, in turn, cause insurance carriers to terminate their relationships with us, all of which would harm our business, results of operations and financial condition.

 

System failures or capacity constraints could harm our business and results of operations.

 

The performance, reliability and availability of our website, call centers and underlying network infrastructures are critical to our financial results, our brand and our relationship with consumers, marketing partners and Medicare insurance carriers. Although we regularly attempt to enhance and maintain our website, call centers and system infrastructure, system failures and interruptions may occur if we are unsuccessful in these efforts or experience difficulties with transitioning existing systems to upgraded systems, if we are unable to accurately project the rate or timing of increases in our website traffic or 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 website. 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 website 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 brand image and subject us to potential liability. Our database and systems are vulnerable to damage or interruption from human error, earthquakes, fire, floods, power loss, telecommunications failures, physical or electronic break-ins, computer viruses, acts of terrorism, other attempts to harm our systems and similar events.

 

Consumers may call our licensed benefit advisors for assistance in connection with submitting Medicare insurance applications after using our platform. We depend upon third parties, including telephone service providers and third-party software providers, to operate our call centers. Any failure of the systems upon which we rely in the operation of our call centers could negatively impact sales as well as our relationship with members, which could harm our business, results of operations and financial condition.

 

If we are unable to attract and retain qualified personnel, our business could be harmed.

 

Our success is dependent upon the performance of our senior management and key personnel. Our future success will depend upon our continued ability to identify, hire, develop, motivate and retain world class talent. Our ability to execute efficiently is dependent upon contributions from all of our employees, in particular our senior management team, including Bryce A. Williams, our Chief Executive Officer, Joseph J. Murad, our Chief Operating Officer, and Cameron C. Liljenquist, our Chief Technology Officer. We do not maintain key person insurance for our senior management team members or key personnel. Key institutional knowledge remains with a small group of long-term employees and directors whom we may not be able to retain. Our management and employees can terminate their employment at any time, and the loss of the services of any of our executive officers or key employees could harm our business. In addition, from time to time, there may be changes in our senior management team that may be disruptive to our business. If our senior management team, including any new hires that we may make, fails to work together effectively and to execute our plans and strategies on a timely basis, our business could be harmed.

 

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We appoint a single writing agent with each insurance carrier. If we lose the service of our appointed writing agent, the duties of writing agent will need to be transitioned to other qualified company personnel. Due to our national reach and the large number of carrier partners whose plans are purchased by our members, this transition may be difficult and requires a significant period of time to complete. If the transition is not successful or takes too long to complete, our agency relationship with particular insurance carriers may be terminated, our commission payments could be discontinued or delayed, our insurance agency licenses could be revoked and, as a result, our business, results of operations and financial condition would be harmed.

 

Our success is also dependent upon our ability to attract additional personnel for all areas of our organization. We may not be successful in attracting and retaining personnel on a timely basis, on competitive terms or at all. If we are unable to attract and retain the necessary personnel, our business and prospects would be harmed.

 

The terms of our loan and security agreement with Silicon Valley Bank may restrict our ability to engage in certain transactions.

 

The terms of our loan and security agreement with Silicon Valley Bank restrict our ability to engage in certain transactions, including disposing of certain assets, incurring additional indebtedness, declaring dividends, acquiring or merging with another entity or leasing additional real property unless conditions set forth in our agreement with Silicon Valley Bank are met or unless we receive prior approval from Silicon Valley Bank. Our obligations under the loan and security agreement are secured by substantially all of our assets. The loan and security agreement further limits our ability to make material changes to our management team or enter into transactions with affiliates. If Silicon Valley Bank does not consent to any of these actions, we could be prohibited from engaging in transactions that could be beneficial to our business and our stockholders.

 

Acquisitions could disrupt our business and harm our financial condition and results of operations.

 

We may decide to acquire complimentary businesses, products and technologies. Our ability as an organization to successfully make and integrate acquisitions is unproven. Acquisitions could require significant capital infusions and could involve many risks, including but not limited to, potential negative impact on our results of operations due to debt or liabilities incurred in connection with an acquisition, difficulties assimilating and integrating the acquired business, disruption of our ongoing business by diverting resources and distracting management, not realizing the expected benefits of the acquisition, and potential dilution of stockholders’ ownership in the event we issue equity securities to complete an acquisition. We cannot assure you that we will be able to identify or consummate any future acquisition on favorable terms, or at all. If we do pursue an acquisition, it is possible that we not realize the anticipated benefits from the acquisition or that the financial markets or investors will negatively view the acquisition. Even if we successfully complete an acquisition, it could harm our business, results of operations and financial condition.

 

We may not be able to secure additional financing in a timely manner, or at all, to meet our future capital needs, which could impair our ability to execute on our business plan.

 

We believe that our existing cash, cash equivalents and short-term investments, expected cash flow from operations and net proceeds of this offering, will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings for other reasons. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. We may not be able to secure additional debt or equity financing in a timely manner, or at all.

 

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Risks Related to Regulation

 

The medical loss ratio requirements that are a part of Healthcare Reform could harm our business.

 

Healthcare Reform contains provisions requiring insurance carriers to maintain specified minimum medical loss ratios. Medical loss ratio refers to the percentage of premium revenue that an insurance company spends on providing health care and improving the quality of care. The medical loss ratio requirements for individual health insurance are effective for calendar year 2011 and later years and, among other things, require health insurance companies to spend 80% of their premium revenue on reimbursement for clinical services and activities that improve health care quality. The medical loss ratio requirement for Medicare Advantage plans is 85% and goes into effect in 2014. In response to the individual medical loss ratio requirements, many insurance carriers have significantly reduced commissions in connection with the sale of these plans. If insurance carriers reduce or further reduce our commissions, including base commission rates or override commissions, in response to medical loss ratio requirements, or as a result of any other aspect of Healthcare Reform, our business, results of operations and financial condition would be harmed. In addition, the medical loss ratio requirements may cause certain insurance carriers to limit the geographies in which they sell health insurance or exit certain markets altogether, to place less reliance on agents and brokers to distribute their plans or to limit their health insurance offerings in any number of other ways, each of which would harm our business, results of operations and financial condition.

 

If we fail to comply with the numerous laws and regulations that are applicable to our business, our results of operations would be harmed.

 

The health insurance industry is heavily regulated by each state in the United States. For instance, state insurance laws require us to maintain a valid license in each state in which we transact health insurance business and further require that we adhere to marketing and sales, documentation and administration practices specific to that state. In addition, each employee who transacts health insurance business on our behalf must maintain a valid agent license in one or more states. Because we do business in all 50 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, revoke and not renew licenses to transact insurance business;

 

   

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

 

   

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

 

   

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

 

   

determine which entities can be paid commissions from insurance carriers and the circumstances under which they may be paid;

 

   

regulate the content of insurance-related advertisements, including websites, and other marketing practices;

 

   

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

 

   

impose fines and other penalties for violations of laws or regulations; and

 

   

impose continuing education requirements on agents and brokers.

 

Due to the complexity, periodic modification and differing interpretations of insurance laws and regulations, we may discover that we are not always in compliance with them. Failure to comply with insurance laws, regulations and guidelines or other laws and regulations applicable to our business could result in significant liability, additional department of insurance licensing requirements, the revocation of licenses in a particular jurisdiction and/or our inability to sell health insurance plans, which could significantly increase our operating expenses and otherwise harm our business, results of operations and financial condition.

 

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We are also subject to additional insurance regulatory risks because we use the internet as a distribution platform. In many cases, it is not clear how existing insurance laws and regulations apply to internet-related health insurance advertisements and transactions. To the extent that new laws or regulations are adopted that conflict with the way we conduct our business, or to the extent that existing laws and regulations are interpreted in a way that is adverse to us, our business, results of operations and financial condition would be harmed.

 

Additionally, we have received, and may in the future receive, inquiries from regulators regarding our marketing and business practices to ensure that they comply with Healthcare Reform, CMS’ Medicare Marketing Guidelines and related laws and regulations. We typically respond by explaining how we believe we are in compliance with relevant regulations or may modify our practices in connection with the inquiry. Any modification of our marketing or business practices in response to future regulatory inquiries could harm our business, results of operations or financial condition. Generally, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or reputation in other jurisdictions due to a requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions in which we transact business. Even if the allegations in any regulatory or other action against us are proven false, any surrounding negative publicity could harm consumer, customer, marketing partner or insurance carrier confidence in us, which could significantly damage our brand and harm our business, results of operations and financial condition.

 

The laws and regulations governing the advertising, offer, sale and purchase of health insurance are subject to change, and future changes may be adverse to our business. For example, a long-standing provision in each state’s law that we believe is advantageous to our business is that once health insurance premiums are set by the carrier and approved by state regulators, they are fixed and not generally subject to negotiation or discounting by insurance companies or agents. Additionally, state laws generally prohibit insurance carriers, agents and brokers from providing financial incentives, such as rebates, to their members in connection with the sale of health insurance. As a result, we do not currently compete with insurance carriers or other agents and brokers on the price of the health insurance plans offered on our website. If these regulations change, we could be forced to reduce prices or provide rebates or other incentives for the health insurance plans sold through our exchange platform. States have adopted, and will continue to adopt, new laws and regulations in response to Healthcare Reform. It is too early to predict how these new laws and regulations will impact our business, but in some cases such laws and regulations could harm our business.

 

We are subject to communications and telemarketing laws governing telephonic communications, which subject us to penalties if we are unable to fully comply with such laws.

 

We market insurance products through various distribution media, including direct mail, online marketing, telemarketing and other methods. Telemarketing of products and services is subject to Federal and state telemarketing regulations, including the Federal Trade Commission’s, or the FTC’s, Telemarketing Sales Rule, or TSR, the Federal Communication Commission’s, or the FCC’s Telephone Consumer Protection Act of 1991, or the TCPA, and the FCC’s implementing regulations, as well as various state telemarketing laws and regulations. The TCPA broadly regulates outbound calls, including live operator calls. Among other things, this limits the hours during which telemarketers may call consumers and restricts the use of automated telephone dialing equipment to call certain telephone numbers unless prior express consent has been obtained. The Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and FTC regulations thereunder prohibit deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and state attorneys general have authority to seek injunctive relief and consumer redress for telemarketing activities deemed to be “unfair or deceptive acts or practices.” The FTC’s TSR applies to both inbound and outbound calls and the FTC’s 2003 Amendment to the TSR created a national “Do-Not-Call” Registry, which became effective in October 2003. Certain states have enacted separate “Do-Not-Call” Registries.

 

Online marketing and, in particular, sending commercial electronic mail is regulated under the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, which requires senders of commercial electronic mail to, among other things, include various disclosures in their commercial

 

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emails. Both the FTC and state attorneys general have authority to seek injunctive relief and statutory damages under the CAN-SPAM Act. The CAN-SPAM Act also permits actions by providers of Internet access service for injunctive relief and damages against violators of the act. Compliance with these Federal and state regulations, where applicable, is generally our responsibility, and we could be subject to a variety of enforcement and private actions for failure to comply with such regulations.

 

We may not be successful in performing services pursuant to Federal or state government contracts, which may limit our ability to execute on our growth strategy.

 

An important element of our strategy is to provide services to government entities in connection with Healthcare Reform and its requirement that states establish health insurance exchanges. While we are involved in a small number of government contracts as a contractor, we have limited experience with government contracting. Generally, government contracts are offered through a competitive bidding process. A number of entities may compete for the award of any particular government contract or related subcontract, and we may not be able to outbid our competitors. Even if we are awarded a contract, unsuccessful bidders may protest or challenge the contract award, which could result in our losing the contract or having the scope of the contract scaled back. Complicated rules apply to doing business with the Federal and state governments, including the Federal Acquisition Regulation, or FAR, special FAR agency supplements and state procurement laws and regulations, compliance with which may be costly and time consuming. Pursuing government contracts is complicated further by the existence of Federal and state conflicts of interest laws that may prohibit utilizing government health benefit consultants as brokers or finders in securing such contracts. In addition, various restrictions under and relating to these government contracts may require us to restructure aspects of our operations to perform under a contract, which may be difficult or impossible. As a government contractor, we are subject to audits, cost reviews and investigations by oversight agencies.

 

We may not be successful in our effort to enter into government contracts, and even if we are, we may face difficulty and unanticipated expense in complying with applicable laws, regulations and contractual requirements, which may change over time. Further, to the extent our channel partners provide consulting services to government entities, we may be required to comply with applicable Federal and state conflicts of interest laws in connection with government contracts entered into upon referrals from such channel partners. If we are not successful in our government contracting efforts, our business, results of operations and financial condition could be harmed. In addition, if we fail to comply with the terms of one or more of our government contracts or applicable laws and regulations, we could be suspended or barred from future government projects for a significant period of time, as well as face civil or criminal fines and penalties.

 

The government contracts we have entered into for the use of our services have short terms. Governmental entities may choose not to renew our contracts with them for any reason, including as a result of performance of the contract, competing solutions or a change in the governmental entity’s preferences. Furthermore, the contracts may be terminated as a result of our performance or as a result of the performance or actions of third parties involved in the contracts, such as subcontractors. Any government contract that violates Federal or state conflicts of interest laws may be voidable or otherwise unenforceable. The termination or nonrenewal of any of our government contracts could harm our business, results of operations and financial condition and make it more difficult for us to successfully bid on future government contracting opportunities.

 

Risks Relating to this Offering, the Securities Markets and Ownership of Our Common Stock

 

We cannot assure you that an active, liquid market will develop for our common stock or what the market price of our common stock will be.

 

Before this offering, there was no public trading market for our common stock, and we cannot assure you that one will develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at an attractive price or at all. We cannot predict the prices at which our common stock will trade. The initial public offering price of our common stock will be determined by negotiations with the underwriters and may not bear any relationship to the market price at which

 

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our common stock will trade after this offering or to any other established criteria of the value of our business.

 

The price of our common stock may be volatile and the value of your investment could decline.

 

The trading price of our common stock following this offering may fluctuate substantially. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

significant volatility in the market price and trading volume of companies in our industry;

 

   

actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

   

whether our results of operations meet the expectations of securities analysts or investors;

 

   

actual or anticipated changes in the expectations of investors or securities analysts;

 

   

publication of research reports about us, our competitors or our industry, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

   

actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

 

   

threatened or actual litigation involving us, our industry or both;

 

   

regulatory developments in the United States that may affect or may be perceived to affect our business;

 

   

general economic conditions and trends;

 

   

major catastrophic events;

 

   

sales of large blocks of our stock; or

 

   

departures of key personnel.

 

In addition, if the market for health care stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, results of operations or financial condition. The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. If our stock price is volatile, we may become the target of securities litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources from our business. This could have a material adverse effect on our business, results of operations and financial condition.

 

Sales of outstanding shares of our common stock into the market in the future could cause the market price of our common stock to drop significantly, even if our business is doing well.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the contractual lock-up and other legal restrictions on resale lapse, the trading price of our common stock could decline. After this offering, approximately             shares of common stock will be outstanding. Of these shares, the             shares of our common stock to be sold in this offering will be freely tradable, unless such shares are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act.

 

Our directors, officers, employees and current stockholders are subject to a 180-day contractual lock-up that prevents them from selling their shares prior to the expiration of this lock-up period. The lock-up is subject to extension under certain circumstances. Morgan Stanley & Co. LLC and Barclays Capital Inc. may, in their sole discretion, permit shares subject to this lock-up to be sold prior to its expiration. For additional information, see “Shares Eligible for Future Sale—Lock-Up Agreements.”

 

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At various times after the lock-up agreements pertaining to this offering expire, up to an additional             shares will be eligible for sale in the public market,             of which are, based on the number of shares outstanding as of March 31, 2012, held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, and various vesting agreements.

 

The 3,050,438 shares underlying stock options that were outstanding as of March 31, 2012 will also become eligible for sale in the public market to the extent permitted by the provisions of various option agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. In addition, as of March 31, 2012, 152,809 shares of common stock were reserved for future issuance under our stock plans, and upon the consummation of this offering, options to purchase approximately 1,800,000 shares of our common stock will be reserved for future issuance under our 2012 Equity Incentive Plan. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline. For additional information, see “Shares Eligible for Future Sale.”

 

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution.

 

If you purchase shares of our common stock in this offering, you will experience substantial and immediate dilution of $         per share based on an assumed initial public offering price of $         per share, which is the midpoint of the range as reflected on the cover page of this prospectus, because the price that you pay will be substantially greater than the net tangible book value per share of the common stock that you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our capital stock. In addition, investors who purchase shares in this offering will contribute approximately     % of the total amount of equity capital raised by us through the date of this offering but will only own approximately     % of our outstanding shares. In addition, we have issued options to acquire common stock at prices significantly below the assumed initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering.

 

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock could be influenced by any research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event securities or industry analysts cover our company and one or more of these analysts downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

 

Insiders will continue to have substantial control over us after this offering, which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Our directors, executive officers and each of our stockholders who own greater than 5% of our outstanding common stock and their affiliates, in the aggregate, will own approximately     % of the outstanding shares of our common stock after this offering, based on the number of shares outstanding as of March 31, 2012. As a result, these stockholders, if acting together, will be able to influence or control matters requiring approval by our stockholders, including the election of directors and the approval of mergers, acquisitions or other strategic transactions. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our stockholders of an opportunity to

 

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receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.

 

We have broad discretion in the use of the net proceeds that we receive in this offering.

 

The principal purposes of this offering are to raise additional capital, to create a public market for our common stock and to facilitate our future access to the public equity markets. Other than the repayment of any outstanding amounts under our term loan with Silicon Valley Bank, we have not determined the specific allocation of the net proceeds that we receive in this offering. We intend to use the balance of the net proceeds that we receive in this offering for general corporate purposes, including working capital. Accordingly, our management will have broad discretion over the specific use of the net proceeds that we receive in this offering and might not be able to obtain a significant return, if any, on investment of these net proceeds. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds. If we do not use the net proceeds that we receive in this offering effectively, our business, results of operations and financial condition could be harmed.

 

We do not intend to pay dividends for the foreseeable future.

 

While we have declared and paid dividends on shares of our preferred and common stock in the past, we intend to retain any earnings to finance the future operation and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our loan and security agreement with Silicon Valley Bank restricts our ability to pay dividends without their prior consent. As a result, you may only receive a return on your investment in our common stock if the market price of our common stock increases and you sell your shares.

 

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

 

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the New York Stock Exchange and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations.

 

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.

 

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However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not “emerging growth companies,” including not being required to comply with the independent auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of these reporting exemptions until we are no longer an “emerging growth company.”

 

We will remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of December 31 of any year prior to that time, we would cease to be an “emerging growth company” as of the following June 30.

 

We also expect that being a public company and these new rules and regulations will make it more expensive for us to maintain director and officer liability insurance. While we currently maintain director and officer liability insurance, we intend to increase policy limits and expand coverage upon the completion of this offering and we may be required to incur substantially higher costs to increase such coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

As a result of the disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and results of operations.

 

Provisions in our certificate of incorporation and bylaws and under Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

 

   

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

prohibit stockholders from calling a special meeting of our stockholders;

 

   

provide that our board of directors is expressly authorized to make, alter or repeal our bylaws; and

 

   

establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

 

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change of control of our company.

 

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Any provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Compensation Discussion and Analysis.” Forward-looking statements include all statements that are not historical facts and can be identified by terms such as “anticipates,” “believes,” “could,” “seeks,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts, “projects,” “should,” “will,” “would” or similar expressions and the negatives of those terms. These forward-looking statements include, but are not limited to, statements concerning the following:

 

   

our expectations regarding our financial performance, including our revenue, expenses, and operations;

 

   

anticipated trends and impact of regulatory reform on our business and the industry in which we operate;

 

   

the effects of increased competition in our market;

 

   

our ability to anticipate market needs or develop new and enhanced services to meet those needs;

 

   

our ability to effectively manage growth and expand our operations and infrastructure;

 

   

the attraction and retention of qualified employees and key personnel;

 

   

the ability of our channel partner strategy to accelerate or increase future member enrollment growth;

 

   

our ability to capture market opportunities outside of the Medicare exchange market;

 

   

our ability to protect our users’ information and adequately address privacy concerns; and

 

   

our anticipated cash needs and our estimates regarding our capital requirements and need for additional liquidity.

 

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

 

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

This prospectus also contains estimates and other information concerning our industry, including market size and growth rates, which are based on industry publications, surveys and forecasts from various third-party sources. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. Although we believe the data from these third-party sources is reliable, information about market-position, market-opportunity and market-size and projections, assumptions and

 

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estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the third-parties and by us.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our sale of             shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $         million, or $         million if the underwriters’ over-allotment option is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $         million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.

 

The principal purposes of this offering are to increase our financial flexibility, increase our visibility in the marketplace and, with respect to this offering, create a public market for our common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for these proceeds or the amounts that we plan to use for any particular purpose. However, we currently intend to use these proceeds primarily for general corporate purposes, which may include working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may use a portion of the net proceeds to repay some or all of the amounts outstanding under our debt facility with Silicon Valley Bank. In addition, we may use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments. We will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

 

DIVIDEND POLICY

 

While we have declared and paid cash dividends on our preferred and common stock in the past, following this offering we currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. In addition, the terms of our loan and security agreement with Silicon Valley Bank currently prohibit us from paying cash dividends without prior consent. Any future determination to declare dividends will be made at the discretion of our board of directors, subject to applicable laws and compliance with covenants under our loan and security agreement that restrict or limit our ability to pay dividends without Silicon Valley Bank’s prior written consent, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth our consolidated cash and cash equivalents and short-term investments and capitalization as of March 31, 2012:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into 14,749,992 shares of common stock upon the completion of this offering; and

 

   

on a pro forma as adjusted basis to give effect to the pro forma matters described above and to reflect our receipt of the net proceeds from our sale of             shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

     As of March 31, 2012
     Actual     Pro Forma     Pro Forma  As
Adjusted(1)
                  

Cash and cash equivalents and short-term investments

   $ 13,261      $ 13,261     
  

 

 

   

 

 

   

 

Debt and capital lease obligations

     10,168        10,168     

Convertible preferred stock, $0.001 par value: 14,750,000 shares authorized, 14,749,992 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted

     22,539            

Stockholders’ deficit:

      

Common stock, $0.001 par value; 20,475,000 shares authorized, 1,546,753 shares issued and outstanding, actual;             shares authorized, 16,296,745 shares issued and outstanding, pro forma; and             shares authorized,             shares issued and outstanding, pro forma as adjusted

     1        16     

Additional paid-in capital

     2,110        24,634     

Accumulated deficit

     (37,433     (37,433  
  

 

 

   

 

 

   

 

Total stockholders’ deficit

     (35,322     (12,783  
  

 

 

   

 

 

   

 

Total capitalization

   $ (2,615   $ (2,615  
  

 

 

   

 

 

   

 

 

(1)   A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the range set forth on the front cover of this prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us.

 

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The number of shares of our common stock set forth in the table above excludes:

 

   

3,050,438 shares of common stock issuable upon the exercise of options outstanding as of March 31, 2012, with a weighted-average exercise price of $1.43 per share;

 

   

948,011 shares of common stock that may be issuable upon the exercise of an outstanding warrant to purchase common stock, with an exercise price of $10.00 per share;

 

   

13,750 shares of common stock issuable upon the exercise of options granted subsequent to March 31, 2012, with an exercise price of $9.15 per share; and

 

   

1,939,059 unallocated shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of (i) 139,059 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan (not including the options to purchase 13,750 shares of common stock granted subsequent to March 31, 2012), and (ii) 1,800,000 shares of common stock reserved for future issuance under our 2012 Equity Incentive Plan, which will become effective in connection with this offering, and shares that become available under our 2012 Equity Incentive Plan, pursuant to provisions thereof that automatically increase the share reserves under this plan each year, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

 

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of common stock in this initial public offering and the pro forma as adjusted net tangible book value per share of common stock immediately after this offering.

 

As of March 31, 2012, our net tangible book value was approximately $         million, or $         per share of common stock. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities, divided by the shares of common stock outstanding at March 31, 2012, assuming the conversion of all outstanding shares of our convertible preferred stock into common stock. The net tangible book value excludes deferred offering costs of $        .

 

After giving effect to our sale of             shares of common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at March 31, 2012 would have been $         , or $         per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $         per share to existing stockholders and an immediate dilution of $        per share to new investors purchasing shares in this offering.

 

The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $                

Net tangible book value per share as of March 31, 2012

   $                   

Increase per share attributable to this offering

     

Pro forma as adjusted net tangible book value per share after this offering

     
     

 

 

 

Net tangible book value dilution per share to new investors in this offering

      $     
     

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, would increase (decrease) our pro forma net tangible book value, as adjusted to give effect to this offering, by $         per share and the dilution in pro forma as adjusted net tangible book value per share to new investors in this offering by $         per share, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

 

If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value per share of our common stock after giving effect to this offering would be $         per share, and the dilution in net tangible book value per share to investors in this offering would be $         per share.

 

The following table summarizes, on a pro forma as adjusted basis as of March 31, 2012, assuming the conversion of all outstanding shares of our convertible preferred stock into common stock, the total number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering at the initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses:

 

     Shares Purchased     Total Consideration     Average
Price

Per  Share
 
     Number    Percent     Amount      Percent    

Existing stockholders

                     $                                 $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

               $                  $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

 

To the extent that any outstanding options are exercised, new investors will experience further dilution.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

You should read the following selected historical consolidated financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included in this prospectus.

 

The consolidated statements of operations data for the years ended June 30, 2009, 2010 and 2011 and the consolidated balance sheet data as of June 30, 2010 and 2011 are derived from our audited consolidated financial statements included in this prospectus. The consolidated statements of operations data for the years ended June 30, 2007 and 2008 and the consolidated balance sheet data as of June 30, 2007, 2008 and 2009 are derived from our audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the nine months ended March 31, 2011 and 2012, and the consolidated balance sheet data as of March 31, 2012, are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited financial information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results to be expected in the future.

 

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00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Year Ended June 30,     Nine Months Ended
March 31,
 
    2007     2008     2009     2010     2011     2011     2012  
   

(in thousands, except share and per share amounts)

 

Consolidated Statements of Operations Data:

             

Revenue:

             

Commissions

  $ 1,879      $ 11,789      $ 16,933      $ 43,646      $ 50,451      $ 35,716      $ 48,411   

Other

    358        631        779        370        676        442        468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    2,237        12,420        17,712        44,016        51,127        36,158        48,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Service center

    3,073        5,584        18,117        14,994        18,551        15,050        19,955   

Sales and marketing

    2,870        4,757        6,768        7,290        10,134        6,346        10,856   

Technology

    817        1,549        2,096        3,060        3,195        2,242        3,264   

General and administrative

    1,072        1,705        5,072        5,464        6,728        5,043        5,974   

Restructuring expense

                         314                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    7,832        13,595        32,053        31,122        38,608        28,681        40,049   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (5,595     (1,175     (14,341     12,894        12,519        7,477        8,830   

Interest income

    18        256        58        28        53        35        30   

Interest expense

    (56     (38     (80     (69     (110     (81     (323
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (5,633     (957     (14,363     12,853        12,462        7,431        8,537   

Provision for income taxes

    8        9        2        346        2,505        575        3,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (5,641   $ (966   $ (14,365   $ 12,507      $ 9,957      $ 6,856      $ 5,224   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(1)(2):

             

Basic

  $ (5,641   $ (966   $ (14,365   $ 280      $ 676      $ 395      $ (30,345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (5,641   $ (966   $ (14,365   $ 821      $ 1,139      $ 635      $ (30,345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(1):

             

Basic

  $ (125.40   $ (13.15   $ (72.01   $ 0.67      $ 0.47      $ 0.28      $ (19.95
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (125.40   $ (13.15   $ (72.01   $ 0.64      $ 0.44      $ 0.27      $ (19.95
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders(1):

             

Basic

    44,983        73,432        199,495        414,615        1,424,511        1,394,005        1,521,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    44,983        73,432        199,495        1,288,140        2,569,722        2,378,444        1,521,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividend declared per common share

  $      $      $      $      $      $      $ 2.25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share attributable to common stockholders (unaudited)(1):

             

Basic

          $          $     
         

 

 

     

 

 

 

Diluted

          $          $     
         

 

 

     

 

 

 

Pro forma weighted-average shares used to compute pro forma net income per share attributable to common stockholders (unaudited)(1):

             

Basic

             
         

 

 

     

 

 

 

Diluted

             
         

 

 

     

 

 

 

Other Financial and Operational Data:

             

Active core members (end of period)(3)

    1,800        32,300        97,600        126,000        161,700        163,000        213,900   

Adjusted EBITDA(4)

  $ (5,295   $ (666   $ (13,259   $ 14,819      $ 14,913      $ 9,270      $ 11,206   

 

(1)   See Note 13 to our consolidated financial statements for further details on the calculation of basic and diluted net income (loss) per share attributable to common stockholders and for a discussion and reconciliation of pro forma net income per share attributable to common stockholders.
(2)   The net income (loss) attributable to common stockholders for the nine months ended March 31, 2012 includes a $35.6 million adjustment for dividends distributed to preferred stockholders during the period. See Note 13 to our consolidated financial statements for further details regarding the adjustments applied in the calculation of basic and diluted net income (loss) per share attributable to common stockholders.
(3)   See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics” for a discussion of active core members.
(4)   See “Adjusted EBITDA” below for a discussion regarding the use of adjusted EBITDA as a financial measure and for a reconciliation to net income (loss), the most directly comparable GAAP financial measure.

 

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Stock-based compensation included in the statements of operations data above was as follows:

 

00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Year Ended June 30,     Nine Months Ended
March 31,
 
    2007     2008     2009     2010     2011     2011     2012  
   

(in thousands)

 

Service center

  $ 2      $ 3      $ 3      $ 5      $ 26      $ 19      $ 172   

Sales and marketing

            3        17        19        29        52        34        364   

Technology

    2                5                6                8                30                23                165   

General and administrative

    2        28        41        52        142        81        291   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 9      $ 53      $ 69      $ 94      $ 250      $ 157      $ 992   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    As of June 30,     As of
March 31,
2012
 
    2007     2008     2009     2010     2011    
    (in thousands)  

Consolidated Balance Sheet Data:

           

Cash and cash equivalents and short-term investments

  $ 58      $ 11,766      $ 9,833      $ 20,612      $ 38,770      $ 13,261   

Working capital (deficit)

    (2,658     9,553        (6,181     6,531        17,528        (8,994

Total assets

    934        13,942        14,082        25,527        44,496        21,492   

Total indebtedness

    2,000        1,034        1,376        1,189        507        10,168   

Convertible preferred stock

           22,539        22,539        22,539        22,539        22,539   

Total stockholders’ deficit

    (2,016     (11,682     (25,925     (12,869     (2,538     (35,322

 

Adjusted EBITDA

 

To provide investors with additional information regarding our financial results, we have disclosed in the table above and within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure.

 

We have included adjusted EBITDA in this prospectus 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 adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors.

 

Our use of 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. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements for such replacements or for new capital expenditures;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

 

   

adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

 

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Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of adjusted EBITDA to net income (loss) for each of the periods indicated:

 

    Year Ended June 30,     Nine Months Ended
March 31,
 
         2007               2008               2009               2010               2011          2011     2012  
   

(in thousands)

 

Reconciliation of Adjusted EBITDA:

             

Net income (loss)

  $ (5,641   $ (966   $ (14,365   $ 12,507      $ 9,957      $ 6,856      $ 5,224   

Adjustments:

             

Depreciation and amortization

          291              456           1,013           1,831           2,144           1,636           1,384   

Provision for income taxes

    8        9        2        346        2,505        575        3,313   

Stock-based compensation

    9        53        69        94        250        157        992   

Interest income

    (18     (256     (58     (28     (53     (35     (30

Interest expense

    56        38        80        69        110        81        323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (5,295   $ (666   $ (13,259   $ 14,819      $ 14,913      $ 9,270      $ 11,206   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this prospectus. Our fiscal year end is June 30 and our fiscal quarters end on September 30, December 31, March 31 and June 30. Our fiscal years ended June 30, 2009, 2010 and 2011 are referred to as fiscal 2009, fiscal 2010 and fiscal 2011, respectively.

 

Overview

 

Extend Health is a leading provider of health benefit management services and operates the largest private Medicare exchange in the United States. As a technology leader in the health insurance industry, we are redefining the manner in which health benefits are offered and delivered. Our solutions create cost savings for our employer clients and provide our individual customers with improved choice and control over their health benefits. Our core solution, ExtendRetiree, enables our employer clients to transition their retirees to individual, defined contribution health plans that provide individuals with a tax-free allowance or “contribution” to spend on their healthcare at an annual cost that the employer controls versus group-based, defined benefit health plans that provide groups of individuals with defined healthcare benefits such as doctor visits, hospitalization and prescription drugs at an uncertain annual cost. ExtendRetiree allows our clients to provide their post-65 retirees with the same or better healthcare benefits at a lower cost to our clients. To date, we have provided an effective alternative to traditional group Medicare health plans for over 150 private and public sector clients, including over 30 Fortune 500 companies such as Caterpillar, General Motors, Honeywell and Whirlpool, and we have helped hundreds of thousands of retirees and their dependents navigate to, evaluate and choose a health plan using our proprietary exchange platform and decision support tools. In addition, we are developing and expanding our solutions to address the pre-65 retiree, or early retiree, and active employee exchange opportunities for our existing and prospective clients.

 

Substantially all of our revenue is generated from commissions paid to us by insurance carriers for health insurance policies issued through our enrollment services. We refer to an application that has been received from a customer and transmitted to an insurance carrier as an enrollment, or a submitted application. Under our contracts with insurance carriers, once an application has been accepted by an insurance carrier and a policy issued, we are generally entitled to receive commissions for five or more years from the policy effective date, provided that the policy is not cancelled during that time period. As a result, the majority of our revenue is recurring in nature and grows in direct proportion to the number of new policies that we add each year. The majority of our revenue is derived from Medicare-related policies, or core policies, including Medicare supplement and Medicare Advantage policies, and we refer to a customer who is enrolled in a core policy as a core member. We also receive commissions for Medicare Part D prescription drug policies, which typically accompany Medicare supplement policies, as well as for enrollments in ancillary health insurance products such as dental and vision plans.

 

We have experienced significant revenue growth over the past three years, recognizing revenue of $17.7 million, $44.0 million and $51.1 million in fiscal 2009, 2010 and 2011, respectively. Our substantial revenue growth from fiscal 2009 to fiscal 2010 was driven by the successful transition of a group of General Motors’ retirees in fiscal 2009, resulting in a 202% year-over-year increase in active core members.

 

To date, we have primarily utilized our direct sales channel to acquire new customers through contractual relationships we establish with employers that provide us with access to large pools of retirees. Starting in fiscal 2011, we formally launched an additional sales channel focused on partnerships with national and regional benefits consultants and brokers. These partners co-market and, in certain circumstances, jointly promote our services to potential employer clients, for which we pay a fee. We anticipate that this channel will accelerate our enrollment growth and contribute a significantly larger proportion of our total enrollments in future years.

 

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Our business of marketing Medicare plans is subject to seasonal fluctuations. The benefits enrollment period for a majority of private employers occurs during October through December of each year for a January 1 effective date, and this period also coincides with the timing of the annual enrollment period, or AEP, when Medicare-eligible individuals can make changes to their Medicare Advantage or Medicare Part D prescription drug coverage for the following year. As a result, the majority of our new enrollment activity has historically occurred during the three months ended December 31, with 87% and 75% of our new enrollments in fiscal 2010 and 2011 occurring during these periods, respectively.

 

To accommodate the higher enrollment volumes during the AEP, we hire additional seasonal benefit advisors to supplement our full-time benefit advisor workforce. The compensation costs associated with our benefit advisors are expensed as incurred, which results in the majority of the AEP-related enrollment costs being recognized during our second fiscal quarter ended December 31. However, we do not begin recognizing the associated commission revenue until our third fiscal quarter ended March 31 when the underlying policies become effective. As our business matures, other seasonality trends may develop and the existing seasonality and consumer behavior that we experience may change. In particular, public sector employers are generally more inclined to opt for transition periods outside of the AEP, or an off-cycle period, as their benefits effective date typically coincides with the beginning of their fiscal year, which is often not January 1. As we continue to expand our penetration into the public sector, we expect to see more of our enrollment volumes distributed throughout the year, which will lessen the impact of seasonality on our results of operations.

 

We have achieved significant growth over the past three years by serving the needs of our core market, which we define as post-65 retirees who are currently covered by employer-sponsored insurance. We believe that there is significant room for growth in our core market as we estimate that there are 12 million Medicare-eligible retirees with employer-sponsored health insurance in the public and private sectors. While our core market has historically consisted of private sector employers, we see significant opportunity in the public sector as states, municipalities and other government sector employers face severe economic pressures and are therefore seeking alternative cost-saving measures. We believe we are well positioned to capture additional market share in this segment with our experience managing the insurance transition process and our thought leadership in this innovative area of health benefits management.

 

We were incorporated in April 2002 as a Delaware limited liability company, and in July 2007, we became Extend Health, Inc., a Delaware corporation. Since the fourth quarter of fiscal 2009, we have funded our operations primarily with cash flows from operations and, to a lesser extent, working capital and financing arrangements.

 

Opportunities, Challenges and Risks

 

We believe that the growth of our business and our future success are dependent upon many factors. While each of these factors presents significant opportunities for us, they also pose important challenges and risks that we must successfully address in order to sustain the growth of our business and improve our results of operations.

 

Increase enrollments through investments in sales and marketing. In order to acquire new employer clients and capitalize on the growth of the retail Medicare market, we will need to grow our sales and marketing teams, rely more heavily on partners to source new business, and significantly increase our investment in direct consumer marketing campaigns. We believe there is substantial opportunity to increase our market share through these channels. However, the majority of the investments that we make in our sales and marketing efforts will occur well in advance of the realization of financial benefits from such investments, such that it may be difficult for us to determine if we are efficiently allocating our resources in this area. Therefore, the investments that we intend to make to strengthen our sales and marketing efforts may not result in an increase in revenue, which would negatively impact our results of operations.

 

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Maintain and expand our strong insurance carrier partner relationships. Our growth is dependent, in part, on our ability to offer a large selection of health plans in order to attract and retain new members. We have partnered with over 75 insurance carriers to provide a robust and competitive plan offering. While we have relationships with a large number of insurance carriers, the majority of our revenue is derived from the commissions we receive from a small number of carriers as a result of continuing consolidation in the healthcare industry and the presence of dominant national carriers. For example, in fiscal 2011, our top two insurance carriers, Mutual of Omaha and UnitedHealthcare, accounted for an aggregate of 58% of our commission revenue.

 

The commissions we receive from insurance carriers can vary widely, and therefore, the relative concentration of enrollments across our carriers can have a significant impact on our commission revenue in any given period. For example, in August 2011, one of our largest carrier partners discontinued the distribution of Medicare supplement policies through all of their indirect distribution vendors. As a result, since August 2011, new Medicare supplement enrollments have shifted to other insurance carriers that pay us lower commission rates on average. Compared to historical weighted-average commission rates, we estimate that future weighted-average commission rates for new Medicare supplement enrollments will decline by 20% to 25% as a result of this change in carrier mix. While this change in carrier mix will likely result in lower commissions on new enrollments in Medicare supplement policies on a prospective basis, our future commission revenue will also be impacted by a number of other factors, including ongoing shifts in carrier and product mix, geographic distribution of our customers and premiums that these insurance carriers charge customers for their policies.

 

Compete effectively. We operate in an intensely competitive market. We have a number of competitors, some of which have numerous advantages, including greater financial resources, broader offerings, stronger relationships with employers and greater name recognition within the health insurance industry, which may put us at a competitive disadvantage. Despite these advantages, we believe that we have historically competed favorably against our larger competitors due to our extensive experience transitioning retirees of large employers from group to individual health plans and the competitive advantage that our proprietary technology provides.

 

Develop innovative solutions in response to healthcare reform. The health insurance industry is evolving rapidly in response to regulatory reform. We believe there will be substantial opportunities to capitalize on these changes by continuing our thought leadership in this arena and developing next-generation solutions for healthcare management. In March 2010, the Federal government enacted significant reforms to healthcare legislation through the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010, which we refer to collectively as Healthcare Reform. While we believe we are well-positioned to take advantage of these evolving industry dynamics, if we cannot expand our solutions in response to Healthcare Reform, we may not be able to take advantage of the significant market opportunity that we believe Healthcare Reform presents.

 

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Key Business Metrics

 

In addition to traditional financial metrics, we rely upon the following key business metrics to evaluate our business performance, develop financial forecasts and facilitate long-term strategic planning:

 

$000,000 $000,000 $000,000 $000,000 $000,000
     As of June 30,     As of March 31,  
     2009     2010     2011     2011     2012  

Active core members

        97,600           126,000           161,700        163,000        213,900   

Pending core members

     800        2,000        10,500        1,500        7,900   
     Year Ended June 30,     Nine Months Ended
March 31,
 
     2009     2010     2011     2011     2012  

Core applications submitted

       73,600          50,000          60,700          49,800          61,800   

Sales channel mix

          

Direct

     100     98     70     81     47

Partner

            2     28     17     51

Retail

                   2     2     2

Adjusted EBITDA(1) (in thousands)

   $ (13,259   $ 14,819      $ 14,913      $ 9,270      $ 11,206   

 

(1)   See “Selected Consolidated Financial Data—Adjusted EBITDA” above for a discussion regarding the use of adjusted EBITDA as a financial measure and for a reconciliation to net income (loss), the most directly comparable GAAP financial measure.

 

Core Members. We define a core member as a customer who is enrolled in a Medicare Advantage or Medicare supplement policy. A core member is considered to be active when their policy has been confirmed by an insurance carrier and has reached its policy effective date, at which point we are entitled to receive commissions. A member is considered to be pending when their policy has not yet been confirmed by an insurance carrier or has not yet reached its policy effective date. Not all pending members will become active, as the individual enrollee may subsequently elect to enroll in an alternative plan or the carrier may decline the pending member’s application. However, based on our historical experience over the past three fiscal years, we expect more than 95% of pending members to convert to active members. The number of core members grows each period by the number of new core policies that we add each year, net of policy cancellations, and is an important indicator of our expected revenue, as we generally receive a recurring commission for five or more years from the policy effective date, provided that the policy is not cancelled.

 

Core Applications Submitted. A core application submitted refers to a completed enrollment for a new Medicare Advantage or Medicare supplement policy that has been transmitted to an insurance carrier. Typically, an application is processed in the quarter preceding the quarter in which the policy becomes effective. For example, applications processed during the annual enrollment period for policies with a January 1 effective date will be reported as core applications submitted during the quarter ended December 31 and as pending core members as of December 31, but will be reflected in the number of active core members as of January 1, when the policy becomes effective.

 

The number of core applications submitted correlates closely with our enrollment-related costs, as we adjust our staffing levels to meet demand and pay sales incentives and other expenses related to the enrollment activity. Measuring our core applications submitted enables us to estimate our core member growth, evaluate the effectiveness of our enrollment operations and more accurately forecast our expenses.

 

Sales Channel Mix. Sales channel mix represents the percentage of core applications submitted that were sourced through our direct, partner or retail channels. To date, the vast majority of our enrollments have been for individuals sourced through employer clients that we acquired directly through the efforts of our internal field sales organization. In 2011, we began utilizing our network of partners to identify, engage and acquire new employer clients, and we expect this partner channel to grow significantly in the future as a percentage of core applications submitted. Our retail strategy is focused on acquiring customers through investment in direct marketing, paid search, other consumer-targeted marketing programs and our channel partners.

 

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Sales channel mix will be an important metric as the cost to acquire new customers varies significantly by channel. For enrollments sourced through the partner channel, we pay a fee that can be as much as 25% of the commission revenue we receive for those enrollments. Additionally, consumer marketing campaigns related to our retail channel require a larger upfront investment than our employer-focused sales efforts. As we source more of our enrollments through the partner and retail channels, our cost to acquire customers will increase, which will result in lower operating margins.

 

Adjusted EBITDA. We define this metric as net income (loss) less interest income, plus depreciation and amortization, interest expense, provision for income taxes and stock-based compensation expense. We have included adjusted EBITDA in this prospectus 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 adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business.

 

Key Components of Our Results of Operations

 

Revenue

 

We generate most of our revenue from commissions paid to us by insurance carriers for health insurance policies issued as a direct result of our enrollment services. Commission revenue from Medicare-related policies, including Medicare supplement, Medicare Advantage, and Medicare Part D prescription drug policies represented substantially all of our revenue for the periods presented.

 

Commission rates and the length of the commission period typically vary by policy type. Commissions on Medicare supplement policies may be based upon a percentage of premium or a fixed rate and are paid either monthly as the underlying premium is received by the insurance carrier or in advance for the first year and monthly thereafter for renewal payments, with the commission rates generally more uniform throughout the commissionable period. The majority of our Medicare supplement compensation arrangements provide for commissions over a six to ten year period provided the policy remains active during that time period. We estimate the life of a Medicare supplement policy typically ranges from six to eight years. As of March 31, 2012, 70% of our active core members were enrolled in a Medicare supplement policy.

 

Compensation structures for Medicare Advantage and Medicare Part D prescription drug policies are subject to Federal regulations that stipulate a six year commission cycle, with the first year payment generally higher than the following five annual renewal payments. Commissions on these products are calculated on a fixed rate basis and are often paid in advance for the first year, and then monthly thereafter for the renewal payments, as long as the policy remains active. We estimate the life of a Medicare Advantage policy typically ranges from three to five years, based on recent historical trends. As of March 31, 2012, 30% of our active core members were enrolled in a Medicare Advantage policy.

 

Commission revenue is impacted by the rates we are paid by insurance carriers, which vary by carrier, policy type, state, policy effective date, policy age and the weighting of enrollment activity across insurance carriers and policy types. Commissions on some of our products are subject to regulatory oversight and may be periodically adjusted in response to changes in regulatory guidelines. Under our carrier compensation arrangements, the commission rate schedule that is in effect on the policy effective date will typically govern the commissions over the life of the policy. As a result, subsequent changes in carrier contract terms generally do not impact commission rates for previously enrolled policies as we will continue to be paid commissions at the rates in effect on the policy effective date. Therefore, the effects of any changes in carrier commission rates are phased in over future periods as new policies are subject to the revised commission terms.

 

Because we typically receive commissions over the life of a policy that generally range from three to eight years, the majority of our revenue is recurring in nature and increases in direct proportion to the growth we experience in the number of active core members. As a result, at the beginning of a financial reporting period, we

 

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have strong visibility into a substantial majority of our revenue for that period, as a significant portion is attributable to members who were enrolled prior to that period. For instance, in fiscal 2011, revenue attributable to policies that were active as of July 1, 2010, the beginning of the fiscal year, represented 78% of our total commission revenue during that fiscal year.

 

As an indication of our estimated future recurring revenue, we report Projected Annual Recurring Revenue, or PARR, which reflects the expected total commission revenue for the subsequent 12 months from all members that are active or pending as of the reporting date. We report PARR as a range as it represents an estimate of our future recurring revenue based on certain member retention assumptions. We believe that PARR is a useful measure of our revenue baseline and a reflection of our revenue visibility at a particular point in time, as it represents the amounts that are expected to be recognized in the ensuing 12 month period assuming no new enrollment activity. The PARR metric includes expected commission revenue on all Medicare-related and ancillary policies and is based upon actual contractual commission rates in effect during the forecasted period as well as assumptions regarding future member retention. Our estimates for future member retention are based on our historical experience regarding the extent and timing of policy attrition along with any known future trends that may be expected to occur during the forecasted period.

 

We also generate revenue from third-party administrator services, or TPA services, provided to clients for the processing of employee health reimbursement claims. We receive a monthly processing fee for the TPA services, which is recognized in the month the services are rendered. For a majority of the TPA services provided, we utilize outside service providers to process the health reimbursement claims, for which we pay a fee. Through December 31, 2011 the TPA services revenue has been presented in the other revenue line of our consolidated statements of operations, net of costs incurred for the outside service providers. Starting with January 1, 2012 client transitions, we are increasingly offering discounts on the fees that we charge for our TPA services. In the substantial majority of cases, we receive fees from new clients that are equal to or less than the fees we pay to the outside service providers we utilize to provide these TPA services, and in many cases the fees are waived entirely, resulting in a net expense. As these fee discounts represent a selling cost to acquire new clients, the net expense for the TPA services incurred for new client contracts after December 31, 2011 are presented in operating expenses within the sales and marketing line item on our consolidated statements of operations. The TPA net revenue related to existing client contracts that were negotiated prior to this change in sales strategy will continue to be included in other revenue and is therefore expected to diminish over time as these existing contracts begin to expire.

 

Operating Expenses

 

Operating expenses consist of service center, sales and marketing, technology and general and administrative expenses. Personnel costs, which consist of salaries, bonuses, commissions, payroll taxes, benefits and stock-based compensation, are the most significant component of each of these expense categories. We expect our operating expenses to continue to grow in the near term as we increase our enrollments, as much of our service center and, to a lesser extent, sales and marketing costs vary in direct proportion to our enrollment activity.

 

Service Center

 

Service center expenses consist primarily of compensation and related expenses for personnel associated with our enrollment and customer service operations and include the commissions paid to our benefit advisors. During our peak demand season in our second fiscal quarter, we hire additional seasonal personnel to service the increased enrollment volumes. As a result, our enrollment operations staffing levels vary widely throughout the year and, over the course of fiscal 2011, ranged from 65 to 500 employees. Significant numbers of these seasonal personnel return year after year resulting in efficiency and productivity gains and higher customer satisfaction. We expect service center expenses to increase in future periods as a result of additional personnel and expenditures necessary to meet the increased enrollment activity.

 

Sales and Marketing

 

Our sales and marketing expenses primarily consist of personnel costs, sales commissions, fees paid to partners, marketing campaign expenditures, net expense for TPA services for client contracts effective on or after January 2012, and travel costs associated with acquiring new employer clients.

 

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We pay fees to a number of our partners in order to facilitate the identification and introduction of potential new employer clients. Under these arrangements, the partner receives a payment for each customer enrollment that is generated from a referred account, either via a flat fee per enrollment or as a percentage of the commission revenue we earn on the active policy. The fees that are paid on a flat fee basis are expensed in the same quarter in which the application is submitted while the fees that are based on a percentage of revenue are expensed as the underlying commission revenue is recognized. As a result, partner fees in a quarter may include expenses associated with members that were enrolled in a prior period. While, historically, the majority of our partner fees have been based on a flat fee arrangement and have been fully expensed in the same quarter that the application was submitted, in the past year, we have shifted toward revenue-share based arrangements for our significant partners. Therefore, we expect partner fees to increase over time as more active policies are subject to ongoing revenue-share based arrangements. Additionally, we expect partner fees to fluctuate on a quarterly basis depending upon the mix of partner arrangements in any given quarter.

 

We also incur costs to generate individual customer leads through our retail sales channel. We plan to continue investing in sales and marketing to expand and grow our business and expect partner fees and costs related to direct marketing, paid search and other consumer-targeted marketing programs, in particular, to increase as we source more of our employer clients through the partner channel and expand our marketing activities to reach the individual retail market. As described in the discussion of TPA services in “Revenue” above, the expected net TPA expense will also contribute to an increase in sales and marketing expenses in future periods.

 

Technology

 

Technology expenses consist primarily of compensation and related expenses for personnel associated with developing and maintaining our exchange platform and tools and management of our information systems. Some qualifying compensation costs associated with the direct development of software used to provide our services are capitalized as an internal-use software cost. We expect technology expenses to increase in future periods as we employ more resources to support and maintain our exchange platform and infrastructure. This increase may be partially offset to the extent that we capitalize internally developed software costs as we continue to develop additional functionality related to the delivery of our services.

 

General and Administrative

 

Our general and administrative expenses primarily consist of personnel costs, recruiting and hiring costs, and expenses for outside professional services, including legal, audit and tax services. Following the completion of this offering, we expect general and administrative expenses to increase due to the anticipated growth of our business and infrastructure and the costs associated with becoming a public company, such as costs associated with SEC reporting and compliance, developing and maintaining internal controls over financial reporting, insurance, investor relations and other related costs.

 

Interest Income

 

Interest income consists of interest income earned on our cash and cash equivalents and short-term investments. We expect interest income will vary between each reporting period depending on our average cash, cash equivalents and short-term investment balances during the period and market interest rates.

 

Interest Expense

 

Interest expense consists of interest accrued or paid on our outstanding equipment loan, term loan, line of credit and capital lease obligations. We expect interest expense to increase in fiscal 2012 as a result of the $10.0 million in term loans advanced during the nine months ended March 31, 2012.

 

Provision for Income Taxes

 

Provision for income taxes consists of Federal and state income tax expenses. In fiscal 2011, we determined that it was more likely than not that we would be able to utilize our remaining net deferred tax assets

 

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and released the valuation allowance that had been recorded against them. Because we utilized all remaining net operating loss carryforwards during fiscal 2011, we expect our fiscal 2012 and future tax rates to more closely reflect the Federal and state statutory rates.

 

Results of Operations

 

The following table is a summary of our consolidated statements of operations as a percentage of our total revenue.

 

    Percentage of Total Revenue  
    Year Ended June 30,     Nine Months Ended
March 31,
 
        2009             2010             2011             2011             2012      

Revenue:

         

Commissions

    96     99     99     99     99

Other

    4        1        1        1        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

            100                100                100                100                100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Service center

    102        34        37        41        41   

Sales and marketing

    38        17        20        18        22   

Technology

    12        7        6        6        7   

General and administrative

    29        12        13        14        12   

Restructuring expense

           1                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    181        71        76        79        82   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (81     29        24        21        18   

Interest income

                                  

Interest expense

                                (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (81     29        24        21        17   

Provision for income taxes

           1        5        2        7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (81 )%      28     19     19     11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Comparison of Nine Months Ended March 31, 2011 and 2012

 

The following table presents our historical results of operations and the changes in these results in dollars and as a percentage for the periods presented:

 

    Nine Months Ended
March 31,
    Change ($)     Change (%)  
    2011     2012      
   

(in thousands, except percentages)

 

Revenue:

 

Commissions

  $     35,716      $     48,411      $     12,695                   36

Other

    442        468        26        6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    36,158        48,879        12,721        35   

Operating expenses:

       

Service center

    15,050        19,955        4,905        33   

Sales and marketing

    6,346        10,856        4,510        71   

Technology

    2,242        3,264        1,022        46   

General and administrative

    5,043        5,974        931        18   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    28,681        40,049        11,368        40   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    7,477        8,830        1,353        18   

Interest income

    35        30        (5     (14

Interest expense

    (81     (323     (242     299   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    7,431        8,537        1,106        15   

Provision for income taxes

    575        3,313        2,738        476   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 6,856      $ 5,224      $ (1,632     (24 )% 
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Commission Revenue

 

Commission revenue for the nine months ended March 31, 2012 was $48.4 million, an increase of $12.7 million, or 36%, compared to the nine months ended March 31, 2011. This revenue growth was primarily due to a 31% increase in the number of active core members from 163,000 active core members at March 31, 2011 to 213,900 active core members at March 31, 2012. Our projected annual recurring revenue, or PARR, at March 31, 2012 was $61.4 million to $64.0 million compared to $50.8 million to $53.0 million at March 31, 2011. Based on the midpoint of the two ranges, our PARR at March 31, 2012 increased by $10.8 million, or 21%, over the prior year period.

 

Service Center

 

Service center expenses for the nine months ended March 31, 2012 were $20.0 million, an increase of $4.9 million, or 33%, compared to the nine months ended March 31, 2011. During the nine months ended March 31, 2012, average headcount increased 25% from the prior year period as we accelerated our hiring of seasonal personnel for the Medicare annual enrollment period in response to regulatory changes in the timing of the AEP and increased client services resources to support new clients. Additionally, during the nine months ended March 31, 2012, we expanded our enrollment operations with the opening of a second service center located in Texas, resulting in $0.7 million in additional expense related to facilities costs and the management and overhead needed to operate a second service center.

 

Sales and Marketing

 

Sales and marketing expenses for the nine months ended March 31, 2012 were $10.9 million, an increase of $4.5 million, or 71%, compared to the nine months ended March 31, 2011. This increase was due, in part, to a $2.6 million increase in compensation and employee-related expenses, as we expanded our direct salesforce and added marketing personnel, resulting in a 83% increase in average headcount year over year. Additionally, marketing expenses increased $1.9 million as a result of increased referral fees, advertising and lead generation activities.

 

Technology

 

Technology expenses for the nine months ended March 31, 2012 were $3.3 million, an increase of $1.0 million, or 46%, compared to the nine months ended March 31, 2011. This increase was primarily due to a $0.9 million increase in compensation expenses as average headcount grew by 37% to support the continued development of our exchange platform and tools.

 

General and Administrative

 

General and administrative expenses for the nine months ended March 31, 2012 were $6.0 million, an increase of $0.9 million, or 18%, compared to the nine months ended March 31, 2011. This increase was primarily driven by an increase in legal and accounting expenses associated with a dividend distribution and related option adjustments, the expansion and renewal of our debt facility, and increased tax reporting and analysis requirements. See “Dividend-Related Option Adjustments” later in this section for further discussion regarding the dividend distribution.

 

Provision for Income Taxes

 

Provision for income taxes was $3.3 million for the nine months ended March 31, 2012, an increase of $2.7 million as compared to income taxes of $0.6 million for the nine months ended March 31, 2011. During the nine months ended March 31, 2011, we determined that it was more likely than not that we would be able to utilize our remaining net deferred tax assets and released the valuation allowance that had been recorded against them, resulting in a net tax expense of $0.6 million. Because we released the valuation allowance and utilized all remaining net operating loss carryforwards during fiscal 2011, we expect our fiscal 2012 tax rate to more closely reflect the Federal and state statutory rates.

 

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Comparison of Fiscal 2010 and 2011

 

The following table presents our historical results of operations and the changes in these results in dollars and as a percentage for the periods presented:

 

     Year Ended June 30,     Change ($)     Change (%)  
     2010     2011      
     (in thousands, except percentages)  

Revenue:

        

Commissions

   $     43,646      $     50,451      $       6,805                   16

Other

     370        676        306        83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     44,016        51,127        7,111        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Service center

     14,994        18,551        3,557        24   

Sales and marketing

     7,290        10,134        2,844        39   

Technology

     3,060        3,195        135        4   

General and administrative

     5,464        6,728        1,264        23   

Restructuring expense

     314               (314     *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     31,122        38,608        7,486        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     12,894        12,519        (375     (3

Interest income

     28        53        25        89   

Interest expense

     (69     (110     (41     (59
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     12,853        12,462        (391     (3

Provision for income taxes

     346        2,505        2,159        624   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 12,507      $ 9,957      $ (2,550     (20 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  *   Not meaningful

 

Commission Revenue

 

Commission revenue for fiscal 2011 was $50.5 million, an increase of $6.8 million, or 16%, compared to fiscal 2010. This revenue growth was due in part to a 28% increase in the number of active core members from 126,000 active core members at the end of fiscal 2010 to 161,700 active core members at the end of fiscal 2011. The commission revenue growth rate was lower than the membership growth rate primarily due to the fact that fiscal 2010 revenue included a full year of revenue attributable to the members that were added in fiscal 2009 in connection with the General Motors transition, which contributed to a 202% increase in active core members in fiscal 2009. In fiscal 2010, active core members grew by 29% resulting in a lower full year contribution to fiscal 2011 revenue relative to the significant membership increase in fiscal 2009. Our PARR at June 30, 2011 was $52.3 million to $54.5 million compared to $37.8 million to $39.3 million at June 30, 2010. Based on the midpoint of the two ranges, our PARR at June 30, 2011 increased by $14.8 million, or 38%, over the prior year period.

 

Other Revenue

 

Other revenue for fiscal 2011 was $0.7 million, an increase of $0.3 million, or 83%, as compared to fiscal 2010. This increase was primarily driven by a 106% increase in the number of customers utilizing our TPA services during fiscal 2011.

 

Service Center

 

Service center expenses for fiscal 2011 were $18.6 million, an increase of $3.6 million, or 24%, compared to fiscal 2010. This increase was primarily driven by a $3.2 million, or 30%, increase in compensation and commission expenses during fiscal 2011, as we increased the number of seasonal personnel to accommodate a 21% increase in the number of new core applications submitted during fiscal 2011.

 

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Sales and Marketing

 

Sales and marketing expenses for fiscal 2011 were $10.1 million, an increase of $2.8 million, or 39%, compared to fiscal 2010. This increase was primarily due to a $1.6 million increase in partner fees, as we expanded the number of client accounts acquired through our partner channel. Additionally, our marketing expenses increased by $0.9 million in fiscal 2011 compared to fiscal 2010 as we invested in corporate awareness, lead generation and strategy development projects intended to enhance our brand and product offering and expand our sales opportunities. Commission expenses for our field sales executives increased $0.4 million, due to a 21% increase in the number of new core applications submitted from fiscal 2010 to fiscal 2011.

 

General and Administrative

 

General and administrative expenses for fiscal 2011 were $6.7 million, an increase of $1.3 million, or 23%, compared to fiscal 2010. This increase was primarily due to increases of $0.3 million in office and equipment expenses and $0.3 million in compensation related expenses, as a result of an increase in headcount. In addition, during fiscal 2011, employee recruiting costs increased by $0.3 million, as we hired additional benefit advisors to accommodate increased enrollment volumes.

 

Restructuring Expense

 

In February 2010, we undertook a strategic initiative to reorganize the business in order to improve our operational and financial efficiencies. In connection with this initiative, we recorded a restructuring charge of $0.3 million in fiscal 2010, which was comprised of severance charges associated with a reduction in the workforce of 26 employees.

 

Provision for Income Taxes

 

Provision for income taxes was $2.5 million for fiscal 2011, an increase of $2.2 million compared to fiscal 2010. Our effective tax rate was 20.1% in fiscal 2011 compared to 2.7% in 2010. In fiscal 2010, the majority of our cash income taxes were offset by net operating loss carryforwards and we maintained a full valuation allowance against our deferred tax assets. In fiscal 2011, we reversed our remaining valuation allowance and incurred tax expense for income in excess of the valuation allowance release. Our effective tax rate increased in fiscal 2011 as our tax expense in fiscal 2010 was limited to cash taxes after net operating loss utilization. We expect our tax rate to increase in fiscal 2012 to more closely reflect the Federal and state statutory rates.

 

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Comparison of Fiscal 2009 and 2010

 

The following table presents our historical results of operations and the changes in these results in dollars and as a percentage for the periods presented:

 

     Year Ended June 30,     Change ($)     Change (%)  
     2009     2010      
     (in thousands, except percentages)  

Revenue:

        

Commissions

   $     16,933      $     43,646      $     26,713                 158

Other

     779        370        (409     (53
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     17,712        44,016        26,304        149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Service center

     18,117        14,994        (3,123     (17

Sales and marketing

     6,768        7,290        522        8   

Technology

     2,096        3,060        964        46   

General and administrative

     5,072        5,464        392        8   

Restructuring expense

            314        314        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,053        31,122        (931     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (14,341     12,894        27,235        *   

Interest income

     58        28        (30     (52

Interest expense

     (80     (69     11        14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (14,363     12,853        27,216        *   

Provision for income taxes

     2        346        344        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (14,365   $ 12,507      $ 26,872        *   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  *   Not meaningful

 

Commission Revenue

 

Commission revenue for fiscal 2010 was $43.6 million, an increase of $26.7 million, or 158%, compared to fiscal 2009. In fiscal 2009, we transitioned a group of General Motors’ retirees, which contributed to a 202% increase in active core members year over year. We began recognizing the commission revenue associated with these new active core members beginning in January 2009, resulting in six months of revenue from this transition in fiscal 2009 and a full year of revenue in fiscal 2010. Our PARR at June 30, 2010 was $37.8 million to $39.3 million compared to $27.5 million to $28.7 million at June 30, 2009. Based on the midpoint of the two ranges, our PARR at June 30, 2010 increased by $10.5 million, or 37%, over the prior year period.

 

Additionally, during 2009, the regulatory body that governs compensation for Medicare Advantage and Medicare Part D prescription drug policies changed the commission refund guidelines to require that a carrier recover some or all of the commissions paid if a policy is cancelled during the first year, resulting in pro-rata recognition of the commission over a 12 month period. The prior guidelines stipulated a three month refund period. Under the prior refund guidelines, the entire first year commission for the Medicare Advantage and prescription drug policies enrolled during the 2008 AEP for a January 1, 2008 policy effective date was fully recognized during fiscal 2008, and no amount of the first year commission was deferred into fiscal 2009. In fiscal 2009, $8.0 million in commissions associated with the 2009 AEP enrollments was deferred and recognized in fiscal 2010 in accordance with the revised refund guidelines.

 

Other Revenue

 

Other revenue for fiscal 2010 was $0.4 million, a decrease of $0.4 million, or 53%, as compared to fiscal 2009. This decrease was partially due to the completion of an agreement with a strategic partner in December 2008 under which we recognized $0.2 million during fiscal 2009.

 

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Table of Contents

Service Center

 

Service center expenses for fiscal 2010 were $15.0 million, a decrease of $3.1 million, or 17%, compared to fiscal 2009. This decrease was primarily driven by a 32% decline in the number of new core applications submitted in fiscal 2010 compared to fiscal 2009. Additionally, during fiscal 2009, to meet the demand generated by the General Motors transition, we utilized outsourced agents at a much higher cost than our internal resources. In fiscal 2010, we leveraged our internal benefit advisors to service the lower enrollment demand, resulting in a net decrease of $3.1 million in compensation and other associated overhead expenses.

 

Sales and Marketing

 

Sales and marketing expenses for fiscal 2010 were $7.3 million, an increase of $0.5 million, or 8%, compared to fiscal 2009. This increase was primarily due to a $0.3 million increase in compensation expense as we hired several key senior executives during this time period.

 

Technology

 

Technology expenses for fiscal 2010 were $3.1 million, an increase of $1.0 million, or 46%, over fiscal 2009. This increase was primarily due to a $0.8 million increase in compensation related expenses as a result of a 30% increase in headcount during fiscal 2010 as compared to fiscal 2009. Additionally, we capitalized $0.3 million less in compensation costs associated with internal-use software development during fiscal 2010 as compared to fiscal 2009.

 

General and Administrative

 

General and administrative expenses for fiscal 2010 were $5.5 million, an increase of $0.4 million, or 8%, compared to fiscal 2009. This increase was primarily due to a $1.3 million increase in compensation expense due to a 95% increase in average headcount during fiscal 2010 compared to fiscal 2009. This increase was partially offset by a $0.8 million decrease in outside services, which consisted of a $0.5 million decrease in consulting expenses related to certain training programs implemented in 2009, and a $0.2 million decrease in accounting fees due to increased expenditures in fiscal 2009 associated with initial financial statement audit activities.

 

Provision for Income Taxes

 

Provision for income taxes in fiscal 2010 was $0.3 million compared to $2,000 in fiscal 2009. This change was primarily due to us generating net income during fiscal 2010 compared to a net loss in fiscal 2009. We had sufficient net operating losses during fiscal 2010 to offset our tax obligations and the net operating losses were offset by a valuation allowance. The tax provision recognized during that period reflects certain state level taxation where the net operating losses could not be utilized.

 

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Table of Contents

Quarterly Results of Operations

 

The following table sets forth our unaudited quarterly statements of operations data for each of the eight quarters presented below (certain items may not foot due to rounding). We have prepared the unaudited quarterly data on a consistent basis with the audited consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our audited consolidated financial statements and the related notes included elsewhere in this prospectus. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended  
    Jun 30,
2010
    Sep 30,
2010
    Dec 31,
2010
    Mar 31,
2011
    Jun 30,
2011
    Sep 30,
2011
    Dec 31,
2011
    Mar 31,
2012
 
    (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data:

               

Revenue:

               

Commissions

  $ 12,143      $ 11,178      $ 11,536      $ 13,002      $ 14,735      $ 15,648      $ 15,142      $ 17,621   

Other

    55        92        152        198        234        132        161        175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    12,198        11,270        11,688        13,200        14,969        15,780        15,303        17,796   

Operating expenses:

               

Service center(1)

    2,173        3,968        7,262        3,820        3,501        6,350       
8,737
  
    4,868   

Sales and marketing(1)

    1,364        1,554        2,937        1,854        3,789        2,715       
4,384
  
    3,757   

Technology(1)

    799        705        601        936        953        1,244       
1,064
  
    956   

General and administrative(1)

    1,319        1,913        1,605        1,526        1,684        2,168        1,729        2,077   

Restructuring expense

    (80                                       

  
      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    5,575        8,140        12,405        8,136        9,927        12,477        15,914        11,658   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    6,623        3,130        (717     5,064        5,042        3,303       
(611

    6,138   

Interest income

    24        14        9        12        18        23        3        4   

Interest expense

    (11     (24     (30     (27     (29     (42     (97     (184
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    6,636        3,120        (738     5,049        5,031        3,284       
(705

    5,958   

Provision (benefit) for income taxes

    180        (982     (327     1,884        1,930        1,230        (281     2,364   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 6,456      $ 4,102      $ (411   $ 3,165      $ 3,101      $ 2,054      $ (424   $ 3,594   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders(2):

               

Basic

  $ 291      $ 349      $ (410   $ 78      $ 289      $ (22,638   $ (11,302   $ 123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 694      $ 569      $ (410   $ 124      $ 545      $ (22,638   $ (11,302   $ 268   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders:

               

Basic

  $ 0.42      $ 0.25      $ (0.30   $ 0.05      $ 0.19      $ (14.91   $ (7.44   $ 0.08   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.39      $ 0.24      $ (0.30   $ 0.05      $ 0.17      $ (14.91   $ (7.44   $ 0.07   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:

               

Basic

    696,969        1,371,882        1,389,005        1,421,729        1,516,367        1,518,092        1,519,920        1,526,098   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    1,777,077        2,373,844        1,389,005        2,418,961        3,143,335        1,518,092        1,519,920        3,772,509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial and Operational Data:

               

Active core members (end of period)

    126,000        126,600        127,800        163,000        161,700        171,000        169,500        213,900   

Pending core members (end of period)

    2,000        1,300        44,100        1,500        10,500        2,500        52,300        7,900   

Core applications submitted

    2,900        2,000        45,600        2,200        10,900        3,700        53,100        5,000   

Adjusted EBITDA(3)

  $ 7,190      $ 3,734      $ (124   $ 5,661      $ 5,644      $ 4,280      $ 222      $ 6,704   

 

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Table of Contents

 

(1)   Stock-based compensation included in the consolidated statements of operations data above was as follows:

 

$,000 $,000 $,000 $,000 $,000 $,000 $,000 $,000
     Three Months Ended  
     Jun 30,
2010
     Sep 30,
2010
     Dec 31,
2010
     Mar 31,
2011
     Jun 30,
2011
     Sep 30,
2011
     Dec 31,
2011
     Mar 31,
2012
 
     (in thousands)  

Service center

   $ 2       $ 5       $ 7       $ 7       $ 7       $ 83       $ 73       $ 16   

Sales and marketing

     8         12         12         11         17         190        
138
  
     36   

Technology

     2         7         7         8         8         82        
66
  
     17   

General and administrative

     14         23         25         33         61         110         94         87   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 26       $ 47       $ 51       $ 59       $ 93       $ 465       $ 371       $ 156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2)   The net loss attributable to common stockholders for the three months ended September 30, 2011 and December 31, 2011 include adjustments of $24.7 million and $10.9 million, respectively, for dividends distributed to preferred stockholders during each period. See Note 13 to our consolidated financial statements for further details regarding the adjustments applied in the calculation of basic and diluted net income (loss) per share attributable to common stockholders.

 

(3)   See “Selected Consolidated Financial Data—Adjusted EBITDA” above for a discussion regarding the use of adjusted EBITDA as a financial measure. The following table presents a reconciliation of adjusted EBITDA to net income (loss), the most directly comparable GAAP financial measure, for each of the periods indicated.

 

$0,000 $0,000 $0,000 $0,000 $0,000 $0,000 $0,000 $0,000
     Three Months Ended  
     Jun 30,
2010
    Sep 30,
2010
    Dec 31,
2010
    Mar 31,
2011
    Jun 30,
2011
    Sep 30,
2011
    Dec 31,
2011
    Mar 31,
2012
 
     (in thousands)  

Reconciliation of Adjusted EBITDA:

                

Net income (loss)

   $ 6,456      $ 4,102      $ (411   $ 3,165      $ 3,101      $ 2,054      $ (424   $ 3,594   

Adjustments:

                

Depreciation and amortization

     541        557        542        537        509        51        462        410   

Provision (benefit) for income taxes

     180        (982     (327     1,884        1,930        1,230        (281     2,364   

Stock-based compensation

     26        47        51        59        93        465       
371
  
    156   

Interest income

     (24     (14     (9     (12     (18     (23     (3     (4

Interest expense

     11        24        30        27        29        42        97        184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 7,190      $ 3,734      $ (124   $ 5,660      $ 5,644      $ 4,280      $ 222      $ 6,704