GoHealth, Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2023
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from to
Commission File Number: 001-39390
GoHealth, Inc.
(Exact name of registrant as specified in its charter)
_________________________
| Delaware | 85-0563805 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
222 W Merchandise Mart Plaza | Suite 1750 | 60654 | ||||||
| Chicago, | Illinois | |||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
(312) 386-8200
(Registrant’s telephone number, including area code)
214 W Huron St.
Chicago, IL 60654
(Former name, former address and former fiscal year, if changed since last report)
_________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A Common Stock, $0.0001 par value per share | GOCO | The Nasdaq Global Market | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Smaller reporting company | ☒ | ||||||||||||||
| Non-accelerated filer | ☒ | Emerging growth company | ☐ | ||||||||||||||
| Accelerated filer | ☐ | ||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 1, 2023, the registrant had 9,554,139 shares of Class A common stock, $0.0001 par value per share, outstanding and 12,816,979 shares of Class B common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
| PAGE | ||||||||||||||
| PART I - FINANCIAL INFORMATION | ||||||||||||||
| ITEM 1. | ||||||||||||||
| ITEM 2. | ||||||||||||||
| ITEM 3. | ||||||||||||||
| ITEM 4. | ||||||||||||||
| PART II - OTHER INFORMATION | ||||||||||||||
| ITEM 1. | ||||||||||||||
| ITEM 1A. | ||||||||||||||
| ITEM 2. | ||||||||||||||
| ITEM 3. | ||||||||||||||
| ITEM 4. | ||||||||||||||
| ITEM 5. | ||||||||||||||
| ITEM 6. | ||||||||||||||
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding our expected growth, future capital expenditures and debt service obligations, are forward-looking statements.
In some cases, you can identify forward-looking statements by terms, such as “may,” “will,” “should,” “aim,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” “likely,” “future” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including the factors described in the sections titled “Summary Risk Factors,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Annual Report on Form 10-K”), the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q for the first fiscal quarter ended March 31, 2023, our Quarterly Report on Form 10-Q for the second fiscal quarter ended June 30, 2023, this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
CERTAIN DEFINITIONS
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires:
•“We,” “us,” “our,” the “Company,” “GoHealth” and similar references refer to GoHealth, Inc., and, unless otherwise stated, all of its direct and indirect subsidiaries, including GoHealth Holdings, LLC.
•“Blocker Company” refers to an entity affiliated with Centerbridge that was an indirect owner of LLC Interests in GoHealth Holdings, LLC prior to the Transactions and is taxable as a corporation for U.S. federal income tax purposes.
•“Blocker Shareholders” refer to entities affiliated with Centerbridge, the owners of the Blocker Company prior to the Transactions, who exchanged their interests in the Blocker Company for shares of our Class A common stock and cash in connection with the consummation of the Transactions.
•“Centerbridge” refers to certain investment funds and other entities affiliated with CCP III Cayman GP Ltd., a Cayman Islands exempted company over which CCP III Cayman GP Ltd. has voting control (including any such fund or entity formed to hold shares of Class A common stock for the Blocker Shareholders).
•“Continuing Equity Owners” refer collectively to direct or indirect holders of LLC Interests and our Class B common stock immediately following consummation of the Transactions, including Centerbridge, NVX Holdings, our Founders, the Former Profits Unit Holders and certain executive officers, employees and other minority investors and their respective permitted transferees who may, following the consummation of our IPO, exchange at each of their respective options (subject in certain circumstances to time-based vesting requirements and certain other restrictions), in whole or in part from time to time, their LLC Interests (along with an equal number of shares of Class B common stock (and such shares shall be immediately cancelled)) for, at our election (determined solely by our independent directors (within the meaning of the listing rules of The Nasdaq Global Market who are disinterested)), cash or newly-issued shares of our Class A common stock.
•“Founders” refer to Brandon M. Cruz, our Co-Founder and Co-Chairman of the Board, and Clinton P. Jones, our Co-Founder and Co-Chairman of the Board.
| GoHealth, Inc. | 2023 Form 10-Q | 1 | ||||||
•“Former Profits Unit Holders” refers collectively to certain of our directors and certain current and former officers and employees, in each case, who directly or indirectly held existing vested and unvested profits units, which were comprised of profits units that have time-based vesting conditions and profits units that have performance-based vesting conditions, of GoHealth Holdings, LLC pursuant to GoHealth Holdings, LLC’s existing profits unit plan and who received LLC Interests in exchange for their profits units in connection with the Transactions. LLC Interests received in exchange for unvested profits units remain subject to their existing time-based vesting requirements. Profit units with performance-based vesting conditions fully vested as such conditions were met in connection with our IPO.
•“GoHealth Holdings, LLC Agreement” refers to GoHealth Holdings, LLC’s amended and restated limited liability company agreement, as further amended, which became effective substantially concurrently with or prior to the consummation of our IPO.
•“LLC Interests” refer to the common units of GoHealth Holdings, LLC, including those that we purchased with a portion of the net proceeds from our IPO.
•“Norvax” refers to Norvax, LLC, a Delaware limited liability company and a subsidiary of GoHealth Holdings, LLC.
•“NVX Holdings” refers to NVX Holdings, Inc., a Delaware corporation that is controlled by the Founders.
•“Transactions” refer to our IPO and certain organizational transactions that were effected in connection with our IPO, and the application of the net proceeds therefrom.
GoHealth, Inc. is a holding company and the sole managing member of GoHealth Holdings, LLC, and its principal asset consists of LLC Interests.
KEY TERMS AND PERFORMANCE INDICATORS; NON-GAAP FINANCIAL MEASURES
Throughout this Quarterly Report on Form 10-Q, we use a number of key terms and provide a number of key performance indicators used by management. We define these terms and key performance indicators as follows:
•“Adjusted EBITDA” represents, as applicable for the period, EBITDA as further adjusted for certain items discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
•“Adjusted EBITDA Margin” refers to Adjusted EBITDA divided by net revenues.
•“Adjusted Gross Margin per Submission” refers to Sales per Submission less Cost per Submission.
•“Cost of Submission” refers to the aggregate cost to convert prospects into Submissions during a particular period. Cost of Submission is comprised of revenue share, marketing and advertising expenses and customer care and enrollment expenses, excluding share-based compensation expense, the impact of revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods and such expenses related to Non-Encompass BPO Services.
•“Cost per Submission” refers to (x) the aggregate cost to convert prospects into Submissions for a particular period (comprised of revenue share, marketing and advertising expenses, and customer care and enrollment expenses, excluding share-based compensation expense and such expenses related to Non-Encompass BPO Services) divided by (y) either (i) a completed application with our licensed agent that is submitted to the insurance health plan partner and subsequently approved by the health plan partner during the indicated period, excluding applications through our Non-Encompass BPO Services or (ii) a transfer by our agent to the health plan partner through the Encompass marketplace during the indicated period.
•“EBITDA” represents net income (loss) before interest expense, income tax expense (benefit) and depreciation and amortization expense.
•“LTV” refers to the Lifetime Value of Commissions, which we define as aggregate commissions estimated to be collected over the estimated life of all commissionable Submissions for the relevant period based on multiple factors, including but not limited to, contracted commission rates, health plan partner mix and expected policy persistency with applied constraints.
•“Non-Encompass BPO Services” refer to programs in which GoHealth-employed agents are dedicated to certain health plans and agencies we partner with outside of the Encompass model.
| GoHealth, Inc. | 2023 Form 10-Q | 2 | ||||||
•“Sales per Submission” refers to (x) the sum of (i) aggregate commissions estimated to be collected over the estimated life of all commissionable Submissions for the relevant period based on multiple factors, including but not limited to, contracted commission rates, health plan partner mix and expected policy persistency with applied constraints, excluding revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods, (ii) Encompass revenue, and (iii) partner marketing and enrollment services, divided by (y) the number of Submissions for such period.
•“Sales/Cost of Submission” refers to (x) the sum of (i) aggregate commissions estimated to be collected over the estimated life of all commissionable Submissions for the relevant period based on multiple factors, including but not limited to, contracted commission rates, health plan partner mix and expected policy persistency with applied constraints, excluding revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods, (ii) Encompass revenue, and (iii) partner marketing and enrollment services, divided by (y) the aggregate cost to convert prospects into Submissions (comprised of revenue share, marketing and advertising expenses, and customer care and enrollment expenses, excluding share-based compensation expense) for such period. Sales and Cost of Submission exclude amounts related to Non-Encompass BPO Services.
•“Submission” refers to either (i) a completed application with our licensed agent that is submitted to the health plan partner and subsequently approved by the health plan partner during the indicated period, excluding applications through our Non-Encompass BPO Services or (ii) a transfer by our agent to the health plan partner through the Encompass marketplace during the indicated period.
We use supplemental measures of our performance that are derived from our consolidated financial information, but which are not presented in our Condensed Consolidated Financial Statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). These non-GAAP financial measures include EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin. Adjusted EBITDA is the primary financial performance measure used by management to evaluate the business and monitor the results of operations. Sales per Submission, Cost per Submission and Adjusted Gross Margin per Submission are also presented on a non-GAAP basis and are key operating metrics used by management to understand the Company’s underlying financial performance and trends.
We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. Adjusted EBITDA is used as a basis for certain compensation programs sponsored by the Company. There are limitations to the use of the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q. For example, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for the most directly comparable measures prepared in accordance with GAAP and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of each of EBITDA, Adjusted EBITDA, Sales per Submission, Cost per Submission and Adjusted Gross Margin per Submission to its most directly comparable GAAP financial measure are presented in the tables below in this Quarterly Report on Form 10-Q. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items and include other expenses, costs and non-recurring items.
| GoHealth, Inc. | 2023 Form 10-Q | 3 | ||||||
| PART I - Financial Information | ||
| ITEM 1. FINANCIAL STATEMENTS. | ||
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GOHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net revenues | 132,037 | 133,052 | 457,974 | 562,299 | ||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Revenue share | 35,992 | 48,044 | 117,876 | 167,041 | ||||||||||||||||||||||
| Marketing and advertising | 39,416 | 22,661 | 124,428 | 151,408 | ||||||||||||||||||||||
| Customer care and enrollment | 46,472 | 51,153 | 134,035 | 196,150 | ||||||||||||||||||||||
| Technology | 11,652 | 11,061 | 31,706 | 34,569 | ||||||||||||||||||||||
| General and administrative | 12,967 | 25,611 | 73,440 | 90,859 | ||||||||||||||||||||||
| Amortization of intangible assets | 23,514 | 23,514 | 70,543 | 70,543 | ||||||||||||||||||||||
| Operating lease impairment charges | — | 350 | 2,687 | 25,345 | ||||||||||||||||||||||
| Restructuring and other related charges | — | 9,797 | — | 11,872 | ||||||||||||||||||||||
| Total operating expenses | 170,013 | 192,191 | 554,715 | 747,787 | ||||||||||||||||||||||
| Income (loss) from operations | (37,976) | (59,139) | (96,741) | (185,488) | ||||||||||||||||||||||
| Interest expense | 17,565 | 15,630 | 51,721 | 39,752 | ||||||||||||||||||||||
| Other (income) expense, net | 771 | (115) | 739 | (65) | ||||||||||||||||||||||
| Income (loss) before income taxes | (56,312) | (74,654) | (149,201) | (225,175) | ||||||||||||||||||||||
| Income tax (benefit) expense | (108) | — | (225) | 472 | ||||||||||||||||||||||
| Net income (loss) | (56,204) | (74,654) | (148,976) | (225,647) | ||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | (32,294) | (44,649) | (86,945) | (138,340) | ||||||||||||||||||||||
| Net income (loss) attributable to GoHealth, Inc. | $ | (23,910) | $ | (30,005) | $ | (62,031) | $ | (87,307) | ||||||||||||||||||
Net loss per share (Note 7): | ||||||||||||||||||||||||||
| Net loss per share of Class A common stock — basic and diluted | $ | (2.61) | $ | (3.41) | $ | (7.04) | $ | (10.54) | ||||||||||||||||||
| Weighted-average shares of Class A common stock outstanding — basic and diluted | 9,489 | 8,825 | 9,194 | 8,293 | ||||||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements
| GoHealth, Inc. | 2023 Form 10-Q | 4 | ||||||
GOHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Net income (loss) | $ | (56,204) | $ | (74,654) | $ | (148,976) | $ | (225,647) | ||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | 143 | 156 | 189 | (306) | ||||||||||||||||||||||
| Comprehensive income (loss) | (56,061) | (74,498) | (148,787) | (225,953) | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to non-controlling interests | (32,212) | (44,556) | (86,836) | (138,534) | ||||||||||||||||||||||
| Comprehensive income (loss) attributable to GoHealth, Inc. | $ | (23,849) | $ | (29,942) | $ | (61,951) | $ | (87,419) | ||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| GoHealth, Inc. | 2023 Form 10-Q | 5 | ||||||
GOHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts, unaudited)
| Sep. 30, 2023 | Dec. 31, 2022 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | 26,387 | $ | 16,464 | ||||||||||
Accounts receivable, net of allowance for doubtful accounts of $139 in 2023 and $89 in 2022 | 12,412 | 4,703 | ||||||||||||
| Commissions receivable - current | 285,922 | 335,796 | ||||||||||||
| Prepaid expense and other current assets | 21,599 | 57,593 | ||||||||||||
| Total current assets | 346,320 | 414,556 | ||||||||||||
| Commissions receivable - non-current | 609,831 | 695,637 | ||||||||||||
| Operating lease ROU asset | 22,932 | 21,483 | ||||||||||||
| Other long-term assets | 2,907 | 1,721 | ||||||||||||
| Property, equipment, and capitalized software, net | 25,350 | 25,282 | ||||||||||||
| Intangible assets, net | 430,069 | 500,611 | ||||||||||||
| Total assets | $ | 1,437,409 | $ | 1,659,290 | ||||||||||
| Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | 6,213 | $ | 15,148 | ||||||||||
| Accrued liabilities | 46,657 | 53,334 | ||||||||||||
| Commissions payable - current | 103,640 | 122,023 | ||||||||||||
| Short-term operating lease liability | 5,785 | 8,974 | ||||||||||||
| Deferred revenue | 42,819 | 50,594 | ||||||||||||
| Current portion of long-term debt | — | 5,270 | ||||||||||||
| Other current liabilities | 12,661 | 10,112 | ||||||||||||
| Total current liabilities | 217,775 | 265,455 | ||||||||||||
| Non-current liabilities: | ||||||||||||||
| Commissions payable - non-current | 221,051 | 253,118 | ||||||||||||
| Long-term operating lease liability | 40,819 | 38,367 | ||||||||||||
| Long-term debt, net of current portion | 496,965 | 504,810 | ||||||||||||
| Other non-current liabilities | 6,884 | 5,839 | ||||||||||||
| Total non-current liabilities | 765,719 | 802,134 | ||||||||||||
Commitments and Contingencies (Note 11) | ||||||||||||||
Series A redeemable convertible preferred stock — $0.0001 par value; 50 shares authorized; 50 shares issued and outstanding at both September 30, 2023 and December 31, 2022. Liquidation preference of $50.9 million at September 30, 2023 and December 31, 2022. | 49,302 | 49,302 | ||||||||||||
| Stockholders’ equity: | ||||||||||||||
Class A common stock – $0.0001 par value; 1,100,000 shares authorized; 9,707 and 8,963 shares issued; 9,550 and 8,950 shares outstanding at September 30, 2023 and December 31, 2022, respectively. | 1 | 1 | ||||||||||||
Class B common stock – $0.0001 par value; 616,021 and 616,259 shares authorized; 12,817 and 13,054 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively. | 1 | 1 | ||||||||||||
Preferred stock – $0.0001 par value; 20,000 shares authorized (including 50 shares of Series A redeemable convertible preferred stock authorized and 200 shares of Series A-1 convertible preferred stock authorized); 50 shares issued and outstanding at both September 30, 2023 and December 31, 2022. | — | — | ||||||||||||
Series A-1 convertible preferred stock— $0.0001 par value; 200 shares authorized; no shares issued and outstanding at both September 30, 2023 and December 31, 2022. | — | — | ||||||||||||
Treasury stock – at cost; 157 and 13 shares of Class A common stock at September 30, 2023 and December 31, 2022, respectively. | (2,423) | (345) | ||||||||||||
| Additional paid-in capital | 649,470 | 626,269 | ||||||||||||
| Accumulated other comprehensive income (loss) | (64) | (144) | ||||||||||||
| Accumulated deficit | (419,054) | (357,023) | ||||||||||||
| Total stockholders’ equity attributable to GoHealth, Inc. | 227,931 | 268,759 | ||||||||||||
| Non-controlling interests | 176,682 | 273,640 | ||||||||||||
| Total stockholders’ equity | 404,613 | 542,399 | ||||||||||||
| Total liabilities, redeemable convertible preferred stock and stockholders’ equity | $ | 1,437,409 | $ | 1,659,290 | ||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| GoHealth, Inc. | 2023 Form 10-Q | 6 | ||||||
GOHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
| Three months ended Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Jul. 1, 2023 | 9,499 | $ | 1 | 12,818 | $ | 1 | (81) | $ | (1,051) | $ | 646,232 | $ | (395,144) | $ | (125) | $ | 210,845 | $ | 460,759 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | (23,910) | (32,294) | (56,204) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common shares related to share-based compensation plans | 208 | — | 6 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 2,173 | 2,173 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 61 | 82 | 143 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common shares repurchased for employee tax withholdings | (76) | (1,372) | (1,372) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accumulated on Series A redeemable convertible preferred stock | (892) | (892) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeitures of Time-Vesting Units | (1) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | — | — | — | — | 1,951 | (1,951) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Sep. 30, 2023 | 9,707 | $ | 1 | 12,817 | $ | 1 | (157) | $ | (2,423) | $ | 649,470 | $ | (419,054) | $ | (64) | $ | 176,682 | $ | 404,613 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Jul. 1, 2022 | 8,797 | $ | 1 | 13,171 | $ | 1 | (12) | $ | (344) | $ | 612,658 | $ | (265,619) | $ | (234) | $ | 411,858 | $ | 758,321 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | (30,005) | (44,649) | (74,654) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common shares related to share-based compensation plans | 18 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 5,483 | 5,483 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 63 | 93 | 156 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common shares repurchased for employee tax withholdings | — | (1) | (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accumulated on Series A redeemable convertible preferred stock | (67) | (67) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeitures of Time-Vesting Units | (10) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | 81 | — | (81) | — | 3,008 | (3,008) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Sep. 30, 2022 | 8,896 | $ | 1 | 13,080 | $ | 1 | (12) | $ | (345) | 621,082 | $ | (295,624) | $ | (171) | $ | 364,294 | $ | 689,238 | ||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| GoHealth, Inc. | 2023 Form 10-Q | 7 | ||||||
GOHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
| Nine months ended Sep. 30, 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Jan. 1, 2023 | 8,963 | $ | 1 | 13,054 | $ | 1 | (13) | $ | (345) | $ | 626,269 | $ | (357,023) | $ | (144) | $ | 273,640 | $ | 542,399 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | (62,031) | (86,945) | (148,976) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common shares related to share-based compensation plans | 510 | — | 456 | 456 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 15,298 | 15,298 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 80 | 109 | 189 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common shares repurchased for employee tax withholdings | (144) | (2,078) | — | (2,078) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accumulated on Series A redeemable convertible preferred stock | (2,675) | (2,675) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeitures of Time-Vesting Units | (3) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | 234 | — | (234) | — | 10,122 | (10,122) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Sep. 30, 2023 | 9,707 | $ | 1 | 12,817 | $ | 1 | (157) | $ | (2,423) | $ | 649,470 | $ | (419,054) | $ | (64) | $ | 176,682 | $ | 404,613 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Nine months ended Sep. 30, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Treasury Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Non-Controlling Interest | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Jan. 1, 2022 | 7,699 | $ | 1 | 13,690 | $ | 1 | — | $ | — | $ | 561,477 | $ | (208,317) | $ | (59) | $ | 539,387 | $ | 892,490 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | (87,307) | (138,340) | (225,647) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of Class A common shares related to share-based compensation plans | 614 | — | 337 | 337 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | 22,776 | 22,776 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | (112) | (194) | (306) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A common shares repurchased for employee tax withholdings | (12) | (345) | (345) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends accumulated on Series A redeemable convertible preferred stock | (67) | (67) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Forfeitures of Time-Vesting Units | (27) | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | 583 | — | (583) | — | 36,559 | (36,559) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at Sep. 30, 2022 | 8,896 | $ | 1 | 13,080 | $ | 1 | (12) | $ | (345) | $ | 621,082 | $ | (295,624) | $ | (171) | $ | 364,294 | $ | 689,238 | |||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| GoHealth, Inc. | 2023 Form 10-Q | 8 | ||||||
GOHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
| Nine months ended Sep. 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
| Operating Activities | ||||||||||||||
| Net income (loss) | $ | (148,976) | $ | (225,647) | ||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||
| Share-based compensation | 15,298 | 22,776 | ||||||||||||
| Depreciation and amortization | 8,357 | 9,881 | ||||||||||||
| Amortization of intangible assets | 70,543 | 70,543 | ||||||||||||
| Amortization of debt discount and issuance costs | 2,397 | 2,163 | ||||||||||||
| Operating lease impairment charges | 2,687 | 25,345 | ||||||||||||
| Non-cash lease expense | 3,080 | 4,064 | ||||||||||||
| Other non-cash items | (636) | (517) | ||||||||||||
| Non-cash restructuring charges | — | 976 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||
| Accounts receivable | (7,030) | 12,852 | ||||||||||||
| Commissions receivable | 135,636 | 85,522 | ||||||||||||
| Prepaid expenses and other assets | 34,632 | 29,608 | ||||||||||||
| Accounts payable | (9,756) | (30,573) | ||||||||||||
| Accrued liabilities | (6,676) | (20,818) | ||||||||||||
| Deferred revenue | (7,775) | 113,645 | ||||||||||||
| Commissions payable | (50,451) | (3,153) | ||||||||||||
| Operating lease liabilities | (7,472) | (5,885) | ||||||||||||
| Other liabilities | 3,982 | 11,121 | ||||||||||||
| Net cash provided by (used in) operating activities | 37,840 | 101,903 | ||||||||||||
| Investing Activities | ||||||||||||||
| Purchases of property, equipment and software | (8,087) | (12,096) | ||||||||||||
| Net cash provided by (used in) investing activities | (8,087) | (12,096) | ||||||||||||
| Financing Activities | ||||||||||||||
| Repayment of borrowings | (15,336) | (3,953) | ||||||||||||
| Payment of preferred stock dividends | (2,675) | — | ||||||||||||
| Repurchase of shares to satisfy employee tax withholding obligations | (2,078) | — | ||||||||||||
| Proceeds from stock option exercises | 70 | — | ||||||||||||
| Proceeds from sale of Series A redeemable convertible preferred stock | — | 50,000 | ||||||||||||
| Issuance cost payments from issuance of Series A redeemable convertible preferred stock | — | (1,641) | ||||||||||||
| Debt issuance cost payments | — | (2,763) | ||||||||||||
| Principal payments under capital lease obligations | — | (103) | ||||||||||||
| Net cash provided by (used in) financing activities | (20,019) | 41,540 | ||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 189 | (305) | ||||||||||||
| Increase (decrease) in cash and cash equivalents | 9,923 | 131,042 | ||||||||||||
| Cash and cash equivalents at beginning of period | 16,464 | 84,361 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 26,387 | $ | 215,403 | ||||||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||
| Purchases of property, equipment and software included in accounts payable | $ | 820 | $ | 100 | ||||||||||
The accompanying Notes are an integral part of these Condensed Consolidated Financial Statements.
| GoHealth, Inc. | 2023 Form 10-Q | 9 | ||||||
GOHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts, unaudited)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
GoHealth, Inc. (the “Company”) is a leading health insurance marketplace and Medicare-focused digital health company whose mission is to improve healthcare in America. The Company works with insurance health plan partners to provide solutions to efficiently enroll individuals in health insurance plans. The Company’s proprietary technology platform leverages modern machine-learning algorithms powered by two decades of insurance purchasing behavior to reimagine the optimal process for helping individuals find the best health insurance plan for their specific needs. The Company’s differentiated combination of a vertically integrated consumer acquisition platform and highly skilled and trained agents has enabled the Company to enroll millions of people in Medicare and individual and family plans since inception. Certain of the Company’s operations do business as GoHealth, LLC, a controlled subsidiary of the Company that was founded in 2008.
The Company was incorporated in Delaware on March 27, 2020, for the purpose of facilitating an initial public offering (the “IPO”) and other related transactions in order to carry on the business of GoHealth Holdings, LLC, a Delaware limited liability company, and its controlled subsidiaries (collectively, "GHH, LLC"). Following the IPO and pursuant to a reorganization into a holding company structure, the Company is a holding company and its principal asset is a controlling equity interest in GHH, LLC. As the sole managing member of GHH, LLC, the Company operates and controls all of the business and affairs of GHH, LLC, and through GHH, LLC and its subsidiaries, conducts its business.
Basis of Presentation and Significant Accounting Policies
In connection with the IPO, the Company became the sole managing member of GHH, LLC and controls the management of GHH, LLC. As a result, the Company consolidates GHH, LLC’s financial results in its Condensed Consolidated Financial Statements and reports a non-controlling interest for the economic interest in GHH, LLC held by the Continuing Equity Owners. Substantially concurrently with the consummation of the IPO, the existing limited liability company agreement of GHH, LLC was amended and restated to, among other things, recapitalize its capital structure by creating a single new class of units (the “common units”) and provide for a right of redemption of common units (subject in certain circumstances to time-based vesting requirements and certain other restrictions) in exchange for, at the Company’s election, cash or newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption, the Company will receive a corresponding number of common units, increasing the Company’s total ownership interest in GHH, LLC.
Net income and loss is allocated to the Continuing Equity Owners on a pro-rata basis, assuming that any Class B common units that are subject to time-based vesting requirements are fully vested.
GHH, LLC is a holding company with no operating assets or operations and was formed to acquire a 100% equity interest in Norvax. On May 6, 2020, Blizzard Parent, LLC changed its name to “GoHealth Holdings, LLC.” GHH, LLC owns 100% of Blizzard Midco, LLC, which owns 100% of Norvax. For all of the periods reported in these Condensed Consolidated Financial Statements, GHH, LLC has not and does not have any material operations on a standalone basis, and all of the operations of GHH, LLC are carried out by Norvax.
The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, but do not include all information and footnote disclosures required under GAAP for annual financial statements. The accompanying Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company’s 2022 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 23, 2023. In the opinion of management, the interim Condensed Consolidated Financial Statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows as of the dates and for the periods presented. All intercompany transactions and balances are eliminated in consolidation.
Certain prior period amounts have been reclassified to conform with the current period presentation. During the first quarter of 2023, the Company reorganized its operating and reportable segments into a single operating and reportable segment. Refer to the “Segment Information” section within this Note below for further information regarding this update. The Company also changed the presentation of its disaggregation of revenue table, which is further described in Note 9. “Revenue” of the Notes to Condensed Consolidated Financial Statements. These reclassifications had no impact on the Company’s financial position, results of operations or cash flows. All share and per share amounts have been retroactively adjusted to reflect the one-for-fifteen reverse stock split. See Note 5. “Stockholders' Equity” of the Notes to Condensed Consolidated Financial Statements for more
| GoHealth, Inc. | 2023 Form 10-Q | 10 | ||||||
information. Revenue share on the Condensed Consolidated Statement of Operations, previously referred to as “cost of revenue,” reflects a name change and does not require any financial information to be reclassified from previous periods.
There have been no material changes to the Company’s significant accounting policies from those disclosed in the notes to the Company’s audited Consolidated Financial Statements as of and for the year ended December 31, 2022, which were included in the Company’s 2022 Annual Report on Form 10-K.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Seasonality
The Medicare annual enrollment period occurs from October 15th to December 7th. As a result, we experience an increase in the number of Submissions during the fourth quarter and an increase in expense related to Medicare Submissions during the third and fourth quarters. Additionally, as a result of the annual Medicare Advantage open enrollment period that occurs from January 1st to March 31st, Medicare Submissions are typically second highest in our first quarter. The second and third quarters are known as special election periods and are our seasonally smallest quarters. A significant portion of our marketing and advertising expenses is driven by the number of health insurance applications submitted through us. Marketing and advertising expenses are generally higher in the fourth quarter during the Medicare annual enrollment period, but because commissions from approved customers are paid to us over time, our operating cash flows could be adversely impacted by a substantial increase in marketing and advertising expenses as a result of a higher volume of applications submitted during the fourth quarter or positively impacted by a substantial decline in marketing and advertising expenses as a result of lower volume of applications submitted during the fourth quarter.
Segment Information
Operating segments are identified as components of an enterprise about which separate discrete financial information is available and reviewed regularly by the chief operating decision-maker (“CODM”). The Company’s CODM is its chief executive officer who reviews financial information together with certain operating metrics principally to make decisions about how to allocate resources and to measure the Company’s performance. During the first quarter of 2023, the Company reorganized its operations from four operating and reportable segments to one operating and reportable segment. The change reflects how the CODM evaluates the Company’s operating and financial performance on a consolidated basis and is consistent with changes made to the Company’s internal reporting structure. Additionally, the single operating segment aligns with the Company’s shift in focus towards Medicare products. All prior period comparative segment information was recast to reflect the current single operating segment in accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting.
Recent Accounting Pronouncements
In March 2020 the Financial Accounting Standards Board issued ASU No. 2020-04, Reference Rate Reform (“ASC 848”). The purpose of ASC 848 is to provide optional guidance to ease the potential effects on financial reporting of the market-wide migration away from Interbank Offered Rates to alternative reference rates. ASC 848 applies only to contracts, hedging relationships and other transactions that reference a reference rate expected to be discontinued because of reference rate reform. The new guidance allows entities to prospectively account for contract modifications within the scope of ASC 848. Therefore, such modifications will not require entities to remeasure the modified contract at the modification date or to reassess a prior accounting conclusion. The guidance may be applied upon issuance of ASC 848 through December 31, 2024, as amended by ASU 2022-06, Reference Rate Reform (ASC 848): Deferral of the Sunset Date of Topic 848, which extended the final sunset date from December 31, 2022 to December 31, 2024. The Company adopted ASC 848 on March 15, 2023 upon entry into Amendment No. 10 to the Company’s Credit Agreement, as further discussed in Note 4, “Long-Term Debt” of these Notes to Condensed Consolidated Financial Statements. The adoption of this standard did not have an impact on the Condensed Consolidated Financial Statements and related disclosures.
2. FAIR VALUE MEASUREMENTS
The Company defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques the Company uses to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as presented below.
| GoHealth, Inc. | 2023 Form 10-Q | 11 | ||||||
| Level 1 Inputs | Unadjusted quoted prices in active markets for identical assets or liabilities. | |||||||
| Level 2 Inputs | Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability. | |||||||
| Level 3 Inputs | Unobservable inputs for the asset or liability. | |||||||
Fair Value Measurements
The carrying amount of certain financial instruments, including cash and cash equivalents, accounts receivable, unbilled receivables, accounts payable, and accrued expenses approximate fair value due to the short maturity of these instruments. The carrying value of debt approximates fair value due to the variable nature of interest rates.
As part of the Company’s continued cost savings initiatives, the Company is actively looking to terminate or sublease certain office spaces and call centers. These actions resulted in no operating lease impairment charge for the three months ended September 30, 2023 and a $2.7 million operating lease impairment charge for the nine months ended September 30, 2023. The Company recorded operating lease impairment charges of $0.4 million and $25.3 million for the three and nine months ended September 30, 2022, respectively.
The operating lease impairment charges reduce the carrying value of the associated right-of-use (“ROU”) assets and leasehold improvements to the estimated fair values. The fair values are estimated using a discounted cash flows approach based on forecasted future cash flows expected to be derived from the property based on current sublease market rent, which is considered a level 3 input in the fair value hierarchy, and other key assumptions such as future sublease market conditions and the discount rate.
3. INTANGIBLE ASSETS, NET
Intangible Assets
The gross carrying amounts, accumulated amortization and net carrying amounts of the Company’s definite-lived amortizable intangible assets, as well as its indefinite-lived intangible trade names, are as follows:
| Sep. 30, 2023 | ||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||
| Developed technology | $ | 496,000 | $ | 286,971 | $ | 209,029 | ||||||||||||||
| Customer relationships | 232,000 | 93,960 | 138,040 | |||||||||||||||||
| Total intangible assets subject to amortization | $ | 728,000 | $ | 380,931 | $ | 347,069 | ||||||||||||||
| Indefinite-lived trade names | 83,000 | |||||||||||||||||||
| Total intangible assets | $ | 430,069 | ||||||||||||||||||
| Dec. 31, 2022 | ||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||
| Developed technology | $ | 496,000 | $ | 233,829 | $ | 262,171 | ||||||||||||||
| Customer relationships | 232,000 | 76,560 | 155,440 | |||||||||||||||||
| Total intangible assets subject to amortization | $ | 728,000 | $ | 310,389 | $ | 417,611 | ||||||||||||||
| Indefinite-lived trade names | 83,000 | |||||||||||||||||||
| Total intangible assets | $ | 500,611 | ||||||||||||||||||
There was no impairment of intangible assets for the three and nine months ended September 30, 2023 and 2022.
As of September 30, 2023, expected amortization expense related to intangible assets for each of the five succeeding years is as follows:
| GoHealth, Inc. | 2023 Form 10-Q | 12 | ||||||
| (in thousands) | Developed Technology | Customer Relationships | Total | |||||||||||||||||
| Remainder of 2023 | $ | 17,715 | $ | 5,800 | $ | 23,515 | ||||||||||||||
| 2024 | 70,857 | 23,200 | 94,057 | |||||||||||||||||
| 2025 | 70,857 | 23,200 | 94,057 | |||||||||||||||||
| 2026 | 49,600 | 23,200 | 72,800 | |||||||||||||||||
| 2027 | — | 23,200 | 23,200 | |||||||||||||||||
| Thereafter | — | 39,440 | 39,440 | |||||||||||||||||
| Total | $ | 209,029 | $ | 138,040 | $ | 347,069 | ||||||||||||||
4. LONG-TERM DEBT
The Company’s long-term debt consisted of the following:
| (in thousands) | Sep. 30, 2023 | Dec. 31, 2022 | ||||||||||||
| Term Loan Facilities | $ | 502,796 | $ | 518,133 | ||||||||||
| Less: Unamortized debt discount and issuance costs | (5,831) | (8,053) | ||||||||||||
| Total debt | $ | 496,965 | $ | 510,080 | ||||||||||
| Less: Current portion of long-term debt | — | (5,270) | ||||||||||||
| Total long-term debt | $ | 496,965 | $ | 504,810 | ||||||||||
Term Loan Facilities
On September 13, 2019, Norvax (the “Borrower”) entered into a first lien credit agreement (the “Credit Agreement”) which provided for a $300.0 million aggregate principal amount senior secured term loan facility (the “Initial Term Loan Facility”). During 2020 and 2021, the Company entered into a series of amendments to the Credit Agreement to provide for, among other items as further described below, (i) $117.0 million of incremental term loans (the “Incremental Term Loan Facility”), (ii) a new class of incremental term loans (the ”2021 Incremental Term Loans”) in an aggregate principal amount equal to $310.0 million, which was used to refinance $295.5 million of outstanding principal under the Initial Term Loan Facility, and (iii) a new class of incremental term loans (the “2021-2 Incremental Term Loans”) in an aggregate principal amount equal to $100.0 million.
On March 14, 2022, the Company entered into Amendment No. 7 to the Credit Agreement and Incremental Facility Agreement (“Amendment No. 7”). Amendment No. 7 provided that (a) the 2021 Incremental Term Loans, from and after the Amendment No. 7 Effective Date, will bear interest at either (i) alternate base rate (“ABR”) plus 5.50% per annum or (ii) LIBOR plus 6.50% per annum and (b) the 2021-2 Incremental Term Loans, from and after the Amendment No. 7 Effective Date, will bear interest at either (i) ABR plus 5.50% per annum or (ii) LIBOR plus 6.50% per annum. Amendment No. 7 further amended the Credit Agreement to remove testing of the Net Leverage Ratio for the December 31, 2021 period and increased the maximum permitted Net Leverage Ratio for future reporting periods through March 31, 2023. The Company incurred $1.7 million of debt issuance costs associated with Amendment No. 7, which are being amortized over the life of the debt to interest expense using the effective interest method.
On August 12, 2022, the Company entered into Amendment No. 8 to the Credit Agreement and Incremental Facility Agreement (“Amendment No. 8”). Amendment No. 8 provided that (a) the 2021 Incremental Term Loans, from and after the Amendment No. 8 Effective Date, will bear interest at either (i) ABR plus 6.50% per annum or (ii) LIBOR plus 7.50% per annum and (b) the 2021-2 Incremental Term Loans, from and after the Amendment No. 8 Effective Date, will bear interest at either (i) ABR plus 6.50% per annum or (ii) LIBOR plus 7.50% per annum. Amendment No. 8 further amended the Credit Agreement to increase the maximum permitted Net Leverage Ratio for future reporting periods from December 31, 2022 through June 30, 2023. The Company incurred $1.0 million of debt issuance costs associated with Amendment No. 8, which are being amortized over the life of the debt to interest expense using the effective interest method.
On November 9, 2022, the Company entered into Amendment No. 9 to the Credit Agreement (“Amendment No. 9”). Amendment No. 9 provided that the Incremental Term Loan, from and after the Amendment No. 8 Effective Date, will bear interest at either (i) ABR plus 6.50% per annum or (ii) LIBOR plus 7.50% per annum. Amendment No. 9 further amended the Credit Agreement to increase the maximum permitted Net Leverage Ratio for the September 30, 2023 reporting period.
On March 15, 2023, the Company entered into Amendment No. 10 to the Credit Agreement (“Amendment No. 10”). Amendment No. 10 amended the Credit Agreement to convert the existing London Interbank-Offered Rate (“LIBOR”)-based rate applicable to the term loan and revolving credit facilities under the Credit Agreement to a Term Secured Overnight Financing Rate (“SOFR”) with a credit spread adjustment of 0.10%, 0.15% or 0.25% per annum for interest periods of one month, three months, or six months, respectively, and a floor of 1.00%, effective on the amendment date. Amendment No. 10 provided that the Incremental Term Loan, the 2021 Incremental Term Loans, and the 2021-2 Incremental Term Loans from and after the rate set date following the Amendment No. 10 Effective Date, will bear interest at either (i) ABR plus 6.50% per annum or (ii) SOFR plus 7.50% per annum.
| GoHealth, Inc. | 2023 Form 10-Q | 13 | ||||||
The Company collectively refers to the Initial Term Loan, Incremental Term Loan Facility, 2021 Incremental Term Loans and 2021-2 Incremental Term Loans as the “Term Loan Facilities.”
As of September 30, 2023, the Company had a principal amount of $110.4 million, $296.3 million and $96.1 million outstanding under the Incremental Term Loan Facility, the 2021 Incremental Term Loans, and the 2021-2 Incremental Term Loans, respectively. As of December 31, 2022, the Company had a principal amount of $113.7 million, $305.4 million, and $99.0 million outstanding under the Incremental Term Loan Facility, the 2021 Incremental Term Loans, and the 2021-2 Incremental Term Loans, respectively. The Term Loan Facilities’ effective interest rates were 12.9% at September 30, 2023 and 11.2% at December 31, 2022.
The Term Loan Facilities are payable in quarterly installments in the principal amount of 0.25% of the original principal amount. The remaining unpaid balance on the Term Loan Facilities, together with all accrued and unpaid interest thereon, is due and payable on or prior to September 13, 2025.
Mandatory Prepayments
The Credit Agreement requires that the Borrower, following the end of each fiscal year, offer to repay the outstanding principal amount of all term loans under the Credit Facilities in an aggregate amount equal to (A) 50.0% of the excess cash flow of the Borrower and its restricted subsidiaries for such fiscal year if the Total Net Leverage Ratio (as defined in the Credit Agreement) is greater than 4.50:1.00, which percentage is reduced to 25% if the Total Net Leverage Ratio is less than or equal to 4.50:1.00 and greater than 4.00:1.00, which percentage is further reduced to 0% if the Total Net Leverage Ratio is less than or equal to 4.00:1.00, minus (B) at the option of the Borrower, (x) the aggregate amount of certain voluntary prepayments of term loans under the Credit Agreement during such fiscal year or after year-end and prior to the time such Excess Cash Flow prepayment is due, (y) the aggregate principal amount of any voluntary prepayments of indebtedness under pari passu incremental facilities, incremental equivalent debt and/or certain refinancing indebtedness, made during such fiscal year or after such fiscal year and prior to the time such prepayment is due. With respect to each required offer of prepayment, each lender of the term loans has the right to refuse any such offer. To the extent any such offer of prepayment is refused, the aggregate amount of the offered prepayment shall be retained by the Borrower and its restricted subsidiaries. Subject to these terms, the lenders accepted the Company’s offer of prepayment in connection with fiscal year 2022, and as such, the Company paid $14.0 million during the second quarter of 2023. No other mandatory prepayments were required or made during the three and nine months ended September 30, 2023 and 2022.
Principal repayment obligations are reduced by the amount of any prepayment, and as such, the $14.0 million prepayment during the second quarter of 2023 satisfied the Company’s principal repayment obligations through the second quarter of 2025.
Revolving Credit Facilities
The Credit Agreement provided for a $30.0 million aggregate principal amount senior secured revolving credit facility (the “Revolving Credit Facility”). During 2020 and 2021, the Company entered into a series of amendments to the Credit Agreement to provide for $28.0 million of incremental revolving credit (the “Incremental Revolving Credit Facilities”), and $142.0 million of incremental revolving credit (the “Incremental No. 4 Revolving Credit Facility”), respectively, for a total amount of $200.0 million.
The Company collectively refers to the Revolving Credit Facility, the Incremental Revolving Credit Facilities, and the Incremental No. 4 Revolving Credit Facility as the “Revolving Credit Facilities.” The Revolving Credit Facilities are separated into two classes of revolving commitments consisting of Class A Revolving Commitments in the amount of $30.0 million and Class B Revolving Commitments in the amount of $170.0 million.
Amendment No. 10, as described above, further provided that borrowings under the Class A Revolving Commitments bear interest at either ABR plus 5.50% per annum or SOFR plus 6.50% per annum. Borrowings under the Class B Revolving Commitments bear interest at either ABR plus 3.00% per annum or SOFR plus 4.00% per annum. The Borrower is required to pay a commitment fee of 0.50% per annum under the Revolving Credit Facilities.
The Company had no amounts outstanding under the Class A Revolving Credit Facilities and Class B Revolving Credit Facilities as of both September 30, 2023 and December 31, 2022. The Revolving Credit Facilities have a remaining capacity of $200.0 million in the aggregate as of both September 30, 2023 and December 31, 2022.
Outstanding borrowings under the Revolving Credit Facilities do not amortize and are due and payable on September 13, 2024.
The Borrower’s obligations under the Term Loan Facilities and Revolving Credit Facilities are guaranteed by Blizzard Midco, LLC and certain of the Borrower’s subsidiaries. All obligations under the Credit Agreement are secured by a first priority lien on substantially all of the assets of the Borrower, including a pledge of all of the equity interests of its subsidiaries. The Credit Agreement contains customary events of default and financial and non-financial covenants. The Company is in compliance with all covenants as of September 30, 2023.
| GoHealth, Inc. | 2023 Form 10-Q | 14 | ||||||
5. STOCKHOLDERS' EQUITY
In connection with the Company’s IPO in July 2020, the Company’s board of directors (the “Board of Directors”) approved an amended and restated certificate of incorporation and amended and restated bylaws. The amended and restated certificate of incorporation authorizes the issuance of up to 1,100,000,000 shares of Class A common stock, 690,000,000 shares of Class B common stock and 20,000,000 shares of preferred stock, each having a par value of $0.0001 per share. The number of shares of Class B common stock authorized is reduced for redemptions and forfeitures as they occur.
The Company’s amended and restated certificate of incorporation and the GHH, LLC Agreement require that the Company and GHH, LLC at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by the Company and the number of LLC Interests owned by the Company, except as otherwise determined by the Company. Additionally, the Company’s amended and restated certificate of incorporation and the GoHealth Holdings, LLC Agreement require that the Company and GHH, LLC at all times maintain a one-to-one ratio between the number of shares of Class B common stock owned by the Continuing Equity Owners and their respective permitted transferees and the number of LLC Interests owned by the Continuing Equity Owners and their respective permitted transferees, except as otherwise determined by the Company. Only the Continuing Equity Owners and the permitted transferees of Class B common stock are permitted to hold shares of Class B common stock. Shares of Class B common stock are transferable for shares of Class A common stock only together with an equal number of LLC Interests.
Holders of shares of the Company’s Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Each share of Class B common stock entitles its holders to one vote per share on all matters presented to the Company’s stockholders generally. Holders of shares of Class B common stock will vote together with holders of the Company’s Class A common stock as a single class on all matters presented to the Company’s stockholders for their vote or approval, except for certain amendments to the Company’s amended and restated certificate of incorporation or as otherwise required by applicable law or the amended and restated certificate of incorporation. Holders of our Class B common stock are not entitled to participate in any dividends declared by our Board of Directors. Under the terms of the Company’s amended and restated certificate of incorporation, the Company’s Board of Directors is authorized to direct the Company to issue shares of preferred stock in one or more series without stockholder approval. The Company’s Board of Directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The Continuing Equity Owners may, subject to certain exceptions, from time to time at each of their options require GHH, LLC to redeem all or a portion of their LLC Interests in exchange for, at the Company’s election (determined by at least two of the Company’s independent directors who are disinterested), newly-issued shares of Class A common stock on a one-for-one basis, or to the extent there is cash available from a secondary offering, a cash payment equal to a volume weighted average market price of one share of the Company’s Class A common stock for each LLC Interest so redeemed, in each case, in accordance with the terms of the GoHealth Holdings, LLC Agreement.
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to the Company and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentages for the three and nine months ended September 30, 2023 were 57.5% and 58.5%, respectively. The non-controlling interest holders' weighted average ownership percentages for the three and nine months ended September 30, 2022 were 59.8% and 61.7%, respectively.
Upon the Company’s dissolution or liquidation, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, holders of Class A common stock and Class B common stock will be entitled to receive ratable portions of the Company’s remaining assets available for distribution; provided, that the holders of Class B common stock shall not be entitled to receive more than $0.0001 per share of Class B common stock and upon receiving such amount, shall not be entitled to receive any of the Company’s other assets or funds with respect to such shares of Class B common stock.
Redeemable Convertible Preferred Stock
On September 23, 2022 (the “Closing Date”), the Company issued 50,000 shares of the Company’s Series A Convertible Perpetual Preferred Stock (the “Issuance”), par value $0.0001 per share (the “Series A redeemable convertible preferred stock”), to Anthem Insurance Companies, Inc. and GH 22 Holdings, Inc. (the “Purchasers”) for an aggregate purchase price of $50.0 million, at $1,000 per share of the Series A redeemable convertible preferred stock.
The Company is authorized to issue 20,000,000 shares of preferred stock with a par value of $0.0001 per share as of both September 30, 2023 and December 31, 2022, which had not been designated to any specific classes of preferred stock prior to the Closing Date. On the Closing Date, the Company designated and authorized the issuance of 50,000 shares under the Series A redeemable convertible preferred stock and 200,000 shares under the Series A-1 Convertible Non-Voting Perpetual Preferred Stock (the “Series A-1 convertible preferred stock”).
| GoHealth, Inc. | 2023 Form 10-Q | 15 | ||||||
The Series A redeemable convertible preferred stock ranks senior to the shares of the Company’s Class A common stock and Class B common stock with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company. The Series A redeemable convertible preferred stock has an initial liquidation preference of $1,000 per share, which shall increase by accumulated quarterly dividends that are not paid in cash (“compounded dividends”). Dividends on each share of Series A redeemable convertible preferred stock shall accrue at an annual rate equal to 7%. Holders of Series A-1 convertible preferred stock are only entitled to dividends if the Company declares such dividends. For the three and nine months ended September 30, 2023, the Company paid in cash $0.9 million and $2.7 million, respectively, of dividends relating to the Series A-1 convertible preferred stock. For the three and nine months ended September 30, 2022, the Company accrued $0.1 million of dividends that were not paid in cash, which were included within temporary equity on the Condensed Consolidated Balance Sheets.
The Series A redeemable convertible preferred stock is convertible in full at the option of the holders into the number of shares of Class A common stock equal to the quotient of (a) the sum of (x) the liquidation preference (reflecting increases for compounded dividends) plus (y) the accrued dividends with respect to each share of convertible preferred stock as of the applicable conversion date divided by (b) the conversion price ($9.60 as of September 30, 2023 and subject to adjustment based on certain changes to the Company’s Class A common stock) as of the applicable conversion date. Notwithstanding the foregoing, a holder of Series A redeemable convertible preferred stock may elect to receive upon conversion, in lieu of the shares of Class A common stock otherwise deliverable, one share of Series A-1 convertible preferred stock for every 1,000 shares of Class A common stock otherwise deliverable upon conversion. The Series A-1 convertible preferred stock will be essentially a substitute for the Class A common stock in the form of non-voting preferred stock.
The terms of the Series A redeemable convertible and A-1 convertible preferred stock contain certain anti-dilution adjustments. Subject to certain conditions, at any time after the third anniversary of the Closing Date, if the volume weighted average price per share of Class A common stock on Nasdaq is equal to or greater than 150% of the then-applicable conversion price for each of at least twenty (20) trading days, whether or not consecutive, in any period of thirty (30) consecutive trading days ending on and including the trading day immediately before the Company provides the holders with notice of its election to convert all or a portion of the Series A redeemable convertible preferred stock into the relevant number of shares of Class A common stock or Series A-1 convertible preferred stock (at the election of the holder), the Company may elect to convert all or a portion of the Series A redeemable convertible preferred stock into the relevant number of shares of Class A common stock or Series A-1 convertible preferred stock.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares of Series A-1 convertible preferred stock (if issued upon conversion of the Series A redeemable convertible preferred stock) will be entitled, out of assets legally available therefor, and subject to the rights of the holders of any senior stock (including the Series A redeemable convertible preferred stock) or parity stock (including the common stock) and the rights of the Company’s existing and future creditors, to receive an aggregate amount per share equal to 1,000 (as may be adjusted) times the aggregate amount to be distributed per share to holders of shares of Class A common stock. Each holder of a whole share of Series A-1 convertible preferred stock (if issued upon conversion of the Series A redeemable convertible preferred stock) shall be entitled to receive when, as and if declared by the Company’s Board of Directors out of funds legally available for the purpose, an amount per share equal to 1,000 (as may be adjusted) times the aggregate per share amount of all cash dividends, and 1,000 (as may be adjusted) times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Class A common stock or a subdivision of the outstanding shares of Class A common stock (by reclassification or otherwise), declared on each share of Class A common stock since the first issuance of any share of Series A-1 convertible preferred stock. Each holder of Series A-1 convertible preferred stock (if issued upon conversion of the Series A redeemable convertible preferred stock) will have the right, at such holder’s option, to convert in full each share of such holder’s Series A-1 convertible preferred stock at such time into the number of shares of Class A common stock based upon a conversion ratio of 1,000 shares of Class A common stock for each share of Series A-1 convertible preferred stock (such ratio being subject to adjustment).
Under the Certificate of Designations, holders of the Series A redeemable convertible preferred stock are entitled to vote with the holders of the Class A common stock on an as-converted basis on all matters submitted to a vote of the holders of the Class A common stock. Notwithstanding the foregoing: (1) the lead Purchaser’s voting rights shall not exceed 9.99% of the voting rights associated with the issued and outstanding shares of capital stock of the Company at any time; and (2) the voting rights of the Purchasers holding Series A redeemable convertible preferred stock, voting on an as-converted basis with the holders of the Class A common stock and the holders of any other class or series of capital stock of the Company then entitled to vote, shall be capped at the maximum amount that would not result in requiring shareholder approval for the exercise of such voting rights pursuant to the rules of Nasdaq. The Series A-1 convertible preferred stock is not entitled to vote with the Class A common stock on matters submitted to a vote of the holders of the Class A common stock and will have no voting rights except as required by applicable law.
In addition, holders of the Preferred Stock are entitled to a separate class vote with respect to, among other things, amendments to the Company’s organizational documents that materially, adversely and disproportionately affect the Series A redeemable convertible preferred stock, authorizations or issuances by the Company of securities that are senior to or pari passu with the Series A redeemable convertible preferred stock and issuing any debt security (for the avoidance of doubt, excluding any draws under the Company’s Existing Credit Agreement referenced in the Certificate of Designations), if the Company’s Consolidated
| GoHealth, Inc. | 2023 Form 10-Q | 16 | ||||||
Total Net Debt (as defined in the Certificate of Designations) following such action would exceed four times the Company’s Consolidated EBITDA (as defined in the Certificate of Designations) for the Company’s most recently completed four consecutive fiscal quarters.
At any time following the fifth anniversary of the Closing Date, the Company may redeem the Series A redeemable convertible preferred stock, in whole or in part, for a per share amount in cash equal to the liquidation preference (reflecting increases for compounded dividends) thereof plus all accrued dividends as of the applicable redemption date. Upon certain change of control events involving the Company, (i) a holder of the Series A redeemable convertible preferred stock may, so long as such payment would not otherwise result in a breach of, or event of default under, then-existing credit agreements, indentures or other financing arrangements, require the Company to purchase and (ii) subject to a holder’s right to convert its shares of Series A redeemable convertible preferred stock into Class A common stock or Series A-1 convertible preferred stock at the then-current conversion price, the Company may elect to purchase, all or a portion of such holder’s shares of Series A redeemable convertible preferred stock that have not been so converted, in each case at a purchase price per share of Series A redeemable convertible preferred stock, payable in cash, equal to (A) if the change of control effective date occurs at any time prior to the fifth anniversary of the Closing Date, 160% of a purchaser’s original investment amount and (B) if the change of control effective date occurs on or after the fifth anniversary of the Closing Date, the liquidation preference (reflecting increases for compounded dividends) of such share of Series A redeemable convertible preferred stock plus the accrued dividends in respect of such share of Series A redeemable convertible preferred stock as of the change of control purchase date.
The Purchasers have entered into a customary registration rights agreement with respect to shares of Class A common stock held by the Purchasers issued upon any future conversion of the Series A redeemable convertible preferred stock or Series A-1 convertible preferred stock.
In connection with the Issuance, the Company, as the managing member of GHH, LLC, caused the GHH, LLC (i) to issue to the Company, in exchange for the proceeds from the Issuance, Series A preferred units (the “Preferred Units”) and (ii) to authorize another series of preferred units (the “Series A-1 Preferred Units”), in each case having an aggregate liquidation preference and having terms substantially economically equivalent to the aggregate liquidation preference and the economic terms of the Series A redeemable convertible preferred stock and the Series A-1 convertible preferred stock, respectively, and entered into Amendment No. 2 to the GoHealth Holdings, LLC Agreement (“Amendment No. 2”) to effectuate the same.
The Company classifies the Series A redeemable convertible preferred stock and Series A-1 convertible preferred stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within the Company’s control. The Company does not remeasure the redeemable convertible preferred stock because it is not currently redeemable and not probable of becoming redeemable. The redeemable convertible preferred stock was recorded at fair value upon issuance, net of issuance costs of $1.6 million.
Reverse Stock Split
On November 10, 2022, the Board of Directors approved a resolution to effect a reverse stock split such that every holder of Class A common stock and Class B common stock (together, “Common Stock”) received one share of the respective class of stock for every fifteen shares of Common Stock held (the “Reverse Stock Split”). The Reverse Stock Split also adjusted the LLC Interests. The authorized shares and par value per share of the Common Stock and preferred stock were not adjusted as a result of the Reverse Stock Split. With respect to the Series A redeemable convertible preferred stock, the conversion price was automatically adjusted to account for the Reverse Stock Split for such shares. Share and per share amounts of preferred stock were not adjusted as a result of the Reverse Stock Split. The Reverse Stock Split became effective on November 17, 2022.
6. SHARE-BASED COMPENSATION PLANS
The following table summarizes share-based compensation expense by operating function for the periods presented:
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Marketing and advertising | $ | 149 | $ | 556 | $ | 378 | $ | 1,212 | ||||||||||||||||||
| Customer care and enrollment | 519 | 738 | 1,847 | 1,993 | ||||||||||||||||||||||
| Technology | 676 | 884 | 2,365 | 2,493 | ||||||||||||||||||||||
| General and administrative | (1,889) | 4,277 | 11,569 | 20,170 | ||||||||||||||||||||||
| Total share-based compensation expense | $ | (545) | $ | 6,456 | $ | 16,159 | $ | 25,868 | ||||||||||||||||||
Stock Appreciation Rights
On June 6, 2022, the Founders were each granted two stock appreciation rights ("SARs") under the 2020 Employment Inducement Award Plan. The first SAR commenced on June 6, 2022, and the second SAR commenced on June 21, 2023. Each SAR will be settled in cash with an aggregate commencement date value equal to $1.5 million (the number of shares to be determined by dividing such value by the per share Black-Scholes valuation as of the date of commencement), will have an
| GoHealth, Inc. | 2023 Form 10-Q | 17 | ||||||
exercise price equal to the fair market value of a share of the Company’s common stock on the date of commencement and will vest in full on the three-year anniversary of the date of commencement. For the SARs with no future service requirement, the total initial fair value of the awards was recorded as an expense at the time of the grant. The fair value of the awards with a future service requirement was recognized on a straight-line basis over the requisite service period (which service period has now been completed). The fair value of the SARs is revalued (mark-to-market) each reporting period using the Black-Scholes valuation model based on the Company’s period-end stock price. SARs are liability-classified awards, and as such, are recorded as a liability on the Condensed Consolidated Balance Sheet. The Company had a share-based compensation liability related to the SARs of $5.8 million and $5.0 million as of September 30, 2023 and December 31, 2022, respectively.
Performance Stock Units (“PSUs”)
During 2021, the Company granted to certain of its employees 32,579 shares of Class A common stock issuable pursuant to performance stock units (“PSUs”). The criteria for the market-based PSUs are based on the Company’s total shareholder return (“TSR”) relative to the TSR of the common stock of a predefined industry peer group. TSR is measured at the end of the performance period, which is generally the period commencing on the grant date and ending on the three-year anniversary of the grant date. Depending on the relative TSR achieved, the number of PSUs earned can vary from 0% of the target award to a maximum of 200% of the target award. The Company estimated the grant-date fair value of the awards subject to a market condition using a Monte Carlo simulation model, using the following weighted-average assumptions: risk-free interest rate of 0.2% and annualized volatility of 72.0%. The grant date fair value of the PSUs was $332.55 per share. The Company recognizes the grant date fair value of PSUs as compensation expense on a straight-line basis over the three-year performance period.
On June 7, 2022, the Company granted, to certain of its executives, an aggregate of 194,444 shares of Class A common stock issuable pursuant to volume weighted average PSUs (“VWAPs”). The number of shares issued on the three-year anniversary of the date of grant is based on volume weighted average price performance over such three year period (“Three Year VWAP”) in the following percentages: (i) 50% if the Three Year VWAP is equal to or greater than $30.00 but less than $45.00; (ii) 100% if the Three Year VWAP is equal to or greater than $45.00 but less than $60.00; (iii) 150% if the Three Year VWAP is equal to or greater than $60.00 but less than $90.00; and (iv) 200% if the Three Year VWAP is equal to or greater than $90.00. The Company estimated the grant-date fair value of the awards subject to a market condition using a Monte Carlo simulation model, using the following weighted-average assumptions: risk-free interest rate of 2.9% and annualized volatility of 94%. The grant-date fair value of the VWAPs was $8.25 per share. The Company recognizes the grant-date fair value of VWAPs as compensation expense on a straight-line basis over the three-year performance period.
On April 10, 2023, the Company granted, to certain of its executives, an aggregate of 100,000 shares of Class A common stock issuable pursuant to PSUs. The criteria for the performance-based PSUs are based on the Company’s compound annual growth rate in Adjusted EBITDA (“Adjusted EBITDA CAGR Percentage”), determined based on the Company’s Adjusted EBITDA for calendar year 2025 compared to the Company’s reported 2022 Adjusted EBITDA. Depending on the Adjusted EBITDA CAGR Percentage achieved, the number of PSUs earned can vary from 0% of the target award to a maximum of 200% of the target award and will vest on the date the Company files its Annual Report on Form 10-K for the fiscal year ending December 31, 2025, subject to the participants’ continued service with the Company through that date. The grant-date fair value of the PSUs was $14.10 per share, which was the Company’s closing stock price on the grant date. The Company will accrue compensation cost on a straight-line basis over the requisite service period for the PSUs that are expected to vest. The Company will reassess the probability of achieving the performance condition at each reporting period and record a cumulative catch-up adjustment for any changes to its assessment, which could be either a reversal or increase in expense.
For the three and nine months ended September 30, 2023, the Company recorded share-based compensation benefit related to PSUs of $1.1 million and expense of $0.4 million, respectively. The share-based compensation benefit for the three months ended September 30, 2023 was driven by a forfeiture related to the departure of an executive officer. For the three and nine months ended September 30, 2022, the Company recorded share-based compensation expense related to PSUs of $0.2 million and $1.2 million, respectively.
7. NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted loss per share is computed giving effect to all potentially dilutive shares. Diluted loss per share for all periods presented is the same as basic loss per share as the inclusion of potentially issuable shares would be antidilutive.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share of Class A common stock is as follows:
| GoHealth, Inc. | 2023 Form 10-Q | 18 | ||||||
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| (in thousands, except per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net loss | $ | (56,204) | $ | (74,654) | $ | (148,976) | $ | (225,647) | ||||||||||||||||||
| Less: Net loss attributable to non-controlling interests | (32,294) | (44,649) | (86,945) | (138,340) | ||||||||||||||||||||||
| Net loss attributable to GoHealth, Inc. | (23,910) | (30,005) | (62,031) | (87,307) | ||||||||||||||||||||||
| Less: Dividends accumulated on redeemable convertible preferred stock | 892 | 67 | 2,675 | 67 | ||||||||||||||||||||||
| Net loss attributable to common stockholders | (24,802) | (30,072) | (64,706) | (87,374) | ||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Weighted-average shares of Class A common stock outstanding—basic | 9,489 | 8,825 | 9,194 | 8,293 | ||||||||||||||||||||||
| Effect of dilutive securities | — | — | — | — | ||||||||||||||||||||||
| Weighted-average shares of Class A common stock outstanding—diluted | 9,489 | 8,825 | 9,194 | 8,293 | ||||||||||||||||||||||
| Net loss per share of Class A common stock—basic and diluted | $ | (2.61) | $ | (3.41) | $ | (7.04) | $ | (10.54) | ||||||||||||||||||
The following number of shares were excluded from the calculation of diluted loss per share because the effect of including such potentially dilutive shares would have been antidilutive:
| Sep. 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Class A common stock issuable pursuant to equity awards | 2,125 | 1,688 | ||||||||||||
| Class A common stock issuable pursuant to conversion of redeemable convertible preferred stock | 3,873 | 5,208 | ||||||||||||
| Class B common stock | 12,817 | 13,079 | ||||||||||||
Shares of Class B common stock do not share in earnings and are not participating securities. Accordingly, separate presentation of loss per share of Class B common stock under the two-class method has not been presented. Shares of Series A redeemable convertible preferred stock are not participating securities as holders receive a contractual dividend. Accordingly, separate presentation of loss per share of Series A redeemable convertible preferred stock under the two-class method has not been presented.
8. INCOME TAXES
The Company is taxed as a corporation for income tax purposes and is subject to federal, state, and local taxes on the income allocated to it from GHH, LLC based upon the Company’s economic interest in GHH, LLC. The Company is the sole managing member of GHH, LLC and, as a result, consolidates the financial results of GHH, LLC. GHH, LLC is a limited liability company taxed as a partnership for income tax purposes, and the subsidiaries of GHH, LLC are limited liability companies for income tax purposes except for a single domestic subsidiary and its foreign subsidiary, which are taxed as a corporation and foreign disregarded entity, respectively. As such, GHH, LLC does not pay any federal income taxes, as income or loss is included in the tax returns of the individual members. Additionally, certain wholly-owned entities taxed as corporations are subject to federal, state, and foreign income taxes in the jurisdictions in which they operate, and accruals for such taxes are included in the Condensed Consolidated Financial Statements.
The Company’s effective tax rate for the three and nine months ended September 30, 2023 was 0.19% and 0.15%, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2022 was 0.00% and (0.21)%, respectively. The effective tax rate for each period is lower than the statutory tax rate primarily due to the effect of loss entities for which the Company excludes from its effective tax rate calculation and loss attributable to non-controlling interests.
Tax Receivable Agreement
In connection with the IPO, the Company entered into a Tax Receivable Agreement with GHH, LLC, the Continuing Equity Owners and the Blocker Shareholders that will provide for the payment by the Company to the Continuing Equity Owners and the Blocker Shareholders of 85% of the amount of tax benefits, if any, that the Company actually realizes (or in some circumstances is deemed to realize). The amounts payable under the Tax Receivable Agreement will vary depending upon a number of factors, including the amount, character, and timing of the taxable income of the Company in the future. As of December 31, 2022 and September 30, 2023, the liability related to the Tax Receivable Agreement was $0.6 million. Should the Company determine that changes to amounts currently recorded arising from the Tax Receivable Agreement are considered probable at a future date based on new information, such additional amounts will be recorded within income from continuing operations at that time.
9. REVENUE
| GoHealth, Inc. | 2023 Form 10-Q | 19 | ||||||
Revenue Recognition for Variable Consideration
The Company’s variable consideration includes the total estimated lifetime value (“LTV”) it expects to receive for selling an insurance product after the health plan partner approves an application. The consideration is variable based on the amount of time it estimates a policy will remain in force, which is based on historical experience or health plan partner experience to the extent available, industry data and expectations as to future retention rates. Additionally, the Company considers the application of a constraint and only recognizes the amount of variable consideration that it believes is probable that it will be entitled to receive and will not be subject to a significant revenue reversal in the future.
On a quarterly basis, the Company re-estimates LTV at a vintage level for outstanding vintages, which takes into account cash received as compared to the original estimates and reviews and monitors changes in the data used to estimate LTV. Changes in LTV may result in an increase or a decrease to revenue and a corresponding change to commissions receivable. The Company analyzes these differences and to the extent the Company believes differences in the estimates are indicative of a change to prior period LTVs, the Company will adjust revenue for the affected vintages at the time such determination is made and when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. For the three and nine months ended September 30, 2023, the Company recorded no revenue adjustments. For the three and nine months ended September 30, 2022, the Company recorded negative revenue adjustments of $3.1 million and $9.3 million, respectively, for changes in estimates relating to performance obligations satisfied in prior periods.
Disaggregation of Revenue
The table below depicts the disaggregation of revenue and is consistent with how the Company evaluates its financial performance:
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Medicare Revenue | ||||||||||||||||||||||||||
| Agency Revenue | ||||||||||||||||||||||||||
Commission Revenue1 | $ | 76,579 | $ | 82,308 | $ | 261,513 | $ | 383,028 | ||||||||||||||||||
| Partner Marketing and Other Revenue | 21,300 | 19,725 | 71,619 | 75,131 | ||||||||||||||||||||||
| Total Agency Revenue | 97,879 | 102,033 | 333,132 | 458,159 | ||||||||||||||||||||||
| Non-Agency Revenue | 33,510 | 12,851 | 106,586 | 22,151 | ||||||||||||||||||||||
| Total Medicare Revenue | 131,389 | 114,884 | 439,718 | 480,310 | ||||||||||||||||||||||
| Other Revenue | ||||||||||||||||||||||||||
| Non-Encompass BPO Services Revenue | — | 17,554 | 9,322 | 75,610 | ||||||||||||||||||||||
| Other Revenue | 648 | 614 | 8,934 | 6,379 | ||||||||||||||||||||||
| Total Other Revenue | 648 | 18,168 | 18,256 | 81,989 | ||||||||||||||||||||||
| Total Net Revenue | $ | 132,037 | $ | 133,052 | $ | 457,974 | $ | 562,299 | ||||||||||||||||||
(1)Commission revenue excludes commissions generated through the Company’s Non-Encompass BPO Services as well as from the sale of individual and family plan insurance products.
Medicare Revenue: The primary services provided by the Company relate to the sale and administration of Medicare insurance products through either the agency model or the non-agency model. The agency model refers to the commission revenue and partner marketing revenue the Company receives when GoHealth agents or the Company’s independent network of outsourced agents enroll the consumer and submit the policy application to the health plan partner, becoming the agent of record. The Company recognizes commission revenue from the sale of insurance products at the point when health plan partners approve an insurance application produced by the Company. The Company records as commission revenue the expected amount of initial commissions received from the health plan partners and any renewal commissions to be paid on such placement as long as the policyholder remains with the same insurance product, which represents the LTV it expects to receive for selling the product after the health plan partner approves an application. As part of its estimation process, the Company constrains revenue such that the amount of revenue recognized is the amount the Company believes is probable will not result in a significant reversal in the future. The Company records partner marketing services over time based on delivering call volumes or providing marketing services.
Non-agency revenue refers to services provided by the Company that support enrollment and engagement activities in which the Company is not the agent of record. The non-agency model moves away from the agency structure in that cash is collected in advance or in close proximity to the point in time revenue is recognized. Non-agency revenue includes enrollment and engagement services through Encompass Connect and Encompass Engage. Encompass Connect is designed to provide enrollment related services to our participating partners. The Company is compensated for generating and transferring leads to the health plan partners, at which time the health plan partner representative will enroll and submit the application, becoming the agent of record. Revenue is recognized at the point in time the lead is transferred. Encompass Engage includes post-enrollment member outreach and engagement services, including facilitating onboarding experiences customized to members’ plan and health needs. The Company recognizes Encompass Engage revenue over time based on member retention and providing post-enrollment services.
| GoHealth, Inc. | 2023 Form 10-Q | 20 | ||||||
Other Revenue: Other revenue is comprised of Non-Encompass BPO Services, which refers to programs in which GoHealth-employed agents are dedicated to certain health plans and agencies we partner with outside of the Encompass model. These services include commission revenue and partner marketing revenue that is directly attributable to Non-Encompass BPO Services. The remaining revenue relates primarily to revenue generated from the sale of individual and family plan insurance products and ancillary services.
Contract Assets and Liabilities
The Company records contract assets and contract liabilities from contracts with customers as it relates to commissions receivable, commissions payable and deferred revenue. Commissions receivable represents estimated variable consideration for commissions to be received from health plan partners for performance obligations that have been satisfied. Commissions payable represents estimated commissions to be paid to the Company’s external agents and other partners.
The Company had unbilled receivables for performance-based enrollment fees and non-agency revenue as of September 30, 2023 and December 31, 2022 of $8.0 million and $39.6 million, respectively, which are recorded in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets. There are no other contract assets or contract liabilities recorded by the Company.
Deferred revenue includes amounts collected for partner marketing services and non-agency revenue in advance of the Company satisfying its performance obligations for such customers. The decrease in deferred revenue during the nine months ended September 30, 2023 was primarily due to less cash received as of September 30, 2023 compared to December 31, 2022 for marketing, administrative and enrollment fees in advance of performing such services that the Company expects to satisfy within the next twelve months.
For the three months ended September 30, 2023 and 2022, the Company recognized no revenue that was deferred as of December 31, 2022 and December 31, 2021, respectively. For the nine months ended September 30, 2023 the Company recognized $45.3 million of revenue that was deferred as of December 31, 2022, and for the nine months ended September 30, 2022, the Company recognized $0.1 million of revenue that was deferred as of December 31, 2021.
Commissions Receivable
Commissions receivable activity is summarized as follows:
| Nine months ended Sep. 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Beginning balance | $ | 1,031,433 | $ | 1,262,507 | ||||||||||
| Commission revenue | 266,393 | 414,735 | ||||||||||||
| Cash receipts | (402,116) | (500,257) | ||||||||||||
| Allowance for credit loss | 43 | 57 | ||||||||||||
| Ending balance | $ | 895,753 | $ | 1,177,042 | ||||||||||
| Less: Commissions receivable - current | 285,922 | 217,937 | ||||||||||||
| Commissions receivable - non-current | $ | 609,831 | $ | 959,105 | ||||||||||
The Company’s contracts with health plan partners expose it to credit risk because a financial loss could be incurred if the counterparty does not fulfill its financial obligation. While the Company is exposed to credit losses due to the potential non-performance of its counterparties, the Company considers this risk to be remote. The Company estimates the allowance for credit losses using available information from internal and external sources, related to historical experiences, current conditions and forecasts. Estimates of loss given default are determined by using historical collections data as well as historical information obtained through research and review of other peer companies. The estimated exposure of default is determined by applying these internal and external factors to the commission receivable balances. The Company estimates the maximum credit risk in determining the commissions receivable amount recorded on the balance sheet.
Significant Customers
The following table presents health plan partners representing 10% or more of the Company’s total revenue for the periods indicated:
| GoHealth, Inc. | 2023 Form 10-Q | 21 | ||||||
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Humana | 44 | % | 28 | % | 41 | % | 26 | % | ||||||||||||||||||
| Elevance Health | 20 | % | 24 | % | 18 | % | 24 | % | ||||||||||||||||||
| United | 20 | % | 15 | % | 20 | % | 17 | % | ||||||||||||||||||
| Centene | 7 | % | 17 | % | 7 | % | 15 | % | ||||||||||||||||||
Concentration of Credit Risk
The Company does not require collateral or other security in granting credit. As of September 30, 2023, three customers each represented 10% or more of the Company’s total accounts receivable and unbilled receivables and, in aggregate, represented 91%, or $18.6 million, of the combined total. As of December 31, 2022, three customers each represented 10% or more of the Company’s total accounts receivable and unbilled receivables and, in aggregate, represented 85%, or $37.6 million, of the combined total.
10. LEASES
The Company has entered into operating agreements with lease periods expiring between 2023 and 2032. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
Components of lease expense are as follows, all recorded within operating expenses in the Condensed Consolidated Statement of Operations:
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Finance lease cost1 | $ | — | $ | — | $ | — | $ | 102 | ||||||||||||||||||
| Operating lease cost | 1,831 | 2,210 | 5,879 | 6,212 | ||||||||||||||||||||||
Short-term lease cost2 | 14 | 117 | 47 | 370 | ||||||||||||||||||||||
Variable lease cost3 | 604 | 65 | 858 | 202 | ||||||||||||||||||||||
| Sublease income | (396) | (295) | (1,181) | (844) | ||||||||||||||||||||||
| Total net lease expense | $ | 2,053 | $ | 2,097 | $ | 5,603 | $ | 6,042 | ||||||||||||||||||
(1)Primarily consists of amortization of finance lease right-of-use assets and an immaterial amount of interest on finance lease liabilities recorded in operating expenses and interest expense in the Condensed Consolidated Statements of Operations.
(2)Includes costs related to leases, which at the commencement date, have a lease term of 12 months or less.
(3)Includes costs incurred by the Company for the right to use an underlying asset that vary because of changes in facts or circumstances occurring after the commencement date, other than the passage of time.
As part of the Company’s continued cost savings initiatives, the Company is actively looking to terminate or sublease certain office spaces and call centers. These actions resulted in no operating lease impairment charge for the three months ended September 30, 2023 and a $2.7 million operating lease impairment charge for the nine months ended September 30, 2023. The Company recorded a $0.4 million and $25.3 million operating lease impairment charge for the three and nine months ended September 30, 2022, respectively. Refer to Note 2. “Fair Value Measurements” for further details.
As of September 30, 2023, future minimum lease payments for operating leases consisted of the following:
| (in thousands) | Operating Leases | |||||||
| Remainder of 2023 | $ | 2,318 | ||||||
| 2024 | 9,717 | |||||||
| 2025 | 8,835 | |||||||
| 2026 | 7,751 | |||||||
| 2027 | 7,997 | |||||||
| Thereafter | 27,451 | |||||||
| Total lease payments | $ | 64,069 | ||||||
| Less: Imputed interest | (17,465) | |||||||
| Present value of lease liabilities | $ | 46,604 | ||||||
Supplemental cash flow information related to leases are as follows:
| GoHealth, Inc. | 2023 Form 10-Q | 22 | ||||||
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||||||||||||
| Operating cash flows from operating leases | $ | 3,075 | $ | 3,816 | $ | 10,123 | $ | 7,703 | ||||||||||||||||||
| Operating lease assets obtained in exchange for new lease obligations: | ||||||||||||||||||||||||||
Operating lease assets obtained in exchange for new lease obligations(1) | 6,735 | $ | — | 6,735 | $ | 26,405 | ||||||||||||||||||||
| Reduction in operating lease ROU assets and lease liabilities due to reassessment of lease terms | $ | — | $ | — | $ | — | $ | 4,155 | ||||||||||||||||||
(1)The Company entered into a lease agreement for its corporate headquarters in Chicago, which commenced on July 5, 2023. The Company entered into a lease agreement with Wilson Tech 5, LLC for office space in Utah, which commenced on June 8, 2022.
The weighted average remaining operating lease term and discount rate are as follows:
| Sep. 30, | ||||||||||||||
| 2023 | 2022 | |||||||||||||
Weighted average remaining lease term: | 7.2 years | 7.6 years | ||||||||||||
| Weighted average discount rate: | 8.9 | % | 8.0 | % | ||||||||||
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
In September 2020, three purported securities class action complaints were filed in the United States District Court for the Northern District of Illinois against the Company, certain of its officers and directors, and certain underwriters, private equity firms, and investment vehicles alleging that the Registration Statement filed in connection with the IPO was negligently prepared and, as a result, contained untrue statements of material fact, omitted material facts necessary to make the statements contained therein not misleading, and failed to make necessary disclosures required under the rules and regulations governing its preparation, including the Securities Act of 1933 (the “Securities Class Action”). Compensatory damages and reasonable costs and expenses incurred in the Securities Class Action were sought by the plaintiffs. On December 10, 2020, the court in the earliest filed action consolidated the three complaints, appointed lead plaintiffs and lead counsel for the consolidated action, and captioned the consolidated action “In re GoHealth, Inc. Securities Litigation.” On February 25, 2021, lead plaintiffs filed a consolidated complaint. On April 26, 2021, the Company and officer and director defendants filed a motion to dismiss the complaint. On April 5, 2022, that motion was denied. On May 31, 2022, the Company and officer and director defendants filed an answer to the consolidated complaint and, on June 21, 2022, they filed an amended answer. On September 23, 2022, lead plaintiffs filed a motion for class certification, which remains pending. The court has not yet set a trial date.
On May 19, 2021, a derivative action (the “Derivative Action”) was filed in the United States District Court for the Northern District of Illinois, purportedly on behalf of the Company and against certain of the Company’s officers and directors, alleging breaches of fiduciary duty and other claims, based on substantially the same factual allegations as in the Securities Class Action. On June 6, 2022, the Derivative Action was stayed pursuant to the parties’ stipulation.
The Company disputes each claim in the above referenced matters and intends to defend the pending actions noted above. The ultimate outcome of any damages that may become payable if its defense is unsuccessful in whole or in part is not probable nor estimable at this time. While the Company feels confident in its defense of these pending matters, there can be no assurance that it will prevail and that any damages that may be awarded will not be material to the results of operations or financial condition of the Company. We are contesting the Securities Class Action and the Derivative Action, but may pursue settlement negotiations in one or both cases, as we deem appropriate.
Although outcomes of these cases are uncertain until final disposition, the Company establishes an accrual for such matter when a loss is deemed to be probable and reasonably estimable. To date, the Company has recorded a $12.0 million accrual for the Securities Class Action and the Derivative Action. The amount of the accrual is an estimate based on the Company’s understanding of the action, the specifics of the case and management’s best estimate of the potential loss to be incurred at this time. This estimate will be adjusted from time to time to reflect any changes in circumstances. It is possible that actual future losses related to the Securities Class Action and the Derivative Action will exceed the current accrual level.
12. RELATED PARTY TRANSACTIONS
The Company is party to various lease agreements with 214 W Huron LLC, 220 W Huron Street Holdings LLC, 215 W Superior LLC, and Wilson Tech 5, LLC, each of which are controlled by significant shareholders of the Company, to lease its corporate offices in Chicago, Illinois and offices in Lindon, Utah. The Company pays rent, operating expenses, maintenance and utilities under the terms of the leases. For the three and nine months ended September 30, 2023 the Company made aggregate lease
| GoHealth, Inc. | 2023 Form 10-Q | 23 | ||||||
payments of $1.5 million and $4.5 million, respectively. For the three and nine months ended September 30, 2022 the Company made aggregate lease payments of $1.5 million and $2.4 million, respectively.
On January 1, 2020, the Company entered into a non-exclusive aircraft dry lease agreement with an entity wholly-owned and controlled by certain significant shareholders of the Company. The agreement allows the Company to use an aircraft owned by this entity for business and on an as-needed basis. The agreement has no set term and is terminable without cause by either party upon 30 days’ prior written notice. Under the agreement, the Company is required to pay $6,036.94 per flight hour for use of the aircraft. For the three and nine months ended September 30, 2023 the Company recorded no expense under the lease. For the three months ended September 30, 2022 the Company recorded no expense under the lease. For the nine months ended September 30, 2022 the Company recorded expense of $0.6 million under the lease.
13. RESTRUCTURING COSTS
During the second and third quarters of fiscal year 2022, the Company implemented restructuring initiatives as part of its strategic transformation to drive efficiency and optimize costs. On June 3, 2022, the Board approved the separation and replacement of key management roles, including Chief Operating Officer, Chief Financial Officer, Chief Strategy Officer, and President. On August 9, 2022, the Company eliminated 828 full-time positions, representing approximately 23.7% of the workforce, primarily within the customer care and enrollment group. The majority of the restructuring charges incurred relate to employee termination benefits and will be settled in cash through the second quarter of 2024. The restructuring activities related to this plan were materially complete as of December 31, 2022. The Company evaluates restructuring charges in accordance with ASC 420 Exit or Disposal Cost Obligations and ASC 712 Compensation—Nonretirement Post-Employment Benefits.
During the three and nine months ended September 30, 2023 the Company incurred no restructuring and other related charges. The components of the restructuring and other related charges for the three and nine months ended September 30, 2022 are as follows:
| (in thousands) | Three months ended Sep. 30, 2022 | Nine months ended Sep. 30, 2022 | ||||||||||||
Employee termination benefits 1 | $ | 8,722 | $ | 10,797 | ||||||||||
Other associated costs 2 | 1,075 | 1,075 | ||||||||||||
| Total restructuring and other related charges | $ | 9,797 | $ | 11,872 | ||||||||||
(1)Employee termination benefits primarily consist of employee severance and benefits that will be settled in cash.
(2)Other associated costs primarily consist of the non-cash acceleration of agent licensing fees as well as legal expenses incurred in connection with the reduction-in-force.
The following table provides the changes in the Company’s restructuring and other related charges that will be settled in cash, included in accrued liabilities on the Condensed Consolidated Balance Sheets:
| Nine months ended Sep. 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
Beginning balance | $ | 2,083 | $ | — | ||||||||||
| Charges incurred | — | 10,896 | ||||||||||||
| Cash paid | (1,138) | (6,480) | ||||||||||||
Ending balance | $ | 945 | $ | 4,416 | ||||||||||
| GoHealth, Inc. | 2023 Form 10-Q | 24 | ||||||
| ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS. | ||
This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this Quarterly Report on Form 10-Q, including the Condensed Consolidated Financial Statements and related Notes, and should be read in conjunction with the accompanying tables. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q and under the heading “Item 1A. Risk Factors.” in the 2022 Annual Report on Form 10-K. The risks and uncertainties described in the 2022 Annual Report on Form 10-K are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition, or results of operations. We assume no obligation to update any of these forward-looking statements.
Unless otherwise noted, all dollars are in thousands. In certain cases, numbers and percentages in the tables below may not foot due to rounding.
Overview
We are a leading health insurance marketplace and Medicare-focused digital health company whose mission is to improve access to healthcare in America. Our proprietary technology platform leverages modern machine-learning algorithms powered by nearly two decades of insurance behavioral data to reimagine the optimal process for helping individuals find the best health insurance plan for their specific needs. Our differentiated combination of a vertically integrated consumer acquisition platform and highly skilled and trained agents has enabled us to enroll millions of people in Medicare and individual and family plans since our inception. With a current commissionable market of nearly $30 billion, over 10,000 Americans turning 65 years old every day and our significant presence in the Medicare space, we believe we will continue to be one of the top choices for insurance advice to help navigate one of the most important purchasing decisions individuals make.
Update on Business Trends and Strategy
The Company is part of a dynamic market and, as expectations evolve, the Company likewise works to evolve in parallel its business strategies and priorities. In response to the pressures on LTVs in 2021 and 2022 that we previously observed and discussed in our 2022 Annual Report on Form 10-K, the Company focused its efforts on delivering efficiency, with an emphasis on operational efficiency as opposed to revenue maximization. As a result, in 2022 we implemented steps to transition to the Encompass model, which is our preferred operating platform that puts the customer at the center of all our activities, including how we market, support enrollment activities, provide administrative services, utilize our proprietary technology, and ultimately deliver a high quality solution to those we serve. The Encompass model supports all Medicare services, including agency and non-agency revenue. Agency revenue refers to the commission revenue and partner marketing revenue the Company receives when GoHealth agents or the Company’s independent network of outsourced agents enroll the consumer and submit the policy application to the health plan partner, becoming the agent of record. Non-agency revenue refers to services provided by the Company that support enrollment and engagement activities in which the Company is not the agent of record. The non-agency model moves away from the agency structure in that cash is collected in advance or in close proximity to the point in time revenue is recognized, and was previously labeled “Encompass Revenue.”
The enrollment and engagement services offered through our non-agency model are strategically designed to enhance the consumer experience, reflecting our increased focus on building trusted, long-term relationships with our consumers. For the three months ended September 30, 2023, non-agency revenue increased by $20.7 million compared to the prior year period. Non-agency revenue grew from 11% of total Medicare revenue for the three months ended September 30, 2022 to 26% of total Medicare revenue for the three months ended September 30, 2023. For the nine months ended September 30, 2023, non-agency revenue increased by $84.4 million compared to the prior year period. Non-agency revenue grew from 5% of total Medicare revenue for the nine months ended September 30, 2022 to 24% of total Medicare revenue for the nine months ended September 30, 2023. The growth of non-agency revenue reinforces our commitment to putting consumers at the center of all we do.
We refined the size of our sales force to align with our focus on quality, and we expanded our services by offering Encompass Connect and Encompass Engage to our health plan partner members. Encompass Connect is designed to focus on consumer acquisition and to provide enrollment related services to our participating health plan partners. Using machine learning technology, our agents aim to effectively qualify and match individuals with the best plan through our PlanFit Tool. This combination of technology and experienced agents delivers a personalized matching process that incorporates consumers’ top priorities and helps them to understand associated tradeoffs across various benefits as they select and enroll in a plan. During the second quarter of 2023, we expanded our Encompass Connect contracts and model to include our external partners.
| GoHealth, Inc. | 2023 Form 10-Q | 25 | ||||||
Our continued investment in technology is an important differentiator for GoHealth and our consumers. During October 2023, we launched our PlanFit CheckUp offering, in which GoHealth agents complete a quality shopping assessment for consumers shopping for a Medicare Advantage plan. PlanFit CheckUp enables consumers to navigate this crowded space, regularly assessing the appropriateness of their current plan through a data-driven customized process, guided by the trusted expertise of a licensed GoHealth agent.
Encompass Engage includes post-enrollment member outreach and engagement services. Our agents strive to alleviate the confusion that consumers often feel by facilitating an onboarding experience customized to a member’s plan and health needs.
With leading proprietary technology and consumer insights, our end-to-end Encompass model offers a differentiated way for Medicare beneficiaries to navigate the complex Medicare Advantage plan selection process and begin to utilize their new plan benefits with greater confidence. By working closely with our benefit consultants and dedicated health plan enrollment specialists, we believe individuals can better understand the plan options available and receive more detailed, plan-specific information during the enrollment process. Coupled with the execution of our new member onboarding action plans, consumers who enroll through our Encompass model have exhibited higher customer persistency.
Additionally, the Company made the strategic decision to exit its Non-Encompass BPO Services, or services in which we dedicate certain agents to specific health plan partners and agencies outside of the Encompass model, to focus on our core business. The exit was completed during the second quarter of 2023. During the three months ended September 30, 2023, Non-Encompass BPO Services contributed no net revenue. During the nine months ended September 30, 2023, Non-Encompass BPO Services contributed $9.3 million of net revenue. During the three and nine months ended September 30, 2022, Non-Encompass BPO Services contributed $17.6 million and $75.6 million of net revenue, respectively.
During the first quarter of 2023, the Company reorganized its operations from four operating and reportable segments to one operating and reportable segment. The change reflects how the CODM evaluates the Company’s operating and financial performance on a consolidated basis and is consistent with changes made to the Company’s internal reporting structure. Additionally, the single operating segment aligns with the Company’s shift in focus towards Medicare products. All prior period comparative segment information was recast to reflect the current single operating segment in accordance with ASC 280, Segment Reporting.
| Ownership | ||
GoHealth, Inc. is the sole managing member of GHH, LLC. Although we have a minority economic interest in GHH, LLC, we have the sole voting interest in, and control of the business and affairs of, GHH, LLC and its direct and indirect subsidiaries. As a result, GoHealth, Inc. consolidates GHH, LLC and records significant non-controlling interest in a consolidated entity in GoHealth, Inc.’s Condensed Consolidated Financial Statements for the economic interest in GHH, LLC held directly or indirectly by the Continuing Equity Owners. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to the Company and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentages for the three and nine months ended September 30, 2023 was 57.5% and 58.5%, respectively. The non-controlling interest holders' weighted average ownership percentages for the three and nine months ended September 30, 2022 were 59.8% and 61.7%, respectively.
The percentage ownership of total shares of Class A and Class B common stock issued and outstanding as of September 30, 2023, is as follows:
| GoHealth, Inc. | 2023 Form 10-Q | 26 | ||||||
The percentage of ownership noted above is inclusive of only Class A and Class B common stock issued and outstanding. It does not include the Series A redeemable convertible preferred stock or the impact of any conversion of such, should a conversion occur. For more information on the Series A redeemable convertible preferred stock, please refer to Note 5 “Stockholders' Equity” of the Notes to Condensed Consolidated Financial Statements.
The Company implemented the Reverse Stock Split, which became effective on November 17, 2022. Please refer to Note 5 “Stockholders' Equity” of the Notes to Condensed Consolidated Financial Statements for more information on the Reverse Stock Split.
GoHealth, Inc. is subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of GHH, LLC and is taxed at the prevailing corporate tax rates. In addition to tax expenses, we also incur expenses related to our status as a public company, plus payment obligations under the Tax Receivable Agreement (“TRA”), which could be significant. We intend to cause GHH, LLC to make distributions to us in an amount sufficient to allow us to pay these expenses and fund any payments due under the TRA.
| GoHealth, Inc. | 2023 Form 10-Q | 27 | ||||||
| Results of Operations | ||
The following is our consolidated results of operations for the three and nine months ended September 30, 2023 and 2022:
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Net revenues | 132,037 | 133,052 | 457,974 | — | 562,299 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Revenue share | 35,992 | 48,044 | 117,876 | 167,041 | ||||||||||||||||||||||
| Marketing and advertising | 39,416 | 22,661 | 124,428 | 151,408 | ||||||||||||||||||||||
| Customer care and enrollment | 46,472 | 51,153 | 134,035 | 196,150 | ||||||||||||||||||||||
| Technology | 11,652 | 11,061 | 31,706 | 34,569 | ||||||||||||||||||||||
| General and administrative | 12,967 | 25,611 | 73,440 | 90,859 | ||||||||||||||||||||||
| Amortization of intangible assets | 23,514 | 23,514 | 70,543 | 70,543 | ||||||||||||||||||||||
| Operating lease impairment charges | — | 350 | 2,687 | 25,345 | ||||||||||||||||||||||
| Restructuring and other related charges | — | 9,797 | — | 11,872 | ||||||||||||||||||||||
| Total operating expenses | 170,013 | 192,191 | 554,715 | — | 747,787 | |||||||||||||||||||||
| Income (loss) from operations | (37,976) | (59,139) | (96,741) | — | (185,488) | |||||||||||||||||||||
| Interest expense | 17,565 | 15,630 | 51,721 | 39,752 | ||||||||||||||||||||||
| Other (income) expense, net | 771 | (115) | 739 | (65) | ||||||||||||||||||||||
| Income (loss) before income taxes | (56,312) | (74,654) | (149,201) | (225,175) | ||||||||||||||||||||||
| Income tax expense (benefit) | (108) | — | (225) | 472 | ||||||||||||||||||||||
| Net income (loss) | (56,204) | (74,654) | (148,976) | (225,647) | ||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | (32,294) | (44,649) | (86,945) | (138,340) | ||||||||||||||||||||||
| Net income (loss) attributable to GoHealth, Inc. | $ | (23,910) | $ | (30,005) | $ | (62,031) | $ | (87,307) | ||||||||||||||||||
| Non-GAAP financial measures: | ||||||||||||||||||||||||||
| EBITDA | $ | (12,482) | $ | (30,959) | $ | (18,580) | $ | (104,999) | ||||||||||||||||||
| Adjusted EBITDA | $ | (11,475) | $ | (14,327) | $ | 18,091 | $ | (34,995) | ||||||||||||||||||
| Adjusted EBITDA margin | (8.7) | % | (10.8) | % | 4.0 | % | (6.2) | % | ||||||||||||||||||
The following is our net revenues for the three and nine months ended September 30, 2023 and 2022:
| Net Revenues | Three months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||
| $ | 132,037 | $ | 133,052 | $ | (1,015) | (0.8) | % | |||||||||||||||||||
| Nine months ended Sep. 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||
| $ | 457,974 | $ | 562,299 | $ | (104,325) | (18.6) | % | |||||||||||||||||||
The decrease for the three months ended September 30, 2023 compared to the prior year period was primarily attributable to a decrease in revenues associated with the strategic decision to exit our Non-Encompass BPO Services to focus on our core business. The decrease was partially offset by a 14% increase in Medicare revenue. The decrease for the nine months ended September 30, 2023 compared to the prior year period was primarily attributable to a decrease in revenues associated with the strategic decision to exit our Non-Encompass BPO Services, as well as a decrease in agent headcount and associated opportunities, which drove an 8% decrease in Medicare revenue.
The following are our key components of operating expenses and results thereof for the three and nine months ended September 30, 2023 and 2022:
| Revenue share | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 35,992 | $ | 48,044 | $ | (12,052) | (25.1) | % | 27.3% | 36.1% | ||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 117,876 | $ | 167,041 | $ | (49,165) | (29.4) | % | 25.7% | 29.7% | ||||||||||||||||||||||||||
| GoHealth, Inc. | 2023 Form 10-Q | 28 | ||||||
The decreases for both the three and nine months ended September 30, 2023 compared to the prior year periods were primarily attributable to declines in certain direct partner campaigns with revenue-sharing components.
| Marketing and advertising expense | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 39,416 | $ | 22,661 | $ | 16,755 | 73.9 | % | 29.9% | 17.0% | ||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 124,428 | $ | 151,408 | $ | (26,980) | (17.8) | % | 27.2% | 26.9% | ||||||||||||||||||||||||||
The increase for the three months ended September 30, 2023 compared to the prior year period was primarily attributable to an increase in investments related to the testing of marketing strategies in advance of the 2023 Medicare annual enrollment period (“AEP”). The decrease for the nine months ended September 30, 2023 compared to the prior year period was primarily attributable to an intentional pullback on marketing and advertising spend during the first two quarters of the current fiscal year as the Company focused on higher quality Submissions through targeted marketing.
| Customer care and enrollment | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 46,472 | $ | 51,153 | $ | (4,681) | (9.2) | % | 35.2% | 38.4% | ||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 134,035 | $ | 196,150 | $ | (62,115) | (31.7) | % | 29.3% | 34.9% | ||||||||||||||||||||||||||
The decrease for the three months ended September 30, 2023 compared to the prior year period was primarily attributable to reduced agent headcount as we focused on improving operational efficiencies, partially offset by increased investment in the development of agents in preparation for the 2023 AEP. The decrease for the nine months ended September 30, 2023 was primarily attributable to reduced agent headcount during the first two quarters of the current fiscal year as we focused on improving operational efficiencies.
| Technology expense | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 11,652 | $ | 11,061 | $ | 591 | 5.3 | % | 8.8% | 8.3% | ||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 31,706 | $ | 34,569 | $ | (2,863) | (8.3) | % | 6.9% | 6.1% | ||||||||||||||||||||||||||
The slight increase for the three months ended September 30, 2023 compared to the prior year period was primarily attributable to the introduction of technological enhancements in preparation for the 2023 AEP. The decrease for the nine months ended September 30, 2023 compared to the prior year period was primarily attributable to reduced headcount in our technology support functions during the first two quarters of the current fiscal year, partially offset by the third quarter technological enhancements in preparation for the 2023 AEP.
| General and administrative expense | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| 12,967 | 25,611 | $ | (12,644) | (49.4) | % | 9.8% | 19.2% | ||||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 73,440 | $ | 90,859 | $ | (17,419) | (19.2) | % | 16.0% | 16.2% | ||||||||||||||||||||||||||
The decrease for the three months ended September 30, 2023 compared to the prior year period was primarily attributable to a decrease in share-based compensation expense and a reduction of expenses related to legal fees. The decrease for the nine months ended September 30, 2023 compared to the prior year period was primarily attributable to a decrease in share-based compensation expense, a reduction of expenses related to consulting fees and reduced headcount in our corporate infrastructure, partially offset by an increase of expenses related to legal fees.
| GoHealth, Inc. | 2023 Form 10-Q | 29 | ||||||
| Amortization of intangible assets | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| 23,514 | 23,514 | $ | — | — | % | 17.8% | 17.7% | ||||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 70,543 | $ | 70,543 | $ | — | — | % | 15.4% | 12.5% | ||||||||||||||||||||||||||
Amortization of intangible assets expense was $23.5 million for the three months ended September 30, 2023 and 2022 and $70.5 million for the nine months ended September 30, 2023 and 2022. Amortization of intangible assets expense relates to the amortization of developed technology and customer relationships.
| Interest expense | Three months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| 17,565 | 15,630 | $ | 1,935 | 12.4 | % | 13.3% | 11.7% | ||||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | ||||||||||||||||||||||||||||||
| $ | 51,721 | $ | 39,752 | $ | 11,969 | 30.1 | % | 11.3% | 7.1% | ||||||||||||||||||||||||||
The increases for both the three and nine months ended September 30, 2023 compared to the prior year periods were primarily attributable to an increase in interest rates on our Term Loan Facilities.
| Non-GAAP Financial Measures | ||
We use supplemental measures of our performance that are derived from our consolidated financial information, but which are not presented in our Condensed Consolidated Financial Statements prepared in accordance with GAAP. These non-GAAP financial measures include net income (loss) before interest expense, income tax (benefit) expense and depreciation and amortization expense, or EBITDA; Adjusted EBITDA; Adjusted EBITDA margin; Sales per Submission; Cost per Submission and Adjusted Gross Margin per Submission. Adjusted EBITDA is the primary financial performance measure used by management to evaluate the business and monitor its results of operations. Sales per Submission, Cost per Submission and Adjusted Gross Margin per Submission are key operating metrics used by management to understand the Company’s underlying financial performance and trends.
Adjusted EBITDA represents, as applicable for the period, EBITDA as further adjusted for certain items summarized in the table below. Adjusted EBITDA margin represents Adjusted EBITDA divided by net revenue. Sales per Submission represents Medicare Revenue per Submission as further adjusted for certain items summarized in the table within the Key Business Performance and Operating Metrics section below. Cost per Submission represents Operating Expense per Submission as further adjusted for certain items summarized in the table within the Key Business Performance and Operating Metrics section below. Adjusted Gross Margin represents Sales per Submission less Cost per Submission.
We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this Quarterly Report on Form 10-Q. For example, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from or as a substitute for the most directly comparable measures prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of each of EBITDA, Adjusted EBITDA, Sales per Submission, Cost per Submission and Adjusted Gross Margin per Submission to its most directly comparable GAAP financial measure, are presented in the tables below in this Quarterly Report on Form 10-Q. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In
| GoHealth, Inc. | 2023 Form 10-Q | 30 | ||||||
future periods, we may exclude similar items, may incur income and expenses similar to these excluded items and include other expenses, costs and non-recurring items.
The following table sets forth the reconciliations of GAAP net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| Non-GAAP Financial Measures | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
| Net revenues | $ | 132,037 | $ | 133,052 | $ | 457,974 | $ | 562,299 | ||||||||||||||||||
| Net income (loss) | (56,204) | (74,654) | (148,976) | (225,647) | ||||||||||||||||||||||
| Interest expense | 17,565 | 15,630 | 51,721 | 39,752 | ||||||||||||||||||||||
| Income tax expense (benefit) | (108) | — | (225) | 472 | ||||||||||||||||||||||
| Depreciation and amortization expense | 26,265 | 28,065 | 78,900 | 80,424 | ||||||||||||||||||||||
| EBITDA | (12,482) | (30,959) | (18,580) | (104,999) | ||||||||||||||||||||||
Share-based compensation expense (benefit)1 | (545) | 6,456 | 16,159 | 25,868 | ||||||||||||||||||||||
Legal fees2 | 339 | — | 14,692 | — | ||||||||||||||||||||||
Operating lease impairment charges3 | — | 350 | 2,687 | 25,345 | ||||||||||||||||||||||
Severance costs4 | — | — | 1,920 | 2,940 | ||||||||||||||||||||||
Professional services5 | 1,213 | 29 | 1,213 | 3,979 | ||||||||||||||||||||||
Restructuring and other related charges6 | — | 9,797 | — | 11,872 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | (11,475) | $ | (14,327) | $ | 18,091 | $ | (34,995) | ||||||||||||||||||
| Adjusted EBITDA Margin | (8.7) | % | (10.8) | % | 4.0 | % | (6.2) | % | ||||||||||||||||||
(1)Represents non-cash share-based compensation (benefit) expense relating to equity awards, as well share-based compensation (benefit) expense relating to liability classified awards that will be settled in cash.
(2)Represents non-routine legal fees and accruals unrelated to our core operations.
(3)Represents operating lease impairment charges, reducing the carrying value of the associated ROU assets and leasehold improvements to the estimated fair values.
(4)Represents costs associated with the termination of executive employment and associated fees unrelated to restructuring activities.
(5)Represents costs primarily associated with non-recurring consulting fees and other professional services.
(6)Represents employee termination benefits and other associated costs related to restructuring activities, as described in Note 13. “Restructuring Costs” of the Notes to Condensed Consolidated Financial Statements.
Adjusted EBITDA | Three months ended Sep. 30, | % of Net Revenues | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| $ | (11,475) | $ | (14,327) | $ | 2,852 | 19.9 | % | (8.7) | % | (10.8) | % | |||||||||||||||||||||||||||
| Nine months ended Sep. 30, | % of Net Revenues | |||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| $ | 18,091 | $ | (34,995) | $ | 53,086 | 151.7 | % | 4.0 | % | (6.2) | % | |||||||||||||||||||||||||||
The increases for both the three and nine months ended September 30, 2023 compared to the prior year periods were primarily due to our focus on driving high-quality Medicare services for our consumers through the Encompass operating model. Our improved operating efficiencies were enabled by reduced headcount, targeted marketing, and enhancements in our proprietary technology.
| Key Business Performance and Operating Metrics | ||
In addition to traditional financial metrics, we rely upon certain business and operating metrics to evaluate our business performance and facilitate our operations. Below are the most relevant business and operating metrics, besides EBITDA and Adjusted EBITDA, for our single operating and reportable segment.
The following tables set forth the reconciliations of Medicare Revenue per Submission, Operating Expense per Submission, and Gross Margin per Submission to Sales per Submission, Cost Per Submission, and Adjusted Gross Margin per Submission for the periods indicated (unaudited):
| GoHealth, Inc. | 2023 Form 10-Q | 31 | ||||||
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Sales per Submission | ||||||||||||||||||||||||||
| Medicare Revenue per Submission | $ | 813 | $ | 934 | $ | 817 | $ | 892 | ||||||||||||||||||
Lookback Adjustments reported during the indicated periods1 | — | 23 | — | 15 | ||||||||||||||||||||||
| Sales per Submission | $ | 813 | $ | 957 | $ | 817 | $ | 907 | ||||||||||||||||||
| Cost per Submission | ||||||||||||||||||||||||||
| Operating Expense per Submission | $ | 1,052 | $ | 1,563 | $ | 1,031 | $ | 1,389 | ||||||||||||||||||
Indirect operating expenses2 | (298) | (572) | (332) | (434) | ||||||||||||||||||||||
Lookback Adjustments reported during the indicated periods1 | — | 7 | — | 4 | ||||||||||||||||||||||
| Exit of Non-Encompass BPO Services | (5) | (122) | (16) | (115) | ||||||||||||||||||||||
Share-based compensation expense3 | (4) | (10) | (4) | (6) | ||||||||||||||||||||||
| Cost per Submission | $ | 745 | $ | 866 | $ | 679 | $ | 838 | ||||||||||||||||||
Gross Margin per Submission4 | $ | (239) | $ | (629) | $ | (214) | $ | (497) | ||||||||||||||||||
Adjusted Gross Margin per Submission5 | $ | 68 | $ | 91 | $ | 138 | $ | 69 | ||||||||||||||||||
(1)Excludes the impact of Lookback Adjustments on Non-Encompass BPO Services.
(2)Indirect operating expenses include technology, general and administrative, amortization of intangible assets, operating lease impairment charges and restructuring and other related charges.
(3)Shared-based compensation expense included within marketing and advertising expenses and customer care and enrollment expenses.
(4)Medicare Revenue per Submission less Operating Expense per Submission.
(5)Sales per Submission less Cost per Submission.
| Submissions | |||||
Submissions are counted when an individual either (i) completes an application with our licensed agent that is submitted to the health plan partner and subsequently approved by the health plan partner during the indicated period, excluding applications through our Non-Encompass BPO Services or (ii) is transferred by our agent to the health plan partner through the Encompass marketplace during the indicated period. Not all Submissions will go into effect, as some individuals may fail to enroll or once enrolled may switch out of a policy within the disenrollment period during the first 90 days of the policy.
The following table presents the number of Submissions for the periods presented:
Submissions | Three months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | Change | % Change | |||||||||||||||||||||||
| 161,550 | 122,964 | 38,586 | 31.4 | % | ||||||||||||||||||||||
| Nine months ended Sep. 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | Change | % Change | |||||||||||||||||||||||
| 538,032 | 538,523 | (491) | (0.1) | % | ||||||||||||||||||||||
The increase for the three months ended September 30, 2023 was attributable to an increase in opportunities resulting from our focus on higher quality Submissions through targeted marketing. The slight decrease for the nine months ended September 30, 2023 compared to the prior year period was primarily driven by a decrease in agent headcount and associated opportunities resulting from our strategic focus on driving high-quality Medicare services and operational efficiencies.
| Sales Per Submission | |||||
Sales per Submission represents (x) the sum of (i) aggregate commissions estimated to be collected over the estimated life of all commissionable Submissions for the relevant period based on multiple factors, including but not limited to, contracted commission rates, health plan partner mix and expected policy persistency with applied constraints, excluding revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods, (ii) Encompass revenue, and (iii) partner marketing and enrollment services, divided by (y) the number of Submissions for such period, as reported above. Aggregate commissions are equal to the sum of the commission revenue due upon the initial sale of a policy, and when applicable, an estimate of future renewal commissions per commissionable Submissions, and this figure excludes commissions through our Non-Encompass BPO Services. The estimate of the future renewal commissions is determined by using the contracted renewal commission rates constrained by a persistency-adjusted renewal period. The persistency-adjusted renewal period is determined based on our historical experience and available industry and health plan partner historical data. Persistency-adjustments allow us to estimate renewal revenue only to the extent probable that a material reversal in revenue would not be expected to occur. These factors may result in varying values from period to period. Sales per Submission represents revenues only from policies sold during the period, but excludes policies originally submitted in prior periods.
| GoHealth, Inc. | 2023 Form 10-Q | 32 | ||||||
The following table presents the Sales per Submission for the periods presented:
| Sales Per Submission | Three months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||
| $ | 813 | $ | 957 | $ | (144) | (15.0) | % | |||||||||||||||||||
| Nine months ended Sep. 30, | ||||||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||||||||||||
| $ | 817 | $ | 907 | $ | (90) | (9.9) | % | |||||||||||||||||||
The decreases for both the three and nine months ended September 30, 2023 compared to the prior year periods were primarily driven by continued pressures on LTV due to increased consumer shopping behavior and an increased constraint on agency commission, partially offset by an increase in commission rates.
| Sales/Cost of Submission and Cost Per Submission | |||||
Sales/Cost of Submission represents (x) the sum of (i) aggregate commissions estimated to be collected over the estimated life of all commissionable Submissions for the relevant period based on multiple factors, including but not limited to, contracted commission rates, health plan partner mix and expected policy persistency with applied constraints, excluding revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods, and such expenses related to our Non-Encompass BPO Services, (ii) Encompass revenue, and (iii) partner marketing and enrollment services, divided by (y) the aggregate cost to convert prospects into Submissions (comprised of revenue share, marketing and advertising expenses and customer care and enrollment expenses, excluding associated share-based compensation expense, the impact of revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods, and such expenses related to our Non-Encompass BPO Services) for such period. The estimate of the future renewal commissions is determined by using the contracted renewal commission rates constrained by a persistency-adjusted renewal period. The persistency-adjusted renewal period is determined based on our historical experience and available industry and health plan partner historical data. Persistency adjustments allow us to estimate renewal revenue only to the extent probable that a material reversal in revenue would not be expected to occur. These factors may result in varying values from period to period. See “Risk Factors—Risks Related to Our Business—Our operating results may be adversely impacted by factors that impact our estimate of LTV” in the 2022 Annual Report on Form 10-K.
Cost per Submission refers to (x) the aggregate cost to convert prospects into Submissions during a particular period (comprised of revenue share, marketing and advertising expenses, and customer care and enrollment expenses, excluding associated share-based compensation expense, the impact of revenue adjustments recorded in the period, but relating to performance obligations satisfied in prior periods, and such expenses related to our Non-Encompass BPO Services) divided by (y) either (i) a completed application with our licensed agent that is submitted to the insurance health plan partner and subsequently approved by the health plan partner during the indicated period, excluding applications through our Non-Encompass BPO Services or (ii) a transfer by our agent to the health plan partner through the Encompass marketplace during the indicated period.
The following are our Sales/Cost of Submission, Cost of Submission (in thousands) and Cost Per Submission for the three and nine months ended September 30, 2023 and 2022.
| Three months ended Sep. 30, | Nine months ended Sep. 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Sales/Cost of Submission | 1.1 | 1.1 | 1.2 | 1.1 | ||||||||||||||||||||||
| Cost of Submission | $ | 120,362 | $ | 106,432 | 365,612 | $ | 451,535 | |||||||||||||||||||
| Cost per Submission | $ | 745 | $ | 866 | 679 | $ | 838 | |||||||||||||||||||
Sales/Cost of Submission was 1.1 for both the three months ended September 30, 2023 and 2022. The increase in Sales/Cost of Submission for the nine months ended September 30, 2023 compared to the prior year period was primarily attributable to our strategic shift towards the Encompass operating model with improved operating efficiencies. The increase in Cost of Submission for the three months ended September 30, 2023 compared to the prior year period was primarily attributable to an increase in investments made in advance of the 2023 AEP, including the testing of marketing strategies, the introduction of technological enhancements and the ongoing development of agents. The decrease in Cost of Submission for the nine months ended September 30, 2023 compared to the prior year period and the decreases in Cost per Submission for both the three and nine months ended September 30, 2023 compared to the prior year periods was primarily attributable to our strategic shift towards the Encompass operating model with improved operating efficiencies.
Liquidity and Capital Resources
Overview
| GoHealth, Inc. | 2023 Form 10-Q | 33 | ||||||
Our liquidity needs primarily include working capital and debt service requirements. At September 30, 2023, cash and cash equivalents totaled $26.4 million. We believe that our current sources of liquidity, which include cash and cash equivalents and funds available under the Credit Facilities, as described further below, will be sufficient to meet our projected operating and debt service requirements for at least the next 12 months. During the year ended December 31, 2022, we raised $50.0 million through the issuance and sale of Series A redeemable convertible preferred stock. Short-term liquidity needs will primarily be funded through the Revolving Credit Facilities, as described further below, if necessary. As of September 30, 2023, the Company had no amounts outstanding under the Revolving Credit Facilities and had a remaining capacity of $200.0 million. Outstanding borrowings under the Revolving Credit Facilities are due and payable on September 13, 2024. To the extent that our current liquidity is insufficient to fund future activities, we may need to raise additional funds, which may include the sale of equity securities or through debt financing arrangements. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations.
The following table presents a summary of cash flows for the nine months ended September 30, 2023 and 2022:
| Nine months ended Sep. 30, | ||||||||||||||
| (in thousands) | 2023 | 2022 | ||||||||||||
| Net cash provided by (used in) operating activities | $ | 37,840 | $ | 101,903 | ||||||||||
| Net cash provided by (used in) investing activities | (8,087) | (12,096) | ||||||||||||
| Net cash provided by (used in) financing activities | (20,019) | 41,540 | ||||||||||||
Operating Activities
Cash provided by operating activities primarily consists of net income (loss) adjusted for certain non-cash items including share-based compensation, depreciation and amortization, amortization of intangible assets, amortization of debt discount and issuance costs, operating lease impairment charges, non-cash lease expense, non-cash restructuring charges and the effect of changes in working capital and other activities.
Collection of commissions receivable depends upon the timing of the receipt of commission payments. If there were to be a delay in receiving a commission payment from a health plan partner within a quarter, the operating cash flows for that quarter could be adversely impacted.
A significant portion of marketing and advertising expense is driven by the number of qualified prospects required to generate the Submissions. Marketing and advertising costs are expensed and generally paid as incurred and since commission revenue is recognized upon approval of a submission but commission payments are paid to us over time, there are working capital requirements to fund the upfront cost of acquiring new policies.
Net cash provided by operating activities was $37.8 million for the nine months ended September 30, 2023, compared to $101.9 million for the nine months ended September 30, 2022. The $64.1 million decrease was driven by a decrease in deferred revenue of $121.4 million, a decrease in commissions payable of $47.3 million, a decrease in operating lease impairment charges of $22.7 million, an increase in accounts receivable of $19.9 million, a decrease in share-based compensation expense of $7.5 million, a decrease in other liabilities of $7.1 million, a decrease in operating lease liabilities of $1.6 million, and other adjustments for non-cash items of $3.4 million, partially offset by a decrease in net loss of $76.7 million, a decrease in commissions receivable of $50.1 million, an increase in accounts payable of $20.8 million, an increase in accrued liabilities of $14.1 million, and a decrease in prepaid expenses and other assets of $5.0 million.
Cash flow from operations for the nine months ended September 30, 2023 was lower than expected because approximately $72.0 million of payments from health plan partners, expected in the third quarter, were received shortly after quarter end.
Investing Activities
Net cash used in investing activities decreased to $8.1 million for the nine months ended September 30, 2023, from $12.1 million for the nine months ended September 30, 2022. The decrease was primarily driven by a decrease in capitalized internal-use software related to new technology, software, and systems, as well as a decrease in purchases of property and equipment.
Financing Activities
Net cash used in financing activities was $20.0 million for the nine months ended September 30, 2023, compared to $41.5 million net cash provided by financing activities for the nine months ended September 30, 2022. The difference was primarily driven by a $50.0 million decrease in proceeds from the issuance and sale of Series A redeemable convertible preferred stock, as well as an $11.4 million increase in the repayment of borrowings.
Credit Facilities
| GoHealth, Inc. | 2023 Form 10-Q | 34 | ||||||
Term Loan Facilities
As of September 30, 2023, the Company had a principal amount of $110.4 million, $296.3 million and $96.1 million outstanding under the Incremental Term Loan Facility, the 2021 Incremental Term Loans, and the 2021-2 Incremental Term Loans, respectively. The Term Loan Facilities’ effective interest rates were 12.9% at September 30, 2023.
The Term Loan Facilities are payable in quarterly installments in the principal amount of 0.25% of the original principal amount. The remaining unpaid balance on the Term Loan Facilities, together with all accrued and unpaid interest thereon, is due and payable on or prior to September 13, 2025.
Mandatory Prepayments
During the second quarter of 2023, the Company made a $14.0 million mandatory prepayment to its lenders in connection with fiscal year 2022. Principal repayment obligations are reduced by the amount of any prepayment, and as such, the $14.0 million prepayment during the second quarter of 2023 satisfied the Company’s principal repayment obligations through the second quarter of 2025. No other mandatory prepayments were required or made during the three and nine months ended September 30, 2023. See Note 4, “Long-Term Debt,” to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information regarding the Company’s mandatory prepayment.
Revolving Credit Facilities
The Company collectively refers to the Revolving Credit Facility, the Incremental Revolving Credit Facilities, and the Incremental No. 4 Revolving Credit Facility as the “Revolving Credit Facilities”. The Revolving Credit Facilities are separated into two classes of revolving commitments consisting of Class A Revolving Commitments in the amount of $30.0 million and Class B Revolving Commitments in the amount of $170.0 million.
The Company had no amounts outstanding under the Class A Revolving Credit Facilities and Class B Revolving Credit Facilities as of both September 30, 2023 and December 31, 2022. The Revolving Credit Facilities have a remaining capacity of $200.0 million in the aggregate as of September 30, 2023.
Outstanding borrowings under the Revolving Credit Facilities do not amortize and are due and payable on September 13, 2024.
See Note 4, “Long-Term Debt,” to the Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information regarding the Company’s Credit Facilities.
Recent Accounting Pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet adopted, see Part 1, Note 1, “Description Of Business And Significant Accounting Policies,” to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities in our financial statements. We regularly assess these estimates; however, actual amounts could differ from those estimates. The most significant items involving management’s estimates include estimates of revenue recognition, commissions receivable, and commissions payable. The impact of changes in estimates is recorded in the period in which they become known.
An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: (1) revenue recognition and commissions receivable, (2) share-based compensation, (3) intangible assets, (4) impairment of operating lease ROU assets, (5) income taxes and (5) liabilities pursuant to tax receivable agreements.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our 2022 Annual Report on Form 10-K. During the three and nine months ended September 30, 2023, there were no material changes to our critical accounting policies from those discussed in our 2022 Annual Report on Form 10-K.
| ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. | ||
| GoHealth, Inc. | 2023 Form 10-Q | 35 | ||||||
As a smaller reporting company, we are not required to include disclosure under this item.
| ITEM 4. CONTROLS AND PROCEDURES | ||
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Evaluation of Disclosure Controls and Procedures
As required by SEC Rule 13a-15(b), the Company, with the participation of management including the chief executive officer and chief financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2023, because of the material weakness in internal control over financial reporting described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Based on this evaluation and those criteria, our management concluded that our internal control over financial reporting was ineffective as of September 30, 2023, because we identified a material weakness related to the ineffective design and operation of process level controls that addressed the completeness and accuracy of key financial data utilized in the recognition of commission revenue, including estimating the total constrained lifetime value of commission revenue and the related revenue share and balance sheet accounts, and the Company did not retain sufficient contemporaneous documentation to demonstrate the operation of review controls over commission revenue at a sufficient level of precision. We reviewed the results of our management’s assessment with our Audit Committee.
We continue to strengthen our internal control over financial reporting and are committed to ensuring that such controls are designed and operating effectively. We have implemented process and control improvements to address the above material weakness that include, but are not limited to: i) established specific management review procedures to ensure completeness and accuracy of key financial data utilized in the recognition of commission revenue and the contemporaneous documentation of such reviews, ii) provided additional training related to validating the accuracy of data used in key review controls and the level of documentation required, and iii) invested in our corporate infrastructure to ensure adequate technology and resources to support our financial reporting process and internal control framework. In 2022, the Company hired a Chief Actuarial Officer who has been partnering with our data scientists, to bring additional experience and oversight of commission revenue and its related process and controls.
When fully implemented and operational, we believe the measures described above will remediate the control deficiencies that have led to the material weakness.
Notwithstanding the existence of the material weakness as described above, our management has concluded that the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting
Except for the material weakness identified above, there were no changes in our internal controls over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| GoHealth, Inc. | 2023 Form 10-Q | 36 | ||||||
| PART II - Other Information | ||
| ITEM 1. LEGAL PROCEEDINGS. | ||
Refer to Note 11, “Commitments And Contingencies,” of the Notes to the Condensed Consolidated Financial Statements for information about legal proceedings.
| ITEM 1A. RISK FACTORS. | ||
We refer you to our 2022 Annual Report on Form 10-K for a discussion of the risk factors that affect our business and financial results. Other than updates to the risk factors set forth below, there have been no material changes in our risk factors from those disclosed in our 2022 Annual Report on Form 10-K.
Changes and developments in the health insurance system and laws and regulations governing the health insurance markets in the United States could materially adversely affect our business, operating results, financial condition and qualified prospects.
Our business depends upon the public and private sector of the U.S. insurance system, which is subject to a changing regulatory environment. Accordingly, the future financial performance of our business will depend in part on our ability to adapt to regulatory developments, including changes in laws and regulations or changes to interpretations of such laws or regulations, especially laws and regulations governing Medicare. For example, the ACA substantially changed the way healthcare is financed by both commercial and government payers and contains a number of provisions that impact our business and operations, including the expansion of Medicaid eligibility to additional categories of individuals. Since its enactment, there have been judicial and Congressional challenges to certain aspects of the ACA, and the potential remains for additional challenges and amendments to the ACA in the future. In addition, changes to the Medicare marketing standards were finalized for the 2022 coverage year, with additional regulatory standards proposed for the 2024 coverage year that have had and will continue to have an impact on our business.
For instance, certain health plan partners compensate us for marketing and administrative services, consistent with current CMS regulations. However, on November 6, 2023, CMS issued a proposed rule that, if adopted, would limit the compensation payable to brokers and agents related to marketing and administrative services. If the rule proposed by CMS is adopted or any other regulatory developments limit or remove the ability for health plan partners to compensate us for marketing and administrative services, or the government determines that our arrangements do not meet the regulatory requirements, the compensation we receive from health plan partners would decline, which would materially and adversely impact our business, operating results and financial condition.
Various aspects of healthcare reform could also cause health plan partners to discontinue certain health insurance products or prohibit us from distributing certain health insurance products in particular jurisdictions. We rely heavily on SNPs during the special enrollment periods, which allows us to utilize our agents throughout the year. If states adopt new laws and regulations or modify the existing laws and regulations governing Medicaid, such changes could decrease the number of individuals eligible for Dual Eligible Special Needs Plans, which could have a material adverse impact on our business, operating results and financial condition. Our business, operating results, financial condition and prospects may be materially and adversely affected if we are unable to adapt to developments in healthcare reform in the United States.
We rely on certain services from the Centers for Medicare & Medicaid Services (“CMS”), and a federal government shutdown that impedes our ability to use these services may materially impact our business.
The current continuing resolution that provides short-term appropriations to fund the U.S. government expires on November 17, 2023, and protracted congressional negotiations have increased the risk of a federal government shutdown. A shutdown could impact CMS, which is a federally-funded government agency. CMS provides a number of critical services to our business, including approval of customer application submissions and access to certain technology platforms. A government shutdown may cause CMS and/or its vendors to conserve spending on these services, including by delaying application submissions or by pausing access to the technology platforms altogether, each of which would impact our ability to use the services in the course of our day-to-day operations and which could harm our business, operating results and financial condition.
Even if our ability to use the services is restored and delays are resolved following the end of the government shutdown, the shutdown-related delays and technology access issues may lead to shifts in consumer behavior. For instance, a delay in approval of customer applications or confirmation of customer plan enrollment may cause changes in customer shopping behavior or cause customers to re-engage in additional plan shopping, each of which could negatively impact our business.
Our business could be adversely affected as a result of uncertainty regarding proposals or other actions taken by stockholders related to the consideration of a possible future transaction.
In May 2023, our Board of Directors received an unsolicited proposal from a group of buyers that includes Centerbridge and the Founders to acquire all of the outstanding shares of Class A common stock and LLC Interests not already owned by the potential
| GoHealth, Inc. | 2023 Form 10-Q | 37 | ||||||
buyers. In August 2023, we announced that, following careful review and consideration with its independent financial and legal advisors, a Special Committee of the Board of the Directors rejected this proposal. Addressing the unsolicited proposal, similar future proposals and any other actions by stockholders or others relating to a potential transaction involving ownership of the Company could interfere with our ability to execute our strategic plans, make it more difficult to attract and retain qualified executives and employees, cause management distraction, require us to utilize more resources than anticipated towards review of strategic alternatives and result in the loss of potential business opportunities, any of which could have a material negative impact on the Company. In addition, our business and operations may be harmed to the extent that our customers, suppliers and others believe that we cannot effectively compete in the marketplace without completing a transaction, or there is customer, supplier or employee uncertainty surrounding the future direction of the product and service offerings and our strategy on a continued basis. There can be no assurance that any transaction will be completed now or in the future.
Further, the unsolicited proposal, similar future proposals and any actual or perceived actions by our stockholders or others relating to a potential transaction involving the Company may cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the Company’s underlying fundamentals and prospects.
| ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. | ||
None.
| ITEM 3. DEFAULTS UPON SENIOR SECURITIES. | ||
None.
| ITEM 4. MINE SAFETY DISCLOSURES. | ||
Not applicable.
| ITEM 5. OTHER INFORMATION. | ||
During the fiscal quarter ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified, or terminated a Rule 10b5-1 trading plan or a non-Rule 10b5-1 trading arrangement for our securities (as defined in Item 408(c) of Regulation S-K).
| GoHealth, Inc. | 2023 Form 10-Q | 38 | ||||||
| ITEM 6. EXHIBITS. | ||
Exhibit Index
| Incorporated by Reference | ||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Description | Form | File No. | Exhibit | Filing Date | Filed/ Furnished Herewith | ||||||||||||||||||||||||||||||||
| 3.1 | 10-Q | 001-39390 | 3.1 | 8/20/2020 | ||||||||||||||||||||||||||||||||||
| 3.2 | 10-Q | 001-39390 | 3.2 | 8/20/2020 | ||||||||||||||||||||||||||||||||||
| 3.3 | 8-K | 001-39390 | 3.1 | 9/26/2022 | ||||||||||||||||||||||||||||||||||
| 3.4 | 8-K | 001-39390 | 3.2 | 9/26/2022 | ||||||||||||||||||||||||||||||||||
| 4.1 | S-1 | 333-239287 | 4.1 | 6/19/2020 | ||||||||||||||||||||||||||||||||||
| 4.2 | 10-K | 01-39390 | 4.2 | 3/16/2021 | ||||||||||||||||||||||||||||||||||
| 10.1# | 10-Q | 001-39390 | 10.1# | 8/10/2023 | ||||||||||||||||||||||||||||||||||
| 31.1 | * | |||||||||||||||||||||||||||||||||||||
| 31.2 | * | |||||||||||||||||||||||||||||||||||||
| 32.1 | ** | |||||||||||||||||||||||||||||||||||||
| 32.2 | ** | |||||||||||||||||||||||||||||||||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | * | ||||||||||||||||||||||||||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | * | ||||||||||||||||||||||||||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | * | ||||||||||||||||||||||||||||||||||||
* Filed herewith.
** Furnished herewith.
# Indicates management contract or compensatory plan.
| GoHealth, Inc. | 2023 Form 10-Q | 39 | ||||||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GoHealth, Inc. (Registrant) | |||||||||||
| Date: | November 9, 2023 | By: | /s/ Vijay Kotte | ||||||||
Vijay Kotte Chief Executive Officer (Principal Executive Officer) | |||||||||||
| Date: | November 9, 2023 | By: | /s/ Jason Schulz | ||||||||
Jason Schulz Chief Financial Officer (Principal Financial and Accounting Officer) | |||||||||||
| GoHealth, Inc. | 2023 Form 10-Q | 40 | ||||||