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 access to healthcare in America. The Company works with insurance carriers to provide solutions to efficiently enroll individuals in health insurance plans. The Company’s proprietary technology platform leverages modern machine-learning algorithms powered by nearly 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 insurance agents leverage the power of its vertically integrated customer acquisition platform to enroll members in Medicare and individual and family plans. Certain of the Company’s operations do business as GoHealth, LLC (“GoHealth”), a wholly owned subsidiary of the Company that was founded in 2008.
The Company was incorporated in Delaware on March 27, 2020 for the purpose of facilitating the Company’s initial public offering (the “IPO”) and other related transactions in order to carry on the business of GoHealth Holdings, LLC (formerly known as Blizzard Parent, LLC), a Delaware limited liability company, and its wholly owned 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. 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. Effective on December 31, 2021, we lost our emerging growth company ("EGC") status, which accelerated the adoption of Accounting Standards Update (“ASU”) 2016-02, Leases and ASU 2019-11, Financial Instruments – Credit Losses. As a result, we recast our previously reported consolidated financial statements effective January 1, 2021 to reflect the adoption of these standards. Other than redeemable convertible preferred stock and restructuring charges, as described further in Note 5. “Stockholders' Equity” and Note 14. “Restructuring Costs”, respectively, there have been no material changes to the Company’s significant accounting policies as discussed in the notes to the Company’s audited consolidated financial statements as of and for the year ended December 31, 2021.
Use of Estimates
The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed
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| GoHealth, Inc. | 2022 Form 10-Q | 10 |
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
A greater number of the Company’s Medicare-related health insurance plans are sold in its fourth quarter during the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year. As a result, the Company’s Medicare plan-related commission revenue is typically highest in the Company’s fourth quarter.
The majority of the Company’s individual and family health insurance plans are sold in its fourth quarter during the annual open enrollment period as defined under the federal Patient Protection and ACA and related amendments in the Health Care and Education Reconciliation Act. Individuals and families generally are not able to purchase individual and family health insurance outside of the open enrollment period, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance or moving to another state. As a result, the Company’s individual and family plan-related commission revenue is typically highest in the Company’s fourth quarter.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The guidance specifies that lessees will need to recognize a right-of-use asset and a lease liability for virtually all their leases except those which meet the definition of a short-term lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or financing. Classification will be based on criteria that are similar to those applied in current lease accounting, but without explicit bright lines. The Company adopted the new guidance effective January 1, 2021. The Company elected the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption. At transition, lessees and lessors may elect to apply a package of practical expedients permitting entities not to reassess: (i) whether any expired or existing contracts are or contain leases; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. These practical expedients must be elected as a package and consistently applied. The Company applied the package of practical expedients upon adoption. As a result of adopting this standard, on January 1, 2021, the Company recorded lease liabilities of $29.3 million, right-of-use assets of $28.0 million, and an immaterial cumulative catch-up adjustment to opening equity. The adoption of this new standard did not have a material impact on the Company’s consolidated statements of operations, comprehensive income (loss), or cash flows. The Company has included expanded disclosures on the condensed consolidated balance sheets and in Note 10. “Leases”.
In November 2019, the FASB issued ASU 2019-11, Financial Instruments – Credit Losses (Topic 326), which amends the guidance for accounting for assets that are potentially subject to credit risk. The amendments affect contract assets, loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company adopted the new guidance effective January 1, 2021. As a result of adopting this standard, on January 1, 2021, the Company recorded a cumulative adjustment to opening equity of $0.5 million. The adoption of this new standard did not have a material impact on the Company’s consolidated statements of operations, comprehensive income (loss), or cash flows.
In August 2020, the FASB issued Accounting Standards Update No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in ASU 2020-06 eliminate two of the three accounting models that require separate accounting for convertible features of debt securities, simplify the contract settlement assessment for equity classification, require the use of the if-converted method for all convertible instruments in the diluted earnings per share calculation and expand disclosure requirements. The Company adopted ASU 2020-06 on January 1, 2022, and the adoption did not have an impact on our consolidated statements of operations, comprehensive income (loss), or cash flows.
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 classifies the inputs used to measure fair value into the following hierarchy:
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| GoHealth, Inc. | 2022 Form 10-Q | 11 |
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| 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 $0.4 million and $25.3 million operating lease impairment charges for the three and nine months ended September 30, 2022, respectively. The Company recorded an operating lease impairment charge of $1.1 million for the three and nine months ended September 30, 2021. The operating lease impairment charge reduces the carrying value of the associated ROU assets and leasehold improvements to the estimated fair values. The fair values are estimated using a discounted cash flows approach 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. A 5% increase or decrease to the market rent per square foot input would increase or decrease the estimated fair value and resulting impairment charge by approximately $1.0 million.
3. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
During 2019, the Company allocated $380.3 million and $6.2 million of the goodwill recognized in connection with the Acquisition to its Medicare—Internal segment and Medicare—External segment, respectively, based on an estimate of the relative fair value of each reportable segment.
The Company tests goodwill for impairment at the reporting unit level annually on November 30th and whenever events or circumstances make it more likely than not that an impairment may have occurred. A reporting unit is an operating segment or one level below an operating segment to which goodwill is assigned when initially recorded. The Company has four reporting units, which are the same as its four operating segments.
Fourth Quarter 2021 Goodwill Impairment Charges
During the annual enrollment period in the fourth quarter of 2021, the Company and the broader industry experienced an increase in consumer shopping which led to lower policy persistency than anticipated and resulted in lower LTV performance. Additionally, operating margins in the fourth quarter of 2021 declined significantly, which was primarily driven by tight labor markets and resulted in higher than expected customer care and enrollment costs. As such and in connection with the Company’s annual and long-range planning process, which coincided with the Company’s annual goodwill impairment test as of November 30, 2021, the Company determined the Medicare— Internal and Medicare— External reporting units’ financial performance were lower than previously anticipated. As a result, the Company’s quantitative goodwill impairment test indicated that the fair values of the Medicare— Internal and Medicare— External reporting units no longer exceeded their carrying values, and the Company recognized goodwill impairment charges of $380.3 million and $6.2 million for the Medicare-Internal and Medicare— External reporting units, respectively, representing the full amount of goodwill associated with these reporting units.
The quantitative goodwill impairment test performed by the Company as of November 30, 2021, included significant level 3 fair value estimates and assumptions including, among others, cash flow projections and selecting an appropriate discount rate.
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:
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| GoHealth, Inc. | 2022 Form 10-Q | 12 |
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| | Sep. 30, 2022 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Developed technology | | $ | 496,000 | | | $ | 216,114 | | | $ | 279,886 | |
| Customer relationships | | 232,000 | | | 70,760 | | | 161,240 | |
| Total intangible assets subject to amortization | | $ | 728,000 | | | $ | 286,874 | | | $ | 441,126 | |
| Indefinite-lived trade names | | | | | | 83,000 | |
| Total intangible assets | | | | | | $ | 524,126 | |
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| | Dec. 31, 2021 |
| (in thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Developed technology | | $ | 496,000 | | | $ | 162,971 | | | $ | 333,029 | |
| Customer relationships | | 232,000 | | | 53,360 | | | 178,640 | |
| Total intangible assets subject to amortization | | $ | 728,000 | | | $ | 216,331 | | | $ | 511,669 | |
| Indefinite-lived trade names | | | | | | 83,000 | |
| Total intangible assets | | | | | | $ | 594,669 | |
There was no impairment of intangible assets for the three and nine months ended September 30, 2022 and 2021.
As of September 30, 2022, expected amortization expense related to intangible assets for each of the five succeeding years is as follows:
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| (in thousands) | | Developed Technology | | Customer Relationships | | Total | | |
| Remainder of 2022 | | $ | 17,715 | | | $ | 5,800 | | | $ | 23,515 | | | |
| 2023 | | 70,857 | | | 23,200 | | | 94,057 | | | |
| 2024 | | 70,857 | | | 23,200 | | | 94,057 | | | |
| 2025 | | 70,857 | | | 23,200 | | | 94,057 | | | |
| 2026 | | 49,600 | | | 23,200 | | | 72,800 | | | |
| Thereafter | | — | | | 62,640 | | | 62,640 | | | |
| Total | | $ | 279,886 | | | $ | 161,240 | | | $ | 441,126 | | | |
4. LONG-TERM DEBT
The Company’s long-term debt consisted of the following:
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| (in thousands) | | Sep. 30, 2022 | | Dec. 31, 2021 |
| Term Loan Facilities | | $ | 519,450 | | | $ | 523,403 | |
| Revolving Credit Facilities | | 155,000 | | | 155,000 | |
| Less: Unamortized debt discount and issuance costs | | (8,793) | | | (8,018) | |
| Total debt | | $ | 665,657 | | | $ | 670,385 | |
| Less: Current portion of long-term debt | | (5,270) | | | (5,270) | |
| Total long-term debt | | $ | 660,387 | | | $ | 665,115 | |
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, the Company entered into a series of amendments to the Credit Agreement to provide for, among other items as further described below, $117.0 million of incremental term loans (the “Incremental Term Loan Facility”).
On June 11, 2021, the Company entered into Amendment No. 5 to the Credit Agreement and Incremental Facility Agreement (“Amendment No. 5”). Amendment No. 5 created 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, pay the related accrued interest and fund the prepayment premium. In connection with Amendment No. 5 and the refinancing of the Initial Term Loan, the Company recognized an $11.9 million loss on debt extinguishment, representing the 2% prepayment premium of $5.9 million and the write-down of deferred financing costs and debt discounts of $6.0 million. The Company incurred $1.7 million of debt issuance costs associated with Amendment No. 5, which are being amortized over the life of the debt to interest expense using the effective interest method.
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| GoHealth, Inc. | 2022 Form 10-Q | 13 |
On November 10, 2021, the Company entered into Amendment No. 6 to the Credit Agreement and Incremental Facility Agreement (“Amendment No. 6”). Amendment No. 6 provided $100.0 million of incremental term loans (the “2021-2 Incremental Term Loans”). The Company incurred $2.5 million of debt issuance costs associated with Amendment No. 6, which are being amortized over the life of the debt to interest expense using the effective interest method.
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.
Borrowings under the Incremental Term Loan Facility are, at the option of the Borrower, either (i) ABR plus 5.50% per annum or (ii) LIBOR plus 6.50% per annum.
The Company collectively refers to the Initial Term Loan, Incremental Term Loan Facility, the 2021 Incremental Term Loans, and the 2021-2 Incremental Term Loans as the “Term Loan Facilities”.
As of September 30, 2022, the Company had a principal amount of $114.1 million, $306.1 million, and $99.3 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, 2021, the Company had a principal amount of $115.0 million, $308.4 million, and $100.0 million outstanding under the Incremental Term Loan Facility, the 2021 Incremental Term Loans, and the 2021-2 Incremental Term Loans, respectively. The Incremental Term Loan Facility effective interest rate was 8.8% at September 30, 2022 and 7.5% at December 31, 2021. The 2021 Incremental Term Loan and the 2021-2 Incremental Term Loan effective interest rates were both 9.8% at September 30, 2022. Both the 2021 Incremental Term Loan and the 2021-2 Incremental Term Loan effective interest rates were 6.0% at December 31, 2021.
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.
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, 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”).
On May 7, 2021, the Company entered into a fourth amendment to the Credit Agreement, which provided $142.0 million of incremental revolving credit (the “Incremental No. 4 Revolving Credit Facility”), 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”.
Amendment No. 5, as described above, also separated the Revolving Credit Facilities 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.
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| GoHealth, Inc. | 2022 Form 10-Q | 14 |
Borrowings under the Class A Revolving Commitments bear interest at either ABR plus 5.50% per annum or LIBOR plus 6.50% per annum. Borrowings under the Class B Revolving Commitments bear interest at either ABR plus 3.00% per annum or LIBOR 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 $23.2 million outstanding under the Class A Revolving Credit Facilities and $131.8 million outstanding under the Class B Revolving Credit Facilities as of both September 30, 2022 and December 31, 2021. The Revolving Credit Facilities have a remaining capacity of $45.0 million in the aggregate as of September 30, 2022. The Class A Revolving Credit Facilities and Class B Revolving Credit Facilities weighted-average effective interest rates were 9.6% and 7.1% at September 30, 2022, respectively, and 7.5% and 5.0% at December 31, 2021, respectively. Subsequent to September 30, 2022, the Company paid $110.0 million of its outstanding obligations under the Revolving Credit Facilities.
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, 2022.
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 shares of Class A common stock, 690,000 shares of Class B common stock and 20,000 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 GoHealth Holdings, LLC Agreement require that the Company and GoHealth Holdings, 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 GoHealth Holdings, 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 GoHealth Holdings, 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, 2022 were 59.8% and 61.7%, respectively. The non-controlling interest holders' weighted average ownership percentages for the three and nine months ended September 30, 2021 were 64.5% and 67.9%, respectively.
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| GoHealth, Inc. | 2022 Form 10-Q | 15 |
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 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 shares of preferred stock with a par value of $0.0001 per share as of both September 30, 2022 and December 31, 2021, 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 shares under the Series A redeemable convertible preferred stock and 200 shares under the Series A-1 Convertible Non-Voting Perpetual Preferred Stock (the “Series A-1 redeemable convertible preferred stock”).
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 redeemable convertible preferred stock are only entitled to dividends if the Company declares such dividends. For the three and nine months ended September 30, 2022, the Company accrued $0.1 million of dividends, which are 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 (initially $0.64 and subject to adjustment based on certain changes to the Company’s Class A common stock, including a reverse stock split) 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 redeemable convertible preferred stock for every 1,000 shares of Class A common stock otherwise deliverable upon conversion. The Series A-1 redeemable 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 and A-1 redeemable 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 redeemable 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 redeemable 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 redeemable 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 redeemable 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 redeemable convertible preferred stock. Each holder of Series A-1 redeemable 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 redeemable convertible preferred stock at such time into
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| GoHealth, Inc. | 2022 Form 10-Q | 16 |
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 redeemable 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 redeemable 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 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 redeemable 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 (the “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 redeemable convertible preferred stock.
In connection with the Issuance, the Company, as the managing member of GoHealth Holdings, LLC (the “LLC”), caused the 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 redeemable convertible preferred stock, respectively, and entered into Amendment No. 2 to the Second Amended and Restated Limited Liability Company Agreement of GoHealth Holdings, LLC (“Amendment No. 2”) to effectuate the same.
The Company classifies the Series A redeemable convertible preferred stock and Series A-1 redeemable 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 October 24, 2022, the Company held a special meeting of stockholders to adopt and approve an amendment to our amended and restated certificate of incorporation to effect a reverse stock split of our outstanding shares of Class A common stock and Class B common stock, at a reverse stock split ratio of 1-for-5 through 1-for-15, as determined by our Board of Directors at a later date. 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”) shall receive one share of the respective class of stock for every fifteen shares of Common Stock held (the “Reverse Stock Split”). In connection with the issuance of the Series A redeemable convertible preferred stock, the conversion will be automatically adjusted to account for the
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| GoHealth, Inc. | 2022 Form 10-Q | 17 |
Reverse Stock Split for such shares. The Company intends for the Reverse Stock Split to become effective on or about 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) | | 2022 | | 2021 | | 2022 | | 2021 |
| Marketing and advertising | | $ | 556 | | | $ | 698 | | | $ | 1,212 | | | $ | 1,462 | |
| Customer care and enrollment | | 738 | | | 957 | | | 1,993 | | | 2,796 | |
| Technology | | 884 | | | 910 | | | 2,493 | | | 2,791 | |
| General and administrative | | 4,277 | | | 4,824 | | | 20,170 | | | 13,051 | |
| Total share-based compensation expense | | $ | 6,456 | | | $ | 7,389 | | | $ | 25,868 | | | $ | 20,100 | |
2021 Employment Inducement Award Plan
On December 19, 2021, the Board of Directors approved the adoption of the GoHealth, Inc. 2021 Employment Inducement Award Plan (as amended from time to time, the “Inducement Award Plan”). In accordance with Rule 5635(c)(4), awards under the Inducement Award Plan may only be made to a newly hired employee who has not previously been a member of the Board of Directors, or an employee who is being rehired following a bona fide period of non-employment by the Company or a subsidiary, as a material inducement to the employee’s entering into employment with the Company or its subsidiary. On June 3, 2022, the Company approved an amendment to the Inducement Award Plan, solely to increase the shares of the Company’s Class A common stock reserved for issuance from an aggregate of 4,000 Class A shares to an aggregate of 25,000 Class A shares.
Restricted Stock Units (“RSUs”)
On June 7, 2022, the Company granted, to certain of its executives, an aggregate of 7,667 shares of Class A common stock issuable pursuant to RSUs, all of which were fully vested on the date of grant. The Company recognized the grant-date fair value of these RSUs, or $6.3 million, as compensation expense on the date of grant.
Performance Stock Units (“PSUs”)
On June 7, 2022, the Company granted, to certain of its executives, an aggregate of 2,917 shares of Class A common stock issuable pursuant to volume weighted average PSUs (“VWAPs”). The number of shares issued on the third 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 $2.00 but less than $3.00; (ii) 100% if the Three Year VWAP is equal to or greater than $3.00 but less than $4.00; (iii) 150% if the Three Year VWAP is equal to or greater than $4.00 but less than $6.00; and (iv) 200% if the Three Year VWAP is equal to or greater than $6.00. 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 94.0%. The grant-date fair value of the VWAPs was $0.55. The Company recognizes the grant-date fair value of VWAPs as compensation expense on a straight-line basis over the three-year performance period.
During 2021, the Company granted to certain of its employees 489 shares of Class A common stock issuable pursuant to PSUs. The criteria for the market-based PSUs is 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 $22.17. The Company recognizes the grant-date fair value of PSUs as compensation expense on a straight-line basis over the three-year performance period.
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. For the three and nine months ended September 30, 2021, the Company recorded share-based compensation expense related to PSUs of $0.8 million and $2.2 million, respectively.
2020 Employee Stock Purchase Plan
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| GoHealth, Inc. | 2022 Form 10-Q | 18 |
On July 7, 2020, the Company adopted the 2020 Employee Stock Purchase Plan (“2020 ESPP”), which became effective on the same date. The purpose of the 2020 ESPP is to provide the Company's eligible employees with an opportunity to purchase designated shares of the Company’s Class A common stock at a price equal to 85% of the lower of the closing price at the beginning or end of each offering period. During the nine months ended September 30, 2022, the Company issued 662 shares of Class A common stock through the 2020 ESPP. During the nine months ended September 30, 2021, the Company issued 50 shares of Class A common stock through the 2020 ESPP.
For the three and nine months ended September 30, 2022, the Company recorded share-based compensation expense related to the 2020 ESPP of $0.1 million and $0.4 million, respectively. For the three and nine months ended September 30, 2021, the Company recorded share-based compensation expense related to the 2020 ESPP of $0.1 million and $0.3 million, respectively.
Stock Appreciation Rights
On June 6, 2022, the Founders were each granted two stock appreciation rights ("SARs") under the 2020 Plan. The first SAR commences on June 6, 2022, and the second SAR will commence on or about June 1, 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 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 third anniversary of the date of commencement. The total initial fair value of the awards were recorded as expense at the time of the grant for the SARs with no future service requirement. The fair value of the awards with a future service requirement will be recognized on a straight-line basis over the requisite service period. 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 within other long-term liabilities on the Condensed Consolidated Balance Sheet. As of September 30, 2022, the Company had a share-based compensation liability related to the SARs of $3.1 million.
Stock Option Repricing
On April 25, 2022 and in accordance with the terms of the GoHealth, Inc. 2020 Incentive Award Plan, the Board of Directors approved a stock option repricing (the “Repricing”) where the exercise price of each Relevant Option (as defined below) was reduced to $1.05 per share, the average trailing 20 trading day closing price of the Company’s Class A common stock as of market close on the day of board approval. “Relevant Options” are all outstanding stock options as of April 25, 2022 (vested or unvested) to acquire shares of the Company’s Class A common stock that were issued to currently employed employees prior to April 1, 2022, but excluding stock options granted to certain executive officers. Except for the reduction in the exercise price of the Relevant Options, all outstanding stock options will continue to remain outstanding in accordance with their current terms and conditions. As a result of the Repricing, the Company will record an incremental share-based compensation charge of $1.1 million, of which $0.3 million was recognized on the date of the Repricing, and $0.8 million is recognized over the remaining term of the repriced options.
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:
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| GoHealth, Inc. | 2022 Form 10-Q | 19 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended Sep. 30, | | Nine months ended Sep. 30, |
| (in thousands, except per share amounts) | | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | | |
| Net loss | | $ | (74,654) | | | $ | (55,518) | | | $ | (225,647) | | | $ | (101,999) | |
| | | | | | | | |
| Less: Net loss attributable to non-controlling interests | | (44,649) | | | (35,278) | | | (138,340) | | | (67,668) | |
| Net loss attributable to GoHealth, Inc. | | (30,005) | | | (20,240) | | | (87,307) | | | (34,331) | |
| Less: Dividends accrued on redeemable convertible preferred stock | | 67 | | | — | | | 67 | | | — | |
| Net loss attributable to common stockholders | | (30,072) | | | (20,240) | | | (87,374) | | | (34,331) | |
| Denominator: | | | | | | | | |
| Weighted-average shares of Class A common stock outstanding—basic | | 132,378 | | | 113,938 | | | 124,401 | | | 102,939 | |
| Effect of dilutive securities | | — | | | — | | | — | | | — | |
| Weighted-average shares of Class A common stock outstanding—diluted | | 132,378 | | | 113,938 | | | 124,401 | | | 102,939 | |
| Net loss per share of Class A common stock—basic and diluted | | $ | (0.23) | | | $ | (0.18) | | | $ | (0.70) | | | $ | (0.33) | |
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) | | 2022 | | 2021 | | | | |
| Class A common stock issuable pursuant to equity awards | | 25,326 | | | 6,393 | | | | | |
| Class A common stock issuable pursuant to conversion of redeemable convertible preferred stock | | 78,125 | | | — | | | | | |
| Class B common stock | | 196,184 | | | 205,995 | | | | | |
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 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, 2022 was 0.00% and (0.21)%, respectively. The Company’s effective tax rate for both the three and nine months ended September 30, 2021 was 0.14%. 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 annual 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 (the “TRA”), which provides 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 TRA 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 September 30, 2022, the Company has determined there is no resulting liability related to the TRA. Should the Company determine that the TRA liability will be considered probable at a future date based on new information, any changes will be recorded within income from continuing operations at that time.
9. REVENUE
Revenue Recognition for Variable Consideration
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| GoHealth, Inc. | 2022 Form 10-Q | 20 |
The Company’s variable consideration includes the total estimated lifetime value (“LTV”) it expects to receive for selling an insurance product after the carrier 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 carrier 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. Due to lower persistency observed during the three and nine months ended September 30, 2022 and declining LTV estimates, the Company applied an incremental LTV constraint to all Medicare policies sold in fiscal 2022.
On a quarterly basis, the Company re-estimates LTV at a vintage level for outstanding vintages, reviews and monitors changes in the data used to estimate LTV, as well as the cash received for each vintage as compared to the original estimates. The difference between cash received for each vintage and the respective estimated LTV can be significant and may or may not be indicative of the need to adjust revenue for prior period vintages. 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, 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. For the three and nine months ended September 30, 2021, the Company recorded a negative revenue adjustment of $6.7 million and $10.3 million, respectively, relating to performance obligations satisfied in prior periods.
Disaggregation of Revenue
The table below depicts the disaggregation of revenue by product, and is consistent with how the Company evaluates its financial performance: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended Sep. 30, | | Nine months ended Sep. 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Commission revenue: | | | | | | | | |
| Medicare: | | | | | | | | |
| Medicare Advantage | | $ | 85,440 | | | $ | 172,086 | | | $ | 407,568 | | | $ | 484,273 | |
| Medicare Supplement | | 33 | | | 533 | | | 436 | | | 2,106 | |
| Prescription Drug Plans | | 796 | | | 516 | | | 3,028 | | | 1,557 | |
| Total Medicare | | 86,269 | | | 173,135 | | | 411,032 | | | 487,936 | |
| Individual and Family Plan: | | | | | | | | |
| Fixed Indemnity | | 100 | | | 660 | | | 656 | | | 4,249 | |
| Short-term | | 94 | | | 226 | | | 375 | | | 845 | |
| Major Medical | | — | | | 130 | | | 72 | | | 539 | |
| Total Individual and Family Plan | | 194 | | | 1,016 | | | 1,103 | | | 5,633 | |
| Ancillary | | 594 | | | 787 | | | 2,594 | | | 2,786 | |
| Small Group | | 1 | | | 10 | | | 6 | | | 82 | |
| Total commission revenue | | 87,058 | | | 174,948 | | | 414,735 | | | 496,437 | |
| Enterprise revenue: | | | | | | | | |
| Partner Marketing and Enrollment Services | | 32,023 | | | 25,263 | | | 96,484 | | | 89,651 | |
| Direct Partner Campaigns | | 11,908 | | | 11,364 | | | 46,390 | | | 26,166 | |
| Other | | 2,063 | | | 159 | | | 4,690 | | | 561 | |
| Total enterprise revenue | | 45,994 | | | 36,786 | | | 147,564 | | | 116,378 | |
| Net revenues | | $ | 133,052 | | | $ | 211,734 | | | $ | 562,299 | | | $ | 612,815 | |
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 insurance carriers for performance obligations that have been satisfied. Commissions payable represents estimated commissions to be paid to the Company’s external agents and other partners. Deferred revenue includes amounts collected for partner marketing and enrollment services, and technology licensing and implementation fees in advance of the Company satisfying its performance obligations for such customers. The increase in deferred revenue during the three and nine months ended September 30, 2022, was primarily due to cash received in the current quarter for marketing, administrative, and prospect qualification fees in advance of performing partner marketing and enrollment services that we expect to satisfy within the next twelve months.
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| GoHealth, Inc. | 2022 Form 10-Q | 21 |
The Company had unbilled receivables for performance-based enrollment fees as of September 30, 2022 and December 31, 2021 of $10.6 million and $20.1 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.
For the three months ended September 30, 2022, the Company recognized no revenue that was deferred as of December 31, 2021. For the nine months ended September 30, 2022, the Company recognized $0.1 million of revenue that was deferred as of December 31, 2021. For the three and nine months ended September 30, 2021, the Company recognized $26 thousand and $0.2 million, respectively, of revenue that was deferred as of December 31, 2020.
Commissions Receivable
Our contracts with carriers expose us to credit risk as a financial loss could be incurred if the counterparty does not fulfill its financial obligation. While we are exposed to credit losses due to the potential non-performance of our counterparties, we consider the risk of this remote. We estimate our maximum credit risk in determining the commissions receivable amount recorded on the balance sheet.
Commissions receivable activity is summarized as follows:
| | | | | | | | | | | | | | |
| | Nine months ended Sep. 30, |
| (in thousands) | | 2022 | | 2021 |
| Beginning balance | | $ | 1,262,507 | | | $ | 809,859 | |
| Commission revenue | | 414,735 | | | 496,437 | |
| Cash receipts | | (500,257) | | | (335,455) | |
| Allowance for credit loss | | 57 | | | (107) | |
| Ending balance | | $ | 1,177,042 | | | $ | 970,734 | |
| Less: Commissions receivable - current | | 217,937 | | | 133,422 | |
| Commissions receivable - non-current | | $ | 959,105 | | | $ | 837,312 | |
10. LEASES
Effect of Standard Adoption
We adopted ASU 2016-02, Leases (Topic 842), effective January 1, 2021, using the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption. We elected the package of practical expedients permitted under the transition guidance within Accounting Standards Codification Topic 842 ("ASC 842") which, among other items, allowed us to carry forward the historical lease classifications. As such, we applied the modified retrospective approach as of the adoption date to those lease contracts for which we have taken possession of the property as of January 1, 2021. Results for reporting periods beginning on or after January 1, 2021 are presented under ASC 842.
Upon transition, on January 1, 2021, we recorded the following increases (decreases) to the respective line items on the Consolidated Balance Sheet:
| | | | | | | | |
| (in thousands) | | Adjustment as of January 1, 2021 |
| Operating lease ROU asset | | $ | 28,044 | |
| Property, equipment and capitalized software, net | | (63) | |
| Short-term operating lease liabilities | | 5,118 | |
| Other current liabilities | | (1,231) | |
| Long-term operating lease liabilities | | 24,156 | |
| Accumulated deficit | | (17) | |
| Non-controlling interests | | (46) | |
Nature of Leases
Under ASC 842, we determine if an arrangement is a lease at inception of the arrangement. We have entered into operating and finance lease agreements with lease periods expiring between 2022 and 2032. Operating leases primarily consist of real estate and data centers, and finance leases primarily consist of office equipment.
As of January 1, 2021, with the adoption of ASC 842, leases are included in operating lease right-of-use (“ROU”) assets and lease liabilities on our Condensed Consolidated Balance Sheets. Operating lease ROU assets and lease liabilities are
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| GoHealth, Inc. | 2022 Form 10-Q | 22 |
recognized at the lease commencement date. Operating lease ROU assets represent our right to use an underlying asset and are based upon the lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. Lease liabilities represent the present value of lease payments over the lease term. The implicit rate within each lease is not readily determinable and therefore we use our incremental borrowing rate at the lease commencement date to determine the present value of the lease payments. The determination of the incremental borrowing rate requires judgement. We determined our incremental borrowing rate for each lease using indicative bank borrowing rates, adjusted for various factors including level of collateralization, term and treasury yield curves to align with the terms of the respective lease.
The Company has elected the following practical expedients for all classes of leased assets:
•Adopt the short-term lease exception for leases with terms of twelve months or less and account for them as if they were operating leases under ASC 840; and
•Apply the practical expedient of combining lease and non-lease components.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We do not include any renewal options in the lease terms for calculating lease liability, as the renewal options allow us to maintain operational flexibility and we are not reasonably certain that we will exercise these renewal options at the time of lease commencement.
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) | | 2022 | | 2021 | | 2022 | | 2021 |
| Finance lease cost (1) | | $ | — | | | $ | 83 | | | $ | 102 | | | $ | 252 | |
| Operating lease cost | | 2,210 | | | 1,848 | | | 6,212 | | | 5,351 | |
| Short-term lease cost (2) | | 117 | | | 79 | | | 370 | | | 316 | |
| Variable lease cost (3) | | 65 | | | 34 | | | 202 | | | 111 | |
| | | | | | | | |
| Sublease income | | (295) | | | (92) | | | (844) | | | (92) | |
| Total net lease expense | | $ | 2,097 | | | $ | 1,952 | | | $ | 6,042 | | | $ | 5,938 | |
(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 made 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 a $0.4 million and $25.3 million operating lease impairment charge for the three and nine months ended September 30, 2022, respectively. The Company recorded a $1.1 million operating lease impairment charge for the three and nine months ended September 30, 2021. Refer to Note 2 “Fair Value Measurements” for further details.
On February 15, 2022, the Company entered into a lease agreement for a site in Slovakia related to our Slovakian operations. The lease is expected to commence on October 1, 2022 with a lease term through March 31, 2030. Annual rent payments are not expected to be material to the financial statements.
As of September 30, 2022, future minimum lease payments for operating leases consisted of the following:
| | | | | | | | |
| GoHealth, Inc. | 2022 Form 10-Q | 23 |
| | | | | | | | | | |
| (in thousands) | | | | Operating Leases |
| Remainder of 2022 | | | | $ | 2,836 | |
| 2023 | | | | 12,383 | |
| 2024 | | | | 7,787 | |
| 2025 | | | | 6,464 | |
| 2026 | | | | 5,289 | |
| Thereafter | | | | 31,145 | |
| Total lease payments | | | | $ | 65,904 | |
| Less: Imputed interest | | | | (17,852) | |
| Present value of lease liabilities | | | | $ | 48,052 | |
Supplemental cash flow information related to leases are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended Sep. 30, | | Nine months ended Sep. 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | | $ | 3,816 | | | $ | 1,680 | | | $ | 7,703 | | | $ | 4,928 | |
| Operating cash flows from finance leases | | $ | — | | | $ | 4 | | | $ | 2 | | | $ | 15 | |
| Financing cash flows from finance leases | | $ | — | | | $ | 77 | | | $ | 103 | | | $ | 231 | |
| | | | | | | | |
| Operating lease assets obtained in exchange for new lease obligations (1) | | $ | — | | | $ | — | | | $ | 26,405 | | | $ | — | |
| Reduction in operating lease ROU assets and lease liabilities due to reassessment of lease terms | | $ | — | | | $ | — | | | $ | 4,155 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
(1)On May 12, 2020, the Company entered into a lease agreement with Wilson Tech 5, LLC, for a proposed site in Lindon, Utah, which commenced on June 8, 2022.
The weighted average remaining lease term and discount rate are as follows:
| | | | | | | | | | | | | | |
| | Sep. 30, |
| (in thousands) | | 2022 | | 2021 |
| Weighted average remaining lease term (in years): | | | | |
| Operating leases | | 7.6 years | | 4.4 years |
| Finance leases | | 0.0 years | | 0.7 years |
| Weighted average discount rate: | | | | |
| Operating leases | | 8.0 | % | | 6.1 | % |
| Finance leases | | — | % | | 6.5 | % |
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. December 2, 2022 is the current deadline for the Company and other defendants to file a response to the class certification motion. The court has not yet set a trial date.
On May 19, 2021, a derivative action (the “Derivative Action”) was filed, 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
| | | | | | | | |
| GoHealth, Inc. | 2022 Form 10-Q | 24 |
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.
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. The Company pays rent, operating expenses, maintenance, and utilities under the terms of the leases. 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. For the three and nine months ended September 30, 2021, the Company made aggregate lease payments of $0.3 million and $1.0 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 the three months ended September 30, 2022, the Company recorded no expense. For the nine months ended September 30, 2022,the Company recorded expense of $0.6 million. For the three and nine months ended September 30, 2021, the Company recorded expense of $0.3 million and $0.7 million, respectively.
During the twelve months ended December 31, 2020, the Company provided a short-term advancement to NVX Holdings, Inc., which is controlled by significant shareholders of the Company, for which the Company recorded a receivable of $3.4 million. The advancement was collected by the Company during the nine months ended September 30, 2021.
13. OPERATING SEGMENTS AND SIGNIFICANT CUSTOMERS
Operating Segments
The Company reports segment information based on how the Company’s chief operating decision maker (“CODM”) regularly reviews operating results, allocates resources and makes decisions regarding business operations. The performance measures of the segments include total revenue and profit (loss). For segment reporting purposes in accordance with ASC 280-10, Segment Reporting, the Company’s business structure is comprised of four operating and reportable segments:
Medicare Internal and External: The Medicare internal and external segments consist primarily of revenues earned from sales of Medicare Advantage, Medicare Supplement, Prescription Drug Plans, and Medicare Special Needs Plans (or “SNPs”), for multiple carriers.
Individual and Family Plan and Other (“IFP and Other”) Internal and External: The IFP and Other internal and external segments consist primarily of revenues earned from sales of individual and family plans, dental plans, vision plans and other ancillary plans to individuals that are not Medicare-eligible.
The Internal and External segments relative to both Medicare and IFP are defined as follows:
Internal: The two internal segments primarily consist of sales of products and plans by Company-employed agents offering qualified prospects plans from multiple carriers, Company-employed agents offering qualified prospects plans on a carrier-specific basis, or sales of products and plans through our online platform without the assistance of our agents (do-it-yourself or “DIY”). The Company earns revenue in this channel through commissions paid by carriers based on sales the Company generates, as well as enrollment fees, hourly fees and other fees for services performed for specific carriers and other partners.
External: The two external segments represent sales of products and plans under the Company’s carrier contracts using an independent, national network of agents who are not employed by the Company. These agents utilize the Company’s technology and platform to enroll consumers in health insurance plans and provide a means to earn a return on leads that otherwise may have not been addressed. The Company also sells insurance prospects (or “leads”) to agencies within this channel. The Company earns revenue in this channel through commissions paid by carriers as a result of policy sales, as well as sales of leads to external agencies.
The following table presents summary results of the Company’s operating segments for the periods indicated:
| | | | | | | | |
| GoHealth, Inc. | 2022 Form 10-Q | 25 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended Sep. 30, | | Nine months ended Sep. 30, |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net revenues: | | | | | | | | |
| Medicare: | | | | | | | | |
| Internal channel | | $ | 79,266 | | | $ | 158,605 | | | $ | 386,796 | | | $ | 476,391 | |
| External channel | | 49,793 | | | 46,237 | | | 161,382 | | | 117,116 | |
| Total Medicare | | 129,059 | | | 204,842 | | | 548,178 | | | 593,507 | |
| IFP and Other: | | | | | | | | |
| Internal channel | | 3,459 | | | 5,742 | | | 11,904 | | | 13,505 | |
| External channel | | 534 | | | 1,150 | | | 2,217 | | | 5,803 | |
| Total IFP and Other | | 3,993 | | | 6,892 | | | 14,121 | | | 19,308 | |
| Net revenues | | 133,052 | | | 211,734 | | | 562,299 | | | 612,815 | |
| Segment profit (loss): | | | | | | | | |
| Medicare: | | | | | | | | |
| Internal channel | | 2,609 | | | (4,126) | | | 26,408 | | | 73,574 | |
| External channel | | (2,201) | | | 1,866 | | | (15,629) | | | (453) | |
| Total Medicare | | 408 | | | (2,260) | | | 10,779 | | | 73,121 | |
| IFP and Other: | | | | | | | | |
| Internal channel | | 496 | | | 2,186 | | | 2,668 | | | 657 | |
| External channel | | (576) | | | (330) | | | (1,245) | | | (227) | |
| Total IFP and Other | | (80) | | | 1,856 | | | 1,423 | | | 430 | |
| Segment profit (loss) | | 328 | | | (404) | | | 12,202 | | | 73,551 | |
| Corporate expense | | 25,806 | | | 23,726 | | | 89,930 | | | 68,239 | |
| Amortization of intangible assets | | 23,514 | | | 23,514 | | | 70,543 | | | 70,543 | |
| | | | | | | | |
| Operating lease impairment charges | | 350 | | | 1,062 | | | 25,345 | | | 1,062 | |
| Restructuring and other related charges | | 9,797 | | | — | | | 11,872 | | | — | |
| Loss on extinguishment of debt | | — | | | — | | | — | | | 11,935 | |
| Interest expense | | 15,630 | | | 6,921 | | | 39,752 | | | 23,886 | |
| Other (income) expense, net | | (115) | | | (30) | | | (65) | | | 27 | |
| Income (loss) before income taxes | | (74,654) | | | (55,597) | | | (225,175) | | | (102,141) | |
There are no internal revenue transactions between the Company’s operating segments. Substantially all revenue for the periods presented was generated from customers located in the United States. The Company’s CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented. The Company’s assets are primarily located in the United States.
Significant Customers
The following table presents carriers representing 10% or more of the Company’s total revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended Sep. 30, | | Nine months ended Sep. 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Humana | | 28 | % | | 40 | % | | 26 | % | | 33 | % |
| Elevance Health | | 24 | % | | 17 | % | | 24 | % | | 28 | % |
| United | | 15 | % | | 14 | % | | 17 | % | | 16 | % |
| Centene | | 17 | % | | 15 | % | | 15 | % | | 13 | % |
| | | | | | | | |
Substantially all of the revenue from these customers was from the sales of products and plans within the Medicare—Internal and Medicare—External segments.
Concentration of Credit Risk
The Company does not require collateral or other security in granting credit. As of September 30, 2022, three customers each represented 10% or more of the Company’s total accounts receivable and unbilled receivables and, in aggregate, represented 72.4%, or $11.2 million, of the combined total. As of December 31, 2021, three customers each represented 10% or more of the Company’s total accounts receivable and unbilled receivables and, in aggregate, represented 87%, or $28.7 million, of the combined total.
14. RESTRUCTURING COSTS
| | | | | | | | |
| GoHealth, Inc. | 2022 Form 10-Q | 26 |
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 Company evaluates restructuring charges in accordance with ASC 420 Exit or Disposal Cost Obligations and ASC 712 Compensation—Nonretirement Post-Employment Benefits.
The components of the restructuring and other related charges 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:
| | | | | | | | | | |
| (in thousands) | | | | Restructuring charges |
| Balance at January 1, 2022 | | | | $ | — | |
| Charges incurred | | | | 10,896 | |
| Cash paid | | | | (6,480) | |
| Balance at September 30, 2022 | | | | $ | 4,416 | |
| | | | | | | | |
| GoHealth, Inc. | 2022 Form 10-Q | 27 |