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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
001-39295
(Commission File Number)
SelectQuote, Inc.
(Exact name of registrant as specified in its charter) | | | | | | | | | | | |
Delaware | | 94-3339273 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | |
6800 West 115th Street | Suite 2511 | | 66211 |
Overland Park | Kansas | | (Zip Code) |
(Address of principal executive offices) | | |
(913) 599-9225
(Registrant's telephone number, including area code)
(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 |
Common Stock, par value $0.01 per share | | SLQT | | New York Stock Exchange |
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 | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
The registrant had outstanding 164,401,645 shares of common stock as of April 30, 2022.
SELECTQUOTE, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
| | | | | | | | |
| PART I FINANCIAL INFORMATION | PAGE |
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. | | |
| | |
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| |
| March 31, 2022 | | June 30, 2021 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 199,359 | | | $ | 286,454 | |
| | | |
Accounts receivable | 168,735 | | | 105,298 | |
Commissions receivable-current | 77,158 | | | 89,120 | |
Other current assets | 13,246 | | | 4,486 | |
Total current assets | 458,498 | | | 485,358 | |
COMMISSIONS RECEIVABLE | 761,138 | | | 756,777 | |
PROPERTY AND EQUIPMENT—Net | 45,558 | | | 29,510 | |
SOFTWARE—Net | 15,558 | | | 12,611 | |
OPERATING LEASE RIGHT-OF-USE ASSETS | 29,018 | | | 31,414 | |
INTANGIBLE ASSETS—Net | 36,022 | | | 40,670 | |
GOODWILL | 73,732 | | | 68,019 | |
OTHER ASSETS | 15,790 | | | 1,436 | |
TOTAL ASSETS | $ | 1,435,314 | | | $ | 1,425,795 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 27,445 | | | $ | 34,079 | |
Accrued expenses | 35,593 | | | 20,676 | |
Accrued compensation and benefits | 46,229 | | | 40,909 | |
| | | |
| | | |
Operating lease liabilities—current | 5,181 | | | 5,289 | |
Current portion of long-term debt | 7,169 | | | 2,360 | |
Other current liabilities | 2,079 | | | 5,504 | |
Total current liabilities | 123,696 | | | 108,817 | |
LONG-TERM DEBT, NET—less current portion | 699,386 | | | 459,043 | |
| | | |
DEFERRED INCOME TAXES | 76,806 | | | 139,240 | |
OPERATING LEASE LIABILITIES | 35,301 | | | 38,392 | |
OTHER LIABILITIES | 3,533 | | | 11,743 | |
Total liabilities | 938,722 | | | 757,235 | |
COMMITMENTS AND CONTINGENCIES (Note 8) | | | |
SHAREHOLDERS’ EQUITY: | | | |
Common stock, $0.01 par value | 1,644 | | | 1,635 | |
Additional paid-in capital | 554,045 | | | 544,771 | |
| | | |
Retained earnings (accumulated deficit) | (68,684) | | | 121,925 | |
Accumulated other comprehensive income | 9,587 | | | 229 | |
Total shareholders’ equity | 496,592 | | | 668,560 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 1,435,314 | | | $ | 1,425,795 | |
See accompanying notes to condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Nine Months Ended March 31, |
| 2022 | | 2021 | | 2022 | | 2021 |
REVENUE: | | | | | | | |
Commission | $ | 222,538 | | | $ | 235,216 | | | $ | 495,494 | | | $ | 660,631 | |
Production bonus and other | 52,575 | | | 30,130 | | | 132,127 | | | 85,054 | |
Total revenue | 275,113 | | | 265,346 | | | 627,621 | | | 745,685 | |
OPERATING COSTS AND EXPENSES: | | | | | | | |
Cost of revenue | 119,459 | | | 71,439 | | | 359,732 | | | 206,605 | |
Marketing and advertising | 125,082 | | | 116,690 | | | 409,005 | | | 298,696 | |
General and administrative | 21,031 | | | 19,251 | | | 64,570 | | | 44,496 | |
Technical development | 6,436 | | | 4,860 | | | 18,675 | | | 13,458 | |
Total operating costs and expenses | 272,008 | | | 212,240 | | | 851,982 | | | 563,255 | |
INCOME (LOSS) FROM OPERATIONS | 3,105 | | | 53,106 | | | (224,361) | | | 182,430 | |
INTEREST EXPENSE, NET | (12,179) | | | (7,355) | | | (31,300) | | | (20,898) | |
LOSS ON EXTINGUISHMENT OF DEBT | — | | | (3,315) | | | — | | | (3,315) | |
OTHER EXPENSE, NET | (23) | | | (349) | | | (177) | | | (1,545) | |
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) | (9,097) | | | 42,087 | | | (255,838) | | | 156,672 | |
INCOME TAX EXPENSE (BENEFIT) | (2,649) | | | 6,852 | | | (65,229) | | | 31,846 | |
NET INCOME (LOSS) | $ | (6,448) | | | $ | 35,235 | | | $ | (190,609) | | | $ | 124,826 | |
| | | | | | | |
NET INCOME (LOSS) PER SHARE: | | | | | | | |
Basic | $ | (0.04) | | | $ | 0.21 | | | $ | (1.16) | | | $ | 0.77 | |
Diluted | $ | (0.04) | | | $ | 0.21 | | | $ | (1.16) | | | $ | 0.75 | |
WEIGHTED-AVERAGE COMMON STOCK OUTSTANDING USED IN PER SHARE AMOUNTS: | | | | | | | |
Basic | 164,083 | | | 163,023 | | | 163,914 | | | 162,705 | |
Diluted | 164,083 | | | 165,731 | | | 163,914 | | | 165,495 | |
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OTHER COMPREHENSIVE INCOME, NET OF TAX: | | | | | | | |
Gain on cash flow hedge | 7,589 | | | 1,810 | | | 9,358 | | | 1,669 | |
OTHER COMPREHENSIVE INCOME | 7,589 | | | 1,810 | | | 9,358 | | | 1,669 | |
COMPREHENSIVE INCOME (LOSS) | $ | 1,141 | | | $ | 37,045 | | | $ | (181,251) | | | $ | 126,495 | |
See accompanying notes to the condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | | | Accumulated Other Comprehensive Income | | Total Shareholders' Equity |
| Shares | | Amount | | | | | |
BALANCES-December 31, 2021 | 164,013 | | | $ | 1,640 | | | $ | 551,002 | | | $ | (62,236) | | | | | $ | 1,998 | | | $ | 492,404 | |
Net loss | — | | | — | | | — | | | (6,448) | | | | | — | | | (6,448) | |
Gain on cash flow hedge, net of tax | — | | | — | | | — | | | — | | | | | 7,421 | | | 7,421 | |
Amount reclassified into earnings, net tax | — | | | — | | | — | | | — | | | | | 168 | | | 168 | |
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings | 10 | | | — | | | 14 | | | — | | | | | — | | | 14 | |
Issuance of common stock pursuant to employee stock purchase plan | 376 | | | 4 | | | 889 | | | — | | | | | — | | | 893 | |
Vesting of restricted stock unit awards net of shares withheld to cover tax withholdings | 2 | | | — | | | (3) | | | — | | | | | — | | | (3) | |
Share-based compensation expense | — | | | — | | | 2,143 | | | — | | | | | — | | | 2,143 | |
BALANCES-March 31, 2022 | 164,401 | | | $ | 1,644 | | | $ | 554,045 | | | $ | (68,684) | | | | | $ | 9,587 | | | $ | 496,592 | |
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Three Months Ended March 31, 2021 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings | | | | Accumulated Other Comprehensive Income/(Loss) | | Total Shareholders' Equity |
| Shares | | Amount | | | | | |
BALANCES-December 31, 2020 | 162,774 | | | $ | 1,628 | | | $ | 545,441 | | | $ | 85,296 | | | | | $ | (1,395) | | | $ | 630,970 | |
Net income | — | | | — | | | — | | | 35,235 | | | | | — | | | 35,235 | |
Gain on cash flow hedge, net of tax | — | | | — | | | — | | | — | | | | | 1,675 | | | 1,675 | |
Amount reclassified into earnings, net tax | — | | | — | | | — | | | — | | | | | 135 | | | 135 | |
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings | 552 | | | 5 | | | (4,331) | | | — | | | | | — | | | (4,326) | |
Issuance of common stock pursuant to employee stock purchase plan | 56 | | | 1 | | | 985 | | | — | | | | | — | | | 986 | |
Share-based compensation expense | — | | | — | | | 1,429 | | | — | | | | | — | | | 1,429 | |
BALANCES-March 31, 2021 | 163,382 | | | $ | 1,634 | | | $ | 543,524 | | | $ | 120,531 | | | | | $ | 415 | | | $ | 666,104 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended March 31, 2022 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings/(Accumulated Deficit) | | | | Accumulated Other Comprehensive Income | | Total Shareholders' Equity |
| Shares | | Amount | | | | | |
BALANCES-June 30, 2021 | 163,510 | | | $ | 1,635 | | | $ | 544,771 | | | $ | 121,925 | | | | | $ | 229 | | | $ | 668,560 | |
Net loss | — | | | — | | | — | | | (190,609) | | | | | | | (190,609) | |
Gain on cash flow hedge, net of tax | — | | | — | | | — | | | — | | | | | 8,844 | | | 8,844 | |
Amount reclassified into earnings, net of tax | — | | | — | | | — | | | — | | | | | 514 | | | 514 | |
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings | 349 | | | 3 | | | 1,293 | | | — | | | | | — | | | 1,296 | |
Issuance of common stock pursuant to employee stock purchase plan | 466 | | | 5 | | | 1,877 | | | — | | | | | — | | | 1,882 | |
Vesting of restricted stock unit awards net of shares withheld to cover tax withholdings | 76 | | | 1 | | | (148) | | | — | | | | | — | | | (147) | |
Share-based compensation expense | — | | | — | | | 6,252 | | | — | | | | | — | | | 6,252 | |
BALANCES-March 31, 2022 | 164,401 | | | $ | 1,644 | | | $ | 554,045 | | | $ | (68,684) | | | | | $ | 9,587 | | | $ | 496,592 | |
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Nine Months Ended March 31, 2021 |
| Common Stock | | Additional Paid-In Capital | | Retained Earnings/(Accumulated Deficit) | | | | Accumulated Other Comprehensive Income/(Loss) | | Total Shareholders' Equity |
| Shares | | Amount | | | | | |
BALANCES-June 30, 2020 | 162,191 | | | $ | 1,622 | | | $ | 548,113 | | | $ | (4,295) | | | | | $ | (1,254) | | | $ | 544,186 | |
Net income | — | | | — | | | — | | | 124,826 | | | | | — | | | 124,826 | |
Gain on cash flow hedge, net of tax | — | | | — | | | — | | | — | | | | | 1,301 | | | 1,301 | |
Amount reclassified into earnings, net tax | — | | | — | | | — | | | — | | | | | 368 | | | 368 | |
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings | 1,135 | | | 11 | | | (9,244) | | | — | | | | | — | | | (9,233) | |
Issuance of common stock pursuant to employee stock purchase plan | 56 | | | 1 | | | 985 | | | — | | | | | — | | | 986 | |
Share-based compensation expense | — | | | — | | | 3,670 | | | — | | | | | — | | | 3,670 | |
BALANCES-March 31, 2021 | 163,382 | | | $ | 1,634 | | | $ | 543,524 | | | $ | 120,531 | | | | | $ | 415 | | | $ | 666,104 | |
See accompanying notes to the condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| | | | | | | | | | | | | |
| Nine Months Ended March 31, |
| 2022 | | 2021 | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income (loss) | $ | (190,609) | | | $ | 124,826 | | | |
Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities: | | | | | |
Depreciation and amortization | 17,957 | | | 11,260 | | | |
Loss on disposal of property, equipment, and software | 741 | | | 261 | | | |
Share-based compensation expense | 6,252 | | | 3,689 | | | |
Deferred income taxes | (65,623) | | | 31,702 | | | |
Amortization of debt issuance costs and debt discount | 4,217 | | | 2,482 | | | |
Write-off of debt issuance costs | — | | | 2,570 | | | |
Fair value adjustments to contingent earnout obligations | — | | | 1,487 | | | |
Non-cash lease expense | 3,065 | | | 2,869 | | | |
Changes in operating assets and liabilities: | | | | | |
Accounts receivable | (62,803) | | | (49,224) | | | |
Commissions receivable | 7,601 | | | (251,188) | | | |
Other assets | (8,275) | | | 4,349 | | | |
Accounts payable and accrued expenses | 8,096 | | | 26,223 | | | |
Operating lease liabilities | (3,868) | | | (2,631) | | | |
Other liabilities | (1,113) | | | 30,378 | | | |
Net cash used in operating activities | (284,362) | | | (60,947) | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Purchases of property and equipment | (24,515) | | | (6,520) | | | |
| | | | | |
Purchases of software and capitalized software development costs | (7,570) | | | (5,807) | | | |
Acquisition of business | (6,927) | | | (23,879) | | | |
Investment in equity securities | (1,000) | | | — | | | |
Net cash used in investing activities | (40,012) | | | (36,206) | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Proceeds from Revolving Credit Facility | 50,000 | | | — | | | |
Payments on Revolving Credit Facility | (50,000) | | | — | | | |
Proceeds from DDTL Facility | 242,000 | | | — | | | |
Payments on DDTL Facility | (613) | | | — | | | |
Net proceeds from Term Loans | — | | | 228,753 | | | |
Payments on Term Loans | (1,180) | | | (84,118) | | | |
| | | | | |
Payments on other debt | (130) | | | (189) | | | |
Proceeds from common stock options exercised and employee stock purchase plan | 3,179 | | | 1,778 | | | |
| | | | | |
| | | | | |
| | | | | |
Payments of tax withholdings related to net share settlement of equity awards | (148) | | | (10,026) | | | |
Payments of debt issuance costs | (328) | | | (885) | | | |
Payments of costs incurred in connection with private placement | — | | | (1,771) | | | |
Payments of costs incurred in connection with initial public offering | — | | | (3,911) | | | |
| | | | | |
Payment of contingent earnout liability | — | | | (32,300) | | | |
Payment of acquisition holdback | (5,501) | | | — | | | |
Net cash provided by financing activities | 237,279 | | | 97,331 | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (87,095) | | | 178 | | | |
CASH AND CASH EQUIVALENTS—Beginning of period | 286,454 | | | 368,870 | | | |
CASH AND CASH EQUIVALENTS—End of period | $ | 199,359 | | | $ | 369,048 | | | |
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SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
Interest paid, net | $ | (27,010) | | | $ | (18,309) | | | |
Income taxes paid, net | (67) | | | (121) | | | |
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See accompanying notes to condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business—SelectQuote, Inc. (together with its subsidiaries, the “Company” or “SelectQuote”) contracts with insurance carriers to sell senior health, life, and auto and home insurance policies by telephone to individuals throughout the United States through the use of multi-channel marketing and advertising campaigns. The Company obtains leads from, among other sources, InsideResponse, a wholly-owned subsidiary that provides sales leads to the consumer insurance industry. The Company also coordinates various healthcare-related services through its Population Health platform, which includes SelectRx, a closed-door, long-term care pharmacy that offers pharmacy services, including essential prescription medications, OTC medications, customized medication packaging, medication therapy management, and other consultative services under the Patient Centered Pharmacy Home (PCPH) model. SelectQuote’s Senior division sells Medicare Advantage, Medicare Supplement, Medicare Part D, and other ancillary senior health insurance related products, and along with Population Health and InsideResponse, is referred to as “Senior”. SelectQuote’s Life division (“Life”) sells term life, final expense, and other ancillary products, and SelectQuote’s Auto & Home division (“Auto & Home”) primarily sells non-commercial auto and home property and casualty insurance products. SelectQuote’s licensed insurance agents provide comparative rates from a variety of insurance carriers relying on our technology distribution channel with a combination of proprietary and commercially available software to perform its quote service and sell insurance policies on behalf of the insurance carriers. The Company primarily earns revenue in the form of commission payments from the insurance carriers. Commission payments are received both when the initial policy is sold (“first year”) and when the underlying policyholder renews their policy in subsequent years (“renewal”). The Company also receives certain volume-based bonuses from some carriers on first-year policies sold based on attaining various predetermined target sales levels or other agreed upon objectives. These bonuses are referred to as “production bonuses” or “marketing development funds.” Additionally, the Company earns revenue from its Population Health platform, mail-order prescription revenue from SelectRx, and lead generation revenue from InsideResponse.
Basis of Presentation—The accompanying unaudited condensed consolidated financial statements include the accounts of SelectQuote, Inc. and its wholly owned subsidiaries: SelectQuote Insurance Services, SelectQuote Auto & Home Insurance Services, LLC (“SQAH”), ChoiceMark Insurance Services, Inc., Tiburon Insurance Services, InsideResponse, LLC, and SelectQuote Ventures, Inc. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with those rules and regulations and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended June 30, 2021, as amended by the Form 10-K/A filed with the SEC on February 14, 2022 (the “2021 Annual Report”) and include all adjustments necessary for the fair presentation of our financial position for the periods presented. Our results for the periods presented in our financial statements are not necessarily indicative of the results to be expected for any subsequent period, including for the year ending June 30, 2022, and therefore should not be relied upon as an indicator of future results. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2021. Certain reclassifications have been made to prior periods to conform with current year presentation.
Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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. The Company regularly assesses these estimates; however, actual amounts could differ from those estimates. The most significant items involving management’s estimates include estimates of revenue recognition, accounts receivable, commissions receivable, the provision for income taxes, share-based
compensation, and valuation of intangible assets and goodwill. The impact of changes in estimates is recorded in the period in which they become known.
Going Concern—The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.
Under the Senior Secured Credit Facility, the Company is required to maintain a certain asset coverage ratio, as discussed further in Note 7 to the condensed consolidated financial statements. As of March 31, 2022, the Company is in compliance with all of its debt covenants; however, our financial projections indicate that, based on our current business plan, we will not maintain the required asset coverage ratio within one year after the date that the condensed consolidated financial statements are issued. Failure to maintain the required ratio would constitute a violation of our obligations under the Senior Secured Credit Facility and would permit our lenders to declare us in default. In the event of a default, our lenders could accelerate all amounts owing under the Senior Secured Credit Facility. We do not currently have sufficient liquidity to repay such indebtedness. We have commenced discussions of a covenant waiver or modification with our lenders; however, the Company cannot provide any assurances that it will be successful in obtaining such a waiver or modification on acceptable terms, or at all. As a result, there is substantial doubt about the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Seasonality—Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year during the Medicare annual enrollment period (“AEP”), which runs from October through December each year, and are allowed to switch plans from an existing plan during the open enrollment period (“OEP”), which runs from January through March each year. As a result, commission revenue for our Senior segment is highest in the second quarter and to a lesser extent, the third quarter during OEP. Most policies sold during AEP are effective as of and renew annually on January 1.
Significant Accounting Policies—There have been no material changes to the Company’s significant accounting policies as described in our 2021 Annual Report.
Recent Accounting Pronouncements Not Yet Adopted—In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if the acquirer had originated the contracts. Prior to this ASU, an acquirer generally recognizes contract assets acquired and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The ASU is to be applied prospectively to business combinations occurring on or after the effective date of the amendment (or if adopted early as of an interim period, as of the beginning of the fiscal year that includes the interim period of early application). The Company will continue to evaluate the impact of this guidance, which will depend on the contract assets and liabilities acquired in future business combinations.
Recent Accounting Pronouncements Adopted—In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies and changes the accounting for certain income tax transactions, among other minor improvements. This standard was effective for the Company on July 1, 2021, and did not have a material impact on the condensed consolidated financial statements and related disclosures.
Immaterial Correction of Prior Period Financial Statements—Subsequent to the issuance of the Company’s financial statements as of and for the year ended June 30, 2021 and as previously disclosed in our Form 10-Q for the three and six months ended December 31, 2021, the Company discovered that the provision for first
year commission revenue for certain final expense policies offered by one of its insurance carrier partners should have been accrued based on a higher lapse rate. The error in the lapse rate resulted in commission revenue being misstated by $6.1 million and $2.0 million, for the years ended June 30, 2021 and 2020, and $2.4 million for the three months ended September 30, 2021, respectively. Accounts receivable was misstated by $8.1 million and $2.0 million as of June 30, 2021 and 2020, respectively. The impact of the error on net income for the year ended June 30, 2021, was a decrease of $4.8 million. Management evaluated this misstatement and concluded it was not material to prior periods, individually or in aggregate. However, correcting the cumulative effect of the error in the three and six months ended December 31, 2021, would have had a significant effect on the results of operations. Therefore, the Company elected to correct the relevant prior period condensed consolidated financial statements and related footnotes for this error for comparative purposes.
The following tables reflect the effects of the correction on all affected line items of the Company’s previously reported condensed consolidated financial statements presented in this Form 10-Q:
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CORRECTED CONDENSED CONSOLIDATED BALANCE SHEET (unaudited) |
| June 30, 2021 |
(in thousands) | As Previously Reported | | Adjustment | | As Corrected |
Accounts receivable | $ | 113,375 | | | $ | (8,077) | | | $ | 105,298 | |
Total current assets | 493,435 | | | (8,077) | | | 485,358 | |
Total assets | 1,433,872 | | | (8,077) | | | 1,425,795 | |
Deferred income taxes | 140,988 | | | (1,748) | | | 139,240 | |
Total liabilities | 758,983 | | | (1,748) | | | 757,235 | |
Retained earnings (accumulated deficit) | 128,254 | | | (6,329) | | | 121,925 | |
Total shareholders’ equity | 674,889 | | | (6,329) | | | 668,560 | |
Total liabilities and shareholders’ equity | $ | 1,433,872 | | | $ | (8,077) | | | $ | 1,425,795 | |
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CORRECTED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) |
| Three Months Ended March 31, 2021 | | Nine Months Ended March 31, 2021 |
(in thousands) | As Previously Reported | | Adjustment | | As Corrected | | As Previously Reported | | Adjustment | | As Corrected |
Commission revenue | $ | 236,793 | | | $ | (1,577) | | | $ | 235,216 | | | $ | 664,312 | | | $ | (3,681) | | | $ | 660,631 | |
Total revenue | 266,923 | | | (1,577) | | | 265,346 | | | 749,366 | | | (3,681) | | | 745,685 | |
Income (loss) from operations | 54,683 | | | (1,577) | | | 53,106 | | | 186,111 | | | (3,681) | | | 182,430 | |
Income (loss) before income tax expense (benefit) | 43,664 | | | (1,577) | | | 42,087 | | | 160,353 | | | (3,681) | | | 156,672 | |
Income tax expense (benefit) | 7,183 | | | (331) | | | 6,852 | | | 32,619 | | | (773) | | | 31,846 | |
Net income (loss) | 36,481 | | | (1,246) | | | 35,235 | | | 127,734 | | | (2,908) | | | 124,826 | |
Net income (loss) per share: | | | | | | | | | | | |
Basic | 0.22 | | | (0.01) | | | 0.21 | | | 0.79 | | | (0.02) | | | 0.77 | |
Diluted | 0.22 | | | (0.01) | | | 0.21 | | | 0.77 | | | (0.02) | | | 0.75 | |
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Comprehensive income (loss) | $ | 38,291 | | | $ | (1,246) | | | $ | 37,045 | | | $ | 129,403 | | | $ | (2,908) | | | $ | 126,495 | |
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CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) |
| | Three Months Ended March 31, 2021 |
(in thousands) | | (Accumulated Deficit)/Retained Earnings | | | | Total Shareholders' Equity |
As Previously Reported | | | | | | |
BALANCES-December 31, 2020 | | $ | 88,461 | | | | | $ | 634,135 | |
Net Income | | 36,481 | | | | | 36,481 | |
BALANCES-March 31, 2021 | | 124,942 | | | | | 670,515 | |
Adjustments | | | | | | |
BALANCES-December 31, 2020 | | (3,165) | | | | | (3,165) | |
Net Loss | | (1,246) | | | | | (1,246) | |
BALANCES-March 31, 2021 | | (4,411) | | | | | (4,411) | |
As Corrected | | | | | | |
BALANCES-December 31, 2020 | | 85,296 | | | | | 630,970 | |
Net Income | | 35,235 | | | | | 35,235 | |
BALANCES-March 31, 2021 | | $ | 120,531 | | | | | $ | 666,104 | |
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CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) |
| | Nine Months Ended March 31, 2021 |
(in thousands) | | (Accumulated Deficit)/Retained Earnings | | | | Total Shareholders' Equity |
As Previously Reported | | | | | | |
BALANCES-June 30, 2020 | | $ | (2,792) | | | | | $ | 545,689 | |
Net Income | | 127,734 | | | | | 127,734 | |
BALANCES-March 31, 2021 | | 124,942 | | | | | 670,515 | |
Adjustments | | | | | | |
BALANCES-June 30, 2020 | | (1,503) | | | | | (1,503) | |
Net Loss | | (2,908) | | | | | (2,908) | |
BALANCES-March 31, 2021 | | (4,411) | | | | | (4,411) | |
As Corrected | | | | | | |
BALANCES-June 30, 2020 | | (4,295) | | | | | 544,186 | |
Net Income | | 124,826 | | | | | 124,826 | |
BALANCES-March 31, 2021 | | $ | 120,531 | | | | | $ | 666,104 | |
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CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) |
| Nine Months Ended March 31, 2021 |
(in thousands) | As Previously Reported | | Adjustment | | As Corrected |
Net income (loss) | $ | 127,734 | | | $ | (2,908) | | | $ | 124,826 | |
Deferred income taxes | 32,475 | | | (773) | | | 31,702 | |
Accounts receivable | (52,905) | | | 3,681 | | | (49,224) | |
Net cash used in operating activities | $ | (60,947) | | | $ | — | | | $ | (60,947) | |
2.ACQUISITIONS
In accordance with ASC Topic 805, Business Combinations, the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities, and intangible assets acquired based on fair values. Any excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is supported by valuations using estimates and assumptions provided by management. Based on the valuation inputs, the Company has recorded assets acquired and liabilities assumed according to the following fair value hierarchy:
| | | | | |
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability. |
Level 3 | Unobservable inputs for the asset or liability |
Lead distribution company—On February 1, 2021, the Company acquired substantially all of the assets of a lead distribution company for an aggregate purchase price of up to $33.5 million (subject to customary adjustments), as set forth in the Asset Purchase Agreement, dated February 1, 2021 (the “Asset Purchase Agreement”). The purchase price is comprised of $30.0 million, of which $24.0 million was paid in cash at the closing of the transaction, with an additional $6.0 million of holdback for indemnification claims, net working capital adjustments, and underperformance. Additionally, the purchase price includes an earnout of up to $3.5 million. The primary purpose of the acquisition was to secure and incorporate the exclusive publisher relationships into the lead generation business of InsideResponse. The Company recorded $0.4 million of acquisition-related costs in general and administrative operating costs and expenses in the condensed consolidated statement of comprehensive income.
During calendar year 2021, the lead distribution company did not achieve the minimum earnout target as set forth in the Asset Purchase Agreement. However, the remaining holdback was earned in full, as the lead distribution company did not fall below the underperformance thresholds as set forth in the Asset Purchase Agreement. The Company settled the remaining holdback of $5.5 million, with interest, after the net working capital true-up of $0.5 million, during the three months ended March 31, 2022.
Under the terms of the Asset Purchase Agreement, the total consideration for the acquisition consisted of the following as of the acquisition date (in thousands):
| | | | | |
Base purchase price | $ | 30,000 | |
Net working capital true-up | (499) | |
Total Purchase Consideration | $ | 29,501 | |
At the date of acquisition, the fair value of net tangible assets acquired approximated their carrying value. The non-compete agreements were valued using the income approach, and the customer relationships were valued
using the multiple period excess earnings method. As such, all aforementioned intangible assets were valued using Level 3 inputs.
Goodwill resulting from the transaction constitutes the excess of the consideration paid over the fair values of the assets acquired and liabilities assumed and primarily represents the benefits of leveraging the exclusive publisher relationships in the business. This acquired goodwill is allocated to Senior (which is also the reporting unit), and $1.6 million will be deductible for tax purposes after adding back acquisition costs and having settled the remaining holdback.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
| | | | | | | | |
Description | Estimated Life | Amount |
Accounts receivable | | $ | 1,301 | |
Total tangible assets acquired | | 1,301 | |
| | |
Non-compete agreements | 5 years | 1,000 | |
Vendor relationships | 9 years | 23,700 | |
Goodwill | Indefinite | 3,500 | |
Total intangible assets acquired | | 28,200 | |
Net Assets Acquired | | $ | 29,501 | |
The Company will amortize the intangible assets acquired on a straight-line basis over their estimated remaining lives, ranging from five to nine years.
Express Med Pharmaceuticals—On April 30, 2021, the Company acquired 100% of the outstanding shares of Express Med Pharmaceuticals, Inc., now SelectRx, a closed-door, long term care pharmacy provider, for an aggregate purchase price of up to $24.0 million (subject to customary adjustments), as set forth in the Stock Purchase Agreement dated April 30, 2021 (the “Stock Purchase Agreement”). The aggregate purchase price of up to $24.0 million is comprised of $17.5 million in cash paid at the closing of the transaction, an additional $2.5 million of holdback for indemnification claims, if any, and an earnout of up to $4.0 million, if any. The primary purpose of the acquisition was to take advantage of the Company's technology and customer base to facilitate better patient care through coordination of strategic, value-based care partnerships. The Company recorded $0.3 million of acquisition-related costs in general and administrative operating costs and expenses in the condensed consolidated statement of comprehensive income. In addition, as a result of the acquisition, the Company has entered into an operating lease with the former President and Chief Executive Officer of Express Med Pharmaceuticals, now our Executive Vice President of SelectRx. Refer to Note 6 in the condensed consolidated financial statements for further details.
The earnout of up to $4.0 million is comprised of two separate provisions. The first provision provides for an earnout of up to $3.0 million and is contingent upon achievement of the following within the first 20 months following the acquisition: facility updates that would allow for processing a minimum of 75,000 active patients, the issuance of pharmacy licenses in all 50 states, and active patients of 15,000 or more. The second provision provides for an earnout of up to $1.0 million and is contingent upon achievement of the following within 36 months following the acquisition: construction of a new facility to accommodate the servicing of additional active patients or 75,000 or more active patients as of the last day of any month prior to the end of the second earnout provision period or as of the end of the second earnout provision period. As the earnout payment is contingent upon continued employment of certain individuals, the Company will recognize the earnout as compensation expense in general and administrative operating costs and expenses in the condensed consolidated statement of comprehensive income in the period in which it is earned. As of March 31, 2022, the Company has not accrued an earnout payment based on performance to date. The $2.5 million of holdback will be due upon the 15-month anniversary of the closing date of the acquisition.
Under the terms of the Stock Purchase Agreement, total consideration in the acquisition consisted of the following as of the acquisition date (in thousands):
| | | | | |
Base purchase price | $ | 20,000 | |
Net working capital true-up | (483) | |
Closing cash | 20 | |
Total purchase consideration | $ | 19,537 | |
At the date of acquisition, the fair value of net tangible assets acquired, excluding property and equipment, approximated their carrying value. The property and equipment was valued primarily using the cost and sales comparison approach to value. For the proprietary software acquired, the replacement cost method under the cost approach was used, estimating the cost to rebuild the software. The non-compete agreement was valued using the income approach, and the customer relationships were valued using the multiple period excess earnings method. As such, all aforementioned intangible assets were valued using Level 3 inputs.
Goodwill resulting from the transaction constitutes the excess of the consideration paid over the fair values of the assets acquired and liabilities assumed and primarily represents the additional value of the synergies of combining the SelectRx business with the Company's technology and existing customer base. This acquired goodwill is allocated to Senior (which is also the reporting unit), and the Company expects approximately $16.3 million to be deductible for tax purposes after adding back acquisition costs and excluding the holdback not yet paid.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
| | | | | | | | |
Description | Estimated Life | Amount |
Cash and cash equivalents | | $ | 20 | |
Accounts receivable | | 613 | |
Other current assets | | 28 | |
Property and equipment, net | | 287 | |
Accounts payable | | (280) | |
Accrued expenses, including compensation and benefits | | (45) | |
Net tangible assets acquired | | 623 | |
| | |
Proprietary Software | 3 years | 550 | |
Non-compete agreements | 5 years | 100 | |
Customer relationships | 1 year | 200 | |
Goodwill | Indefinite | 18,064 | |
Total intangible assets acquired | | 18,914 | |
Net assets acquired | | $ | 19,537 | |
The Company will amortize the intangible assets acquired on a straight-line basis over their estimated remaining lives, ranging from one to five years.
Simple Meds—On August 31, 2021, SelectRx acquired 100% of the outstanding equity interests of Simple Meds, a full-service pharmaceutical distributor, for an aggregate purchase price of $7.0 million (subject to
customary adjustments), as set forth in the Membership Interest Purchase Agreement dated August 31, 2021. The aggregate purchase price of $7.0 million was paid in cash at the closing of the transaction. The primary purpose of the acquisition was to accelerate the expansion of the prescription drug management business by combining the operations and existing infrastructure of Simple Meds into SelectRx.
Under the terms of the Membership Interest Purchase Agreement, total consideration in the acquisition consisted of the following as of the acquisition date (in thousands):
| | | | | |
Base purchase price | $ | 7,000 | |
Net working capital true-up | 347 | |
Closing cash | 61 | |
Total purchase consideration | $ | 7,408 | |
At the date of acquisition, the fair value of net tangible assets acquired approximated their carrying value. The customer relationships were valued using the multiple period excess earnings method, and as such, were valued using Level 3 inputs.
Goodwill resulting from the transaction constitutes the excess of the consideration paid over the fair values of the assets acquired and liabilities assumed and primarily represents the additional value of the synergies of combining the Simple Meds business with the Company's technology and existing customer base. This acquired goodwill is allocated to Senior (which is also the reporting unit), and the Company expects approximately $5.6 million to be deductible for tax purposes after adding back acquisition costs.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
| | | | | | | | |
Description | Estimated Life | Amount |
Cash and cash equivalents | | $ | 61 | |
Accounts receivable | | 634 | |
Other current assets | | 474 | |
Property and equipment, net | | 415 | |
Accounts payable | | (259) | |
Net tangible assets acquired | | 1,325 | |
| | |
Customer relationships | 1 year | 370 | |
Goodwill | Indefinite | 5,713 | |
Total intangible assets acquired | | 6,083 | |
Net assets acquired | | $ | 7,408 | |
From the date of acquisition, August 31, 2021, through March 31, 2022, Simple Meds generated $8.6 million of pharmacy prescription revenue.
3.PROPERTY AND EQUIPMENT—NET
Property and equipment—net consisted of the following:
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | June 30, 2021 |
Computer hardware | $ | 25,405 | | | $ | 13,351 | |
Machinery and equipment(1) | |