Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
Benefytt Technologies, Inc. ("BFYT") is a Delaware corporation that was incorporated on October 26, 2012 under the name Health Insurance Innovations, Inc. and that changed its name to Benefytt Technologies, Inc, on March 6, 2020. In this quarterly report, unless the context suggests otherwise, references to the "Company," "we," "us" and "our" refer to Benefytt Technologies, Inc. (formerly known as Health Insurance Innovations, Inc.) and its consolidated subsidiaries. The term "HPIH" refers to our majority owned subsidiary, Health Plan Intermediaries Holdings, LLC, on a stand-alone basis. The terms "HealthPocket" or "HP" refer to HealthPocket, Inc., which was acquired by HPIH on July 14, 2014 (and is now wholly owned by Health Insurance Innovations Holdings, LLC, or "HIIH," a wholly owned subsidiary of HPIH formed on December 17, 2018). The term "Benefytt Reinsurance" refers to Benefytt, LLC, a wholly owned subsidiary of HIIH which was formed on May 1, 2019. The term "TogetherHealth" collectively refers to the three subsidiaries TogetherHealth PAP, LLC, TogetherHealth Insurance, LLC, and Rx Helpline, LLC, which were acquired by HPIH on June 5, 2019, and are all wholly owned subsidiaries of HPIH. The term "TIB" refers to Total Insurance Brokers, LLC which was acquired on August 5, 2019 and is wholly owned by HPIH. The term "ASIA" refers to American Service Insurance Agency LLC, a wholly owned subsidiary which was acquired by HPIH on August 8, 2014. HP, HIIH, Benefytt Reinsurance, TogetherHealth, TIB, and ASIA are consolidated subsidiaries of HPIH, which is a consolidated subsidiary of BFYT.
Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the SEC for quarterly reports on Form 10-Q. Accordingly, they do not include all of the financial information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. The information included in this quarterly report, including the interim condensed consolidated financial statements and the accompanying notes, should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP.
In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the financial position, results of operations, stockholders' equity, and cash flows of the Company. The condensed consolidated results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2020.
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 consolidated financial statements. These estimates also affect the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from estimates, and any such differences may be material to our financial statements.
We are not presently aware of any events or circumstances arising from the COVID-19 pandemic that would require us to update our estimates or judgments or revise the carrying value of our assets or liabilities. Our estimates may change, however, as new events occur and additional information is obtained, any such changes will be recognized in the condensed consolidated financial statements.
Reclassifications
Right of use assets and operating lease liabilities are now reported as separate line items on the condensed consolidated balance sheets. Prior period right of use assets were previously reported as a component of other assets and operating lease liabilities were reported as a component of other liabilities. These amounts have been reclassified to conform to the current period presentation.
Prior period marketing and advertising expenses included within the condensed consolidated statements of operations have been reclassified to conform to the current period presentation. The Company previously reported marketing and advertising expense as a component of selling, general and administrative expenses but now reports these expenses as a separate line item in the condensed consolidated statements of operations.
Summary of Significant Accounting Policies
The following is an update to our significant accounting policies described in Note 1, Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies, in our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
Financial Instruments - Credit Losses (Topic 326)
Allowance for Credit Losses - Advanced Commissions: The allowance for credit losses is a valuation account that is deducted from the gross amount of advanced commissions to present the net amount expected to be collected. Advanced Commissions are charged against the allowance when management believes that it is no longer collectible based on future collections of premium from each distributor's book of business. This allowance for credit losses is netted against our long-term advanced commissions which are classified within other assets on the condensed consolidated balance sheets.
Management estimates the allowance balance using relevant available information, from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments are made for differences such as lower than estimated persistency of a distributor's book of business, changes in conditions, or other relevant factors. The allowance for credit loss is measured on a collective basis as similar risks characteristics exists. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recent Accounting Pronouncements
Recently adopted accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, which amends the guidance for evaluating impairment of financial assets subject to risks such as contract assets, loans, receivables, and other financial assets. 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. ASU 2016-13 became effective for us on January 1, 2020. See Summary of Significant Accounting Polices within this Note 1 for further information.
Accounting pronouncements not yet adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The objective of this ASU is to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR). The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the effect of the adoption of this pronouncement on our financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which clarifies and simplifies accounting for income taxes by eliminating certain exceptions for intraperiod tax allocation principles and the methodology for calculating income tax rates in an interim period, among other updates. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the effect of the adoption of this pronouncement on our financial statements and related disclosures.
The Company has reviewed all other issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial statements.
2. Business Combinations
TogetherHealth
On June 5, 2019, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with RxHelpline, LLC ("RXH"), TogetherHealth PAP, LLC ("THP"), TogetherHealth Insurance, LLC ("THI" and, collectively with RXH and THP, "TogetherHealth"), TogetherHealth Soup, L.P. ("Seller") and certain principals of TogetherHealth, pursuant to which HPIH purchased 100% of the outstanding limited liability company interests of TogetherHealth (the "Interests"). The closing of the transactions contemplated by the Purchase Agreement occurred on June 5, 2019, simultaneous with the signing of the Purchase Agreement.
The purchase price for the Interests under the Purchase Agreement was approximately $50.0 million in cash, subject to certain closing and post-closing adjustments (the "Cash Consideration"), the issuance of 630,000 shares of the Company's Class A common stock, and an earn-out agreement pursuant to which the Seller will receive payments over a five-year post-closing period equal to a percentage of the TogetherHealth's gross margin above specified thresholds. Pursuant to the Purchase Agreement, a portion of the cash consideration consisting of $2.5 million was held back by HPIH in order to fund payment of post-closing adjustments to the cash consideration and post-closing indemnification obligations of the parties of which, $1.5 million has since been released. The shares issued pursuant to the Purchase Agreement are subject to lock-up agreements pursuant to which the holders thereof are restricted from selling or transferring such shares for a three-year period, subject to a release from the lock-up of one-third of the subject shares on each of the first three anniversary dates of the Purchase Agreement and subject to other release-acceleration provisions and customary exceptions.
This transaction is expected to provide us with additional benefits such as increased and ongoing sales referrals that we will use to convert to policies, or sell externally, which will help facilitate our entry into new markets and revenue streams, such as the market for the distribution of Medicare insurance products to individuals 65 years of age or older.
The following table summarizes the fair value of the consideration paid for the acquisition as of June 5, 2019 ($ in thousands):
|
|
|
|
|
Cash consideration(1)
|
$
|
49,852
|
|
Class A common stock, at fair value(2)
|
11,784
|
|
Earnout consideration, at fair value(3)
|
49,298
|
|
Settlement of intercompany balances
|
(560
|
)
|
Total consideration
|
$
|
110,374
|
|
|
|
(1)
|
Cash consideration was $50.0 million, of which $2.5 million was withheld by HPIH for the payment of post-closing adjustments. Measurement period adjustments resulted in $148,000 for working capital adjustments.
|
|
|
(2)
|
The fair value of the Class A common stock derived from the market price of the stock, adjusted to include a discount for lack of marketability due to the trading restrictions pursuant to the Purchase Agreement.
|
|
|
(3)
|
Represents the fair value estimate of income-based contingent consideration, which may be realized by the sellers incrementally over five years after the closing date of the acquisition. The fair value of the contingent consideration arrangement as of the acquisition date was estimated using a risk-adjusted probability analysis. As of June 5th, 2019, management estimated the payments to be approximately $97.6 million over the five years however the maximum cash payout is unlimited.
|
For the three months ended March 31, 2020, the Company updated its preliminary allocation of the purchase price of the assets and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using information and assumptions available which management believes are reasonable.
The following table summarizes the allocation of the total purchase price for the acquisition: ($ in thousands):
|
|
|
|
|
Cash
|
$
|
179
|
|
Accounts receivable and other assets(1)
|
333
|
|
Contract asset(1)(2)
|
12,798
|
|
Property, plant and equipment(1)
|
34
|
|
Intangible asset - brand
|
430
|
|
Intangible asset - BPO relationship
|
24,700
|
|
Goodwill
|
72,660
|
|
Accounts payable, accrued expenses, and other liabilities(1)
|
(760
|
)
|
Total
|
$
|
110,374
|
|
|
|
(1)
|
The carrying value of accounts receivable, contract asset, property, plant and equipment, accounts payable and accrued expenses approximated fair value; as such, no adjustments to the accounts were recorded in association with the acquisition.
|
|
|
(2)
|
Current quarter adjustments of $708,000 were due to revisions of collection estimates of policies in force.
|
The goodwill allocated to the purchase price was calculated as the fair value of the consideration less the assets acquired and liabilities assumed. This value of goodwill is primarily related to the expected results of future operations of TogetherHealth, its existing operational processes, and the experience of the acquired executives. The amount of goodwill that is expected to be deductible for tax purposes is $48.5 million.
As a result of acquiring TogetherHealth, our condensed consolidated results of operations include the results of TogetherHealth since the acquisition date. TogetherHealth's revenues for the three months ended March 31, 2020 were $16.5 million. For the three months ended March 31, 2020 pre-tax net loss was $2.0 million. Pre-tax net loss for the quarter ended March 31, 2020 includes $3.1 million of amortization expense associated with the valuations of the acquired intangible assets noted above.
The following unaudited pro forma financial information represents the consolidated financial information as if the acquisition had been included in our consolidated results beginning on the first day of the fiscal year prior to the acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entities to remove intercompany transactions and transaction costs incurred and to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied on the first day of the fiscal year prior to the acquisition, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisitions; the costs to combine the companies' operations; or the costs necessary to achieve these costs savings, operating synergies and revenue enhancements. The pro forma results do not necessarily reflect the actual results of operations of the combined companies under our ownership and operation.
|
|
|
|
|
|
|
|
|
|
($ in thousands, except per share data)
Unaudited
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Revenue
|
$
|
71,561
|
|
|
$
|
97,820
|
|
Net (loss) income before income taxes
|
(59,421
|
)
|
|
7,225
|
|
Net (loss) income
|
(49,815
|
)
|
|
3,889
|
|
Net (loss) income attributable to Benefytt Technologies, Inc.
|
(44,266
|
)
|
|
2,372
|
|
|
|
|
|
Net (loss) income per share - basic
|
(3.68
|
)
|
|
0.20
|
|
Net (loss) income per share - diluted
|
(3.68
|
)
|
|
0.18
|
|
|
|
|
|
Weighted average Class A common shares outstanding
|
|
|
|
Basic
|
12,023,121
|
|
|
12,018,490
|
|
Diluted
|
12,023,121
|
|
|
13,102,731
|
|
Other Acquisitions
On July 29, 2019, the Company entered into a Stock Purchase Agreement to acquire the interests of a corporation, which owned and operated HealthInsurance.com. The acquisition was accounted for as a purchase of an asset and classified as an intangible asset on the condensed consolidated balance sheet.
On August 5, 2019, the Company entered into a Membership Interest Purchase Agreement with TIB Florida Holdco, Inc. to acquire 100% of the outstanding limited liability company interests of TIB, a distribution company, to complement our entrance into the business of distributing Medicare. The $22.3 million purchase price of TIB was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value with the excess purchase price of $22.2 million recorded as goodwill. This value of goodwill is primarily related to the expected results of future operations of TIB. The purchase price included an earnout, with an estimated fair value as of August 5, 2019, of $19.3 million, estimated using a risk-based probability analysis. The earnout agreement stipulates payments of $1.0 million per year for the first three years, if certain gross margin thresholds are met, plus a percentage of the acquired company's gross margin above specified thresholds to be paid over five years. As of August 5, 2019, management estimated the payments to be approximately $72.5 million if all conditions are satisfied; however the maximum payout is unlimited.
3. Goodwill and Intangible Assets
At the end of February 2020, in conjunction with the preparation of the 2020 annual guidance, the Board of Directors approved a significant change in our overall business strategy to accelerate growth within the Medicare segment. The Company planned to de-emphasize its IFP segment while maximizing cash flows and enhancing e-commerce capabilities within IFP. By decreasing emphasis on new IFP business, the Company plans to use cash flows from the IFP segment to invest in accelerating growth of the Medicare segment.
As the Company progressed with its plans to shift toward Medicare and away from IFP, the Company decreased the number and amount of advance commissions made to certain third-party distributors while redeploying that capital to a limited number of our highest-quality IFP third-party distributors. This action in conjunction with the planned decrease in forecasted IFP revenue was deemed to be a triggering event for impairment testing. The Company performed a quantitative analysis as of February 29, 2020 using both market and income approaches (comparative company and discounted cash flow, respectively) to estimate the fair value of our reporting units. Forecasts of future cash flows were based on our best estimate of future revenues and operating expenses, based primarily on expected Company growth, pricing, market share, and general economic conditions, which at the time did not consider an estimate for the impact of COVID-19, if any. As a result of the impairment analysis, the Company determined that the carrying value of the IFP segment exceeded its fair value, such that the Company recorded a $41.1 million impairment charge to reduce goodwill which is recorded as loss on impairment on the condensed consolidated statement of operations. The loss on impairment has no impact on operating cash flows, debt covenants or on the metrics for which the Company evaluates itself.
The changes in the carrying amounts of goodwill were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IFP
|
|
Medicare
|
|
Total
|
Balance as of December 31, 2019
|
$
|
41,076
|
|
|
$
|
94,106
|
|
|
$
|
135,182
|
|
Purchase accounting measurement period adjustment
|
—
|
|
|
708
|
|
|
708
|
|
Goodwill impairment adjustment
|
(41,076
|
)
|
|
—
|
|
|
(41,076
|
)
|
Balance as of March 31, 2020
|
$
|
—
|
|
|
$
|
94,814
|
|
|
$
|
94,814
|
|
We also considered whether the carrying values of definite lived intangible assets may not be recoverable. No impairment was present for definite lived intangibles as of March 31, 2020 or December 31, 2019 however, in evaluating the remaining estimated useful life, the Company revised its estimate to reduce HP's brand and customer relationship useful life to one remaining year.
4. Leases
The Company has operating leases for real estate and certain equipment. Our leases have remaining lease terms of one to seven years, some of which includes options to extend the lease for up to five years, and some of which include options to terminate the lease within one year. The options however were not used in the determination of the lease term. The Company had four new operating leases; one for the Company's new corporate office and three additional leases that all commenced during the three months ended March 31, 2020.
As of March 31, 2020 and December 31, 2019, the Company had right of use assets of approximately $16.6 million and $496,000, respectively, on the condensed consolidated balance sheet.
As of March 31, 2020, current and non-current lease liabilities were approximately $1.5 million and $15.0 million, respectively. As of December 31, 2019, current and non-current lease liabilities were approximately $237,000 and $224,000, respectively.
Operating lease expense was $505,000 and $174,000 for the three months ended March 31, 2020 and 2019, respectively. Short-term lease expense for the three months ended March 31, 2020 was $121,000 and was immaterial for the three months ended March 31, 2019. The difference between the undiscounted cash flows and the operating lease liabilities recorded on the condensed consolidated balance sheet as of March 31, 2020 is approximately $2.5 million compared to $30,000 as of December 31, 2019.
Supplemental cash flow information related to operating leases were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
Cash paid within operating cash flows
|
$
|
546
|
|
|
$
|
210
|
|
The following table summarizes the maturities of operating lease liabilities as of March 31, 2020, ($ in thousands):
|
|
|
|
|
Remainder of 2020
|
$
|
1,407
|
|
2021
|
2,787
|
|
2022
|
2,871
|
|
2023
|
2,652
|
|
2024
|
2,695
|
|
2025
|
2,760
|
|
Thereafter
|
3,788
|
|
Total lease payments
|
$
|
18,960
|
|
The weighted-average remaining lease term and discount rates are as follows:
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Weighted-average remaining lease term
|
6.7 years
|
|
|
1.8 years
|
|
Weighted-average discount rate
|
4.09
|
%
|
|
6.25
|
%
|
As of March 31, 2020, the Company does not have any significant additional operating leases that have not yet commenced.
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following as of ($ in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Carriers and vendors payable
|
$
|
15,706
|
|
|
$
|
17,876
|
|
Marketing and advertising costs
|
6,956
|
|
|
11,732
|
|
Professional fees
|
2,731
|
|
|
2,022
|
|
Customer care and enrollment costs
|
2,053
|
|
|
4,501
|
|
Legal fees and contingencies
|
11,968
|
|
|
5,511
|
|
Compensation and benefits
|
3,191
|
|
|
5,905
|
|
Acquisition costs
|
143
|
|
|
1,305
|
|
Other
|
2,820
|
|
|
2,625
|
|
Total accounts payable and accrued expenses
|
$
|
45,568
|
|
|
$
|
51,477
|
|
Legal fees increased during the three months ended March 31, 2020 in part for the items detailed in the Legal Proceedings section of Note 14, which includes a $2.8 million settlement accrual as disclosed therein. Accrued compensation and benefits decreased due to payment of accrued executive bonuses and continued severance payments for former HPIH executives, offset by additional amounts accrued for 2020 bonus payments.
Legal fees are now presented as a separate line item within the above table. These fees were previously reported as a component of professional fees and have been reclassified to conform to current period presentation.
6. Debt
Except for items detailed below there have been no material changes to debt as reported with the Company's annual report and Form 10-K for the year ended December 31, 2019.
As of March 31, 2020, we had a $194.4 million outstanding balance from draws on the Credit Facility and there was $15.0 million available to be drawn upon. As of December 31, 2019, we had a $180.3 million outstanding balance from draws on the Senior Credit Facility.
As of March 31, 2020, and December 31, 2019, there was $244,000 and $246,000, respectively, of accrued interest included in accounts payable and accrued expenses on the condensed consolidated balance sheets. The Company is in compliance with all debt covenants.
The debt maturity schedule for our long-term debt is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
Issuance Date
|
|
Maturity Date
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Rate
|
Non-current portion of line of credit
|
June 2019
|
|
2022
|
|
$
|
50,000
|
|
|
$
|
32,000
|
|
|
3.52
|
%
|
Non-current portion of term loan
|
June 2019
|
|
2021 - 2022
|
|
134,062
|
|
|
136,875
|
|
|
3.45
|
%
|
Non-current portion of unamortized debt issuance costs
|
|
|
|
|
(592
|
)
|
|
(928
|
)
|
|
|
|
|
|
|
|
183,470
|
|
|
167,947
|
|
|
|
Current portion of term loan
|
June 2019
|
|
2020 - 2021
|
|
10,313
|
|
|
9,375
|
|
|
3.45
|
%
|
Current portion of line of credit
|
June 2019
|
|
2020
|
|
—
|
|
|
2,000
|
|
|
—
|
%
|
Current portion of unamortized debt issuance costs
|
|
|
|
|
(825
|
)
|
|
(691
|
)
|
|
|
|
|
|
|
|
$
|
192,958
|
|
|
$
|
178,631
|
|
|
|
The aggregate contractual maturities of debt for each of the five fiscal years are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Debt repayments
|
$
|
7,500
|
|
|
$
|
13,125
|
|
|
$
|
173,750
|
|
|
$
|
—
|
|
|
$
|
—
|
|
7. Stockholders’ Equity
Except for the items detailed below, there have been no material changes to Stockholders' Equity as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Tax Obligation Settlements and Treasury Stock Transactions
Treasury stock is recorded pursuant to the surrender of shares by certain employees to satisfy statutory tax withholding obligations on vested restricted stock awards and the exercise of stock appreciation rights. In addition, certain forfeited stock-based awards are transferred to and recorded as treasury stock, and certain restricted stock awards may have been granted from shares in Treasury.
During the three months ended March 31, 2020 and 2019, there were 72,390 and 33,700 shares, respectively, transferred to Treasury for statutory tax withholding obligations as a result of stock appreciation rights ("SARs") exercises or vested restricted stock awards. During the three months ended March 31, 2020, there were 102,287 shares reissued out of Treasury for issuances of stock related to a combination of exercises and grants under our Long Term Incentive Plan.
During the three months ended March 31, 2020, there were no shares transferred to Treasury as a result of forfeitures of stock awards.
For the three months ended March 31, 2020 and 2019, there were cash outflows of $1.5 million and $918,000, respectively, to cover the tax obligations for the settlement of share vesting and exercises under the Company's Long Term Incentive Plan.
Share Repurchase Program
During the three months ended March 31, 2020, there were no repurchases of our registered Class A common stock. During the year ended December 31, 2019, we repurchased 1,981,241 shares of our registered Class A common stock under the share repurchase program at an average price per share of $32.23.
Exchange Agreement
On January 22, 2020, the sole holders of our Class B common stock, Health Plan Intermediaries, LLC (“HPI”) and Health Plan Intermediaries Sub, LLC (“HPIS”), two companies owned and controlled by our founder Michael Kosloske, exchanged a total of 900,000 shares of Class B common stock and an equal number of Series B membership interests for 900,000 shares of Class A common stock. This transaction contributed to a 6.4% decrease in HPI and HPIS' collective economic interest in HPIH since December 31, 2019.
8. Revenue
Disaggregated Revenue
The following table presents our revenue, disaggregated by major product type and timing of revenue recognition for the three months ended March 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Sales and Marketing Services
|
|
Member Management
|
|
Total
|
|
Sales and Marketing Services
|
|
Member Management
|
|
Total
|
Revenue by Source
|
|
|
|
|
|
|
|
|
|
|
|
Commission revenue(1)
|
|
|
|
|
|
|
|
|
|
|
|
STM(2)
|
$
|
20,135
|
|
|
$
|
936
|
|
|
$
|
21,071
|
|
|
$
|
32,319
|
|
|
$
|
884
|
|
|
$
|
33,203
|
|
HBIP
|
12,406
|
|
|
1,205
|
|
|
13,611
|
|
|
28,329
|
|
|
1,797
|
|
|
30,126
|
|
Supplemental(2)
|
15,867
|
|
|
1,030
|
|
|
16,897
|
|
|
21,394
|
|
|
1,112
|
|
|
22,506
|
|
Medicare
|
16,742
|
|
|
—
|
|
|
16,742
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Services revenue
|
—
|
|
|
631
|
|
|
631
|
|
|
—
|
|
|
1,168
|
|
|
1,168
|
|
Consumer engagement revenue
|
2,281
|
|
|
—
|
|
|
2,281
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other revenues
|
328
|
|
|
—
|
|
|
328
|
|
|
323
|
|
|
—
|
|
|
323
|
|
Total revenue
|
$
|
67,759
|
|
|
$
|
3,802
|
|
|
$
|
71,561
|
|
|
$
|
82,365
|
|
|
$
|
4,961
|
|
|
$
|
87,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing of Revenue Recognition
|
|
|
|
|
|
|
|
|
|
|
|
Transferred at a point in time
|
$
|
67,759
|
|
|
$
|
—
|
|
|
$
|
67,759
|
|
|
$
|
82,365
|
|
|
$
|
—
|
|
|
$
|
82,365
|
|
Transferred over time
|
—
|
|
|
3,802
|
|
|
3,802
|
|
|
—
|
|
|
4,961
|
|
|
4,961
|
|
Total revenue
|
$
|
67,759
|
|
|
$
|
3,802
|
|
|
$
|
71,561
|
|
|
$
|
82,365
|
|
|
$
|
4,961
|
|
|
$
|
87,326
|
|
|
|
(1)
|
For the purposes of disaggregated revenue presentation, when additional Discount Benefit products are sold with an STM, HBIP, or supplemental product, the associated revenue for the Discount Benefit products are reported within the STM, HBIP, or supplemental product category depicted within the table.
|
|
|
(2)
|
The Company changed its presentation of brokerage revenue during the fourth quarter of 2019. Previously brokerage revenue was reported as a separate line item with the disaggregated revenue table however the Company has reclassified the revenue into the respective STM or supplemental category that the brokerage sales were associated with.
|
After our initial estimate and constraint of variable consideration is made, in accordance with ASC 606 the Company reassesses its estimate and constraint at the end of each reporting period. As more information about the underlying uncertainties becomes known the Company will make adjustments as required.
Reassessment of Variable Consideration
After our initial estimate and constraint of variable consideration is made, in accordance with ASC 606 the Company reassesses its estimate and constraint at the end of each reporting period. As more information about the underlying uncertainties becomes known the Company will make adjustments as required.
For IFP product sales, during the three months ended March 31, 2020, we recognized a $2.9 million decrease in revenue primarily as a result of a decrease in durations related to the reassessment of variable consideration and changes in estimate due to lower retention of Health Benefit Insurance Plans ("HBIP") and supplemental products sold in the fourth quarter of 2018 and the first quarter of 2019 which was inconsistent with our historical experience.
For Medicare product sales, during the three months ended March 31, 2020, we recognized a $1.9 million decrease in revenue due to adjusting significant measurement estimates as a result of actual amounts received on plans sold during the 2019 Medicare Annual Election Period.
Commissions Expense - In connection with the reassessment of variable consideration, the Company also had a change in estimate for the three months ended March 31, 2020 which decreased previously recorded commissions expense by $3.3 million.
The change in estimate related to lower retention on HBIP and supplemental products as described above, and the positive impact of lifetime value calculations within the prepaid commission arrangements.
Remaining Performance Obligations
As of March 31, 2020, approximately $15.8 million of member management revenue is expected to be recognized over the next 60 months from the remaining performance obligations for IFP and supplemental contracts.
9. Stock-based Compensation
No SARs or stock options were granted during the three months ended March 31, 2020 and 2019.
The following table summarizes restricted shares granted (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Restricted shares
|
55
|
|
|
260
|
|
The following table summarizes stock-based compensation expense ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Restricted shares
|
$
|
2,547
|
|
|
$
|
1,766
|
|
SARs
|
157
|
|
|
149
|
|
Less amounts capitalized for internal-use software(1)
|
(77
|
)
|
|
(99
|
)
|
Total
|
$
|
2,627
|
|
|
$
|
1,816
|
|
|
|
(1)
|
See Property and Equipment, in Note 1 of our Annual Report on Form 10-K for the year ended December 31, 2019 for further information on internal use software.
|
The following table summarizes unrecognized stock-based compensation expense and the remaining weighted average period over which such stock-based compensation expense is expected to be recognized as of March 31, 2020 ($ in thousands):
|
|
|
|
|
|
|
|
Unrecognized Expense
|
|
Weighted Average Remaining Years
|
Restricted shares
|
$
|
12,927
|
|
|
2.1
|
SARs
|
930
|
|
|
1.8
|
Total
|
$
|
13,857
|
|
|
|
The amounts in the table above do not include the cost of any additional awards that may be granted in future periods nor any changes in our forfeiture rate.
During the three months ended March 31, 2020, there were 93,750 SARs exercised resulting in an increase of 47,287 issued shares of Class A common stock. During the three months ended March 31, 2019 there were 625 SARs exercised resulting in an increase of 139 shares of issued Class A common stock. During the three months ended March 31, 2020 and 2019, there were 500 and 7,500 SARs forfeited, respectively.
During the three months ended March 31, 2020 and 2019, there were no options exercised or forfeited.
During the three months ended March 31, 2020, there were no restricted stock awards issued for performance shares. During the three months ended March 31, 2019, there were 147,000 restricted stock awards issued for performance shares. These awards were previously granted in which the performance metrics were contractually satisfied during the respective period.
We recognized $600,000 in income tax benefits from stock-based activity for the three months ended March 31, 2020. We recognized income tax benefits of $74,000 from stock-based activity for the three months ended March 31, 2019.
For the three months ended March 31, 2020 and 2019, we capitalized $77,000 and $99,000, respectively, of stock-based compensation expense related to the development of internal-use software. See Notes 1 and 5 of our Annual Report on Form 10-K for the year ended December 31, 2019 for further information on our internal-use software.
10. Net (Loss) Income per Share
The computations of basic and diluted net income per share attributable to BFYT were as follows ($ in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Basic net (loss) income attributable to Benefytt Technologies, Inc.
|
$
|
(44,266
|
)
|
|
$
|
1,331
|
|
Weighted average shares—basic
|
12,023,121
|
|
|
11,388,490
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Restricted shares
|
—
|
|
|
557,142
|
|
SARs
|
—
|
|
|
524,762
|
|
Stock options
|
—
|
|
|
2,337
|
|
Weighted average shares—diluted
|
12,023,121
|
|
|
12,472,731
|
|
Basic net (loss) income per share attributable to Benefytt Technologies, Inc.
|
$
|
(3.68
|
)
|
|
$
|
0.12
|
|
Diluted net (loss) income per share attributable to Benefytt Technologies, Inc.
|
$
|
(3.68
|
)
|
|
$
|
0.11
|
|
Potential common shares are included in the diluted per share calculation when dilutive. Potential common shares consist of Class A common stock issuable through unvested restricted stock grants and stock appreciation rights and are calculated using the treasury stock method.
The following securities were not included in the calculation of diluted net income per share because such inclusion would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Restricted shares
|
719
|
|
|
38
|
|
SARs
|
334
|
|
|
7
|
|
Stock options
|
4
|
|
|
—
|
|
Additionally, potential common stock totaling 1,016,667 shares at March 31, 2020 and 2,416,667 shares at March 31, 2019 issuable under the exchange agreement were not included in diluted shares because such inclusion would be anti-dilutive. See Note 10 in our Annual Report on Form 10-K for the year ended December 31, 2019 for further details on the exchange agreement.
11. Income Taxes
BFYT is organized as a corporation and as of March 31, 2020, is a 92.9% owner of HPIH, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a result, HPIH is not subject to federal and in most state jurisdictions entity level income taxation; however, any taxable income or loss generated by HPIH is passed through to and included in the taxable income or loss of its members, including BFYT, on a pro rata basis.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and signed into law. The CARES Act includes several provisions for corporations including allowing companies to carryback certain Net Operating Losses (“NOLs”), increasing the amount of deductible interest, and increasing the amount of NOLs that corporations can use to offset income. The respective benefit and provision for income taxes for BFYT, inclusive of its allocable share of net taxable income from HPIH, for the three months ended March 31, 2020 and 2019 was $9.6 million and $2.8 million, respectively, resulting in an effective tax benefit/rate of 16.2% and 56.2%, respectively. The effective tax rate decreased primarily due to the change in the valuation allowance during the three months ended March 31, 2019 that increased the rate. The effective tax rate for the three months ended March 31, 2020 is also lower than the federal statutory rate of 21% due to an increase in the valuation allowance of HIIH.
HPIH wholly-owns HIIH, a corporation that reports its U.S. federal and state income taxes separate from BFYT due to the Company’s ownership structure. Consequently, its federal and state tax jurisdictions are separate from those of BFYT, which prevents deferred tax assets and liabilities of BFYT and HIIH from offsetting one another. The effective tax rate for each of the three months ended March 31, 2020 and 2019 for HIIH was 0.0%, as we continue to maintain a full valuation allowance against the net HIIH deferred tax assets. On a standalone basis, excluding the effects of HIIH’s effective tax rate, the effective tax rate for the three months ended March 31, 2020 and 2019 for BFYT is 30.6% and 42.9%, respectively. The decrease primarily relates to the change in the valuation allowance during the three months ended March 31, 2019 that increased the rate off set by the Company’s discrete tax benefits primarily related to the provisions of the CARES Act, including changes allowing for NOL carryback.
Deferred taxes on our investment in HPIH are measured on the difference between the carrying amount of our investment in HPIH and the corresponding tax basis of this investment. We do not measure deferred taxes on differences within HPIH, as those differences inherently comprise our deferred taxes on our external investment in HPIH. Book to tax timing differences that exist in HPIH inherently affect BFYT’s deferred taxes as the outside basis difference changes.
For the three months ended March 31, 2020 and 2019, respectively, we did not have a balance of gross unrecognized tax benefits, and as such, no amount would favorably affect the effective income tax rate in any future periods.
12. Fair Value Measurements
We measure and report financial assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (referred to as 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 used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value of our financial assets and liabilities is determined by using three levels of input, which are defined as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities;
Level 2: Quoted prices in active markets for similar assets or liabilities, 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; and
Level 3: Unobservable inputs for the asset or liability.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
We utilize the income approach to measure the fair value of our financial liabilities. As subjectivity exists with respect to many of the valuation techniques, the fair value estimates we have disclosed may not equal prices that we may ultimately realize if the assets are sold or the liabilities are settled with third parties. Below is a description of our valuation methods.
Contingent consideration for business acquisitions. Contingent consideration is related to the acquisitions of TogetherHealth and TIB as described in Note 2. The inputs include forecasts of future results, discount rates reflecting the credit risk, and the probability of the underlying outcome of the results required by TogetherHealth and TIB for us to make payments and the nature of such payments. The underlying outcomes are subject to the target results in the respective agreements. These liabilities are included in Level 3 of the fair value hierarchy. The fair values of our contingent consideration arrangements are sensitive to changes in forecasts and discount rates.
The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, advanced commissions, carriers and vendors payable, commissions payable, accounts payable and accrued expenses, and debt as of March 31, 2020 and December 31, 2019, respectively, approximate fair value because of the short-term duration of these instruments.
As of March 31, 2020, our liabilities measured at fair value were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Fair Value Measurement as of March 31, 2020
|
|
as of
March 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent acquisition consideration
|
$
|
68,052
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,052
|
|
|
$
|
68,052
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,052
|
|
The following table sets forth changes in Level 3 financial liabilities ($ in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
65,171
|
|
|
$
|
—
|
|
Fair value adjustment
|
2,881
|
|
|
—
|
|
Ending balance
|
$
|
68,052
|
|
|
$
|
—
|
|
Changes in the fair value of contingent consideration were driven by forecasted changes in the number of agents and marketing cost expectations. The change in fair value is included in fair value adjustment to contingent acquisition consideration on the accompanying condensed consolidated statements of operations.
13. Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("CODM") in deciding how to allocate resources and in assessing performance. Our President and Chief Executive Officer is our named CODM. The CODM reviews our Company information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of the Company’s reportable segments. The Company has two reportable operating segments within our operating platform: Medicare and IFP.
To determine the Company's reportable operating segments, we consider the nature of operating activities, economic characteristics, existence of separate senior management teams and the type of information used by the CODM to evaluate the results of operations. Components with similar economic characteristics, products and services, customers, distribution methods, and operational processes that operate in a similar regulatory environment are combined.
The accounting policies of the segments are the same as those described in Note 1, “Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2019. The Company evaluates the performance of its reportable segments based on segment sales and segment operating income. Operating income for each segment includes sales to third parties and related operating expenses directly attributable to the segment. SG&A expenses are included in the segment in which the expenditures are incurred. Operating income for each segment excludes certain expenses managed outside the reportable segments which include various expenses such as corporate expenses, certain share-based compensation expenses, income taxes, various nonrecurring charges and other separately managed general and administrative costs. The Company does not include intercompany transfers between segments for management reporting purposes.
The following table presents a summary of our operating results by segment ($ in thousands):
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
Revenue
|
|
Medicare revenue
|
$
|
18,896
|
|
IFP revenue
|
52,665
|
|
Total revenue
|
71,561
|
|
|
|
Segment Profit
|
|
Medicare loss
|
(1,643
|
)
|
IFP profit
|
8,328
|
|
Total segment profit
|
6,685
|
|
|
|
Corporate
|
(5,752
|
)
|
Interest expense
|
(2,094
|
)
|
Depreciation and amortization
|
(4,345
|
)
|
Provision for income taxes
|
9,606
|
|
Loss on impairment
|
(41,076
|
)
|
Stock-based compensation and related costs
|
(2,707
|
)
|
Fair value adjustment to contingent consideration
|
(2,881
|
)
|
Transaction costs
|
(129
|
)
|
Indemnity and other legal costs
|
(7,092
|
)
|
Severance, restructuring and other
|
(30
|
)
|
Net loss
|
$
|
(49,815
|
)
|
There are no material internal revenue transactions between our operating segments. Our CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.
The Company did not have Medicare operations prior to the June 5, 2019 acquisition of TogetherHealth and therefore a comparative period is not presented.
14. Commitments and Contingencies
Health Plan Intermediaries, LLC
HPI and its subsidiary HPIS, which are beneficially owned by Mr. Kosloske, a former director of the Company, are deemed to be related parties of the Company by virtue of their Series B Membership Interests in HPIH, of which we are the managing member. During the three months ended March 31, 2020, HPIH did not make any cash distributions for these entities related to estimated federal or state income taxes, pursuant to the operating agreement entered into by HPIH and HPI. No amounts were accrued for estimated federal and state taxes as of March 31, 2020 or December 31, 2019. For the three months ended March 31, 2019, $677,000 in cash distributions were made for estimated federal and state income taxes. Pursuant to the operating agreement of HPIH, we determine when distributions will be made to the members of HPIH and the amount of any such distributions, except that HPIH is required by the operating agreement to make certain pro rata distributions to each member of HPIH quarterly on the basis of the assumed tax liabilities of the members.
Tax Receivable Agreement
As of March 31, 2020, Series B Membership Interests, together with an equal number of shares of Class B common stock have been exchanged for a total of 7,650,000 shares of Class A common stock subsequent to the IPO. As of March 31, 2020, as a result of these exchanges, we have recorded a liability of $34.1 million pursuant to the Tax Receivable Agreement ("TRA") and is included in long-term liabilities on the accompanying condensed consolidated balance sheets. We have determined that this amount is probable of being paid based on our estimates of future taxable income. This liability represents the share of tax benefits
payable to the entities beneficially owned by Mr. Kosloske, if we generate sufficient taxable income in the future. As of March 31, 2020, we have made $3.7 million of cumulative payments under the TRA.
Legal Proceedings
The Company is subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company accrues losses associated with legal claims when such losses are probable and reasonably estimable. If the Company determines that a loss is probable and cannot estimate a specific amount for that loss, but can estimate a range of loss, the best estimate within the range is accrued. If no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. Estimates are adjusted as additional information becomes available or circumstances change. Legal defense costs associated with loss contingencies are expensed in the period incurred. In addition to ordinary-course litigation that the Company does not believe to be material, the Company is a party to the proceedings and matters described below:
State Regulatory Examinations
Massachusetts Regulatory Inquiry
The Company received notification of a civil investigative demand from the Massachusetts Attorney General's Office ("MAG") on June 16, 2016. The MAG requested certain information and documents from the Company to review the Company's practices relating to its compliance with Massachusetts laws and regulations to ensure that they are neither deceptive nor constitute unfair trade practices. The Company has made various personnel available for depositions with the MAG. The MAG asked the Company to certify the completeness of the discovery responses provided to the MAG, and while the Company believes it has complied, the MAG nevertheless moved to compel additional documents and testimony from the Company. The court agreed with the MAG and ordered the Company to produce additional documents and provide further depositions. The Company has appealed this decision, and the initial arguments for the appeal will be heard on May 14, 2020.
The Company otherwise continues to cooperate with the MAG in the interest of bringing the matter to an agreeable conclusion. It is still too early to assess whether the MAG's investigation will result in a material impact on the Company. The Company believes that based on the nature of the allegations raised by the MAG, a loss arising from the future assessment of a civil penalty against the Company is probable. Notwithstanding, due to the procedural stage of the investigative process, the settlement of another party (a carrier) for the same set of allegations, and the fact that the Company has not received evidentiary material from the MAG, the Company is currently unable to estimate the amount of any potential civil penalty or determine a range of potential loss under the MAG's investigation of the Company.
California Regulatory Action
On August 29, 2018, the Company received an Order to Show Cause and Notice of Hearing from the California Department of Insurance (the "Department") and following proactive engagement by the Company, the Department withdrew its order and issued a subpoena to the Company and certain insurers to allow it to gather more information. The subpoenas relate to whether certain policyholders were eligible to purchase hospital benefit plans. The Company has provided data and documents and continues to cooperate with the Department's inquiry.
Claims by individuals that involve independently licensed third-party insurance agencies and their agents, and independent insurance carriers, in which the Company is named as a co-defendant
In a case styled as Charles M. Butler, III and Chole Butler v. Unified Life Ins. Co., et al., Case No. 17-cv-00050-SPW-TJC, U.S. District Court for the District of Montana (Billings Div.) ("Butler case"), in which allegations of misrepresentation and claims handling were made against an independent third-party insurance agency and an insurance carrier, the plaintiff also named the Company as a party. The Company was served on May 11, 2017 and is vigorously asserting defenses against the claims.
In a case styled as Carter v. Companion Life Insurance Company et al., Case No. 18-cv-350, U.S. District Court for the District of Alabama ("Carter complaint"), in which allegations were made against an insurance carrier relating to the handling of claims where the plaintiff also named the Company as a party. The Carter complaint was received on March 20, 2018 and an amended complaint was subsequently filed on July 6, 2018. The Company is vigorously asserting defenses against the claims.
In a case styled as David Diaz, et al. v. Health Plan Intermediaries Holdings, LLC, et al., Case No. 18-cv-04240, U.S. District Court for the District of Arizona, filed on August 21, 2018, the two plaintiffs allege misrepresentation relating to the sale of an insurance policy that later allegedly did not cover hospital bills. The insurance agent who sold the policy was an employee of the Company's wholly-owned subsidiary, ASIA, and that agent is also named as a co-defendant. The Company and the individual
defendant have answered a subsequently amended complaint and rejected the substantive allegations. Discovery is ongoing. The Company is vigorously asserting defenses against the claims.
In a case styled as Aiello v. Lifeshield National Insurance Company, et al., Case No. 19-020396, in the Circuit Court of the 17th Judicial Circuit, Broward County, Florida, dated October 10, 2019, the plaintiff alleges that needed medical care was declined, requiring him to pay out-of-pocket medical bills, and seeks reimbursement for the alleged unpaid bills and unspecified damages. The Company is vigorously asserting defenses against the claims.
The Company has also received claims from insureds relating to lack of carrier coverage, claims handling, and alleged deceptive sales practices relating to carriers with which we do business. In each of these individual insureds' claims, the Company attempts to dismiss, challenge, or resolve the claims as quickly as possible. While it is reasonably possible that a loss may arise from any of the above matters, the amount of such loss is not known or estimable at this time.
Other
Purported Securities Class Action Lawsuits
In September 2017, three putative securities class action lawsuits were filed against the Company and certain of its current and former executive officers. The cases were styled Cioe Investments Inc. v. Health Insurance Innovations, Inc., Gavin Southwell, and Michael Hershberger, Case No. 1:17-cv-05316-NG-ST, filed in the U.S. District Court for the Eastern District of New York on September 11, 2017; Michael Vigorito v. Health Insurance Innovations, Inc., Gavin Southwell, and Michael Hershberger, Case No. 1:17-cv-06962, filed in the U.S. District Court for the Southern District of New York on September 13, 2017; and Shilpi Kavra v. Health Insurance Innovations, Inc., Patrick McNamee, Gavin Southwell, and Michael Hershberger, Case No. 8:17-cv-02186-EAK-MAP, filed in the U.S. District Court for the Middle District of Florida on September 21, 2017. All three of the foregoing actions (the "Securities Actions") were filed after a decline in the trading price of the Company's common stock following the release of a report authored by a short-seller of the Company's common stock raising questions about, among other things, the Company's public disclosures relating to the Company's regulatory examinations and regulatory compliance. All three of the Securities Actions contained substantially similar allegations to those raised in the short-seller report alleging that the Company made materially false or misleading statements or omissions relating to regulatory compliance matters, particularly regarding the Company's application for a third-party administrator license in the State of Florida, which was issued by the State on February 14, 2018.
In November and December 2017, the Cioe Investments and Vigorito cases were transferred to the U.S. District Court for the Middle District of Florida, and on December 28, 2017, they were consolidated with the Kavra matter under the case caption, In re Health Insurance Innovations Securities Litigation, Case No. 8:17-cv-02186-EAK-MAP (M.D. Fla.). On February 6, 2018, the court appointed Robert Rector as lead plaintiff and appointed lead counsel, and lead plaintiff filed a consolidated complaint on March 23, 2018. The consolidated complaint, which dropped Patrick McNamee as a defendant and added Michael Kosloske as a defendant, largely sets forth the same factual allegations as the initially filed Securities Actions filed in September 2017 and added allegations relating to alleged materially false statements and omissions relating to the regulatory proceeding previously initiated against the Company by the Montana State Auditor, Commissioner of Securities and Insurance (the "CSI") which proceeding was dismissed on October 31, 2017. The complaint also adds allegations regarding insider stock sales by Messrs. Kosloske and Hershberger. The consolidated complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), SEC Rule 10b-5, and Section 20(a) of the Exchange Act. According to the consolidated complaint, the lead plaintiff in the action is seeking an undetermined amount of damages, interest, attorneys' fees and costs on behalf of a putative class of individuals and entities that acquired shares of the Company's common stock during a period ending September 11, 2017. On May 7, 2018, the Company and co-defendants filed a motion to dismiss all claims. On March 29, 2019, the court sua sponte ordered mandatory mediation before United States Magistrate Judge Christopher Tuite, which did not result in a settlement. On June 28, 2019, the court granted in part, and denied in part, the motion to dismiss, and dismissed all claims against Messrs. Southwell and Kosloske. Discovery commenced, and the Company opposed Plaintiff’s motion to certify the putative class. The parties have since reached an agreement in principle to resolve the matter without any admission of liability or fault on the part of the Company or any of its current or former personnel for a settlement payment of $2.8 million to be funded by the Company’s insurers. This resolution remains subject both to formal documentation of the terms of the parties’ agreement and to Court approval. The settlement is recorded within accounts payable and accrued expenses and the related insurance recoverable is recorded in accounts receivable, net, prepaid expenses and other current assets on the condensed consolidated balance sheets.
On February 18, 2019, a putative class action lawsuit styled Julian Keippel v. Health Insurance Innovations, Inc., Gavin Southwell, and Michael D. Hershberger, Case No. 8:19-cv-00421, was filed against the Company, its chief executive officer, and chief financial officer in the U.S. District Court for the Middle District of Florida. According to the complaint, the plaintiff in the action is seeking an undetermined amount of damages, interest, attorneys' fees, and costs on behalf of a putative class of individuals
and entities that acquired shares of the Company's common stock during the period February 28, 2018 through November 27, 2018. The complaint alleges that the Company made materially false and/or misleading statements and/or material omissions during the purported class period relating to the Company's relationship with third parties, particularly Health Benefits One LLC/Simple Health Plans and affiliates. The complaint alleges that, among other things, the Company failed to disclose to investors that a substantial portion of the Company's revenues were derived from third parties who allegedly used deceptive tactics to sell the Company's products and that regulatory scrutiny of such third parties would materially impact the Company's operations. The complaint alleges violations of Section 10(b) and Section 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated under the Securities Exchange Act. On May 13, 2019, the court appointed lead plaintiff Oklahoma Municipal Retirement Fund and City of Birmingham Retirement and Relief System and lead counsel Saxena White P.A. The lead plaintiff filed a consolidated amended complaint on July 19, 2019. The consolidated complaint incorporated the allegations from the first complaint and added allegations of alleged materially false or misleading statements or material omissions relating to alleged deficiencies in the Company's compliance and customer service programs and the number of complaints the Company received from consumers relating to third parties, particularly Health Benefits One LLC/Simple Health and affiliates. The complaint also adds allegations regarding insider stock sales by Messrs. Southwell and Hershberger. The plaintiffs are seeking an undetermined amount of damages, interest, attorneys' fees and costs on behalf of putative classes of individuals and entities that acquired shares of the Company's common stock during a purported class period of September 25, 2017 through April 11, 2019. On August 28, 2019, the Company moved to dismiss the action, which the court denied on November 4, 2019. The case is currently in discovery. The Company intends to vigorously defend against these claims.
Putative Derivative Action Lawsuits and Stockholder Matters
Two individuals, Ian DiFalco and Dayle Daniels, filed separate but similar derivative action complaints on April 5 and April 6, 2018, respectively, in the U.S. District Court for the District of Delaware (Case No. Case No. 1:18-cv-00519) naming most of the Company's directors and executive officers at such time as defendants. The derivative complaints assert alleged violations of Section 14(a) of the Exchange Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 20(a) of the Exchange Act, and claims for alleged breach of fiduciary duties, alleged unjust enrichment, alleged abuse of control, alleged gross mismanagement, and alleged waste of corporate assets. The factual allegations in the complaints are based largely on the allegations in the above-described In re Health Insurance Innovations Securities Litigation. The plaintiffs are seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, restitution, interest, and attorneys' fees and costs. On June 5, 2018, the court entered an order staying the litigation pending resolution In re Health Insurance Innovations Securities Litigation, and as a result of the agreement in principle to such action as described above, the parties have scheduled a mediation for late May 2020. Otherwise, defendants intend to vigorously defend against these claims.
An individual stockholder, Melvyn Klein, filed a derivative action complaint on June 26, 2019, in the U.S. District Court for the District of Delaware naming as defendants Gavin T. Southwell, former director Michael W. Kosloske, director Paul E. Avery, director Anthony J. Barkett, director Paul Gabos, director Robert Murley, former director Bruce Telkamp, former director Sheldon Wang, and officer Michael D. Hershberger (Case No. 1:19-cv-01206). The derivative complaint asserts alleged violations of Section 14(a) of the Securities Exchange Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 20(a) of the Exchange Act, and claims for alleged breach of fiduciary duties, alleged unjust enrichment, and alleged waste of corporate assets. The factual allegations in the complaint are largely the same as the allegations in the above-described DiFalco and Daniels derivative action. The Plaintiff is seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, interest, and attorneys' fees and costs. This action has been consolidated with the above-described DiFalco and Daniels actions and is subject to the stay entered into on June 5, 2018 and the above-described mediation planned for late May 2020. Otherwise the Company intends to vigorously defend against these claims.
In November 2019, the Company received a demand letter on behalf of stockholder Rebecca Leary demanding under Section 220 of the Delaware General Corporation Law that the Company allow Ms. Leary the right to inspect certain Company documents. The letter states that Ms. Leary is making the demand to, inter alia, investigate whether the members of the Company’s Board of Directors breached their fiduciary duties in connection with an alleged failure to ensure that the Company’s sales practices complied with applicable laws and regulations. On December 6, 2019, counsel to the Company responded to the demand by, inter alia, denying that the stockholder had demonstrated a proper purpose for the inspection but agreeing to produce a limited set of documents, which were delivered to counsel to the stockholder in February 2020.
Telephone Consumer Protection Act
The Company has received a number of private-party claims relating to telephonic-sales calls allegedly conducted by independent third-party distributors. Generally, these claims assert that the Company violated the Telephone Consumer Protection Act ("TCPA"), although the Company does not engage in the alleged activities. In fact, the Company maintains internal and external compliance staff and processes to monitor independent third-party distributor compliance. Historically, the Company has
been successful at obtaining dismissals or settling the claims for immaterial amounts. The Company continues to vigorously defend itself in pending cases, some styled as purported class-actions, filed by what has been determined to be serial-professional plaintiffs or serial TCPA attorneys such as those cases filed by Kenneth Moser, Robert Hossfeld, Mary Bilek, Chrisopher Bilek, Barbara Mohon, and Ken Johansen. On August 7, 2019, the U.S. District Court for the Southern District of California (Case No. 17-CV-1127) certified two classes in the Moser case, and the Company timely appealed the Court’s Order on the Motion for Class Certification. The parties are awaiting a ruling on such.
The Company has received other complaints for alleged TCPA violations from other claimants, the majority of which are not lawsuits. The Company believes many of these individuals to be professional plaintiffs and not common consumers. The Company maintains an internal legal department that, among other things, reviews these claims as they arise, coordinates the Company’s response to such, and supports outside counsel when litigation defense is required. While these types of claims have previously settled, been dismissed, or resolved without any material effect on the Company, there is a possibility in the future that one or more of the above cases could have a material effect. The Company commonly uses outside legal counsel to defend against such claims and requires that the independent third-party distributors who are related to any such claims provide indemnification and reimbursement to the Company for the costs associated with these Claims.
Health Benefits One, LLC (Simple Health)
On November 1, 2018, the Company received notice that a lawsuit styled as Federal Trade Commission v. Simple Health Plans, et al. was filed against an independent third-party distributor and its principal, along with their related companies. The Company is not a party to this case. A temporary restraining order ("TRO") was granted by the United States District Court, Southern District of Florida, against Simple Health Plans, LLC and certain of its affiliates, appointing a receiver (the "Receiver") and imposing other restrictions against the defendants in this case. On November 1, 2018, the Company terminated its relationship with all of the defendants, has been in communication and working cooperatively with the appointed Receiver and the FTC. In coordination with the FTC and the appointed Receiver, the Company continues to transfer funds to the Receiver that would otherwise be due to Simple Health, and the Company and FTC successfully notified all consumers of their ongoing insurance options.
Separate from the FTC case against Simple Health, a proposed class action, but not yet certified, styled as Belin et. al. v. Health Insurance Innovations, Inc., et. al., Case No. 19-cv-61430, was filed in the U.S. District Court for the Southern District of Florida on June 7, 2019. The case alleges that the Company conspired with Simple Health using a theory of the Racketeer Influenced and Corrupt Organizations Act along with other claims and seeks unspecified damages. The Company's Motion to Dismiss was partially denied and the Company intends to vigorously defend against the claims.
Other matters
We enter into agreements in the ordinary course of business that may require us to indemnify other parties for claims brought by a third-party. From time to time, we have received requests for indemnification. Presently the Company is managing and responding to both formal demands and informal requests for indemnification from a number of carriers related to the Company's settled market conduct examination, states' investigations into carriers relating to agent licensing, private party lawsuits, and the TCPA claims identified above. Management cannot reasonably estimate any potential losses, but these claims could result in a material liability for us.
15. Related Party Transactions
There have been no material changes to the Related Party Transaction disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2019.
16. Subsequent Events
On May 11, 2020 the Company elected to increase its borrowings under our Credit Facility to enhance our liquidity and provide maximum financial flexibility as the effects of the COVID-19 pandemic continue to evolve and impact the global financial markets. The Company withdrew the remaining available $15.0 million and the Credit Facility is fully drawn.
As further disclosed in Note 14, the Company has reached an agreement in principle to resolve the matter In re Health Insurance Innovations Securities Litigation without any admission of liability or fault on the part of the Company or any of its current or former personnel for a settlement payment of $2.8 million to be funded by the Company’s insurers. This resolution remains subject both to formal documentation of the terms of the parties’ agreement and to Court approval. The settlement is
recorded within accounts payable and accrued expenses and the related insurance recoverable is recorded in accounts receivable, net, prepaid expenses and other current assets on the condensed consolidated balance sheets.