Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________
FORM 10-Q
 __________________________________________________
 (Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2019
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___________ to __________
Commission File Number: 1-35811
 ___________________________________________________________
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12886705&doc=42
Health Insurance Innovations, Inc.
(Exact name of registrant as specified in its charter)
________________________________________________________
Delaware
 
46-1282634
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
15438 N. Florida Avenue, Suite 201, Tampa FL
 
33613
(Address of Principal Executive Offices)
 
(Zip Code)
(813) 397-1187
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
___________________________________________________________
 
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 [X] No [  ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] 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 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
[  ]
Emerging growth company           
[  ]
Accelerated filer
[X]
Non-accelerated filer
[  ]
(Do not check if a smaller reporting company)
 
Smaller reporting 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 Exchange Act Rule 12b-2). Yes [  ] No [X]



Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $0.001 par value
HIIQ
Nasdaq Global Market
As of May 1, 2019, the registrant had 11,512,687 shares of Class A common stock, $0.001 par value, outstanding and 2,416,667 shares of Class B common stock, $0.001 par value, outstanding.
 
 
 
 
 





CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3





PART I—FINANCIAL INFORMATION
 
ITEM 1—FINANCIAL STATEMENTS 

HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Balance Sheets
($ in thousands, except share and per share data)
 
March 31, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
6,483

 
$
9,321

Restricted cash
16,481

 
16,678

Accounts receivable, net, prepaid expenses and other current assets
1,727

 
2,108

Advanced commissions, net
30,063

 
29,867

Contract asset, net
166,858

 
165,494

Total current assets
221,612

 
223,468

Long-term contract asset, net
144,529

 
132,566

Property and equipment, net
4,859

 
5,134

Goodwill
41,076

 
41,076

Intangible assets, net
3,882

 
4,217

Deferred tax assets
26,385

 
25,967

Other assets
793

 
61

Total assets
$
443,136

 
$
432,489

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
26,643

 
$
32,397

Commissions payable, net
102,817

 
106,608

Deferred revenue
227

 
409

Income taxes payable
18,038

 
15,586

Due to member
9,543

 
7,978

Other current liabilities
405

 
13

Total current liabilities
157,673

 
162,991

Long-term commissions payable, net
94,894

 
84,716

Revolving line of credit
65,000

 
15,000

Due to member
26,210

 
25,693

Other liabilities
135

 
621

Total liabilities
343,912

 
289,021

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Class A common stock (par value $0.001 per share, 100,000,000 shares authorized; 14,800,824 and 14,425,824 shares issued as of March 31, 2019 and December 31, 2018, respectively; 11,512,687 and 12,387,349 shares outstanding as of March 31, 2019 and December 31, 2018, respectively)
15

 
14

Class B common stock (par value $0.001 per share, 20,000,000 shares authorized; 2,416,667 and 2,541,667 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively)
2

 
3

Preferred stock (par value $0.001 per share, 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively)

 

Additional paid-in capital
93,340

 
94,194

Treasury stock, at cost (3,288,137 and 2,038,475 shares as of March 31, 2019 and December 31, 2018, respectively)
(108,758
)
 
(67,185
)
Retained earnings
82,135

 
80,804

Total Health Insurance Innovations, Inc. stockholders’ equity
66,734

 
107,830

Noncontrolling interests
32,490

 
35,638

Total stockholders’ equity
99,224

 
143,468

Total liabilities and stockholders' equity
$
443,136

 
$
432,489


The accompanying notes are an integral part of the condensed consolidated financial statements
4




HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Income (unaudited)
($ in thousands, except share and per share data)
 
Three Months Ended March 31,
 
2019
 
2018
Revenues
$
87,326

 
$
75,931

Operating expenses:
 

 
 

Third-party commissions
60,671

 
45,505

Credit card and ACH fees
1,523

 
1,377

Selling, general and administrative
18,659

 
16,213

Depreciation and amortization
1,132

 
1,165

Total operating expenses
81,985

 
64,260

Income from operations
5,341

 
11,671

 
 
 
 
Other expense (income):
 

 
 

Interest expense (income)
345

 
(26
)
Other expense
17

 
28

Net income before income taxes
4,979

 
11,669

Provision for income taxes
2,797

 
5,017

Net income
2,182

 
6,652

Net income attributable to noncontrolling interests
851

 
2,044

Net income attributable to Health Insurance Innovations, Inc.
$
1,331

 
$
4,608

 
 
 
 
Per share data:
 

 
 

Net income per share attributable to Health Insurance Innovations, Inc.
 

 
 

Basic
$
0.12

 
$
0.40

Diluted
$
0.11

 
$
0.36

Weighted average Class A common shares outstanding
 

 
 

Basic
11,388,490

 
11,589,777

Diluted
12,472,731

 
12,658,277

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements
5




HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Stockholders’ Equity (unaudited)
($ in thousands, except share data)
 
Health Insurance Innovations, Inc.
 
 
 
 
 
Class A Common Stock
 
Class B Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Shares
 
Amount
 
Retained Earnings
 
Noncontrolling Interests
 
Stockholders’ Equity
Balance as of January 1, 2018
12,350,981

 
$
13,000

 
3,841,667

 
$
4,000

 
$
71,770

 
380,777

 
$
(6,887
)
 
$
19,305

 
$
22,796

 
$
107,001

Adjustment due to adoption of ASC 606

 

 

 

 

 

 

 
48,505

 
23,866

 
72,371

Net income

 

 

 

 

 

 

 
4,608

 
2,044

 
6,652

Issuance of Class A common stock under equity compensation plans
184,002

 

 

 

 
3

 

 

 

 

 
3

Class A common stock withheld in Treasury from restricted share vesting
(1,109
)
 

 

 

 

 
1,109

 
(36
)
 

 

 
(36
)
Stock-based compensation

 

 

 

 
2,821

 

 

 

 

 
2,821

Distributions

 

 

 

 

 

 

 

 
(224
)
 
(224
)
Balance as of March 31, 2018 (unaudited)
12,533,874

 
$
13,000

 
3,841,667

 
$
4,000

 
$
74,594

 
381,886

 
$
(6,923
)
 
$
72,418

 
$
48,482

 
$
188,588

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Health Insurance Innovations, Inc.
 
 
 
 
 
Class A Common Stock
 
Class B Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Shares
 
Amount
 
Retained Earnings
 
Noncontrolling Interests
 
Stockholders’ Equity
Balance as of December 31, 2018
12,387,349

 
$
14

 
2,541,667

 
$
3

 
$
94,194

 
2,038,475

 
$
(67,185
)
 
$
80,804

 
$
35,638

 
$
143,468

Net income

 

 

 

 

 

 

 
1,331

 
851

 
2,182

Issuance of Class A common stock in private offering
125,000

 
1

 

 

 
1,848

 

 

 

 

 
1,849

Exchange of Series B Membership Interests and exchange and cancellation of Class B common stock

 

 
(125,000
)
 
(1
)
 

 

 

 

 
(1,757
)
 
(1,758
)
Repurchases of Class A common stock
(1,351,241
)
 

 

 

 

 
1,351,241

 
(45,272
)
 

 

 
(45,272
)
Issuance of Class A common stock under equity compensation plans
250,000

 

 

 

 

 

 

 

 

 

Class A common stock withheld in Treasury for tax withholding for share-based compensation
(33,700
)
 

 

 

 

 
33,700

 
(918
)
 

 

 
(918
)
Forfeiture of restricted stock held in Treasury
(21,939
)
 

 

 

 
587

 
21,939

 
(587
)
 

 

 

Issuances of restricted shares from Treasury
157,000

 

 

 

 
(5,197
)
 
(157,000
)
 
5,197

 

 

 

Issuances of Class A common stock from Treasury
218

 

 

 

 
(7
)
 
(218
)
 
7

 

 

 

Stock-based compensation

 

 

 

 
1,915

 

 

 

 

 
1,915

Distributions

 

 

 

 

 

 

 

 
(2,242
)
 
(2,242
)
Balance as of March 31, 2019 (unaudited)
11,512,687

 
$
15

 
2,416,667

 
$
2

 
$
93,340

 
3,288,137

 
$
(108,758
)
 
$
82,135

 
$
32,490

 
$
99,224

 


The accompanying notes are an integral part of the condensed consolidated financial statements
6




HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
($ in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Operating activities:
 

 
 

Net income
$
2,182

 
$
6,652

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 

 
 

Stock-based compensation
1,816

 
2,633

Depreciation and amortization
1,132

 
1,165

Deferred income taxes
191

 
262

Changes in operating assets and liabilities:
 

 
 

Decrease in accounts receivable, prepaid expenses and other assets
(351
)
 
261

(Increase) decrease in advanced commissions
(196
)
 
8,383

Increase in income taxes receivable

 
(633
)
Increase in contract asset, net
(13,327
)
 
(8,181
)
Increase in income taxes payable
2,452

 
2,434

Decrease in accounts payable, accrued expenses and other liabilities
(5,848
)
 
(6,575
)
Increase (decrease) in commissions payable
6,387

 
(2,945
)
Decrease in deferred revenue
(182
)
 
(394
)
Net cash (used in) provided by operating activities
(5,744
)
 
3,062

Investing activities:
 

 
 

Capitalized internal-use software
(315
)
 
(570
)
Purchases of property and equipment
(109
)
 
(113
)
Net cash used in investing activities
(424
)
 
(683
)
Financing activities:
 

 
 

Proceeds from borrowing under revolving line of credit
50,000

 

Payments related to tax withholding for share-based compensation
(918
)
 
(36
)
Issuances of Class A common stock under equity compensation plans

 
3

Purchases of Class A common stock pursuant to share repurchase plan
(45,272
)


Distributions to member
(677
)
 
(862
)
Net cash provided by (used in) financing activities
3,133

 
(895
)
Net (decrease) increase in cash and cash equivalents, and restricted cash
(3,035
)
 
1,484

Cash and cash equivalents, and restricted cash at beginning of period
25,999

 
55,827

Cash and cash equivalents, and restricted cash at end of period
$
22,964

 
$
57,311


The accompanying notes are an integral part of the condensed consolidated financial statements
7




HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
Supplemental Cash Flow Information (unaudited)
($ in thousands)

 
Three Months Ended March 31,
 
2019
 
2018
Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
159

 
$
2,969

Interest
212

 
1

Non-cash investing activities:
 
 
 
Capitalized stock-based compensation
$
99

 
$
188

Non-cash financing activities:
 
 
 
Change in due to member related to Exchange Agreement
$
517

 
$

Change in deferred tax asset related to Exchange Agreement
(609
)
 

Issuance of Class A common stock in a private offering related to Exchange Agreement
1,849

 

Exchange of Class B membership interests related to Exchange Agreement
(1,758
)
 

Declared but unpaid distribution to member of Health Plan Intermediaries Holdings, LLC
1,565

 



The accompanying notes are an integral part of the condensed consolidated financial statements
8




HEALTH INSURANCE INNOVATIONS, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies
 
Health Insurance Innovations, Inc. is a Delaware corporation incorporated on October 26, 2012. In this quarterly report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our,” refer to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The terms “HIIQ” and “HPIH” refer to the stand-alone entities Health Insurance Innovations, Inc., and Health Plan Intermediaries Holdings, LLC, respectively. The terms “HealthPocket” or “HP” refer to HealthPocket, Inc., a subsidiary which was acquired by HPIH (and is wholly owned by HPIH) on July 14, 2014. The term “ASIA” refers to American Service Insurance Agency LLC, a subsidiary which was acquired by HPIH (and is wholly owned by HPIH) on August 8, 2014. HP and ASIA are consolidated subsidiaries of HPIH, which is a consolidated subsidiary of HIIQ.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements for the three months ended March 31, 2019 and 2018 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, 2018. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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, 2019 are not necessarily indicative of the results to be expected for any subsequent interim period or for the year ending December 31, 2019.

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 materially differ from those estimates.

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 for the year ended December 31, 2018 included in our Annual Report on Form 10-K.

Lease Accounting

The Company determines if an arrangement contains a lease at inception. For arrangements where the Company is the lessee, operating leases are included in other assets, other current liabilities, and other liabilities on the condensed consolidated balance sheet as of March 31, 2019. The Company currently does not have any finance leases.

Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. Right-of-use assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities as the Company’s leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company applied the transition method retrospectively at the beginning of the period of adoption however there was no cumulative-effect adjustment to retained earnings.



9





Practical expedients

The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company’s operating leases. Additionally, the Company applied the package of practical expedients to forgo reassessing certain conclusions reached under legacy GAAP. The Company elected to apply the short-term lease measurement and recognition exemption in which right-of-use assets and lease liabilities are not recognized for short-term leases.

Fair Value Measurements

The Company’s financial instruments include restricted cash, accounts payable, accrued liabilities and long-term debt. The carrying amount of restricted cash, accounts payable and accrued liabilities approximate fair value because of the short-term nature of these instruments. Further, based on the borrowing rates currently available to the Company for loans with similar terms, the Company believes the carrying amount of our borrowings against our line of credit approximates its fair value.

Recent Accounting Pronouncements

Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), further updated by ASU No. 2018-10, No. 2018-20 and No. 2019-01, which modifies lease accounting for lessees to increase transparency and comparability by requiring organizations to recognize lease assets and lease liabilities on the balance sheet and increasing disclosures about key leasing arrangements. The amendment updates the critical determinant from capital versus operating to whether a contract is or contains a lease because lessees are required to recognize lease assets and lease liabilities for all leases - financing and operating - other than short term. We adopted this guidance on January 1, 2019. See the preceding section within this Note 1 titled "Lease Accounting" and Note 2 for additional details regarding the adoption of this standard.

Accounting pronouncements not yet adopted
    
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. Leases

The Company has operating leases for real estate and certain equipment. The Company has lease assets of approximately $639,000, reported within other assets on the condensed consolidated balance sheet. Current lease liabilities of approximately $405,000 are reported within other current liabilities and non-current lease liabilities of approximately $133,000 are reported in other liabilities on the condensed consolidated balance sheet as of March 31, 2019. Operating lease expense was $174,000 for the three months ended March 31, 2019. Short-term lease expense for the three months ended March 31, 2019, was not material. The difference between the undiscounted cash flows and the operating lease liabilities recorded on the condensed consolidated balance sheet as of March 31, 2019 is approximately $93,000.

Supplemental cash flow information, as of March 31, 2019, related to operating leases was as follows ($ in thousands):
Cash paid within operating cash flows
$
210


The weighted-average remaining lease term and discount rates are as follows:
Weighted-average remaining lease term
1.8 years

Weighted-average discount rate
6.25
%



10





As of December 31, 2018, the future minimum lease payments under noncancellable operating leases under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows ($ in thousands): 
2019
$
615

2020

2021

2022

2023

Total minimum lease payments
$
615

 
As of March 31, 2019, the Company does not have any significant additional operating leases that have not yet commenced.

3. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following as of ($ in thousands):
 
March 31, 2019
 
December 31, 2018
Carriers and vendors payable
$
17,251

 
$
17,352

Accrued professional fees
1,788

 
1,676

Accrued compensation and benefits
3,979

 
5,045

Accrued credit card/ACH fees
540

 
550

Accounts payable
105

 
688

Accrued interest
138

 
28

Other accrued expenses
2,842

 
7,058

Total accounts payable and accrued expenses
$
26,643

 
$
32,397


Accrued compensation and benefits decreased due to payment of accrued executive bonuses and continued severance payments for former HPIH and HP executives, offset by additional amounts accrued for 2019 bonus payments. Other accrued expenses decreased primarily due to the payment of $3.4 million related to the multistate Regulatory Settlement Agreement as discussed in Note 14 of our 2018 Annual Report on Form 10-K.

4. Debt
    
On February 28, 2019, the Company, through HPIH (“Borrower”), entered into an amendment (the “First Amendment”) to the Company’s and Borrower’s existing Credit Agreement, dated July 17, 2017, by and among Borrower, the Company, and certain of its affiliates, as guarantors, and SunTrust Bank (the “Existing Credit Agreement”). The First Amendment amended the Existing Credit Agreement to, among other things:

Increase the amount of the revolving credit facility pursuant to which SunTrust Bank (the “Lender”) has agreed to make revolving loans and issue letters of credit (the “Credit Facility”) from $30.0 million to $75.0 million;

Increase the aggregate amount available under the Credit Facility to $25.0 million through an increase in the revolving loan commitment or the establishment of one or more term loans, in either case, as Borrower may request from the Lender; and

Extend the maturity date of the Credit Facility from July 17, 2020 to February 28, 2022 (the “Termination Date”).

Borrowings under the Credit Agreement can either be, at HPIH’s election: (i) at the Base Rate (which is the highest of the prime rate, the federal funds rate plus 0.50%, the one-month LIBOR index rate plus 1.00%, and zero) plus a spread ranging from 0.75% to 1.25% or (ii) at Adjusted LIBOR (as defined in the First Amendment) plus a spread ranging from 1.75% to 2.25%. The applicable spread is dependent upon HPIH’s Consolidated Total Leverage Ratio (as defined in the First Amendment). Interest accrued on each Base Rate Loan (as defined in the First Amendment) is payable in arrears on the last day of each calendar quarter and on the Termination Date. Interest accrued on each Eurodollar Loan (as defined in the First Amendment) is payable on the last day of the applicable interest period, or every three months, whichever comes sooner, and on the Termination Date.



11





As of March 31, 2019, we had a $65.0 million outstanding balance from draws on the Credit Facility and there was $10.0 million available to be drawn upon. As of December 31, 2018, we had a $15.0 million outstanding balance from draws on the Credit Facility.

As of March 31, 2019, and December 31, 2018, there was $138,000 and $28,000, respectively, of accrued interest included in accounts payable and accrued expenses on the consolidated balance sheets. The Company is in compliance with all debt covenants.

5. 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 at December 31, 2018.

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. 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, 2019 and 2018, there were 33,700 and 1,109 shares, respectively, transferred to Treasury for statutory tax withholding obligations as a result of exercises or vested restricted stock awards. During the three months ended March 31, 2019, there were 157,137 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, 2018, there were no shares reissued out of Treasury.

During the three months ended March 31, 2019, there were 21,939 shares transferred to Treasury as a result of forfeitures of stock awards. During the three months ended March 31, 2018, there were no shares transferred to Treasury as a result of forfeitures of stock awards.

For the three months ended March 31, 2019 and 2018, there were cash outflows of $918,000 and $36,000, 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, 2019 we repurchased 1,351,241 of our registered Class A common stock under the current share repurchase program at an average price per share of $33.47. During the year ended December 31, 2018, we repurchased 1,550,136 shares of our registered Class A common stock under the current share repurchase program at an average price per share of $36.02. There were no repurchases made during the three months ended March 31, 2018.

Exchange Agreement
    
Under the Exchange Agreement, dated February 13, 2013, between the Company and HPI and HPIS (the “Exchange Agreement”), on March 22, 2019, HPI exchanged 123,750 shares of Class B common stock of HIIQ and 123,750 membership interests of HPIH for 123,750 shares of Class A common stock of HIIQ. On that same date, HPIS exchanged 1,250 shares of Class B common stock of HIIQ and 1,250 membership interests of HPIH for 1,250 shares of Class A common stock of HIIQ. See Note 8 of our Annual Report on Form 10-K for further information on the Exchange Agreement.



12





6. 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, 2019 ($ in thousands):
 
Sales and marketing services
 
Member management
 
Total
Revenue by Source
 
 
 
 
 
Commission revenue(1)
 
 
 
 
 
STM
$
32,043

 
$
884

 
$
32,927

HBIP
28,329

 
1,797

 
30,126

Supplemental
21,119

 
1,112

 
22,231

Other

 

 

Services revenue

 
1,168

 
1,168

Brokerage revenue
551

 

 
551

Other revenues
323

 

 
323

Total revenue
$
82,365

 
$
4,961

 
$
87,326

 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
Transferred at a point in time
$
82,365

 
$

 
$
82,365

Transferred over time

 
4,961

 
4,961

Total revenue
$
82,365

 
$
4,961

 
$
87,326


The following table presents our revenue, disaggregated by major product type and timing of revenue recognition, for the three months ended March 31, 2018 ($ in thousands):
 
Sales and marketing services
 
Member management
 
Total
Revenue by Source
 
 
 
 
 
Commission revenue(1)
 
 
 
 
 
STM
$
12,978

 
$
716

 
$
13,694

HBIP
36,761

 
1,986

 
38,747

Supplemental
21,380

 
1,102

 
22,482

Other

 
19

 
19

Services revenue

 
1

 
1

Brokerage revenue
900

 

 
900

Other revenues
88

 

 
88

Total revenue
$
72,107

 
$
3,824

 
$
75,931

 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
Transferred at a point in time
$
72,107

 
$

 
$
72,107

Transferred over time

 
3,824

 
3,824

Total revenue
$
72,107

 
$
3,824

 
$
75,931


(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.



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We have not recognized any material amounts for amortization, changes in estimates, or impairment loss. Changes in estimates and impairment are reviewed each reporting period against actual persistency for a particular block of products sold.

Remaining Performance Obligations

As of March 31, 2019, approximately $16.0 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.

7. Stock-based Compensation

No stock appreciation rights ("SARs") or stock options were granted during the three months ended March 31, 2019 and 2018.

The following table summarizes restricted shares granted (in thousands):
 
Three Months Ended March 31,
 
2019

2018
Restricted shares
260

 

 
The following table summarizes stock-based compensation expense ($ in thousands):
 
Three Months Ended March 31,
 
2019

2018
Restricted shares
$
1,766

 
$
2,269

SARs
149

 
552

Less amounts capitalized for internal-use software
(99
)
 
(188
)
Total
$
1,816

 
$
2,633

 
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, 2019 ($ in thousands):
 
Unrecognized Expense
 
Weighted Average Remaining Years
Restricted shares
$
12,973

 
2.2
SARs
806

 
1.6
Total
$
13,779

 
 
 
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, 2019, there were 625 SARs exercised resulting in an increase of 139 issued shares of Class A common stock. During the three months ended March 31, 2018 there were 2,400 SARs exercised resulting in an increase of 2,000 shares of issued Class A common stock. During the three months ended March 31, 2019 there were 7,500 SARs forfeited. During the three months ended March 31, 2018, there were no outstanding SARs forfeited.

During the three months ended March 31, 2019, there were no options exercised. During the three months ended March 31, 2018 there were 2,600 options exercised. During the three months ended March 31, 2019 and 2018 there were no options forfeited.

During the three months ended March 31, 2019 and 2018, there were 147,000 and 179,400 restricted stock awards issued for performance shares, respectively. These awards were previously granted in which the performance metrics were contractually satisfied during the period. During the three months ended March 31, 2019, there were no performance shares forfeited. During the three months ended March 31, 2018, there were 2,600 performance shares forfeited.

We recognized income tax benefits from stock-based activity of $74,000 for the three months ended March 31, 2019. We recognized no income tax benefits from stock-based activity for the three months ended March 31, 2018.



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For the three months ended March 31, 2019 and 2018, we capitalized $99,000 and $188,000, respectively, of stock-based compensation expense related to the development of internal-use software. See Notes 1 and 4 of our Annual Report on Form 10-K for the period ended December 31, 2018 for further information on our internal-use software.

8. Net Income per Share

The computations of basic and diluted net income per share attributable to HIIQ for the three months ended March 31, 2019 and 2018 were as follows ($ in thousands, except share and per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Basic net income attributable to Health Insurance Innovations, Inc.
$
1,331

 
$
4,608

Weighted average shares—basic
11,388,490

 
11,589,777

Effect of dilutive securities:
 

 
 

Restricted shares
557,142

 
538,465

SARs
524,762

 
521,782

Stock options
2,337

 
8,253

Weighted average shares—diluted
12,472,731

 
12,658,277

Basic net income per share attributable to Health Insurance Innovations, Inc.
$
0.12

 
$
0.40

Diluted net income per share attributable to Health Insurance Innovations, Inc.
$
0.11

 
$
0.36


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,
 
2019
 
2018
Restricted Shares
38

 

SARs
7

 
251


Additionally, potential common stock totaling 2,416,667 shares at March 31, 2019 and 3,841,667 shares at March 31, 2018 issuable under the exchange agreement were not included in diluted shares because such inclusion would be anti-dilutive. See Note 8 in our Annual Report on Form 10-K for the year ended December 31, 2018 for further details on the exchange agreement.

9. Income Taxes

HPIH is taxed as a partnership for income tax purposes; as a result, it is not subject to entity-level federal or state income taxation, but its members are liable for taxes with respect to their allocable shares of each company’s respective net taxable income. We are subject to U.S. corporate federal, state, and local income taxes on our allocable share of net taxable income that is reflected in our condensed consolidated financial statements.

The effective tax rate for the three months ended March 31, 2019 was 56.2%. The effective tax rate for the three months ended March 31, 2018 was 43.0%. For the three months ended March 31, 2019 the provision for income taxes was $2.8 million. For the three months ended March 31, 2018, the provision for income taxes was $5.0 million. 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.



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Due to the ownership structure of HP, which is a taxable entity, it cannot join in a consolidated tax filing with HIIQ. Consequently, its federal and state tax jurisdictions are separate from those of HIIQ, which prevents deferred tax assets and liabilities of HIIQ and HP from offsetting one another. On a standalone basis, the effective tax rate for the three months ended March 31, 2019 for HIIQ was 42.9%, while the effective tax rate for each of the three months ended March 31, 2019 for HP was 0.0%. On a standalone basis, the effective tax rate for the three months ended March 31, 2018 for HIIQ was 39.8%, while the effective tax rate for the three months ended March 31, 2018 for HP was 0.0%.

The adoption of ASC 606 created an opening balance sheet tax liability adjustment, the impact of which is spread over four years starting with 2018. The impact of this opening balance sheet tax liability adjustment in Q1 2019 increased our Tax Provision by an additional $1.4 million resulting in a total tax expense of $2.8 million thus increasing our effective tax rate from 28.1% to 56.2%. This adjustment will continue to inflate our effective tax rate for the remainder of 2019 and will continue to increase our effective tax rates going into 2020 and 2021.

For the three months ended March 31, 2019 and 2018, 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. The Company accounts for interest and penalties associated with uncertain tax positions as a component of tax expense, and none were included in the Company’s financial statements as there are no uncertain tax positions outstanding as of March 31, 2019 and 2018, respectively. The Company’s 2015 through 2018 tax years remain subject to examination by tax authorities. 

10. Commitments and Contingencies

Health Plan Intermediaries, LLC

HPI and its subsidiary HPIS, which are beneficially owned by Mr. Kosloske, a former executive officer 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, 2019, HPIH paid cash distributions of $677,000 for these entities related to estimated federal and state income taxes, pursuant to the operating agreement entered into by HPIH and HPI. Additional estimated federal income taxes of $1.6 million were accrued for as of March 31, 2019 and $6.7 million was accrued as of December 31, 2018 and are included in due to member account on the condensed consolidated balance sheet. For the three months ended March 31, 2018, $862,000 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, 2019, Series B Membership Interests, together with an equal number of shares of Class B common stock have been exchanged for a total of 6,250,000 shares of Class A common stock subsequent to the IPO. As of March 31, 2019, as a result of these exchanges, we have recorded a liability of $34.2 million pursuant to the Tax Receivable Agreement ("TRA"), of which $8.0 million is included in current liabilities and $26.2 million 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, 2019, we have made $2.4 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:



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State Regulatory Examinations

Massachusetts Regulatory Action

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, and to date three such depositions have occurred. 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 Company disagrees with the MAG on this issue and is responding accordingly.

The Company otherwise continues to cooperate with the MAG in the interest of bringing the matter to an agreeable conclusion. While the MAG has indicated it is amenable to exploring all available options, 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 neither requested nor 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. It is possible there may be no financial loss, a nominal or minimal loss, or some other mutually satisfactory resolution.

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 alleging that the Company made misleading statements relating to health insurance policies. The Company has responded with a general denial and raised multiple affirmative defenses and is actively engaged with the Department to resolve the matter. A hearing date has not been set as discussions to resolve the matter are ongoing.

Washington Regulatory Action

On November 8, 2018, the Company received notice of an investigation by the Washington State Office of the Insurance Commissioner alleging that the Company may have sold unauthorized products to Washington residents and/or allowed unaffiliated producers to solicit the sale of insurance products. The investigation also alleges that independent sales agents may have misrepresented the products sold.

We are proactively communicating and cooperating with all regulatory agencies involved in the above-described examinations and actions. However, it is too early to determine whether any of these regulatory matters will have a material impact on our business. Any adverse finding could result in significant penalties or other liabilities and/or a requirement to further modify our marketing or business practices and the practices of our third-party independent distributors, which could harm our business, results of operations, or financial condition. Moreover, an adverse regulatory action in one jurisdiction could result in penalties and adversely affect our license status or reputation in other jurisdictions due to the requirement that adverse regulatory actions in one jurisdiction be reported to other jurisdictions.

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. While it is possible that a loss may arise from this case, the amount of such loss is not known or estimable at this time.

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 has moved to dismiss the Amended Complaint, and the Company's motion was granted in part and denied in part. While it is possible that a loss may arise from this case, the amount of such loss is not known or estimable at this time.


17






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, 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, American Service Insurance Agency (“ASIA”) and that agent is also named as a co-defendant. The Company has moved to dismiss the complaint and the Court granted the Company's motion.

In a case styled as Stephen Grant, et al. v. Everest Reinsurance, et al., Case No. 19-cv-00232, U.S. District Court for the Western District of Texas, the plaintiffs allege misrepresentation, on the part of an independent third-party insurance agency, relating to the sale of an insurance policy. The policy allegedly did not cover later-incurred medical bills when at the time the carrier rescinded their policy. The Company’s response to the complaint is still being evaluated, and while it is possible that a loss may arise from this case, the amount of such loss is not known or estimable at this time.

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.

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-2186-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 plaintiffs in the action 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 on periods ending September 11, 2017. On May 7, 2018, the Company and co-defendants filed a motion to dismiss all claims, which is now fully briefed. On March 29, 2019, the court sua sponte ordered mandatory mediation on April 24, 2019, which did not result in a settlement and is scheduled to continue on May 22, 2019. In connection with the mandatory mediation order, the court administratively closed the case and terminated pending motions pending the outcome of the mediation, with the case to be reopened and any pending motions reactivated if the parties do not resolve the dispute at mediation. If the case is reopened, the Company intends to vigorously defend against these claims.

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


18





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. The Company has not yet been served in the action and intends to vigorously defend against the claims if and when the Company is served.

Putative Derivative Action Lawsuits

Two individuals, Ian DiFalco and Dayle Daniels, filed separate but similar derivative action complaints on April 5 and April 6, 2018, respectively, in the Delaware Court of Chancery naming most of the Company’s directors and executive officers 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 securities class action consolidated complaint. The derivative suit includes additional allegations relating to misconduct by third-party call centers utilized by the Company in its operations. 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 of the above-described securities litigation (In re Health Insurance Innovations Securities Litigation). Defendants intend to vigorously defend against these claims. However, at this time, the Company cannot predict the probable outcome of these actions, and, accordingly, no amounts have been accrued in the Company’s consolidated financial statements for this action.

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 filed by what has been determined to be serial-professional plaintiffs such as those cases filed by Craig Cunningham and Kenneth Moser. In the Cunningham case, the Company has been successful at having the case dismissed twice. Mr. Cunningham refiled his case a third time and the Company has responded with another motion to dismiss. Moser, like Cunningham, has been a plaintiff in hundreds of similar cases against a variety of types of companies nationwide. As of December 31, 2018, the Moser case filed in the U.S. District Court for the Southern District of California is pending a decision from the Court relating to class certification.

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 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 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. The Company is not a party to this lawsuit and there is no indication from the FTC that it seeks to add the Company to the lawsuit.


19






The FTC and the defendants (the Company is not a defendant or party in the case) had a hearing in Federal Court on the FTC’s request to convert the Court’s TRO to a Preliminary Injunction. The Court indicated that it would rule on the FTC’s motion seeking the preliminary injunction before May 17, 2019. To assist affected consumers, the Company notified the FTC that it would staff a consumer-services line to assist consumers with administrative, billing and related non-claims questions (as the Company does not adjudicate claims). The Company has also been in cooperative communication with the FTC regarding the form of an educational notice letter or other communication that it will send to affected consumers. The communication would provide options for consumers who are affected by Simple Health’s alleged conduct. The Company has also maintained communications with the Court appointed Receiver. The Company transfers funds that would otherwise be due to Simple Health to the Receiver, pursuant to the Court’s Order. The Receiver and the FTC are aware that the Company continues to bill consumers for the health insurance and ancillary products. Neither the Company nor the FTC have sought to terminate insurance coverages on any consumers who indicate that they may need or want their present insurance to continue. The Company last communicated with the FTC on May 3, 2019 to further coordinate relating to consumer communications so that the Simple Health insured-consumers may decide whether to continue their coverage. The Company is working with the FTC on a multi-phase communication plan with the FTC to advise consumers accordingly, and such will be subject to Court approval. This approach will also be subject to the expected, upcoming Court decision on whether to convert the TRO to a preliminary injunction.
 
Separate from the FTC case that is against Simple Health, a lawsuit styled as Patricia Parker, et al. v. Health Insurance Innovations, Inc., et al. was filed in Florida state court on April 19, 2019. The lawsuit, styled as a class action, but not yet certified, alleges the Company conspired with Simple Health, and brings causes of action under the Florida Racketeer Influenced and Corrupt Organizations Act, conspiracy, fraud, and other claims. The Company has not yet been served in the lawsuit, and denies the allegations.

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 written demands and informal requests for indemnification from a number of carriers related to the MCE, states' investigations into carriers relating to agent licensing, and the TCPA claims identified above. Such demands and requests have been received from several carriers relating to lawsuits set forth above, although no legal proceedings are currently pending relating to these matters. Management cannot reasonably estimate any potential losses, but these demands could result in a material liability for us.

11. Related Party Transactions

There have been no material changes to the Related Party Transactions disclosures made in our Annual Report on Form 10-K for the period ended December 31, 2018, except for those noted in Note 5 and Note 10 above related to required payments under the TRA, exchanges under the Exchange Agreement, and the HPIH and HPI Operating Agreement.

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
We have made statements in the Management’s Discussion and Analysis of Financial Condition and Results of Operations below and in other sections of this report that are forward-looking statements. All statements other than statements of historical fact included in this quarterly report are forward-looking statements. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties, and assumptions about us, may include projections of our future financial performance, our anticipated growth strategies, anticipated trends in our business, future and continued regulatory matters and compliance, and other future events or circumstances. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements, and other future events or circumstances to differ materially from the results, level of activity, performance or achievements, events or circumstances expressed or implied by the forward-looking statements, including those factors discussed in “Part I. – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and those factors discussed in “Part II – Item 1A. Risk Factors” below.



20





We cannot guarantee future results, level of activity, performance, achievements, events, or circumstances. We are under no duty to update any of these forward-looking statements after the date of this report to conform our prior statements to actual results or revised expectations.

Key Business Metrics

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

Premium Equivalents. We define this metric as our total collections, including the combination of premiums, fees for discount benefit plans, enrollment fees, and third-party commissions and referral fees. We have included premium equivalents in this report because, while diminishing in importance since the adoption of ASC 606, it has historically been a key measure used by our management to understand and evaluate our core operating performance and trends. This financial measurement is considered a non-GAAP financial measure and is not recognized under generally accepted accounting principles in the United States of America (“GAAP”) and should not be used as, and is not an alternative to, revenues as a measure of our operating performance.
 
Revenues. Our revenues primarily consist of commissions and fees earned for health insurance policies and supplemental products issued to members, referral fees, and fees for discount benefit plans paid by members as a direct result of our enrollment services, brokerage services, member management, or referral sales. Revenues reported by the Company are net of risk premiums remitted to insurance carriers and fees paid for discount benefit plans.

Commission rates that we receive for the sale of products are agreed to in advance with the relevant insurance carrier and vary by carrier and policy type. Under our carrier compensation arrangements, the commission rate schedule that is in effect on the policy effective date governs the commissions over the life of the policy. All amounts due to insurance carriers and discount benefit vendors are reported and paid to them according to the procedures provided for in the contractual agreements between the individual carrier or vendor and us.
 
We continue to receive a commission payment for each month a member renews their policy, or until the plan expires or is terminated.

The following table presents a reconciliation of premium equivalents to revenues ($ in thousands):
 
Three Months Ended March 31,
 
2019

2018
Premium equivalents
$
147,674

 
$
115,582

Less risk premium
58,428

 
37,971

Less amounts earned by third party obligors
1,920

 
1,680

Revenues
$
87,326

 
$
75,931


Submitted Applications. Our submitted applications are an important input of our expected revenues. A member may be enrolled in more than one policy or discount benefit plan simultaneously. We have included submitted applications in this report because in conjunction with expected duration units (see below), it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget and to develop short- and long-term operational plans. In particular, the inclusion of submitted applications can provide a useful measure for period-to-period comparisons of our business. Submitted applications is a non-GAAP financial measure not recognized under GAAP and should not be used as, and is not an alternative to, comparable GAAP results. Other companies may calculate this measure differently than we do. Submitted applications has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.



21





The following table presents submitted IFP applications by distribution source:
 
Submitted IFP Applications during the Three Months Ended March 31,
 
2019
 
2018
 
Change (%)
Third-party distribution
63,000

 
59,700

 
5.5
 %
Owned distribution
12,700

 
19,100

 
(33.5
)%
Total (excluding fulfillment only)
75,700

 
78,800

 
(3.9
)%
Fulfillment only(1)
1,100

 
13,200

 
(91.6
)%
Total
76,800

 
92,000

 
(16.5
)%

(1) 
Represents de-emphasized products where the Company outsourced all sales and marketing obligations and some member management services. The Company terminated these fulfillment only arrangements in December, 2018.

The following table presents submitted IFP applications by eCommerce source:
 
Submitted IFP Applications during the Three Months Ended March 31,
 
2019
 
2018
 
Change (%)
Owned eCommerce
9,600

 
16,400

 
(41.5
)%
Third-party eCommerce
4,600

 
2,400

 
91.6
 %
Total eCommerce
14,200

 
18,800

 
(24.5
)%
All other
61,500

 
60,000

 
2.5
 %
Total (excluding fulfillment only)
75,700

 
78,800

 
(3.9
)%
Fulfillment only(1)
1,100

 
13,200

 
(91.6
)%
Total
76,800

 
92,000

 
(16.5
)%

(1) 
Represents de-emphasized products where the Company outsourced all sales and marketing obligations and some member management services. The Company terminated these fulfillment only arrangements in December, 2018.

Expected Duration Units. Our expected duration units are an important indicator of our expected revenues. We have included expected duration units in this report because it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget and to develop short- and long-term operational plans. In particular, the inclusion of expected duration units can provide a useful measure for period-to-period comparisons of our business. Expected duration units is a non-GAAP financial measure not recognized under GAAP and should not be used as, and is not an alternative to, comparable GAAP results. Other companies may calculate this measure differently than we do. Expected duration units has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table presents expected duration units for IFP by distribution source:
 
IFP Expected Duration Units during the Three Months Ended March 31,
 
2019
 
2018
 
Change (%)
Third-party distribution
589,800

 
494,300

 
19.3
 %
Owned distribution
90,200

 
73,600

 
22.6
 %
Total (excluding fulfillment only)
680,000

 
567,900

 
19.7
 %
Fulfillment only(1)
12,100

 
132,000

 
(90.8
)%
Total
692,100

 
699,900

 
(1.1
)%

(1) 
Represents de-emphasized products where the Company outsourced all sales and marketing obligations and some member management services. The Company terminated these fulfillment only arrangements in December, 2018.



22





The following table presents expected duration units for IFP by eCommerce source:
 
IFP Expected Duration Units during the Three Months Ended March 31,
 
2019
 
2018
 
Change (%)
Owned eCommerce
63,900

 
52,300

 
22.2
 %
Third-party eCommerce
43,700

 
23,400

 
86.8
 %
Total eCommerce
107,600

 
75,700

 
42.1
 %
All other
572,400

 
492,200

 
16.3
 %
Total (excluding fulfillment only)
680,000

 
567,900

 
19.7
 %
Fulfillment only(1)
12,100

 
132,000

 
(90.8
)%
Total
692,100

 
699,900

 
(1.1
)%

(1) 
Represents de-emphasized products where the Company outsourced all sales and marketing obligations and some member management services. The Company terminated these fulfillment only arrangements in December, 2018.

Constrained Lifetime Value per Submitted Application ("LVSA"). We have included LVSA in this report because it is a key measure used by our management to understand and evaluate our core revenue performance and trends, to prepare our annual budget and to develop short- and long-term operational plans. In particular, the inclusion of LVSA can provide a useful measure for period-to-period comparisons of our business. LVSA is a non-GAAP financial measure not recognized under GAAP and should not be used as, and is not an alternative to, comparable GAAP results. Other companies may calculate this measure differently than we do. LVSA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.

The following table presents the LVSA, by product type ($, except # of submitted applications):
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
Revenue per Submitted Application
 
# of Submitted Applications
 
Revenue per Submitted Application
 
# of Submitted Applications
Short Term Medical <12 months
$
367

 
10,700

 
$
393

 
35,000

Short Term Medical ≥12 months
993

 
29,700

 
518

 
300

Total STM
827

 
40,400

 
394

 
35,300

Health Benefit Insurance Plans
889

 
35,300

 
878

 
43,500

Supplemental
335

 
67,700

 
351

 
64,700

Total (excluding fulfillment only)
$
610

 
143,400

 
$
521

 
143,500


Policies in Force. We consider a policy to be in force when we have issued a member his or her insurance policy or discount benefit plan and have collected the applicable premium payments, commissions, and/or discount benefit fees. Our policies in force are an important indicator of our expected revenues. A member may be enrolled in more than one policy or discount benefit plan simultaneously. A plan becomes inactive upon notification to us of termination of the policy or discount benefit plan, when the member’s policy or discount benefit plan expires or following non-payment of premiums or discount benefit fees when due.
 
The following table presents the number of policies in force by product type:
 
As of March 31,
 
 
 
2019
 
2018
 
Change
IFP
194,100

 
192,300

 
0.9
 %
Supplemental products
178,800

 
190,900

 
(6.3
)%
Total
372,900

 
383,200

 
(2.7
)%

EBITDA. We define this metric as net income before interest, income taxes and depreciation and amortization. We have included EBITDA in this report because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating EBITDA can provide a useful measure for


23





period-to-period comparisons of our business. However, EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. Other companies may calculate EBITDA differently than we do. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
 
Adjusted EBITDA. To calculate adjusted EBITDA, we calculate EBITDA, which is then further adjusted for items such as stock-based compensation and related costs, and items that are not generally a part of regular operating activities, including tax receivable adjustments, indemnity and other related legal costs, and severance, restructuring, and acquisition costs. Adjusted EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. We have presented adjusted EBITDA because we consider it an important supplemental measure of our performance and believe that it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate adjusted EBITDA differently than we do. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
 
The following table presents a reconciliation of net income to EBITDA and adjusted EBITDA ($ in thousands):
 
Three Months Ended March 31,
 
2019

2018
Net income
$
2,182

 
$
6,652

Interest expense (income)
345

 
(26
)
Depreciation and amortization
1,132

 
1,165

Provision for income taxes
2,797

 
5,017

EBITDA
6,456

 
12,808

Stock-based compensation and related costs(1)
1,861

 
2,665

Transaction costs
273

 
56

Indemnity and other related legal costs
672

 
287

Severance, restructuring and other charges
3

 

Adjusted EBITDA
$
9,265

 
$
15,816


(1)
During the second quarter of 2018, the Company began including payments related to employer taxes for vesting and exercises of stock-based compensation within the stock-based compensation and related costs adjustment line item. For period-over-period comparability, the Company has included these amounts in the three months ended March 31, 2018. For the three months ended March 31, 2019 and 2018, the impact on adjusted EBITDA was immaterial and resulted in no change to adjusted net income per share for either period.

Adjusted Net Income. To calculate adjusted net income, we calculate net income then add back amortization (but not depreciation), interest, tax expense, items such as stock-based compensation and related costs, and other items that are not generally a part of regular operating activities, including, tax receivable adjustments, indemnity and other related legal costs, severance, restructuring, and acquisition costs. From adjusted pre-tax net income we apply a pro forma tax expense calculated at an assumed rate of 24%, which consists of the maximum federal corporate rate of 21%, with an assumed 3% state tax rate. We believe that when measuring Company and executive performance against the adjusted net income measure, applying a pro forma tax rate better reflects the performance of the Company without regard to the Company’s organizational tax structure. We have included adjusted net income in this report because it is a key performance measure used by our management to understand and evaluate our core operating performance and trends and because we believe it is frequently used by analysts, investors, and other interested parties in their evaluation of the Company. Other companies may calculate this measure differently than we do. Adjusted net income has limitations as an analytical tool, and you should not consider it in isolation or substitution for earnings per share as reported under GAAP.
 
Adjusted Net Income per Share. Adjusted net income per share is computed by dividing adjusted net income by the total number of weighted-average diluted Class A and weighted-average Class B shares of our common stock for each period. We have included adjusted net income per share in this report because it is a key measure used by our management to understand and evaluate our core operating performance and trends and because we believe it is frequently used by analysts, investors and other interested parties in the evaluation of companies. Other companies may calculate this measure differently than we do. Adjusted net income per share has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for earnings per share as reported under GAAP.
 


24





The following table presents a reconciliation of net income to adjusted net income and adjusted net income per share (in thousands, except per share data):
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
2,182

 
$
6,652

Interest expense (income)
345

 
(26
)
Amortization
335

 
464

Provision for income taxes
2,797

 
5,017

Stock-based compensation and related costs
1,861

 
2,665

Transaction costs
273

 
56

Indemnity and other related legal costs
672

 
287

Severance, restructuring and other charges
3

 

Adjusted pre-tax income
8,468

 
15,115

Pro forma income taxes
(2,032
)
 
(3,628
)
Adjusted net income
$
6,436

 
$
11,487

Total weighted average diluted share count
15,000

 
16,500

Adjusted net income per share
$
0.43

 
$
0.70


Adjusted SG&A. We define this metric as total GAAP selling, general, and administrative ("SG&A") expenses adjusted for stock-based compensation and related costs, transaction costs, indemnity and other related legal costs, severance, restructuring and other costs. We have included Adjusted SG&A in this report because it is a key measure used by our management to understand and evaluate our core operating performance and trends. Other companies may calculate this measure differently than we do. Adjusted SG&A has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for SG&A as reported under GAAP.
 
The following table presents a reconciliation of SG&A to Adjusted SG&A ($ in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Total SG&A
$
18,659

 
$
16,213

Less Stock-based compensation and related costs
1,861

 
2,665

Less Transaction costs
273

 
56

Less Indemnity and other related legal costs
672

 
287

Less Severance, restructuring and other charges
3

 

Adjusted SG&A
$
15,850

 
$
13,205


Results of Operations

Comparison of Three Months Ended March 31, 2019 and 2018

Revenues
 
Revenues for the three months ended March 31, 2019 were $87.3 million, an increase of $11.4 million, or 15.0%, compared to the same period in 2018. The increase was primarily due to a sales mix shift to longer duration products with greater LVSA. See the related tables in the Key Business Metrics section of this MD&A.

Third-party Commissions

Our third-party commissions consist of fees and commissions paid to third-party distributors for selling our products to members. Third-party commissions, as a percentage of revenue, will vary based on the mix of sales between AgileHealthInsurance.com and our third-party distributors.



25





Third-party commissions for the three months ended March 31, 2019 were $60.7 million, an increase of $15.2 million, or 33.3%, compared to the three months ended March 31, 2018. Third-party commissions represented 69.5% of revenues for the three months ended March 31, 2019, as compared to 59.9% of revenues for the three months ended March 31, 2018. The increases in third-party commissions were primarily due to product mix shift to products sold with longer policy durations and an increase channel mix utilizing a higher proportion of independent third-party distributors.

Selling, General and Administrative Expense

Our SG&A expenses primarily consist of personnel costs, which include salaries, bonuses, commissions, stock-based compensation, payroll taxes and benefits. SG&A expenses also include advertising and marketing expenses, and travel costs. In addition, these expenses also include expenses for outside professional services and technology expenses, including legal, audit and financial services, and the maintenance of our technology platform.

SG&A expense for the three months ended March 31, 2019 was $18.7 million. This represents an increase of $2.4 million, or 15.1%, compared to the three months ended March 31, 2018. The increase in SG&A was primarily attributable to increased advertising and marketing spend for AgileHealthInsurance.com.

SG&A expense represented 21.4% of revenues for the three months ended March 31, 2019 and 2018.

Provision for Income Taxes

For the three months ended March 31, 2019 and 2018, we recorded a provision for income taxes for $2.8 million and $5.0 million, reflecting effective tax rates of 56.2% and 43.0%, respectively. See Note 9 of the accompanying condensed financial statements for further information on income taxes and the effective tax rates.

Noncontrolling Interest

We are the sole managing member of HPIH and have 100% of the voting rights and control. As of March 31, 2019, we had an 82.7% economic interest in HPIH, whereas HPI and HPIS had the remaining 17.3% economic interest in HPIH. HPI and HPIS’ interest in HPIH is reflected as a noncontrolling interest in our accompanying condensed consolidated financial statements. During the three months ended March 31, 2019, Mr. Kosloske exchanged a total of 125,000 shares of Class B common stock and an equal number of Series B membership interests. This transaction contributed to the 4.9% decrease in HPI and HPIS' collective economic interest in HPIH since December 31, 2018. See Note 8 of the Annual Report on Form 10-K for the year ended December 31, 2018 for further information on the Exchange Agreement.

Net income attributable to HIIQ for the three months ended March 31, 2019, and 2018 included HIIQ’s share of its consolidated entities’ net income and loss.

Liquidity and Capital Resources

General

As of March 31, 2019, we had $6.5 million of cash and cash equivalents. We believe that our available cash and cash flows expected to be generated from operations will be adequate to satisfy our current and planned operations for at least the next 12 months, although we can give no assurances concerning future liquidity.

Our Indebtedness

As of March 31, 2019, we had a $65.0 million outstanding balance from draws on the Credit Facility and $10.0 million was available to be drawn upon. As of December 31, 2018, we had $15.0 million outstanding from draws on the revolving line of credit. The Company was in compliance with all covenants for all periods. See Note 4 to the condensed consolidated financial statements for additional details on our Credit Facility.



26





Cash Flows

The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this report:
 
Three Months Ended March 31,
 
2019
 
2018
Cash (used in) provided by:
 
 
 
Operating activities
$
(5,744
)
 
$
3,062

Investing activities
(424
)
 
(683
)
Financing activities
3,133

 
(895
)

Cash Flows from Operating Activities

Cash flows from operating activities during the three months ended March 31, 2019 decreased compared to the three months ended March 31, 2018. Operating cash flow for the three months ended March 31, 2019 was decreased primarily by the $3.4 million payment for closing of the market conduct examination, and a collective $10.5 million increase in commissions and advanced commission payments. This use of operating cash was offset by an approximate $6.6 million increase in cash received from higher cash collected from revenues.

Cash Flows from Investing Activities

Our primary investing activities for the three months ended March 31, 2019 were attributable to capitalized internal-use software costs of $315,000 and purchases of property and equipment for $109,000. Our primary investing activities for the three months ended March 31, 2018 were attributable to capitalized internal-use software and website development costs of $570,000 and purchases of property and equipment of $113,000.

Cash Flows from Financing Activities

During the three months ended March 31, 2019, cash provided by financing activities of $3.1 million was primarily driven by $45.3 million for purchases of Class A common stock pursuant to our share repurchase plan, distributions to member for $677,000, and $918,000 for payments associated with the net settlement of employee tax liabilities related to share exercises and restricted share vesting. Cash outflows were offset by a draw of $50.0 million on the Company's revolving line of credit.

During the three months ended March 31, 2018, cash used in financing activities of $895,000 was primarily driven by distributions to member of $862,000.

Off-Balance Sheet Arrangements

Through March 31, 2019, we had not entered into any material off-balance sheet arrangements.

Contractual Obligations
 
Payments Due in Fiscal Year
Contractual Obligations
Total
 
2019
 
2020
 
2021
 
Thereafter
Line of credit
$
73,035

 
$
2,079

 
$
2,759

 
$
2,759

 
$
65,438

Operating leases
671

 
508

 
49

 
50

 
64

Total
$
73,706

 
$
2,587

 
$
2,808

 
$
2,809

 
$
65,502




27





Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. The preparation of these financial statements require management to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. We base our estimates, assumptions, and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Different assumptions and judgments could change the estimates used in the preparation of our financial statements, which, in turn, could change the results from those reported. We evaluate our estimates, assumptions, and judgments on an ongoing basis.

The critical accounting estimates, assumptions, and judgments that we believe have the most significant impact on our financial statements are described in Note 1 to the accompanying condensed consolidated financial statements, the Notes to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and Part I, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 under the heading “Critical Accounting Policies and Estimates.”

There have been no material changes to the Company’s critical accounting policies and estimates since the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 except for the following:

Lease Accounting

The Company has applied a portfolio approach to apply the guidance in ASC 842, as we reasonably expect that the results of applying ASC 842 to the portfolio would not materially differ from applying it to individual leases. Management judgment is required in determining the size and composition of the portfolio to ensure that the results are not materially different than lease-by-lease application.

Using the portfolio approach the Company applied a single incremental borrowing rate to the portfolio of leases, as we determined that a reasonable portfolio could be accumulated because the leases share common key characteristics, such as lease terms and underlying assets.

Recent Accounting Pronouncements

Note 1 to the condensed consolidated financial statements contains a discussion of recently issued accounting pronouncements and their impact or potential future impact on the Company’s financial results, if determinable, under the sub-heading “Recent Accounting Pronouncements.”

Carrier Concentration

For the three months ended March 31, 2019, three carriers accounted for 78% of our total collections. For the year ended December 31, 2018, three carriers accounted for 54% of our total collections. For the three months ended March 31, 2019, Federal Insurance Company ("CHUBB") accounted for 40%, Lifeshield National accounted for 27%, and American Financial Security Life Insurance accounted for 11% of total collections. The Company anticipates that total collections in 2019 will continue to be concentrated among a small number of carriers, although as a part of the Company’s strategy of improving and increasing its product mix by seeking to add innovative new products, the Company anticipates that its carrier concentration may decrease.

Legal and Other Contingencies

The Company is subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources, and other factors. The Company accrues for 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. For a further detailed discussion surrounding legal and other contingencies, see Note 10 "Commitments and Contingencies."



28





ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of the Company’s quantitative and qualitative disclosures about market risks, see Item 7A. "Quantitative and Qualitative Disclosures About Market Risks," in our 2018 Annual Report on Form 10-K. As of March 31, 2019, there has been no material change in this information.

ITEM 4—CONTROLS AND PROCEDURES

As discussed in Item 9A of our Annual Report on Form 10-K for the year ended December 31, 2018, we identified material weaknesses in the design and operation of our internal controls related to our revenue accounting, which were limited to matters relating to the implementation of ASC 606. To remediate the material weakness, the Company is executing a plan to implement enhanced training on policies, procedures, controls, and technical accounting guidance for contract reviews for revenue accounting and technical staff, and the Company hired additional staff and has implemented a recurring review process for all adjustments to contract assets and liabilities. The Company expects that the above referenced actions will appropriately remediate the material weaknesses by the end of the second fiscal quarter of 2019.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of March 31, 2019, and solely due to the unremediated material weaknesses described above, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective. As a result of this conclusion, the financial statements for the period covered by this report were prepared with particular attention to the unremediated material weaknesses previously disclosed. Accordingly, management believes that the condensed consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented, in accordance with U.S. GAAP, notwithstanding the unremediated weaknesses.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


29





PART II—OTHER INFORMATION
 
ITEM 1—LEGAL PROCEEDINGS

Legal Proceedings are set forth under Note 10 "Commitments and Contingencies" included in Part I, Item 1 of this Quarterly Report on Form 10-Q and are incorporated herein by reference.

ITEM 1A—RISK FACTORS

There have been no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

ITEM 2—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the three months ended March 31, 2019.

Issuer Purchases of Equity Securities

Share Repurchase Program

On October 13, 2017, the Company’s Board of Directors authorized a $50.0 million share repurchase program of the Company’s outstanding Class A Common Stock, which was increased to $200.0 million by the Board of Directors on March 14, 2019. The share repurchase authorization permits the Company to periodically repurchase shares for cash through October 2019 in open market purchases, block transactions and privately negotiated transactions in accordance with applicable federal securities laws. The actual timing, number and value of shares repurchased under the program will be determined by the Company’s management at its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, regulatory requirements, capital availability and compliance with the terms of the Company’s credit facility. Repurchases under the program will be funded from one or a combination of existing cash balances, future free cash flow, and cash from borrowings under our Credit Facility.

During the three months ended March 31, 2019, there were 1,351,241 shares repurchased under the repurchase program at an average price of $33.47.

Employee Awards

Pursuant to certain restricted stock award agreements, we allow the surrender of restricted shares by certain employees to satisfy statutory tax withholding obligations on the vesting of restricted stock awards. During the three months ended March 31, 2019, there were 33,621 shares withheld to satisfy statutory tax withholding on vested restricted stock awards.

The following table sets forth information with respect to repurchases of shares of our Class A common stock during the fiscal quarter ended March 31, 2019:
Periods
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Dollar Value of Shares That May Yet Be Purchased Under the Plan(2)
January 1, 2019 through January 31, 2019
 
186,241

(1) 
$
31.60

 
154,156

 
$
34,193,225

February 1, 2019 through February 28, 2019
 

(1) 
$

 

 
$
34,193,225

March 1, 2019 through March 31, 2019
 
1,198,700

(1) 
$
33.95

 
1,197,085

 
$
93,921,499

Total
 
1,384,941

 

 
1,351,241

 


(1) 
Includes shares that were surrendered by employees to satisfy statutory tax withholding obligations in connection with the vesting or exercise of stock-based compensation awards.
(2)
Maximum dollar value of shares that may yet be repurchased under the repurchase program reflects the remaining authorized repurchase amount of $39.2 million at January 1, 2019 then adjusted by repurchase activity and the Board authorized increase on March 14, 2019.



30





ITEM 3—DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4—MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5—OTHER INFORMATION

None.

ITEM 6—EXHIBITS

The following exhibits are filed herewith or incorporated by reference herein:
Exhibit No.
 
Description
10.1#
 
10.2#
 
10.3*
 
31.1*
 
31.2*
 
32**
 
100.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
101.LAB
 
XBRL Taxonomy Label Linkbase Document
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
101.DEF
 
XBRL Taxonomy Definition Document

*    Document is filed with this Quarterly Report on Form 10-Q.
**    Document is furnished with this Quarterly Report on Form 10-Q.



31





SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
HEALTH INSURANCE INNOVATIONS, INC.
 
 
May 7, 2019
/s/ Gavin D. Southwell
 
GAVIN D. SOUTHWELL
 
PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
(PRINCIPAL EXECUTIVE OFFICER)
 
 
May 7, 2019
/s/ Michael D. Hershberger
 
MICHAEL D. HERSHBERGER
 
CHIEF FINANCIAL OFFICER, SECRETARY, AND TREASURER
 
(PRINCIPAL FINANCIAL OFFICER)



32


exhibit103
FIRST AMENDMENT TO CREDIT AGREEMENT AND SECURITY AND PLEDGE AGREEMENT AND GUARANTOR JOINDER AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT AND SECURITY AND PLEDGE AGREEMENT AND GUARANTOR JOINDER AGREEMENT, dated as of February 28, 2019 (this “Amendment”), is entered into by and among HEALTH PLAN INTERMEDIARIES HOLDINGS, LLC, a Delaware limited liability company (the “Borrower”), the Guarantors party hereto and SUNTRUST BANK (the “Lender”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement (as defined below). RECITALS WHEREAS, the Borrower, the Guarantors from time to time party thereto and the Lender are parties to that certain Credit Agreement, dated as of July 17, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) and parties to that certain Security and Pledge Agreement, dated as of July 17, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the “Security Agreement”); WHEREAS, the Borrower has requested an increase of the Aggregate Revolving Commitments and certain other modifications to the Credit Agreement and the Security Agreement; and WHEREAS, the Lender has agreed to provide such requested amendments, subject to the terms and conditions herein; NOW, THEREFORE, in consideration of the agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. Amendments to Credit Agreement. (a) The text, “WHEREAS, the Borrower has requested that the Lender provide, in its favor, a $30,000,000 revolving credit facility;” in the preliminary statements to the Credit Agreement is hereby amended to read, “WHEREAS, the Borrower has requested that the Lender provide, in its favor, a revolving credit facility;”. (b) The following definitions are hereby added to Section 1.1 of the Credit Agreement in the appropriate alphabetical order to read as follows: “Annual Statutory Statement” shall mean the annual statutory financial statement of the Insurance Subsidiary required to be filed with the Arkansas Department. “Arkansas Department” shall mean the Arkansas Department of Insurance. “Beneficial Ownership Certification” shall mean a certification regarding beneficial ownership as required by the Beneficial Ownership Regulation. “Beneficial Ownership Regulation” shall mean 31 C.F.R. § 1010.230. “First Amendment Effective Date” shall mean February 28, 2019.


 
“Insurance Subsidiary” shall mean Benefytt, LLC, an Arkansas limited liability company. “Quarterly Statutory Statement” shall mean the quarterly statutory financial statement of the Insurance Subsidiary required to be filed with the Arkansas Department. (c) The following definitions in Section 1.1 of the Credit Agreement are hereby amended and restated in their entirety to read as follows: “Aggregate Revolving Commitments” shall mean the Revolving Commitments of the Lender at any time outstanding. On the First Amendment Effective Date, the aggregate amount of the Aggregate Revolving Commitments is Seventy-Five Million Dollars ($75,000,000). “Applicable Insurance Regulatory Authority” shall mean, (a) with respect to any Insurance Brokerage Entity, the Governmental Authority located in the jurisdiction in which such Insurance Brokerage Entity is domiciled or such other jurisdiction which due to the nature of such Insurance Brokerage Entity’s activities, has regulatory authority over such Person, and any federal Governmental Authority regulating the insurance industry and/or the insurance brokerage industry and (b) with respect to the Insurance Subsidiary, the Arkansas Department and, to the extent it has regulatory authority over the Insurance Subsidiary, the insurance department or similar Governmental Authority charged with regulating insurance companies or insurance holding companies in each other jurisdiction in which the Insurance Subsidiary conducts business or is licensed to conduct business. “Capital Expenditures” shall mean for any period, without duplication, (a) the additions to property, plant and equipment and other capital expenditures of the Parent and its Subsidiaries (other than the Insurance Subsidiary) that are (or would be) set forth on a consolidated statement of cash flows of the Parent for such period and (b) Capital Lease Obligations incurred by the Parent and its Subsidiaries (other than the Insurance Subsidiary) during such period. “Consolidated EBITDA” shall mean, for the Parent and its Subsidiaries (other than the Insurance Subsidiary) for any period, determined on a consolidated basis, an amount equal to the sum of (a) Consolidated Net Income for such period plus (b) to the extent deducted in determining Consolidated Net Income for such period, without duplication, (i) Consolidated Interest Expense for such period, (ii) income tax expense for such period, (iii) depreciation and amortization for such period, (iv) non-cash charges, expenses or losses (including, without limitation, non-cash costs and/or expenses incurred pursuant to any management equity plan, stock option plan or any other stock subscription or shareholder agreement but excluding (A) any regular operating non-cash charge, loss or expense that is an accrual of a reserve for a cash expense or payment to be made, or anticipated to be made, in a future period and (B) any expenses or charges related to accounts receivable), (v) reasonable and documented costs, fees and expenses incurred on or before the date that is ninety (90) days after Closing Date in connection with the negotiation, execution and delivery of this Agreement and the other Loan Documents, (vi) liability adjustments (or minus gains) under the Tax Receivable Agreement, (vii) reasonable and documented out-of-pocket fees and expenses incurred in connection with (A) Acquisitions (whether consummated or not) and any attempted or 2 CHAR1\1639159v5


 
consummated sale, issuance or disposition of Capital Stock or Investments permitted hereunder, including secondary offerings of Class B Shares (as defined in the Exchange Agreement) and (B) one-time regulatory fines or penalties, restructuring, severance and headcount reductions; provided, that the aggregate amount of all such fees and expenses with respect to the items described in this clause (vii) shall not exceed twenty-five percent (25.0%) of Consolidated EBITDA for the period of four (4) Fiscal Quarters most recently ended (determined prior to giving effect to such add-backs) and (viii) other cash charges acceptable to the Lender minus (c) to the extent included in calculating Consolidated Net Income, any non-cash gains. “Consolidated Interest Expense” shall mean, for the Parent and its Subsidiaries (other than the Insurance Subsidiary) for any period determined on a consolidated basis, the sum of (a) total interest expense, including without limitation the interest component of any payments in respect of Capital Lease Obligations capitalized or expensed during such period (whether or not actually paid during such period) plus (b) the net amount payable (or minus the net amount receivable) with respect to Hedging Transactions during such period (whether or not actually paid or received during such period). “Consolidated Net Income” shall mean, for the Parent and its Subsidiaries (other than the Insurance Subsidiary) for any period determined on a consolidated basis, the net income (or loss) of the Parent and its Subsidiaries (other than the Insurance Subsidiary) for such period but excluding therefrom (to the extent otherwise included therein) (a) any extraordinary gains or losses, (b) any gains attributable to write-ups of assets and (c) any equity interest of the Parent or any Subsidiary of the Parent in the unremitted earnings of any Person that is not a Subsidiary. “Consolidated Total Debt” shall mean, as of any date, all Indebtedness of the Parent and its Subsidiaries (other than the Insurance Subsidiary) measured on a consolidated basis as of such date, but excluding Indebtedness of the type described in subsection (i) of the definition thereto. “Excluded Property” shall mean, with respect to any Loan Party, (a) any owned or leased real property, (b) unless requested by the Lender, any IP Rights for which a perfected Lien thereon is not effected either by filing of a Uniform Commercial Code financing statement or by appropriate evidence of such Lien being filed in either the United States Copyright Office or the United States Patent and Trademark Office, (c) unless requested by the Lender, any personal property (other than personal property described in clause (b) above) for which the attachment or perfection of a Lien thereon is not governed by the Uniform Commercial Code, (d) the Capital Stock of any Foreign Subsidiary or the Insurance Subsidiary to the extent not required to be pledged to secure the Obligations pursuant to Section 5.11(a), (e) any property which, subject to the terms of Section 7.8, is subject to a Lien of the type described in Section 7.2(d) pursuant to documents which prohibit such Loan Party from granting any other Liens in such property, (f) Excluded Accounts and (g) any lease, license or other similar agreement or any property subject to a purchase money security interest or similar arrangement to the extent that a grant of a security interest therein would violate or invalidate such lease, license or similar agreement or purchase money security interest or similar arrangement or create a right of termination in favor of any other party thereto (other than the Borrower or a Guarantor) after giving effect to the applicable anti-assignment provisions of the Uniform Commercial Code and other applicable Laws, other than proceeds and receivables thereof, the assignment of which is expressly deemed effective under the 3 CHAR1\1639159v5


 
Uniform Commercial Code and other applicable Laws notwithstanding such prohibition; provided, however, that the security interests granted under the Collateral Documents in favor of the Lender shall attach immediately to any asset that ceases to meet any of the criteria for Excluded Property described in any of the foregoing clauses (a) through (g) above, including, without limitation, if the terms of the agreement(s) relating thereto that prohibit or limit the pledge or granting of security interest therein or that would give rise to a violation or invalidation of the agreement(s) with respect thereto, (i) are no longer in effect or (ii) have been waived by the other party to any such lease, license or other agreement. “Guarantors” shall mean, collectively, (a) the Parent, (b) each Subsidiary identified as a “Guarantor” on the signature pages hereto, (c) each Person that joins as a Guarantor pursuant to Section 5.10 or otherwise, (d) with respect to (i) any Hedging Obligations between any Loan Party (other than the Borrower) and any Lender-Related Hedge Provider that are permitted to be incurred under this Agreement and any Bank Products Obligations owing by any Loan Party (other than the Borrower), the Borrower and (ii) the payment and performance by each Specified Loan Party of its obligations under its Guaranty with respect to all Swap Obligations, the Borrower, and (e) the successors and permitted assigns of the foregoing. In no event shall the Insurance Subsidiary be or become required to be a Guarantor hereunder. “LC Commitment” shall mean that portion of the Aggregate Revolving Commitments that may be used by the Borrower for the issuance of Letters of Credit in an aggregate face amount not to exceed Ten Million Dollars ($10,000,000). “Lien” shall mean any mortgage, pledge, security interest, lien (statutory or otherwise), charge, encumbrance, hypothecation, assignment, deposit arrangement, or other arrangement having the practical effect of any of the foregoing or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any capital lease having the same economic effect as any of the foregoing), but not including any approval of any Applicable Insurance Regulatory Authority required in connection with a change in control of the Insurance Subsidiary. “Revolving Commitment Termination Date” shall mean the earliest of (a) February 28, 2022, (b) the date on which the Revolving Commitments are terminated pursuant to Section 2.5 and (c) the date on which all amounts outstanding under this Agreement have been declared or have automatically become due and payable (whether by acceleration or otherwise). (d) Clause (f) of the definition of Permitted Acquisition in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (f) the aggregate cash and non-cash consideration (including any assumption of Indebtedness, deferred purchase price and any earn-out obligations (in the case of earn-out obligations, included only to the extent such earn-out obligations should be recorded as a liability on the financial statements of the Parent and its Subsidiaries in accordance with GAAP in connection with such Acquisition) and any equity consideration) paid by the Parent and its Subsidiaries shall not exceed for all Acquisitions occurring in any Fiscal Year, $30,000,000. 4 CHAR1\1639159v5


 
(e) A new sentence is hereby added to the end of Section 1.4 of the Credit Agreement to read as follows: Any reference herein to a merger, transfer, consolidation, amalgamation, assignment, sale or disposition, or similar term, shall be deemed to apply to a division of or by a limited liability company, or an allocation of assets to a series of a limited liability company (or the unwinding of such a division or allocation), as if it were a merger, transfer, consolidation, amalgamation, assignment, sale or disposition, or similar term, as applicable, to, of or with a separate Person. Any division of a limited liability company shall constitute a separate Person hereunder (and each division of any limited liability company that is a Subsidiary, joint venture or any other like term shall also constitute such a Person or entity). (f) A new Section 1.7 is hereby added to the Credit Agreement to read as follows: Section 1.7 Rules of Interpretation with Respect to the Insurance Subsidiary. Should an applicable Governmental Authority notify any Loan Party of a potentially actionable issue or concern related to control of the Insurance Subsidiary on the basis that the Lender is potentially a control person or determine that the Lender is acting as a control person, in each case as defined or used under applicable Laws, of the Insurance Subsidiary due to one or more provisions of this Agreement, the parties agree to promptly further negotiate in good faith to modify this Agreement such that the Lender is not considered by such Governmental Authority to be a control person of the Insurance Subsidiary and to effect the original intent of the parties as closely as possible in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. (g) Section 2.18 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 2.18 Increase of the Revolving Commitments and Incremental Term Loans. The Borrower shall have the right from time to time after the First Amendment Effective Date, upon at least five (5) Business Days’ prior written notice to the Lender, to request an increase in the Aggregate Revolving Commitments or establish one or more additional term loans (each such term loan, an “Incremental Term Loan”) by up to $25,000,000, provided, that: (a) no Default or Event of Default shall have occurred and be continuing on the date on which such increase in the Aggregate Revolving Commitments or such Incremental Term Loan is to become effective; (b) such increase in the Aggregate Revolving Commitments or such Incremental Term Loan shall be in a minimum amount of $5,000,000 and in integral multiples of $1,000,000 in excess thereof (or such lesser amounts as the Lender may agree in its discretion); (c) the Lender shall have received all documents (including resolutions of the board of directors (or similar governing body) of the Loan Parties and opinions of counsel to the Loan Parties) it may reasonably request relating to the corporate or other necessary authority for such increase in the Aggregate Revolving Commitments or establishment of such Incremental Term 5 CHAR1\1639159v5


 
Loan and the validity of such increase in the Aggregate Revolving Commitments or establishment of such Incremental Term Loan, and any other matters relevant thereto, all in form and substance reasonably satisfactory to the Lender; (d) the Lender shall have received a Pro Forma Compliance Certificate in form and substance reasonably satisfactory to the Lender demonstrating that, after giving effect to such increase in the Aggregate Revolving Commitments (assuming, for purposes of such demonstration, that the Revolving Commitment, as increased, is fully drawn) or such Incremental Term Loan, on a Pro Forma Basis, the Parent shall be in compliance with the financial covenants set forth in Article VI for the period of four (4) Fiscal Quarters most recently ended prior to the date of determination for which financial statements were delivered under Section 5.1(a) or (b); (e) any increase in the Aggregate Revolving Commitments under this Section 2.18 shall have terms identical to those for the Revolving Loans under this Agreement, except for fees payable to the Lender in connection with such increase in the Aggregate Revolving Commitments; (f) amortization, the Maturity Date, pricing and use of proceeds applicable to any Incremental Term Loan shall be as set forth in the definitive documentation therefor; provided that any such Incremental Term Loan shall have a Maturity Date that is coterminous with or later than the Revolving Commitment Termination Date; (g) all conditions precedent to the making of a Loan and/or the issuance of a Letter of Credit set forth in Section 3.2 shall have been satisfied at the time of any increase in the Aggregate Revolving Commitments (even if there is no Borrowing thereunder on such date); and (h) the Lender (or any successor thereto) shall not have any obligation to provide any increase in its Revolving Commitment or any Incremental Term Loan Commitment, and any decision by the Lender to provide any increase in its Revolving Commitment or any Incremental Term Loan shall be made in its sole discretion. (h) A new sentence is hereby added to the end of Section 4.13 of the Credit Agreement to read as follows: As of the First Amendment Effective Date, the information included in the Beneficial Ownership Certification is true and correct in all respects. (i) Section 4.15 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 4.15 Subsidiaries. Schedule 4.15 sets forth (a) the name of, the ownership interest of each Loan Party in, the jurisdiction of incorporation or organization of, and the type of, each Subsidiary and identifies each Subsidiary that is a Loan Party, in each case as of the First Amendment Effective Date and (b) the authorized Capital Stock of the Parent and each of its Subsidiaries as of the First Amendment Effective Date. All issued and outstanding Capital Stock of the Parent and each of its Subsidiaries is duly 6 CHAR1\1639159v5


 
authorized and validly issued, fully paid, non-assessable, as applicable, and, solely with respect to the Subsidiaries, free and clear of all Liens other than those in favor of the Lender, for the benefit of the holders of the Obligations. All such securities were issued in compliance in all material respects with all applicable state and federal Laws concerning the issuance of securities. As of the First Amendment Effective Date, all of the issued and outstanding Capital Stock of the Subsidiaries is owned by the Persons and in the amounts set forth on Schedule 4.15. Except as set forth on Schedule 4.15, there are no pre-emptive or other outstanding rights, options, warrants, conversion rights or other similar agreements or understandings for the purchase or acquisition of any Capital Stock of any of the Subsidiaries of the Parent. (j) The second, third and fourth sentences of Section 4.17 of the Credit Agreement are hereby amended and restated in their entireties to read as follows: Set forth on Schedule 4.17-2 is the chief executive office, U.S. tax payer identification number and organizational identification number of each Loan Party as of the First Amendment Effective Date. The exact legal name and state of organization of each Loan Party as of the First Amendment Effective Date is as set forth on the signature pages hereto. Except as set forth on Schedule 4.17-3, no Loan Party has during the five years preceding the First Amendment Effective Date (i) changed its legal name, (ii) changed its state of formation, or (iii) been party to a merger, consolidation or other change in structure. (k) Clauses (c), (d) and (e) of Section 5.1 of the Credit Agreement are hereby, respectively, amended and restated in their entireties to read as follows: (c) concurrently with the delivery of the financial statements referred to in clauses (a) and (b) above, a Compliance Certificate signed by the principal executive officer or the principal financial officer of the Parent (i) certifying as to whether there exists a Default or Event of Default on the date of such certificate, and if a Default or an Event of Default then exists, specifying the details thereof and the action that the Loan Parties have taken or propose to take with respect to such Default or Event of Default, (ii) setting forth in reasonable detail calculations demonstrating compliance with the financial covenants set forth in Article VI, (iii) certifying that as of the date thereof, all representations and warranties of each Loan Party set forth in the Loan Documents are true and correct in all material respects (other than those representations and warranties that are expressly qualified by concepts of materiality or a Material Adverse Effect, in which case such representations and warranties are true and correct in all respects), except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date (other than those representations and warranties that are expressly qualified by concepts of materiality or a Material Adverse Effect, in which case such representations and warranties shall be true and correct in all respects as of such earlier date), (iv) stating whether any change in GAAP has occurred since December 31, 2016, and if any change has occurred, specifying the effect of such change on the financial statements accompanying such Compliance Certificate (provided, that any such statement contained in the Annual Report on Form 10-K of the Parent or the Quarterly Report on Form 10-Q of the Parent filed with the SEC shall be deemed to satisfy the requirements of this clause (iv)), (v) specifying any change in the identity of the Subsidiaries as of the end of such Fiscal Year or Fiscal Quarter from the Subsidiaries identified to the Lender on the Closing Date or as of the most recent Fiscal Year or Fiscal Quarter, as the case 7 CHAR1\1639159v5


 
may be and (vi) setting forth Investments made by any Loan Party or Subsidiary (other than the Insurance Subsidiary) in the Insurance Subsidiary that is eliminated upon consolidation in accordance with GAAP; (d) (i) as soon as available and in any event within 90 days after the end of the Fiscal Year, a preliminary pro forma budget for the succeeding Fiscal Year, containing an income statement, balance sheet and statement of cash flow of the Parent and its Subsidiaries on a quarterly basis for such succeeding Fiscal Year (“Pro Forma Budget”), as well as a preliminary pro forma budget for the succeeding Fiscal Year, containing combined income statements, balance sheets and statements of cash flow of the Parent and its Subsidiaries but excluding the Insurance Subsidiary on a quarterly basis for such succeeding Fiscal Year, and (ii) promptly after it has been approved by the Parent’s board of directors, the final (as approved by the Parent’s board of directors) Pro Forma Budget; (e) (i) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed with the SEC, or with any national securities exchange, or distributed by the Parent to its shareholders generally, as the case may be, and (ii) promptly after the same are filed with the Arkansas Department, copies of the Insurance Subsidiary’s Quarterly Statutory Statements and Annual Statutory Statement; and (l) Section 5.2 of the Credit Agreement is hereby amended by (i) deleting the “and” at the end of clause (g), (ii) replacing the “.” at the end of clause (h) with “; and” and (iii) adding a new clause (i) to read as follows: (i) any change in the information provided in the Beneficial Ownership Certification that would result in a change to the list of beneficial owners identified in such certification. (m) Section 5.10 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: If any Subsidiary is acquired or formed after the Closing Date, promptly notify the Lender thereof and, within ten (10) Business Days after any such Subsidiary is acquired or formed, if such Subsidiary is a Domestic Subsidiary (other than the Insurance Subsidiary), cause such Domestic Subsidiary (other than the Insurance Subsidiary) to become a Guarantor. A Subsidiary (other than the Insurance Subsidiary) shall become an additional Guarantor by executing and delivering to the Lender a Guarantor Joinder Agreement in form and substance reasonably satisfactory to the Lender, accompanied by (a) all other Loan Documents related thereto, (b) certified copies of Organization Documents, appropriate authorizing resolutions of the board of directors of such Subsidiaries, and opinions of counsel comparable to those delivered pursuant to Section 3.1(c), and (c) such other documents as the Lender may reasonably request. (n) Section 5.11(a)(i) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (i) 100% of the issued and outstanding Capital Stock of each Domestic Subsidiary (other than the Insurance Subsidiary) of any Loan Party and 8 CHAR1\1639159v5


 
(o) Section 7.4 of the Credit Agreement is hereby amended by (i) deleting the “and” at the end of clause (g), (ii) renumbering clause (h) to be clause (j) and (iii) inserting new clauses (h) and (i), respectively, to read as follows: (h) portfolio Investments made by the Insurance Subsidiary in the ordinary course of business that are consistent with its investment policy, as such policy may be established, amended or modified from time to time by the Insurance Subsidiary; (i) Investments in the Insurance Subsidiary which in the aggregate do not exceed $2,500,000 at any time outstanding, calculating the amount of such Investment as the amount actually invested less any readily identifiable returns in the form of cash or Cash Equivalents on such Investment; and (p) The phrase “Make any Asset Sale” in Section 7.6 of the Credit Agreement is amended to read “Make any Asset Sale (other than any Asset Sale made by the Insurance Subsidiary in the ordinary course of business)”. (q) Section 7.12(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (b) any Material Agreements, except in any manner that would not have an adverse effect on the Lender, the Parent or any of its Subsidiaries; provided, however, that the Loan Parties and their Subsidiaries shall be permitted to amend, modify or waive any provision of a Material Agreement to the extent expressly required to do so under applicable Law or in writing by any Applicable Insurance Regulatory Authority, in each case, with prompt written notice of such amendment, termination or waiver to be provided to the Lender. (r) Section 7.19(i) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: (i) accepting risk for healthcare services, other than by and through the Insurance Subsidiary; (s) The first sentence of Section 8.1 is hereby amended and restated in its entirety to read as follows: If any of the following events (each an “Event of Default”) shall occur, other than with respect to the Insurance Subsidiary: (t) Section 10.14 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: Section 10.14 Patriot Act. The Lender hereby notifies the Loan Parties that, (a) pursuant to the requirements of the Patriot Act, it is required to obtain, verify and record information that identifies each Loan Party, which information includes the name and address of such Loan Party and other information that will allow the Lender to identify such Loan Party in accordance with the Patriot Act and (b) pursuant to the Beneficial Ownership Regulation, it is required to obtain a Beneficial Ownership Certificate. 9 CHAR1\1639159v5


 
(u) Schedules 4.15, 4.17-2 and 4.17-3 to the Credit Agreement are hereby amended and restated in their entirety to read as set forth on Schedules 4.15, 4.17-2 and 4.17-3 attached hereto. 2. Amendments to Security Agreement. (a) Clause (i) of the definition of “Pledged Equity” in Section 1 of the Security Agreement is hereby amended and restated in its entirety to read as follows: (i) one hundred percent (100%) of the issued and outstanding Capital Stock of each Domestic Subsidiary (other than the Insurance Subsidiary) and (b) The second paragraph of Section 2 of the Security Agreement is hereby amended and restated in its entirety to read as follows: Notwithstanding anything to the contrary contained herein, (A) the security interests granted under this Agreement shall not extend to any Excluded Property and (B) the Lender acknowledges and agrees that, solely to the extent required by any applicable Law or one or more Governmental Authorities or any Applicable Insurance Regulatory Authority, the ownership of the Capital Stock of the Insurance Subsidiary (the “Specified Shares”) and voting rights in such Specified Shares, shall remain with the Parent even if an Event of Default has occurred and is continuing, unless (i) the applicable Governmental Authority or Applicable Insurance Regulatory Authority shall have given its prior consent (solely to the extent such consent is required by applicable Law) to the change in ownership of such Specified Shares by transfer to an acquirer whether by purchase at a public or private sale of such Specified Shares or by merger or other transfer effecting a change in ownership in such Specified Shares, or to the exercise of such rights to effect a change in ownership of such Specified Shares by the Lender, a receiver, trustee, conservator or other agent or designee duly appointed in accordance with applicable Law or (ii) the transferee of such Specified Shares is approved (solely to the extent such approval is required by applicable Law) as the owner of such Specified Shares pursuant to applicable rules and regulations of the applicable Governmental Authority or Applicable Insurance Regulatory Authority. To enforce the provisions of this subsection, the Loan Parties acknowledge and agree that the Lender may request, and the Loan Parties hereby authorize and consent to the Lender requesting, the appointment of a receiver from any court of competent jurisdiction. To the extent permitted by applicable Law, the Loan Parties acknowledge and agree that the Lender may instruct, and the Loan Parties authorize and consent to the Lender providing such instruction to, such receiver to seek from the applicable Governmental Authority or Applicable Insurance Regulatory Authority a transfer of any such Specified Shares for the purpose of seeking a purchaser or other transferee to whom it will ultimately be transferred. Upon the occurrence and during the continuance of an Event of Default, at the Lender’s request, the Parent shall promptly use its commercially reasonable efforts to cooperate in obtaining the consent or approval of any applicable Governmental Authority or Applicable Insurance Regulatory Authority, if required, for any action or transactions contemplated hereby, including, without limitation, the preparation, execution and filing with such Governmental Authority or Applicable Insurance Regulatory Authority of the assignor’s or transferor’s portion of any application for consent or approval to the transfer of the Specified Shares necessary or appropriate under the applicable Governmental Authority or Applicable Insurance Regulatory Authority’s rules and regulations for approval of the transfer or assignment of any portion of the Specified Shares. 10 CHAR1\1639159v5


 
(c) Section 3(f) of the Security Agreement is hereby amended and restated in its entirety to read as follows: (f) No Other Capital Stock, Instruments, Etc. As of the First Amendment Effective Date, such Obligor owns all certificated Capital Stock in any Subsidiary, if any, that is required to be pledged and delivered to the Lender hereunder other than as set forth on Schedule 1 hereto, and all such certificated Capital Stock, if any, shall have been delivered to the Lender. (d) Section 3(j) of the Security Agreement is hereby amended and restated in its entirety to read as follows: (j) Commercial Tort Claims. As of the First Amendment Effective Date, such Obligor has no Commercial Tort Claims seeking damages in excess of $10,000 in any individual instance or $20,000 in the aggregate when taken together with all Commercial Tort Claims of all of the other Obligors, other than as set forth on Schedule 2 hereto. (e) Section 3(k) of the Security Agreement is hereby amended and restated in its entirety to read as follows: (k) Copyrights, Patents and Trademarks. (i) Schedule 3 hereto includes all registrations or applications for Copyrights, Patents and Trademarks and all material Copyright Licenses, Patent Licenses and Trademark Licenses owned by such Obligor in its own name, or to which any Obligor is a party, as of the First Amendment Effective Date. (ii) All registrations or letters pertaining to Copyrights, Patents and Trademarks have been duly and properly filed, and to any Obligor’s knowledge, each Copyright, Patent and Trademark of such Obligor is valid, subsisting, unexpired, enforceable and has not been abandoned. (iii) Except as set forth on Schedule 3 hereto, none of such Copyrights, Patents and Trademarks is the subject of any licensing or franchise agreement as of the First Amendment Effective Date. (iv) Except as would not reasonably be expected to have a Material Adverse Effect, to such Obligor’s knowledge, no holding, decision or judgment has been rendered by any Governmental Authority that would limit, cancel or question the validity of such Copyright, Patent or Trademark. (v) No action or proceeding is pending, seeking to limit, cancel or question the validity of any Copyright, Patent or Trademark that would reasonably be expected to have a Material Adverse Effect. (f) Schedules 1, 2 and 3 to the Security Agreement are hereby amended and restated in their entirety to read as set forth on Schedules 1, 2 and 3 attached hereto. 3. Effectiveness; Conditions Precedent. This Amendment shall be effective upon satisfaction (or waiver in accordance with Section 10.2 of the Credit Agreement) of the following conditions precedent in each case in form and substance satisfactory to the Lender: 11 CHAR1\1639159v5


 
(a) Amendment. Receipt by the Lender of a counterpart of this Amendment and the other Loan Documents signed by or on behalf of each party hereto or written evidence satisfactory to the Lender (which may include facsimile transmission, or a .pdf copy sent by e- mail, of such signed signature page) that such party has signed a counterpart of this Amendment. (b) Organization Documents; Resolutions and Certificates. Receipt by the Lender of: (i) a certificate of the Secretary or Assistant Secretary of each Loan Party, (x) (A) attaching and certifying copies of such Loan Party’s Organization Documents or (B) certifying that no changes, amendments or other modifications have been made to such Loan Party’s Organization Documents since the Closing Date and (y) attaching and certifying copies of resolutions of such Loan Party’s board of directors (or equivalent governing body), authorizing the execution, delivery and performance of the Loan Documents to which it is a party and certifying the name, title and true signature of each officer of such Loan Party executing the Loan Documents to which it is a party; and (ii) certificates of good standing or existence, as may be available from the Secretary of State of the jurisdiction of organization of such Loan Party. (c) Opinions of Counsel. Receipt by the Lender of favorable written opinions of counsel to the Loan Parties addressed to the Lender, and covering such matters relating to the Loan Parties, this Amendment and the transactions contemplated herein in form and substance satisfactory to the Lender. (d) Officer’s Closing Certificate. Receipt by the Lender of a certificate, dated the First Amendment Effective Date and signed by the chief financial officer or other Responsible Officer of the Parent, certifying that after giving effect to the funding of Revolving Loans (if any) on the First Amendment Effective Date and the consummation of the other transactions contemplated herein, (i) the Loan Parties are Solvent on a consolidated basis, (ii) the conditions specified in Section 2(e) are satisfied as of the First Amendment Effective Date, (iii) all representations and warranties of each Loan Party set forth in the Loan Documents are true and correct in all material respects (other than those representations and warranties that are expressly qualified by concepts of materiality or a Material Adverse Effect, in which case such representations and warranties are true and correct in all respects), except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date (other than those representations and warranties that are expressly qualified by concepts of materiality or a Material Adverse Effect, in which case such representations and warranties are true and correct in all respects as of such earlier date) and (iv) no Default or Event of Default exists. (e) Required Consents and Approvals. The Loan Parties shall have received all consents (including any necessary governmental consents), approvals, authorizations, registrations and filings and orders required or advisable to be made or obtained under any applicable Law, the Organization Documents of any Loan Party or by any Contractual Obligation of any Loan Party, in connection with the execution, delivery, performance, validity and enforceability of this Amendment or any of the transactions contemplated hereby, and such consents, approvals, authorizations, registrations, filings and orders shall be in full force and effect and all applicable waiting periods shall have expired, and no investigation or inquiry by 12 CHAR1\1639159v5


 
any Governmental Authority regarding this Amendment or any other transaction being financed with the proceeds of the Loan Documents shall be ongoing. (f) Insurance. Receipt by the Lender of certificates of insurance issued on behalf of insurers of the Loan Parties, describing in reasonable detail the types and amounts of insurance (property and liability) maintained by the Loan Parties, and endorsements naming the Lender as additional insured on liability policies and lender’s loss payee on property and casualty policies. (g) Personal Property Collateral. Receipt by the Lender, in form and substance satisfactory to the Lender of: (i) searches of Uniform Commercial Code filings in the jurisdiction of formation of each Loan Party; (ii) Uniform Commercial Code financing statements for each appropriate jurisdiction as is necessary, in the Lender’s reasonable discretion, to perfect the Lender’s security interest in the Collateral; (iii) all certificates evidencing any certificated Capital Stock pledged to the Lender pursuant to the Security Agreement or any other pledge agreement, together with duly executed in blank, undated stock powers attached thereto (unless, with respect to the pledged Capital Stock of any Foreign Subsidiary, such stock powers are deemed unnecessary by the Lender in its reasonable discretion under the applicable Law of the jurisdiction of organization of such Person); (iv) searches of ownership of, and Liens on, United States registered intellectual property owned by each Loan Party in the appropriate governmental offices; and (v) duly executed notices of grant of security interest in the form required by any security agreement as are necessary, in the Lender’s reasonable discretion, to perfect the Lender’s security interest in the United States registered intellectual property owned by the Loan Parties (if and to the extent perfection may be achieved in the United States Patent and Trademark Office or the United States Copyright Office by such filings). (h) KYC Information. (i) The provision by the Loan Parties of all documentation and other information that the Lender requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Patriot Act; and (ii) if the Borrower qualifies as a “legal entity customer” under the Beneficial Ownership Regulation, the Loan Parties shall provide a Beneficial Ownership Certification in relation to the Borrower. (i) Execution Affidavits. Receipt by the Lender of execution affidavits or other evidence as the Lender may reasonably request in order to establish that either (i) this Amendment has been executed by the Loan Parties outside of the State of Florida and delivered to the Lender (or its agent) outside of the State of Florida or (ii) all applicable documentary taxes have been paid. 13 CHAR1\1639159v5


 
(j) Fees and Expenses. Receipt by the Lender of all fees, expenses and other amounts due and payable on or prior to the First Amendment Effective Date, including without limitation reimbursement or payment of all out-of-pocket expenses of the Lender (including reasonable fees, charges and disbursements of counsel to the Lender) required to be reimbursed or paid by the Borrower hereunder, under any other Loan Document and under any agreement with the Lender. 4. Amendment is a “Loan Document”. This Amendment shall be deemed to be, and is, a Loan Document and all references to a “Loan Document” in the Credit Agreement and the other Loan Documents (including, without limitation, all such references in the representations and warranties in the Credit Agreement and the other Loan Documents) shall be deemed to include this Amendment. 5. Representations and Warranties; No Default. The Borrower hereby represents and warrants to the Lender that, immediately after giving effect to this Amendment, (a) all representations and warranties of each Loan Party set forth in the Loan Documents are true and correct in all material respects (other than those representations and warranties that are expressly qualified by concepts of materiality or a Material Adverse Effect, in which case such representations and warranties are true and correct in all respects), except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct in all material respects as of such earlier date (other than those representations and warranties that are expressly qualified by concepts of materiality or a Material Adverse Effect, in which case such representations and warranties are true and correct in all respects as of such earlier date) and (b) no Default or Event of Default exists. 6. Reaffirmation of Obligations. Each Loan Party (a) acknowledges and consents to all of the terms and conditions of this Amendment, (b) affirms all of its obligations under the Loan Documents (as amended by this Amendment) and (c) agrees that this Amendment and all documents, agreements and instruments executed in connection with this Amendment do not operate to reduce or discharge such Loan Party’s obligations under the Loan Documents (except to the extent such obligations are modified pursuant to this Amendment). 7. Reaffirmation of Security Interests. Each Loan Party (a) affirms that each of the Liens granted in or pursuant to the Loan Documents is valid and subsisting and (b) agrees that this Amendment and all documents, agreements and instruments executed in connection with this Amendment do not in any manner impair or otherwise adversely affect any of the Liens granted in or pursuant to the Loan Documents. 8. No Other Changes. Except as modified hereby, all of the terms and provisions of the Loan Documents shall remain in full force and effect. 9. Counterparts; Delivery. This Amendment may be executed by one or more of the parties to this Amendment on any number of separate counterparts (including by facsimile), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission or by any other electronic imaging means (including .pdf), shall be effective as delivery of a manually executed counterpart of this Amendment. 10. Fees and Expenses. The Borrower agrees to pay all reasonable out-of-pocket fees and expenses of the Lender in connection with the preparation, execution and delivery of this Amendment, including without limitation the reasonable fees and expenses of Moore & Van Allen PLLC, counsel to the Lender. 14 CHAR1\1639159v5


 
11. Governing Law. THIS AMENDMENT AND ANY CLAIMS, CONTROVERSY, DISPUTE OR CAUSE OF ACTION (WHETHER IN CONTRACT OR TORT OR OTHERWISE) BASED UPON, ARISING OUT OF OR RELATING TO THIS AMENDMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. 12. Subsidiary Guarantor Joinder. The Loan Parties are required by Sections 5.10 and 5.11 of the Credit Agreement to (i) cause each of BIMSYM-HPIP, LLC, a Delaware limited liability company, and Health Insurance Innovations Holdings, Inc., a Delaware corporation (each, a “New Subsidiary” and, collectively, the “New Subsidiaries”), to become a “Guarantor” under the Credit Agreement and (ii) pledge the Capital Stock of each New Subsidiary directly owned by any Loan Party to the Lender to secure the Obligations. Accordingly, each New Subsidiary and the Loan Parties hereby agree as follows with the Lender: (a) Each New Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, such New Subsidiary will be deemed to be a party to the Credit Agreement and a “Guarantor” for all purposes of the Credit Agreement and shall have all of the obligations of a Guarantor thereunder as if it had executed the Credit Agreement. Each New Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions applicable to the Guarantors contained in the Credit Agreement. Without limiting the generality of the foregoing terms of this Section 12(a), each New Subsidiary hereby, jointly and severally together with the other Guarantors, guarantees to the Lender, each Affiliate of the Lender that enters into Bank Products or Hedging Transactions with the Borrower or any Subsidiary, and each other holder of the Obligations, as provided in Article IX of the Credit Agreement, as primary obligor and not as surety, the prompt payment of the Obligations in full when due (whether at stated maturity, as a mandatory prepayment, by acceleration or otherwise) strictly in accordance with the terms thereof. (b) Each New Subsidiary hereby acknowledges, agrees and confirms that, by its execution of this Agreement, such New Subsidiary will be deemed to be a party to the Security Agreement and an “Obligor” for all purposes of the Security Agreement, and shall have all the obligations of an Obligor thereunder as if it had executed the Security Agreement. Each New Subsidiary hereby ratifies, as of the date hereof, and agrees to be bound by, all of the terms, provisions and conditions contained in the Security Agreement. Without limiting the generality of the foregoing terms of this Section 12(b), to secure the prompt payment and performance in full when due, whether by lapse of time, acceleration, mandatory prepayment or otherwise, of the Secured Obligations (here and hereinafter as defined in the Security Agreement), each New Subsidiary hereby grants to the Lender, for the benefit of the holders of the Secured Obligations, a continuing security interest in, and a right of set off against any and all right, title and interest of such New Subsidiary in and to the Collateral (as such term is defined in the Security Agreement) of such New Subsidiary. (c) Each New Subsidiary hereby represents and warrants to the Lender that: (i) As of the date hereof, no New Subsidiary owns or leases any real property located in the United States. (ii) Set forth on Schedule 4-17-2 is the chief executive office, U.S. tax payer identification number and organizational identification number of each New Subsidiary as of the date hereof. 15 CHAR1\1639159v5


 
(iii) The exact legal name and state of organization of each New Subsidiary is as set forth on the signature pages hereto. (iv) Set forth on Schedule 4 is each location where assets of any New Subsidiary are located as of the date hereof. (v) Except as set forth on Schedule 4-17-3, no New Subsidiary has during the five years preceding the date hereof (A) changed its legal name, (B) changed its state of formation, or (C) been party to a merger, consolidation or other change in structure. (vi) Set forth on Schedule 3 is a list of all IP Rights owned by any New Subsidiary as of the date hereof. (vii) As of the date hereof, no New Subsidiary has commercial tort claims involving a claim for damages in excess of $10,000 in any individual instance or $50,000 in the aggregate when taken together with all commercial tort claims of any of the Loan Parties not subject to a Lien in favor of the Lender, other than as set forth on Schedule 2. (viii) Set forth on Schedule 4.15 is each Subsidiary of each New Subsidiary, together with (A) jurisdiction of formation, (B) number of shares of each class of Capital Stock outstanding, (C) if any, the certificate number(s) of the certificates evidencing such Capital Stock and number and percentage of outstanding shares of each class owned by such New Subsidiary (directly or indirectly) of such Capital Stock and (D) number and effect, if exercised, of all outstanding options, warrants, rights of conversion or purchase and all other similar rights with respect thereto. (d) The address of each New Subsidiary for purposes of all notices and other communications is the address set forth for any Loan Party in Section 10.1 of the Credit Agreement. (e) Each New Subsidiary hereby waives acceptance by the Lender of the guaranty by the New Subsidiaries under Article IX of the Credit Agreement. (f) All of the parties hereto, including the Lender, hereby acknowledge and agree that, notwithstanding Section 5.10 of the Credit Agreement and the definition of the term “Guarantor Joinder Agreement” set forth in the Credit Agreement, (i) the provisions of this Section 12 shall be deemed a “Guarantor Joinder Agreement” for all purposes of the Credit Agreement and the other Loan Documents and (ii) the execution and delivery of this Amendment by the New Subsidiaries shall fulfill the obligations of the Loan Parties under the Credit Agreement and the other Loan Documents to deliver a Guarantor Joinder Agreement in respect of the New Subsidiaries. 13. Consent to Dissolutions. The Borrower has informed the Lender that it intends to dissolve (the “Guarantor Dissolutions”) each of Secured Software Solutions LLC, a Florida limited liability company, Sunrise Health Plans, LLC, a Florida limited liability company, and Sunrise Group Marketing LLC, a Florida limited liability company (each, a “Disposed Guarantor” and, collectively, the “Disposed Guarantors”). The Borrower has requested that the Lender consent to the Guarantor Dissolutions, notwithstanding the restrictions in Section 7.3 of the Credit Agreement which prohibits a Guarantor from liquating or dissolving. So long as (i) the Loan Parties shall have caused each Disposed Guarantor to transfer all or substantially all of its assets to another Loan Party prior to such dissolution and (ii) such dissolution shall have occurred within one hundred twenty (120) days of the First Amendment Effective Date, the Lender hereby (a) agrees and 16 CHAR1\1639159v5


 
consents to the Guarantor Dissolutions, (b) agrees that immediately prior to the effectiveness of each Guarantor Dissolution, the applicable Disposed Guarantor shall, promptly upon written request by the Loan Parties to the Lender be released from all of its obligations under the Credit Agreement and the other Loan Documents as a Guarantor, all Liens granted by the applicable Disposed Guarantor shall be terminated and the applicable Disposed Guarantor shall cease to be a Loan Party under the Loan Documents, and (c) agrees to deliver promptly such releases and other instruments, documents and agreements as may be reasonably requested by the Borrower to evidence or give effect to release of the applicable Disposed Guarantor as a Loan Party. The consent is limited solely to the Guarantor Dissolutions and the matters contained in this Section 13. [SIGNATURE PAGES FOLLOW] 17 CHAR1\1639159v5


 


 


 


 


 


 
SCHEDULE 4.15 SUBSIDIARIES Legal Entity* Tax ID Form State of Ownership Authorized Capital Incorporation Stock Health Plan 46- Limited DE As of December Unlimited Series A Intermediaries 0580972 Liability 31, 2018: Membership Interests; Holdings, LLC Company 14,425,824 Series 20,000,000 Series B A Membership Membership Interests Interests: Parent; 26,216 Series B Membership Interests: Health Plan Intermediaries Sub, Inc.; 2,515,451 Series B Membership Interests: Health Plan Intermediaries, Inc. American Service 27- Limited TX Sole Member: N/A Insurance Agency 4829115 Liability Borrower LLC Company Insurance Center for 45- Limited DE Sole Member: N/A Excellence, LLC 5404618 Liability Borrower Company Sunrise Group 27- Limited FL Sole Member: N/A Marketing LLC 2697713 Liability Borrower Company Sunrise Health 26- Limited FL Sole Member: N/A Plans, LLC 4123872 Liability Borrower Company Secured Software 27- Limited FL Sole Member: N/A Solutions LLC 4452961 Liability Borrower Company BimSym-HPIH, 83- Limited DE Sole Member: N/A LLC 3334626 Liability Borrower Company Health Insurance 83- Corporation DE 100 shares 500 shares common Innovations 3351994 common stock: stock Holdings, Inc. Borrower HealthPocket, Inc. 45- Corporation DE 1,000 shares 1,000 shares common 5293710 common stock: stock Health Insurance Innovations Holdings, Inc. Benefytt, LLC ** Limited AR Sole Member: N/A Liability Health Insurance Company Innovations Holdings, Inc. CHAR1\1639159v5


 
* Other than Benefytt, LLC, all listed entities are Loan Parties. ** Will be obtained following approval of plan of operation by the Arkansas Insurance Department. *** Health Insurance Innovations, Inc., a Delaware corporation, is the ultimate corporate parent of the above listed legal entities. As of December 31, 2018, the authorized capital stock of Parent is 100,000,000 shares Class A common stock; 20,000,000 shares Class B common stock; 5,000,000 shares preferred stock; and issued and outstanding capital stock is 14,425,824 shares Class A common stock and 2,541,667 shares Class B common stock issued and outstanding. CHAR1\1639159v5


 
SCHEDULE 4.17-2 LOCATIONS OF CHIEF EXECUTIVE OFFICE, TAXPAYER IDENTIFICATION NUMBER, ETC. Chief Executive Office Address Tax ID Health Insurance 15438 N. Florida Avenue, Suite 201 46-1282634 Innovations, Inc. Tampa, FL 33613 Health Plan 15438 N. Florida Avenue, Suite 201 46-0580972 Intermediaries Holdings, Tampa, FL 33613 LLC American Service 15438 N. Florida Avenue, Suite 201 27-4829115 Insurance Agency LLC Tampa, FL 33613 Insurance Center for 15438 N. Florida Avenue, Suite 201 45-5404618 Excellence, LLC Tampa, FL 33613 Sunrise Group Marketing 15438 N. Florida Avenue, Suite 201 27-2697713 LLC Tampa, FL 33613 Sunrise Health Plans, 15438 N. Florida Avenue, Suite 201 26-4123872 LLC Tampa, FL 33613 Secured Software 15438 N. Florida Avenue, Suite 201 27-4452961 Solutions LLC Tampa, FL 33613 BimSym-HPIH, LLC 15438 N. Florida Avenue, Suite 201 83-3334626 Tampa, FL 33613 Health Insurance 15438 N. Florida Avenue, Suite 201 83-3351994 Innovations Holdings, Tampa, FL 33613 Inc. HealthPocket, Inc. 444 Castro Street, Suite 912 Mountain 45-5293710 View, CA 94041 CHAR1\1639159v5


 
SCHEDULE 4.17-3 CHANGES IN LEGAL NAME, STATE OF FORMATION AND STRUCTURE Current Name Prior name Notes Sunrise Group Marketing Sunrise Group Marketing, Inc. Converted from corporation to limited LLC liability company on July 19, 2013 Sunrise Health Plans, Sunrise Health Plans, Inc. Converted from corporation to limited LLC liability company on July 19, 2013 Secured Software Secured Software Solutions, Inc Converted from corporation to limited Solutions LLC liability company on July 19, 2013 BimSym-HPIH, LLC Formed on January 24, 2019 Health Insurance Incorporated on December 17, 2018 Innovations Holdings, Inc. HealthPocket, Inc. • SV Merger Sub, Inc. merged with and into HealthPocket, Inc. effective July 14, 2014 with HealthPocket, Inc. continuing as the surviving entity. • On January 1, 2019, Health Plan Intermediaries Holdings, LLC contributed 1,000 shares of common stock of HealthPocket, Inc. to Health Insurance Innovations Holdings, Inc. Benefytt, LLC* Organized on January 7, 2019 * Benefytt, LLC is a Subsidiary of Health Insurance Innovations Holdings, Inc., but is not a Loan Party. Please also see “THE REOGRANIZATION OF OUR CORPORATE STRUCTURE” in the Parent’s Final IPO Prospectus filed with the SEC on Form 424B4 CHAR1\1639159v5


 
SCHEDULE 1 PLEDGED EQUITY SUBSIDIARY OWNER PERCENT SHARES/INTEREST CERTIFICATED PLEDGED OWNED Health Plan Health Insurance 14,425,824 Series A Intermediaries 100% No Innovations, Inc. Membership Interests Holdings, LLC American Service Health Plan Insurance Agency Intermediaries 100% Sole Member No LLC Holdings, LLC Insurance Center for Health Plan Excellence, LLC Intermediaries 100% Sole Member No Holdings, LLC Sunrise Group Health Plan Marketing LLC Intermediaries 100% Sole Member No Holdings, LLC Sunrise Health Plans, Health Plan LLC Intermediaries 100% Sole Member No Holdings, LLC Secured Software Health Plan Solutions LLC Intermediaries 100% Sole Member No Holdings, LLC BimSym-HPIH, LLC Health Plan Intermediaries 100% Sole Member No Holdings, LLC Health Insurance Health Plan 100 Shares Common Innovations Holdings, Intermediaries 100% Yes Stock Inc. Holdings, LLC HealthPocket, Inc. Health Insurance 1,000 Shares Common Innovations 100% Yes Stock Holdings, Inc. CHAR1\1639159v5


 
SCHEDULE 2 COMMERCIAL TORT CLAIMS Health Insurance Innovations, Inc., et al. v. HCC Medical Insurance Services, LLC, et al., Case No. 17- CA-6679, Circuit Court, Hillsborough County, FL (claim for declaratory relief). CHAR1\1639159v5


 
SCHEDULE 3 COPYRIGHTS, PATENTS, AND TRADEMARKS OWNER MARK COUNTRY FILE APP / REG REG NO STATUS / STATE DATE SERIAL DATE NO Health Plan AGILE HEALTHPLANS UNITED 2/18/2014 86196564 6/16/2015 4754245 REGISTERED Intermediaries STATES Holdings, LLC Health Plan H HEALTH INSURANCE UNITED 7/8/2014 86331496 8/25/2015 4798077 REGISTERED Intermediaries INNOVATIONS and Design STATES Holdings, LLC Health Plan MYBENEFITSKEEPER and UNITED 1/30/2018 87775781 N/A N/A PUBLISHED Intermediaries Design STATES Holdings, LLC Health Plan HIIQ UNITED 3/20/2017 87377271 10/16/18 5587124 REGISTERED Intermediaries STATES Holdings, LLC HealthPocket, AGILEHEALTHINSURANCE UNITED 2/17/2015 86537483 10/6/2015 4826442 REGISTERED Inc. STATES HealthPocket, H and Design UNITED 9/6/2012 85722156 6/17/2014 4552395 REGISTERED Inc. STATES HealthPocket, H and Design UNITED 9/6/2012 85980281 2/11/2014 4482673 REGISTERED Inc. STATES HealthPocket, MILLIONS OF PEOPLE UNITED 9/11/2012 85980188 11/5/2013 4430109 REGISTERED Inc. SAVING BILLIONS OF STATES DOLLARS CHAR1\1639159v5


 
SCHEDULE 4 LOCATION OF ASSETS 15438 N. Florida Avenue, Suite 201 Tampa, FL 33613 CHAR1\1639159v5


 
Exhibit


Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gavin D. Southwell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Insurance Innovations, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2019
/s/ Gavin D. Southwell
 
GAVIN D. SOUTHWELL
 
PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
(Principal Executive Officer)
 
 
 


Exhibit


Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael D. Hershberger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Insurance Innovations, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 7, 2019
/s/ Michael D. Hershberger
 
MICHAEL D. HERSHBERGER
 
CHIEF FINANCIAL OFFICER, SECRETARY, AND TREASURER
(Principal Financial Officer)
 
 
 


Exhibit


Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned in connection with this quarterly report of Health Insurance Innovations, Inc. (the “Company”) on Form 10-Q for the quarterly period ended March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned’s knowledge:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: May 7, 2019
/s/ Gavin D. Southwell
 
GAVIN D. SOUTHWELL
 
PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
(Principal Executive Officer)
 
Date: May 7, 2019
/s/ Michael D. Hershberger
 
MICHAEL D. HERSHBERGER
 
CHIEF FINANCIAL OFFICER, SECRETARY, AND TREASURER
(Principal Financial Officer)
 
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to Health Insurance Innovations, Inc. and will be retained by Health Insurance Innovations, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.