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 June 30, 2013

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

      

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)

(877) 376-5831

(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 or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

   

 

Large accelerated filer

   

¨

      

Accelerated filer

   

¨

   

   

   

   

Non-accelerated filer

   

¨  (Do not check if a smaller reporting company)

      

Smaller reporting company

   

x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of August 9, 2013 the registrant had 5,309,594 shares of Class A common stock, $0.001 par value, outstanding and 8,566,667 shares of Class B common stock, $0.001 par value, outstanding.

      

      

   

   


HEALTH INSURANCE INNOVATIONS, INC.

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

CONTENTS

   

 

PART I—FINANCIAL INFORMATION  

3

   

   

   

ITEM 1—FINANCIAL STATEMENTS (Unaudited)  

3

   

   

   

   

   

Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012  

3

   

   

   

   

   

   

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012  

4

   

   

   

   

   

   

Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2013 and 2012  

5

   

   

   

   

   

   

Consolidated Statements of Stockholders’/Member’s Equity for the Six Months Ended June 30, 2013 and the year ended December 31, 2012  

6

   

   

   

   

   

   

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012  

7

   

   

   

   

   

   

Notes to Consolidated Financial Statements  

8

   

   

   

   

   

ITEM 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations  

23

   

   

   

   

ITEM 3—Quantitative and Qualitative Disclosures About Market Risk  

36

   

   

   

   

ITEM 4—Controls and Procedures  

36

   

   

   

PART II—OTHER INFORMATION  

38

   

   

   

ITEM 1—Legal Proceedings  

38

   

   

   

   

ITEM 1A—Risk Factors  

38

   

   

   

   

ITEM 2—Unregistered Sales of Equity Securities and Use of Proceeds  

39

   

   

   

   

ITEM 3—Defaults Upon Senior Securities  

39

   

   

   

   

ITEM 4—Mine Safety Disclosures  

39

   

   

   

   

ITEM 5—Other Information  

40

   

   

   

   

ITEM 6—Exhibits  

41

   

   

   

Signatures  

42

   

   


   

PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

HEALTH INSURANCE INNOVATIONS, INC

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

Consolidated Balance Sheets

($ in 000’s, except share amounts)

   

 

   

   

June 30, 2013

   

      

December 31, 2012

   

Assets

   

   

(unaudited)

   

      

   

   

   

Current assets:

   

   

   

   

      

   

   

   

Cash and cash equivalents

   

$

27,979

      

      

$

750

      

Cash held on behalf of others

   

   

4,213

      

      

   

3,839

      

Credit card and ACH transactions receivable

   

   

1,073

      

      

   

588

      

Short-term investments

   

   

20,491

      

      

   

—  

   

Accounts receivable

   

   

196

      

      

   

273

      

Advanced commissions

   

   

2,479

      

      

   

297

      

Prepaid expenses and other current assets

   

   

615

      

      

   

217

      

Total current assets

   

   

57,046

      

      

   

5,964

      

Property and equipment, net of accumulated depreciation

   

   

268

      

      

   

213

      

Capitalized offering costs

   

   

—  

      

      

   

1,819

      

Goodwill

   

   

5,906

      

      

   

5,906

      

Intangible assets, net of accumulated amortization

   

   

3,508

      

      

   

3,959

      

Other assets

   

   

28

      

      

   

100

      

Total assets

   

$

66,756

      

      

$

17,961

      

Liabilities and stockholders’/member’s equity

   

   

   

   

      

   

   

   

Current liabilities:

   

   

   

   

      

   

   

   

Accounts payable and accrued expenses

   

$

1,213

      

      

$

2,062

      

Carriers and vendors payable

   

   

3,380

      

      

   

2,790

      

Commissions payable

   

   

1,695

      

      

   

1,533

      

Current portion of long-term debt

   

   

—  

      

      

   

813

      

Current portion of noncompete obligation

   

   

129

      

      

   

155

      

Income taxes payable

   

   

1,295

      

      

   

—  

   

Due to member of Health Plan Intermediaries, LLC

   

   

—  

      

      

   

773

      

Other current liabilities

   

   

460

      

      

   

345

      

Total current liabilities

   

   

8,172

      

      

   

8,471

      

Long-term debt, less current portion

   

   

—  

      

      

   

2,481

      

Noncompete obligation

   

   

588

      

      

   

626

      

Due to related parties pursuant to tax receivable agreement

   

   

359

      

      

   

—  

   

Other liabilities

   

   

57

      

      

   

45

      

Total liabilities

   

   

9,176

      

      

   

11,623

      

Commitments and contingencies

   

   

   

   

      

   

   

   

Stockholders’/member’s equity:

   

   

   

   

      

   

   

   

Class A common stock (par value $0.001 per share, 100,000,000 shares authorized; 5,309,594 shares issued and outstanding)

   

   

5

      

      

   

—  

   

Class B common stock (par value $0.001 per share, 20,000,000 shares authorized; 8,566,667 shares issued and outstanding)

   

   

9

      

      

   

—  

   

Preferred stock (par value $0.001 per share, 5,000,000 shares authorized; 0 shares issued and outstanding)

   

   

—  

      

      

   

—  

   

Additional paid-in capital

   

   

25,262

      

      

   

—  

   

Accumulated other comprehensive loss

   

   

(15

)  

      

   

—  

   

Accumulated deficit

   

   

(4,092

)

      

   

—  

   

Member’s equity of Health Plan Intermediaries, LLC

   

   

—  

      

      

   

6,335

      

Noncontrolling interests

   

   

36,411

      

      

   

3

      

Total stockholders’/member’s equity

   

   

57,580

      

      

   

6,338

      

Total liabilities and stockholders’/member’s equity

   

$

66,756

      

      

$

17,961

      

   

See accompanying notes.

   

       

 

 3 


   

HEALTH INSURANCE INNOVATIONS, INC.

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

($ in 000’s, except per share data)

   

 

   

   

Three months ended
June 30,

      

   

Six months ended
June 30,

   

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Revenues (premium equivalents of $24,194 and $18,024 for the three months ended June 30, 2013 and 2012, respectively and $46,279 and $33,757 for the six months ended June 30, 2013 and 2012, respectively)

   

$

13,598

   

      

$

9,935

   

      

$

26,069

   

      

$

18,458

   

Third-party commissions

   

   

8,473

   

      

   

6,710

   

      

   

16,510

   

      

   

12,450

   

Credit cards and ACH fees

   

   

283

   

      

   

213

   

      

   

548

   

      

   

423

   

Contract termination expense

   

   

—  

   

      

   

—  

   

      

   

5,500

   

      

   

—  

   

General and administrative expenses

   

   

5,354

   

      

   

1,811

   

      

   

9,662

   

      

   

3,234

   

Depreciation and amortization

   

   

246

   

      

   

271

   

      

   

490

   

      

   

542

   

Total operating costs and expenses

   

   

14,356

   

      

   

9,005

   

      

   

32,710

   

      

   

16,649

   

(Loss) income from operations

   

   

(758

)

      

   

930

   

      

   

(6,641

)

      

   

1,809

   

Other (income) expense:

   

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Interest (income) expense

   

   

(17

)

      

   

62

   

      

   

21

   

      

   

127

   

Other (income) expense

   

   

(44

)

      

   

(4

)

      

   

384

   

      

   

(10

)

Net (loss) income before income taxes

   

   

(697

)

      

   

872

   

      

   

(7,046

)

      

   

1,692

   

Provision for income taxes

   

   

128

   

      

   

—  

   

      

   

1,295

   

      

   

—  

   

Net (loss) income

   

   

(825

)

      

   

872

   

      

   

(8,341

)

      

   

1,692

   

Net loss attributable to noncontrolling interests

   

   

(421

)

      

   

(20

)

      

   

(4,249

)

      

   

(20

)

Net (loss) income attributable to Health Insurance Innovations, Inc. and Health Plan Intermediaries, LLC

   

$

(404

)

      

$

892

   

      

$

(4,092

)

      

$

1,712

   

Per Share data

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

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

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

$

(0.08

)

   

   

   

   

   

$

(0.86

)

   

   

   

   

Diluted

   

$

(0.08

)

   

   

   

   

   

$

(0.86

)

   

   

   

   

Weighted average shares outstanding

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

   

4,766,667

   

   

   

   

   

   

   

4,750,000

   

   

   

   

   

Diluted

   

   

4,766,667

   

   

   

   

   

   

   

4,750,000

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes.

 

 4 


   

HEALTH INSURANCE INNOVATIONS, INC.

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

($ in 000’s)

   

 

   

Three months ended
June 30,

   

      

Six months ended
June 30,

   

   

2013

   

      

2012

   

      

2013

   

      

2012

   

Net (loss) income

$

(825

)

      

$

872

   

      

$

(8,341

)

      

$

1,692

   

Other comprehensive loss:

   

   

   

      

   

   

   

      

   

   

   

      

   

   

   

Unrealized loss on available-for-sale securities

   

(30

)

      

   

—  

   

      

   

(30

)

      

   

—  

   

Comprehensive (loss) income

   

(855

)

      

   

872

   

      

   

(8,371

)

      

   

1,692

   

Less: Comprehensive loss attributable to noncontrolling interests

   

(15

)

   

   

—  

   

   

   

(15

)

   

   

—  

   

Comprehensive (loss) income attributable to Health Insurance Innovations, Inc. and Health Plan Intermediaries, LLC.

$

(840

)

   

$

872

   

   

$

(8,356

)

   

$

1,692

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

See accompanying notes.

   

   

 

 5 


   

HEALTH INSURANCE INNOVATIONS, INC.

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

Consolidated Statements of Stockholders’/Member’s Equity (unaudited)

($ in 000’s, except share data)

   

 

   

   

Health Plan Intermediaries, LLC
and Subsidiaries

   

   

Health Insurance Innovations, Inc.

   

   

   

   

   

   

   

   

   

   

   

Class A Common Stock

   

   

Class B Common Stock

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Member’s 
Equity

   

   

Noncontrolling

Interest

   

   

Shares

   

   

Amount

   

   

Shares

   

   

Amount

   

   

Additional
Paid-in
Capital

   

   

Accumulated Other Comprehensive Loss

   

   

Accumulated
Deficit

   

   

Noncontrolling
Interests

   

   

Total
Stockholders’/ Member’s Equity

   

Balance as of January 1, 2012

   

$

6,996

      

   

$

—  

   

   

   

—  

   

   

$

—  

   

   

   

—  

   

   

$

—  

   

   

$

—  

   

   

$

—  

   

   

$

—  

   

   

$

—  

   

   

$

6,996

      

Net income

   

   

3,349

      

   

   

(89

)

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

3,260

      

Contribution from minority partner

   

   

—  

   

   

   

92

      

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

92

      

Distributions

   

   

(4,010

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(4,010

)

Balance as of December 31, 2012

   

$

6,335

      

   

$

3

   

   

   

—  

   

   

$

—  

   

   

   

—  

   

   

$

—  

   

   

$

—  

   

   

$

—  

   

   

$

—  

   

   

$

—  

   

   

$

6,338

      

Net loss

   

   

(248

   

   

(11

)

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(259

)

Contributions

   

   

—  

   

   

   

10

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

10

      

Distributions

   

   

(171

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(171

)

Balance prior to February 13, 2013

   

   

5,916

      

   

   

2

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

5,918

      

Effects of initial public offering and reorganization

   

   

(5,916

   

   

(2

)

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

5,918

      

   

   

—  

   

Balance as of February 13, 2013

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

5,918

      

   

   

5,918

      

Net loss subsequent to February 13, 2013

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(4,092

   

   

(3,990

)

   

   

(8,082

)

Other comprehensive loss

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(15

)

   

   

—  

   

   

   

(15

)

   

   

(30

)

Issuance of Class A common stock in initial public offering, net of issuance costs

   

   

—  

   

   

   

—  

   

   

   

4,666,667

      

   

   

5

      

   

   

—  

   

   

   

—  

   

   

   

57,750

      

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

57,755

      

Issuance of Class B common stock in initial public offering

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

8,666,667

      

   

   

9

      

   

   

(36,453

)

   

   

—  

   

   

   

—  

   

   

   

36,444

      

   

   

—  

   

Issuance of Class A common stock in underwriters’ exercise of over-allotment option

   

   

—  

   

   

   

—  

   

   

   

100,000

      

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

1,302

      

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

1,302

      

Purchase of Series B Membership interests and exchange and cancellation of Class B common stock

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(100,000

)

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

(1,302

)

   

   

(1,302

)

Issuance of Class A common stock under equity compensation plans

   

   

—  

   

   

   

—  

   

   

   

542,927

      

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

2,701

      

   

   

—  

   

   

   

—  

   

   

   

—  

   

   

   

2,701

      

Acquisition of noncontrolling interest in consolidated subsidiary

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

(38

)

   

   

   

   

   

   

   

   

   

   

(52

)

   

   

(90

)

Contributions

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

6

   

   

   

6

   

Distributions

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

(598

)

   

   

(598

)

Balance as of June 30, 2013

   

$

—  

   

   

$

—  

   

   

   

5,309,594

      

   

$

5

      

   

   

8,566,667

      

   

$

9

      

   

$

25,262

   

   

$

(15

)

   

$

(4,092

)

   

$

36,411

      

   

$

57,580

      

   

See accompanying notes.

   

 

 6 


   

HEALTH INSURANCE INNOVATIONS, INC.

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

Consolidated Statements of Cash Flows (unaudited)

($ in 000’s)

   

 

   

   

Six Months Ended June 30,

   

   

   

2013

   

   

2012

   

Operating activities:

   

   

   

   

   

   

   

   

Net (loss) income

   

$

(8,341

)

   

$

1,692

      

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

   

   

   

   

   

   

   

   

Stock-based compensation

   

   

2,701

      

   

   

—  

   

Depreciation and amortization

   

   

490

      

   

   

542

      

Loss on extinguishment of debt

   

   

71

      

   

   

—  

   

Amortization of deferred financing costs

   

   

7

      

   

   

23

      

Changes in operating assets and liabilities:

   

   

   

   

   

   

   

   

Increase in cash held on behalf of others

   

   

(374

)

   

   

(319

)

Increase in credit card transactions receivable

   

   

(485

)

   

   

(133

)

Decrease in accounts receivable

   

   

77

      

   

   

23

      

Increase in advanced commissions

   

   

(2,182

)

   

   

(284

Decrease in gateway processor deposit

   

   

—  

      

   

   

400

      

Increase in prepaid expenses and other assets

   

   

(331

)

   

   

(4

Increase in carriers and vendors payable

   

   

590

      

   

   

260

      

(Decrease) increase in accounts payable, accrued expenses and other liabilities

   

   

(212

)

   

   

618

      

Increase in commissions payable

   

   

162

      

   

   

143

      

Increase in due to related parties pursuant to tax receivable agreement

   

   

359

      

   

   

—  

   

Increase in income taxes payable

   

   

1,295

   

   

   

—  

   

Decrease in amounts due to member of Health Plan Intermediaries, LLC

   

   

—  

   

   

   

(126

Net cash (used in) provided by operating activities

   

   

(6,173

)

   

   

2,835

      

Investing activities:

   

   

   

   

   

   

   

   

Acquisitions of short-term investments, net

   

   

(20,521

)

   

   

—  

   

Purchases of property and equipment

   

   

(94

)

   

   

(64

Loans to distributors

   

   

(163

)

   

   

(100

Proceeds from repayment of loans to distributors

   

   

96

      

   

   

100

   

Payments for deposits

   

   

(7

)

   

   

—  

   

Net cash used in investing activities

   

   

(20,689

)

   

   

(64

)

Financing activities:

   

   

   

   

   

   

   

   

Repayments of notes payable

   

   

(51

)

   

   

—  

   

Repayments of long-term debt

   

   

(3,294

)

   

   

(380

)

Payments under noncompete obligation

   

   

(64

)

   

   

—  

   

Distributions to member of Health Plan Intermediaries, LLC

   

   

(1,542

)

   

   

(1,118

)

Payments for equity issuance

   

   

(1,643

)

   

   

(561

)

Payments under capital leases

   

   

(1

)

   

   

(3

)

Issuance of Class A common stock in initial public offering, net of underwriters’ discount

   

   

60,760

      

   

   

—  

   

Issuance of Class A common stock in underwriters’ exercise of over-allotment option

   

   

1,302

      

   

   

—  

   

Purchase of Series B Membership interests

   

   

(1,302

)

   

   

—  

   

Acquisition of noncontrolling interest in subsidiary

   

   

(90

)

   

   

—  

   

Contributions from noncontrolling interests

   

   

16

   

   

   

20

   

Net cash provided by (used in) financing activities

   

   

54,091

      

   

   

(2,042

Net increase in cash and cash equivalents

   

   

27,229

      

   

   

729

      

Cash and cash equivalents at beginning of period

   

   

750

      

   

   

618

      

Cash and cash equivalents at end of period

   

$

27,979

      

   

$

1,347

      

See accompanying notes.

   

       

 

 

 7 


   

HEALTH INSURANCE INNOVATIONS, INC.

(Prior to February 13, 2013 Health Plan Intermediaries, LLC and Subsidiaries)

Notes to Consolidated Financial Statements

(Unaudited)

   

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

In this quarterly report, unless the context suggests otherwise, references in this report to the “Company,” “we,” “us” and “our” refer (1) prior to the February 13, 2013 initial public offering (“IPO”) of the Class A common stock of Health Insurance Innovations, Inc. and related transactions, to Health Plan Intermediaries, LLC (“HPI”) and its consolidated subsidiaries and (2) after our IPO and related transactions, to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The terms “HII”, “HPIH” and “ICE” refer to the stand-alone entities Health Insurance Innovations, Inc., Health Plan Intermediaries Holdings, LLC, and Insurance Center for Excellence, LLC, respectively. HPIH and ICE are consolidated subsidiaries of HII.

Business Description and Organizational Structure of the Company

Our Business

We are a developer and administrator of affordable individual health insurance and discount benefit plans that are sold throughout the United States. Our main product, short-term medical (“STM”) insurance, is an alternative to traditional individual major medical plans and generally offers comparable benefits for qualifying individuals. We also offer guaranteed-issue hospital indemnity plans for individuals under the age of 65 and a variety of ancillary products that are frequently purchased together with the STM and hospital indemnity plans as supplements. We design and structure insurance products on behalf of our contracted insurance carrier companies; market them to individuals through a network of distributors; and manage our relationships with our customers whom are referred to as “members,” through our customer service agents. Our sales are primarily executed online and offer real-time fulfillment through our proprietary web-based technology platform, through which we receive credit card and automated clearing house (“ACH”) payments directly from the members at the time of sale. In certain cases, premiums are collected from the distributor. The plans are underwritten by contracted insurance carrier companies, and we assume no underwriting or insurance risk.

Our History

Our business began operations in 2008, and historically, we operated through HPI. In August 2008, Naylor Group Partners, LLC (“Naylor”) made a capital contribution to HPI in exchange for a 50% ownership interest in HPI. In September 2011, HPI purchased all of the units owned by Naylor for $5.3 million plus financing costs of $135,000. HPI financed a portion of the purchase price by entering into a loan agreement with a bank for $4.3 million. The remaining purchase price was funded with HPI cash and a contribution from Michael Kosloske (“Mr. Kosloske”), our Chairman, President and Chief Executive Officer. Following the purchase, Mr. Kosloske became the sole member of HPI.

Our Reorganization and the IPO

Health Insurance Innovations, Inc. was incorporated in the State of Delaware on October 26, 2012 to facilitate the IPO and to become a holding company owning as its principal asset membership interests in HPIH. Since November 2012, we have operated our business through HPIH and its consolidated subsidiaries. See Note 6 for more information about the IPO.

In anticipation of the IPO, on November 7, 2012, HPI assigned the operating assets of our business through a series of transactions to HPIH, and HPIH assumed the operating liabilities of HPI.

Our Organizational Structure after the IPO

Health Insurance Innovations, Inc. has two classes of outstanding capital stock: Class A common stock and Class B common stock. Class A shares represent 100% of the economic rights of the holders of all classes of our common stock to share in our distributions. Class B shares do not entitle their holders to any dividends paid by, or rights upon liquidation of, Health Insurance Innovations, Inc. Shares of our Class A common stock vote together with shares of our Class B common stock as a single class, except as otherwise required by law. Each share of our Class A common stock and our Class B common stock entitles its holder to one vote. As of June 30, 2013, Mr. Kosloske beneficially owns 61.7% of our outstanding Class A common stock and Class B common stock on a combined basis, which equals his combined economic interest in the Company, and has effective control over the outcome of votes on all matters requiring approval by our stockholders.

 

 

 8 


   

Health Insurance Innovations, Inc. is a holding company owning as its principal asset Series A Membership Interests in HPIH. HPIH has two series of outstanding equity: Series A Membership Interests, which may only be issued to Health Insurance Innovations, Inc., as sole managing member, and Series B Membership Interests. The Series B Membership Interests are held by HPI and Health Plan Intermediaries Sub, LLC (“HPIS”), a subsidiary of HPI, and these entities are beneficially owned by Mr. Kosloske. As of June 30, 2013, (i) the Series A Membership Interests held by Health Insurance Innovations, Inc. represent 38.3% of the outstanding membership interests, 38.3% of the economic interests and 100% of the voting interests in HPIH and (ii) the Series B Membership Interests held by the entities beneficially owned by Mr. Kosloske represent 61.7% of the outstanding membership interests, 61.7% of the economic interests and no voting interest in HPIH.

For greater detail regarding our organizational structure, our capitalization, the exchange agreement referenced below and related matters, see “Item 1. Business—Our History and the Reorganization of Our Corporate Structure” set forth in our annual report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2013.

Exchange Agreement

On February 13, 2013, we entered into an exchange agreement (the “Exchange Agreement”) with the holders of Series B Membership Interests. Pursuant to and subject to the terms of the Exchange Agreement and the amended and restated limited liability company agreement of HPIH, holders of Series B Membership Interests, at any time and from time to time, may exchange one or more Series B Membership Interests, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to equitable adjustments for stock splits, stock dividends and reclassifications. In connection with each exchange, HPIH will cancel the delivered Series B Membership Interests and Class B common stock and issue to us Series A Membership Interests on a one-for-one basis. Thus, as holders exchange their Series B Membership Interests for Class A common stock, our interest in HPIH will increase.

Holders will not have the right to exchange Series B Membership Interests if we determine that such exchange would be prohibited by law or regulation or would violate other agreements to which we may be subject. We may impose additional restrictions on the exchange that we determine necessary or advisable so that HPIH is not treated as a “publicly traded partnership” for U.S. federal income tax purposes. If the Internal Revenue Service were to contend successfully that HPIH should be treated as a “publicly traded partnership” for U.S. federal income tax purposes, HPIH would be treated as a corporation for U.S. federal income tax purposes and thus would be subject to entity-level tax on its taxable income.

We and the exchanging holder will each generally bear our own expenses in connection with an exchange, except that, subject to a limited exception, we are required to pay any transfer taxes, stamp taxes or duties or other similar taxes in connection with such an exchange.

Tax Receivable Agreement

The purchase of Series B Membership Interests (together with an equal number of shares of our Class B common stock) with the net proceeds from the sale of shares reserved to cover over-allotments from the IPO, as well as subsequent exchanges of Series B Membership Interests (together with an equal number of shares of our Class B common stock, for shares of our Class A common stock) are expected to increase our tax basis in our share of HPIH’s tangible and intangible assets. These increases in tax basis are expected to increase our depreciation and amortization income tax deductions and create other tax benefits and therefore may reduce the amount of income tax that we would otherwise be required to pay in the future.

On February 13, 2013, we entered into a tax receivable agreement with the holders of Series B Membership Interests (currently HPI and HPIS, which are beneficially owned by Mr. Kosloske). The agreement requires us to pay to such holders 85% of the cash savings, if any, in U.S. federal, state and local income tax we realize (or are deemed to realize in the case of an early termination payment, a change in control or a material breach by us of our obligations under the tax receivable agreement) as a result of any possible future increases in tax basis described above and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement itself. This is HII’s obligation and not an obligation of HPIH. HII will benefit from the remaining 15% of any realized cash savings. For purposes of the tax receivable agreement, cash savings in income tax is computed by comparing our actual income tax liability with our hypothetical liability had we not been able to utilize the tax benefits subject to the tax receivable agreement itself. The tax receivable agreement became effective upon completion of the IPO and will remain in effect until all such tax benefits have been used or expired, unless HII exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or HII breaches any of its material obligations under the tax receivable agreement in which case all obligations will generally be accelerated and due as if HII had exercised its right to terminate the agreement. Any potential future payments will be calculated using the market value of our Class A common stock at the time of the relevant exchange and prevailing tax rates in future years and will be dependent on us generating sufficient future taxable income to realize the benefit. Payments are generally due under

 

 

 9 


   

the tax receivable agreement within a specified period of time following the filing of our tax return for the taxable year with respect to which payment of the obligation arises. For further information on the tax receivable agreement, see Note 13.

Basis of Presentation

The consolidated financial statements reflect the results of operations of HPI through the closing of the IPO on February 13, 2013, and HII subsequent to the IPO.

The consolidated financial statements include our accounts and those of our controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Our accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934 and do not include all of the information and notes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of consolidated financial position, results of operations and cash flows have been included. The consolidated balance sheet data for the year ended December 31, 2012 was derived from our audited financial statements, but does not include all the disclosures required by GAAP. For further information, refer to our Annual Report on Form 10-K for the year ended December 31, 2012, including the consolidated financial statements and accompanying notes.

Noncontrolling interests are included in the consolidated balance sheets as a component of stockholders’ equity that is not attributable to the equity of HII. We report separately the amounts of consolidated net income or loss attributable to us and noncontrolling interests.

As an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we intend to take advantage of certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. These exemptions will apply for a period of five years following the completion of our IPO although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

Use of Estimates

The preparation of the 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 financial statements. These estimates also affect the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Significant Accounting Policies

Revenue recognition

Our revenues consist of commissions earned for health insurance policies and discount benefit plans issued to members, enrollment fees paid by members, and administration fees paid by members as a direct result of our enrollment services. The cash amounts that we receive from payments by members are referred to as “premium equivalents.” We report revenues net of premiums remitted to insurance carriers and fees paid to vendors of discount benefit plans. Revenues are net of an allowance for policies expected to be cancelled by members. We establish the allowance for estimated policy cancellations through a charge to revenues. The allowance is estimated using historical data to project future experience. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported. We periodically review the adequacy of the allowance and record adjustments as necessary. The net allowance for estimated policy cancellations was $77,000 as of June 30, 2013 and December 31, 2012.

Revenue is earned at the time of sale, which coincides with the policy effective date.  Premium equivalents are paid by the members at the time of sale.   Upon payment by the member, the member immediately receives all policy-related documents, including their insurance card, in electronic format, thereby completing delivery and our responsibility with respect to the sale transaction. Commission rates for all of our 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. In addition, we earn enrollment and administration fees on policies issued. 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 us and the individual carrier or vendor. Risk premiums representing the amounts due to and

 

 

 10 


   

remitted to our carriers, are typically reported and remitted to insurance carriers on the 15th day of the month following the end of the month in which they are collected.

In concluding that revenues should be reported on a net basis, we considered Financial Accounting Standards Board (“FASB”) requirements and whether we have the responsibility to provide the goods or services to the customer or if it relies on a supplier to provide the goods or services to the customer. We are not the ultimate party responsible for providing the insurance coverage or discount benefits to the member and, therefore, we are not the primary obligor in the arrangement. The supplier, or insurance carrier, bears the risk for that insurance coverage. We therefore report our revenues net of amounts paid to its contracted insurance carrier companies and discount benefit vendors.

Third-party commissions and advanced commissions

We utilize a broad network of licensed third-party distributors to sell the plans that we develop. We pay commissions that vary by the type of policy to these distributors based on a percentage of the policy premiums. We pay additional commissions to the distributors for discount benefit plans issued. We record commission expense in the period in which the distributors earn the commissions.

Advanced commissions consist of amounts advanced to certain third-party distributors. We perform ongoing credit evaluations of our distributors, all of which are located in the United States. We recover the advanced commissions from future commissions earned on premiums collected. We have not experienced any credit losses from commission advances and, accordingly, have not recognized a provision for bad debt for the periods presented. A fee for the advanced commission of up to 2% of the insurance premium sold is charged to the distributors and recognized as income as earned. The interest income earned from advanced commissions was $28,000 and $4,000 for the three months ended June 30, 2013 and June 30, 2012, respectively, and $47,000 and $10,000 for the six months ended June 30, 2013 and June 30, 2012, respectively and is included in other (income) expense  on the accompanying consolidated statements of operations. The balance of advanced commissions was $2.5 million and $297,000 as of June 30, 2013 and December 31, 2012, respectively.

Cash and cash equivalents and short-term investments

We account for cash on hand and demand deposits with banks and other financial institutions as cash. Short-term, highly liquid investments with original maturities of three months or less are considered cash equivalents. Investments in cash equivalents include, but are not limited to, demand deposit accounts, money market accounts and certificates of deposit with maturities of three months or less.

Periodically, we invest cash on hand in other short-term, highly-liquid investments. Such investments that have maturities greater than three months are classified as short-term investments and include, but are not limited to, certificates of deposit with maturities greater than three months, but less than one year, and certain equity securities. See Note 3 for further information on short-term investments.

Cash held on behalf of others

In our capacity as policy administrator, we collect premiums from members and distributors and, after deducting our earned fees, remit these premiums to our contracted insurance carriers, discount benefit vendors and distributors. We hold the unremitted funds in a fiduciary capacity in bank accounts until they are disbursed, and the use of such funds for certain carriers is restricted. These unremitted amounts are reported as cash held on behalf of others in the accompanying consolidated balance sheets with the related liabilities reported as carriers and vendors payable and commissions payable. Cash held on behalf of others was $4.2 million and $3.8 million as of June 30, 2013 and December 31, 2012, respectively.

Accounts receivable

Accounts receivable represent amounts due to us for premiums collected by a third-party and are generally considered delinquent 15 days after the due date. The underlying insurance contracts are cancelled retroactively if the payment remains delinquent. We have not experienced any credit losses from accounts receivable and have, accordingly, not recognized a provision for uncollectible accounts receivable.

Credit card and ACH transactions receivable

Members may pay their policy premiums to us by credit card or through ACH transfers. The credit card and ACH vendor remits cash for these transactions to us. Credit card and ACH transactions processed by the credit card and ACH vendors or processors, but

 

 

 11 


   

not yet remitted to us, are recorded as credit card and ACH transactions receivable. A portion of the amounts receivable from these transactions is related to carrier premiums, discount benefit plan fees and third-party commissions. The balance related to carrier premiums, discount benefit plan fees and commissions was $862,000 and $484,000 as of June 30, 2013 and December 31, 2012, respectively, and is included in credit card and ACH transactions receivable on the accompanying balance sheets.

We incur fees for these transactions that are expensed as incurred.

Capitalization of offering costs

Capitalized offering costs are costs directly attributable to the IPO. Prior to the IPO, we had capitalized $3.0 million of offering costs. Upon closing the IPO in February 2013, these costs were netted against the proceeds of the IPO; as such, there was no balance in capitalized offering costs as of June 30, 2013. As of December 31, 2012, the balance of capitalized offering costs was $1.8 million.

Property and equipment

Property and equipment is recorded at cost, less accumulated depreciation, in the accompanying consolidated balance sheets. Depreciation expense for property and equipment was $20,000 and $12,000 for the three months ended June 30, 2013 and 2012, respectively, and $39,000 and $24,000 for the six months ended June 30, 2013 and 2012, respectively and is computed using the

straight-line method over the following estimated useful lives:

   

 

Computer equipment

      

5 years

Furniture and fixtures

      

7 years

Leasehold improvements

      

Shorter of lease term or estimated useful life

We periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. No impairment losses were recognized for the periods presented.

Goodwill and other intangible assets

Goodwill

Under FASB guidance, the process of evaluating the potential impairment of goodwill involves a two-step process and requires significant judgment at many points during the analysis. In the first step, we determine whether there is an indication of impairment by considering relevant qualitative factors or comparing the fair value of the reporting unit to its carrying amount, including goodwill. Our annual impairment test is performed with a measurement date of October 1. If, based on the first step, we determine that there is an indication of goodwill impairment, we assess the impairment in step two in accordance with FASB guidance.

In the second step, we determine the fair value using a combination of three valuation approaches: the cost approach, the market approach and the income approach. The cost approach uses multiples from publicly available transactional data of acquired comparable target companies.

The market approach uses a guideline company methodology, which is based upon a comparison of the reporting unit to similar publicly-traded companies within our industry. We derive a market value of invested capital or business enterprise value for each comparable company by multiplying the price per share of common stock of the publicly traded companies by their total common shares outstanding and adding each company’s current level of debt. We calculate a business enterprise multiple based on revenue and earnings from each company, then apply those multiples to our revenue and earnings to calculate a business enterprise value. Assumptions regarding the selection of comparable companies are made based on, among other factors, capital structure, operating environment and industry. As the comparable companies were typically larger and more diversified than our business, multiples were adjusted prior to application to our revenues and earnings to reflect differences in margins, long-term growth prospects and market capitalization.

The income approach uses a discounted debt-free cash flow analysis to measure fair value by estimating the present value of future economic benefits. To perform the discounted debt-free cash flow analysis, we develop a pro forma analysis of the reporting unit to estimate future available debt-free cash flow and discounting estimated debt-free cash flow by an estimated industry weighted average cost of capital based on the same comparable companies used in the market approach. Per FASB guidance, the weighted average cost of capital is based on inputs (e.g., capital structure, risk, etc.) from a market participant’s perspective and not necessarily from the reporting unit’s perspective. Future cash flow is projected based on assumptions for our economic growth, industry expansion, future operations and the discount rate, all of which require significant judgments by management.

 

 

 12 


   

After computing a separate business enterprise value under the above approaches, we apply a weighting to them to derive the business enterprise value of the reporting unit. The weightings are evaluated each time a goodwill impairment assessment is performed and give consideration to the relative reliability of each approach at that time. Based on these weightings, we calculated a business enterprise value for the reporting unit. We then added debt-free liabilities of the reporting unit to the calculated business enterprise value to derive an implied fair value of the reporting unit. The implied fair value is then compared to the reporting unit’s carrying value. Upon completion of the analysis in step one as of October 1, 2012, we determined that the fair value of business exceeded its respective carrying value. As such, a step two analysis was not required.

Our goodwill balance arose from the acquisition of the Naylor units of HPI.

The changes in the carrying amounts of goodwill were as follows:

   

 

Balance as of January 1, 2012

   

$

5,906,000

      

Goodwill acquired

   

   

—  

   

Impairment of goodwill

   

   

—  

   

Balance as of December 31, 2012

   

$

5,906,000

      

Goodwill acquired

   

   

—  

   

Impairment of goodwill

   

   

—  

   

Balance as of June 30, 2013

   

$

5,906,000

      

Other intangible assets

Other intangible assets consist of our brand, the carrier network and distributor relationships that were recognized in connection with acquisition purchase accounting, as well as capitalized software and a noncompete agreement. Finite-lived intangible assets are amortized over their useful lives from two to seven years.

Major classes of intangible assets as of June 30, 2013 consisted of the following:

   

 

   

Weighted-average
Amortization

   

      

Gross Carrying
Amount

   

      

Accumulated
Amortization

   

      

Intangible
Asset, net

   

Brand

   

2

      

      

$

400,000

      

      

$

350,000

      

      

$

50,000

      

Capitalized software

   

5

      

      

   

45,000

      

      

   

8,000

      

      

   

37,000

      

Carrier network

   

5

      

      

   

40,000

      

      

   

14,000

      

      

   

26,000

      

Distributor relationships

   

7

      

      

   

3,610,000

      

      

   

903,000

      

      

   

2,707,000

      

Noncompete agreement

   

5

      

      

   

843,000

      

      

   

155,000

      

      

   

688,000

      

Total intangible assets

   

6.2

      

      

$

4,938,000

      

      

$

1,430,000

      

      

$

3,508,000

      

   

Major classes of intangible assets as of December 31, 2012 consisted of the following:

   

 

   

Weighted-average
Amortization

   

      

Gross Carrying
Amount

   

      

Accumulated
Amortization

   

      

Intangible
Asset, net

   

Brand

   

2

      

      

$

400,000

      

      

$

250,000

      

      

$

150,000

      

Capitalized software

   

5

      

      

   

45,000

      

      

   

4,000

      

      

   

41,000

      

Carrier network

   

5

      

      

   

40,000

      

      

   

10,000

      

      

   

30,000

      

Distributor relationships

   

7

      

      

   

3,610,000

      

      

   

645,000

      

      

   

2,965,000

      

Noncompete agreement

   

5

      

      

   

843,000

      

      

   

70,000

      

      

   

773,000

      

Total intangible assets

   

6.2

      

      

$

4,938,000

      

      

$

979,000

      

      

$

3,959,000

      

Amortization expense for the three months ended June 30, 2013 and 2012 was $226,000 and $259,000, respectively, and for the six months ended June 30, 2013 and 2012 was $451,000 and $518,000, respectively.

Accounting for income taxes

Our former operating entity, HPI, was taxed as an S corporation for income tax purposes. Therefore, we were not subject to entity-level federal or state income taxation prior to the IPO. HPIH is currently taxed as a partnership for federal income tax purposes; as a result, the members pay taxes with respect to their allocable shares of each company’s respective net taxable income.

 

 

 13 


   

Following the IPO, HPIH continues to operate in the United States as a partnership for U.S. federal income tax purposes. We are subject to U.S. corporate federal, state and local income taxes that are attributable to HII as reflected in our consolidated financial statements. We use the liability method of accounting for income taxes. Significant management judgment is required in determining the provision for income taxes and, in particular, any valuation allowance that is recorded or released against our deferred tax assets.

We evaluate quarterly the positive and negative evidence regarding the realization of net deferred tax assets. The carrying value of our net deferred tax assets is based on our belief that it is more likely than not that we will generate sufficient future taxable income to realize these deferred tax assets.

We account for uncertainty in income taxes using a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Such amounts are subjective, as a determination must be made on the probability of various possible outcomes. We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition and measurement could result in recognition of a tax benefit or an additional tax provision.

Fair value of financial instruments

We measure and report financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (referred to as an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value of our financial assets and liabilities is determined by using three levels of input, which are defined as follows:

   

 

Level 1:

   

Quoted prices in active markets for identical assets or liabilities

Level 2:

   

Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

Level 3:

   

Unobservable inputs for the asset or liability

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

We utilize the market approach to measure the fair value of our financial assets. Our short-term investment in a marketable security, available-for-sale is valued based on Level 1 inputs as it is a publicly-traded mutual fund with a quoted price in an active market. Our noncompete obligation is valued based on Level 2 inputs, and primarily valued using nonbinding market prices that are corroborated by observable market data. The inputs and fair value are reviewed for reasonableness and may be further validated by comparison to publicly available information or compared to multiple independent valuation sources.

 

 

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The carrying amounts of financial assets and liabilities reported in the accompanying consolidated balance sheets for cash and cash equivalents, cash held on behalf of others, other short-term investments, credit card transactions receivable, accounts receivable, advanced commissions, carriers and vendors payable, commissions payable, and accounts payable and accrued expenses as of June 30, 2013 approximate fair value because of the short-term duration of these instruments.

As of June 30, 2013, our short-term investments, which include a marketable security, available-for-sale (a mutual fund) and certificates of deposit with maturities greater than three months to nine months, and our noncompete obligation measured at fair value were as follows:

   

 

   

   

   

   

   

Fair Value Measurement as of June 30, 2013

   

   

   

Carrying Value as of
June 30, 2013

   

   

Level 1

   

   

Level 2

   

   

Level 3

   

Assets:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Marketable security, available-for-sale

   

$

14,970,000

   

   

$

14,970,000

   

   

$

—  

   

   

$

—  

   

Certificates of deposit

   

   

5,521,000

   

   

   

5,521,000

   

   

   

—  

   

   

   

—  

   

   

   

$

20,491,000

   

   

$

20,491,000

   

   

$

—  

   

   

$

—  

   

Liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Noncompete obligation, including current portion

   

$

717,000

   

   

$

—  

   

   

$

693,000

   

   

$

—  

   

As of December 31, 2012, our long-term debt and noncompete obligation measured at fair value were as follows:

   

 

   

   

   

   

   

Fair Value Measurement as of December 31, 2012

   

   

   

Carrying Value as of
December 31, 2012

   

   

Level 1

   

   

Level 2

   

   

Level 3

   

Liabilities:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Long-term debt, including current portion

   

$

3,294,000

   

   

$

—  

   

   

$  

3,314,000

   

   

$

—  

   

Noncompete obligation, including current portion

   

   

781,000

   

   

   

—  

   

   

   

779,000

   

   

   

—  

   

   

   

$

4,075,000

   

   

$

—  

   

   

$

4,093,000

   

   

$

—  

   

Recent Accounting Pronouncements

In December 2011, the FASB issued guidance which requires disclosures of both gross and net information about instruments and transactions eligible for offset as well as transactions subject to an agreement similar to a master netting agreement. This guidance was adopted effective January 1, 2013. As this guidance is limited to presentation only, adoption of this guidance did not have a material impact on our financial position or results of operations.

In July 2012, the FASB issued amended guidance relating to goodwill and other intangible assets which permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with GAAP. The more-likely-than-not threshold is defined as having a likelihood of more than 50%. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. This guidance was adopted effective as of January 1, 2013. Since this guidance only changes the manner in which we assess indefinite-lived intangible assets for impairment, adoption did not have a material effect on our financial position or results of operations.

   

   

2. Business Acquisitions

Acquisition of Insurance Center for Excellence, LLC and Other Transactions

On June 1, 2012, HPI and TSG Agency, LLC (“TSG”) acquired ICE. ICE is a call center training facility for the Company’s distributors. In connection with the transaction, HPI received an 80% controlling interest in ICE and was required to contribute $80,000 in capital contributions, and TSG received a 20% noncontrolling interest in the business and was required to contribute $20,000 in capital contributions. Subsequent to the initial contributions, HPI contributed an additional $240,000, and TSG contributed an additional $60,000, respectively, to ICE during the year ended December 31, 2012. During the six months ended June 30, 2013, we

 

 

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contributed $40,000 to ICE, and TSG contributed $16,000 to ICE. On June 30, 2013, we purchased TSG’s 20% interest in ICE for $90,000 and, as a result, ICE is our wholly-owned subsidiary.  

ICE entered into employment agreements with employees of The Amacore Group, Inc. (“Amacore”) contemporaneously with the June 1, 2012 formation of ICE, and at the date of formation, former Amacore employees comprise the full staff of ICE. ICE additionally assumed a month-to-month lease for space that was occupied by Amacore immediately prior to the formation of ICE.

Concurrent with the formation of ICE, ICE additionally entered into a sublease agreement (“Lease Agreement”) with Amacore for additional space effective June 1, 2012. Under the Lease Agreement, ICE assumed all rights, responsibilities, obligations, terms and conditions of the original lease, which expires on April 30, 2015. Amacore agreed to transfer to ICE a security deposit previously paid by Amacore of approximately $13,000, and Amacore contributed $15,000 to ICE for the purchase of property and equipment, certain office and computer equipment and rights to certain 800 numbers, to ICE that have minimal value. We are recognizing the consideration provided by Amacore as a lease incentive that is being amortized over the term of the lease on a straight-line basis.

Additionally, concurrent with its June 1, 2012 formation, ICE entered into an Agent Producer Agreement and an Assignment of Commissions Agreement with Amacore (collectively referred to as “Agent Agreement”). Under the Agent Agreement, ICE assigned its commissions with respect to Assurant dental sales to Amacore in return for production incentives, training, marketing materials, commission payments and reporting, advances on commissions and ongoing sales support.

The transaction with Amacore as described above is a business combination, and no assets or liabilities, including intangible assets or goodwill, were recognized other than those described above.

In March 2013, we paid $5.5 million to enter into an agreement to terminate certain contract rights with TSG. As a result of this transaction, Ivan Spinner, who controls TSG, became an employee of the Company. This transaction was expensed during the six months ended June 30, 2013, and is included within contract termination expense on the accompanying consolidated statement of operations.

   

3. Short-term investments

As of June 30, 2013, short-term investments consisted of the following:

   

 

   

   

Carrying Value as
of June 30, 2013

   

      

Fair Value as of
June 30, 2013

   

Certificates of deposit (1)