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 September 30, 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=13196147&doc=65
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)
___________________________________________________________
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
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]
As of November 8, 2019, the registrant had 12,296,567 shares of Class A common stock, $0.001 par value, outstanding and 1,916,667 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)
 
September 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
9,160

 
$
9,321

Restricted cash
17,607

 
16,678

Accounts receivable, net, prepaid expenses and other current assets
3,352

 
2,108

Advanced commissions, net
29,233

 
29,867

Income taxes receivable
15,012

 

Contract asset, net
158,083

 
165,494

Total current assets
232,447

 
223,468

Long-term contract asset, net
153,193

 
132,566

Property and equipment, net
4,788

 
5,134

Goodwill
119,399

 
41,076

Intangible assets, net
36,905

 
4,217

Deferred tax assets
5,959

 
25,967

Other assets
522

 
61

Total assets
$
553,213

 
$
432,489

 
 
 
 
Liabilities and stockholders’ equity
 

 
 

Current liabilities:
 

 
 

Accounts payable and accrued expenses
$
33,136

 
$
32,397

Commissions payable, net
85,652

 
106,608

Income taxes payable

 
15,586

Short-term debt, net
7,795

 

Due to member
1,312

 
7,978

Other current liabilities
359

 
422

Total current liabilities
128,254

 
162,991

Long-term commissions payable, net
75,594

 
84,716

Long-term contingent consideration
57,176

 

Long-term debt, net
150,617

 
15,000

Due to member
29,091

 
25,693

Other liabilities
1,340

 
621

Total liabilities
442,072

 
289,021

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

Class A common stock (par value $0.001 per share, 100,000,000 shares authorized; 16,219,217 and 14,425,824 shares issued as of September 30, 2019 and December 31, 2018, respectively; 12,287,657 and 12,387,349 shares outstanding as of September 30, 2019 and December 31, 2018, respectively)
16

 
14

Class B common stock (par value $0.001 per share, 20,000,000 shares authorized; 1,916,667 and 2,541,667 shares issued and outstanding as of September 30, 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 September 30, 2019 and December 31, 2018)

 

Additional paid-in capital
116,203

 
94,194

Treasury stock, at cost (3,931,560 and 2,038,475 shares as of September 30, 2019 and December 31, 2018, respectively)
(127,489
)
 
(67,185
)
Retained earnings
89,222

 
80,804

Total Health Insurance Innovations, Inc. stockholders’ equity
77,954

 
107,830

Noncontrolling interests
33,187

 
35,638

Total stockholders’ equity
111,141

 
143,468

Total liabilities and stockholders' equity
$
553,213

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
75,272

 
$
71,467

 
$
220,954

 
$
219,180

Operating expenses:
 

 
 

 
 
 
 
Third-party commissions
35,187

 
48,669

 
122,768

 
139,832

Credit card and ACH fees
1,473

 
1,570

 
4,578

 
4,318

Selling, general and administrative
30,765

 
18,260

 
70,797

 
54,197

Depreciation and amortization
4,805

 
1,270

 
7,576

 
3,655

Total operating expenses
72,230

 
69,769

 
205,719

 
202,002

Income from operations
3,042

 
1,698

 
15,235

 
17,178

 
 
 
 
 
 
 
 
Other expense (income):
 

 
 

 
 
 
 
Interest expense (income)
1,999

 
15

 
3,693

 
(39
)
TRA (income) expense
(212
)
 
721

 
(212
)
 
721

Other expense

 
29

 

 
88

Net income before income taxes
1,255

 
933

 
11,754

 
16,408

(Benefit) provision for income taxes
(3,584
)
 
(559
)
 
1,503

 
5,737

Net income
4,839

 
1,492

 
10,251

 
10,671

Net income attributable to noncontrolling interests
39

 
353

 
1,833

 
3,125

Net income attributable to Health Insurance Innovations, Inc.
$
4,800

 
$
1,139

 
$
8,418

 
$
7,546

 
 
 
 
 
 
 
 
Per share data:
 

 
 

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

 
 

 
 
 
 
Basic
$
0.43

 
$
0.09

 
$
0.74

 
$
0.62

Diluted
$
0.40

 
$
0.08

 
$
0.68

 
$
0.57

Weighted average Class A common shares outstanding
 

 
 

 
 
 
 
Basic
11,156,747

 
12,853,739

 
11,404,200

 
12,130,722

Diluted
11,903,992

 
14,060,453

 
12,311,676

 
13,302,811

 

 

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




HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
($ in thousands, except share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Total Equity, Beginning of Period
$
97,349

 
$
189,547

 
$
143,468

 
$
107,001

Class A Share Capital:
 
 
 
 
 
 
 
Beginning balance
16

 
14

 
14

 
13

Issuance of Class A common stock in a private offering

 

 
1

 
1

Issuance of Class A common stock for acquisition consideration

 

 
1

 

Ending balance
$
16

 
$
14

 
$
16

 
$
14

 
 
 
 
 
 
 
 
Class B Share Capital:
 
 
 
 
 
 
 
Beginning balance
$
2

 
$
3

 
$
3

 
$
4

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

 

 
(1
)
 
(1
)
Ending balance
$
2

 
$
3

 
$
2

 
$
3

 
 
 
 
 
 
 
 
Additional paid-in capital:
 
 
 
 
 
 
 
Beginning balance
$
107,781

 
$
87,469

 
$
94,194

 
$
71,770

Issuance of Class A common stock in a private offering
6,047

 
57

 
7,895

 
9,231

Issuance of Class A common stock for acquisition consideration

 

 
11,783

 

Issuance of Class A common stock under equity compensation plan

 
3

 

 
6

Issuance of Class A common stock from treasury

 

 
(402
)
 

Issuance of restricted shares from treasury
(730
)
 

 
(5,926
)
 

Forfeitures of restricted stock held in treasury

 

 
587

 

Stock-based compensation
3,105

 
4,431

 
8,072

 
10,936

Contributions

 

 

 
17

Ending balance
$
116,203

 
$
91,960

 
$
116,203

 
$
91,960

 
 
 
 
 
 
 
 
Treasury Stock:
 
 
 
 
 
 
 
Beginning balance
$
(127,979
)
 
$
(11,998
)
 
$
(67,185
)
 
$
(6,887
)
Repurchases of Class A common stock

 
(15,701
)
 
(63,916
)
 
(19,502
)
Class A common stock withheld in Treasury from restricted share vesting
(240
)
 
(2,160
)
 
(2,129
)
 
(3,470
)
Forfeitures of restricted stock held in treasury

 

 
(587
)
 

Issuance of restricted shares from treasury
730

 

 
5,926

 

Issuance of Class A common stock from treasury

 

 
402

 

Ending balance
$
(127,489
)
 
$
(29,859
)
 
$
(127,489
)
 
$
(29,859
)
 
 
 
 
 
 
 
 
Retained Earnings:
 
 
 
 
 
 
 
Beginning balance
$
84,422

 
$
74,217

 
$
80,804

 
$
19,305

Adjustments due to adoption of ASC 606

 

 

 
48,505

Net income
4,800

 
1,139

 
8,418

 
7,546

Ending balance
$
89,222

 
$
75,356

 
$
89,222

 
$
75,356

 
 
 
 
 
 
 
 
Equity Attributable to Non-controlling Interests:
 
 
 
 
 
 
 
Beginning balance
$
33,107

 
$
39,842

 
$
35,638

 
$
22,796

Adjustments due to adoption of ASC 606

 

 

 
23,866

Net income attributable to non-controlling interest
39

 
353

 
1,833

 
3,125

Exchange of Series B Membership interest and exchange and cancellation of Class B common stock
(6,858
)
 

 
(8,615
)
 
(8,047
)
Contribution (distribution)
6,899

 
(654
)
 
4,331

 
(2,199
)
Ending balance
33,187

 
39,541

 
33,187

 
39,541

Total Equity, End of Period
$
111,141

 
$
177,015

 
$
111,141

 
$
177,015


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





HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Continued)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
Class A Common Shares Outstanding:
 
 
 
 
 
 
 
Beginning balance
11,778,253

 
13,707,715

 
12,387,349

 
12,350,981

Repurchases of Class A common stock
 
 
(310,890
)
 
(1,981,241
)
 
(426,135
)
Issuance of Class A common stock in a private offering
500,000

 

 
625,000

 
1,300,000

Issuance of Class A common stock for acquisition consideration

 

 
630,000

 

Issuance of Class A common stock under equity compensation plan

 
163,775

 
538,393

 
374,066

Issuance of Class A common stock from treasury

 

 
12,236

 

Issuance of restricted shares from treasury
22,500

 

 
179,500

 

Class A common stock withheld in treasury from restricted share vesting
(13,096
)
 
(45,397
)
 
(81,641
)
 
(83,709
)
Forfeitures of restricted stock held in treasury

 

 
(21,939
)
 

Ending balance
12,287,657

 
13,515,203

 
12,287,657

 
13,515,203

 
 
 
 
 
 
 
 
Class B Common Shares Outstanding:
 
 
 
 
 
 
 
Beginning balance
2,416,667

 
2,541,667

 
2,541,667

 
3,841,667

Exchange of Series B Membership interests and exchange and cancellation of Class B common stock
(500,000
)
 

 
(625,000
)
 
(1,300,000
)
Ending balance
1,916,667

 
2,541,667

 
1,916,667

 
2,541,667

 
 
 
 
 
 
 
 
Treasury Shares Outstanding:
 
 
 
 
 
 
 
Beginning balance
3,940,964

 
534,334

 
2,038,475

 
380,777

Repurchases of Class A common stock

 
310,890

 
1,981,241

 
426,135

Issuance of Class A common stock from treasury

 

 
(12,236
)
 

Issuance of restricted shares from treasury
(22,500
)
 

 
(179,500
)
 

Forfeitures of restricted stock held in treasury

 

 
21,939

 

Class A common stock withheld in Treasury from restricted share vesting
13,096

 
45,397

 
81,641

 
83,709

Ending balance
3,931,560

 
890,621

 
3,931,560

 
890,621












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




HEALTH INSURANCE INNOVATIONS, INC.
Condensed Consolidated Statements of Cash Flows (unaudited)
($ in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Operating activities:
 

 
 

Net income
$
10,251

 
$
10,671

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

 
 

Stock-based compensation
7,720

 
10,503

Depreciation and amortization
7,576

 
3,655

Deferred income taxes
22,899

 
460

Changes in operating assets and liabilities:
 

 
 

Increase in accounts receivable, prepaid expenses and other assets
(1,873
)
 
(398
)
(Increase) decrease in advanced commissions
(210
)
 
8,187

Increase in income taxes receivable
(15,012
)
 
(2,542
)
Decrease (increase) in contract asset, net
290

 
(5,693
)
(Decrease) increase in income taxes payable
(15,586
)
 
193

(Decrease) increase in accounts payable, accrued expenses and other liabilities
(1,432
)
 
6,376

Decrease in commissions payable, net
(29,056
)
 
(12,058
)
(Decrease) increase in due to member pursuant to tax receivable agreement
(212
)
 
721

Net cash (used in) provided by operating activities
(14,645
)
 
20,075

Investing activities:
 

 
 

Business acquisition, net of cash acquired
(49,895
)
 

Acquisition of digital asset
(8,133
)
 

Capitalized internal-use software
(1,232
)
 
(1,290
)
Purchases of property and equipment
(359
)
 
(534
)
Net cash used in investing activities
(59,619
)
 
(1,824
)
Financing activities:
 

 
 

Proceeds from borrowing of debt, net of issuance costs
208,412

 

Repayment on borrowings of debt
(65,000
)
 

Payments related to tax withholding for share-based compensation
(2,129
)
 
(3,470
)
Issuances of Class A common stock under equity compensation plans

 
6

Purchases of Class A common stock pursuant to share repurchase plan
(63,916
)

(19,502
)
Distributions to member
(2,335
)
 
(2,837
)
Net cash provided by (used in) financing activities
75,032

 
(25,803
)
Net increase (decrease) in cash and cash equivalents, and restricted cash
768

 
(7,552
)
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
$
26,767

 
$
48,275

 


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




Health Insurance Innovations, Inc.
Condensed Consolidated Statements of Cash Flows (Continued)
Supplemental Cash Flow Information
($ in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Supplemental cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Income taxes, net
$
9,210

 
$
7,651

Interest
3,250

 
6

Non-cash investing activities:
 
 
 
Business acquisition - equity consideration
$
11,784

 
$

Business acquisition - contingent consideration
18,438

 

Business acquisition - cash withheld by HIIQ to fund post-closing adjustments
2,600

 

Capitalized stock-based compensation
352

 
433

Non-cash financing activities:
 
 
 
Change in due to member related to Exchange Agreement
$
3,610

 
$
10,476

Change in deferred tax asset related to Exchange Agreement
(2,891
)
 
(11,661
)
Issuance of Class A common stock in a private offering related to Exchange Agreement
7,896

 
9,232

Exchange of Class B membership interests related to Exchange Agreement
(8,616
)
 
(8,048
)
Reversal of accrued distribution to member of Health Plan Intermediaries Holdings, LLC due to adoption of Sec. 451 (b) proposed regulations (Note 11).
(6,901
)
 



The accompanying notes are an integral part of the condensed consolidated financial statements
9




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,” “HIIQ,” “we,” “us,” and “our” refer to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The term “HPIH” refers to the stand-alone entity Health Plan Intermediaries Holdings, LLC. The term “HP” refers to HealthPocket, Inc., a subsidiary which was acquired by HPIH on July 14, 2014 (and is now wholly owned by Health Insurance Innovations Holdings, LLC, or "HIIH," a wholly owned subsidiary of HPIH formed on December 17, 2018). The term "Benefytt" refers to Benefytt, LLC, a subsidiary of HIIH which was formed on May 1, 2019. 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. The term "TogetherHealth" collectively refers to the three subsidiaries TogetherHealth PAP, LLC, TogetherHealth Insurance, LLC, and Rx Helpline, LLC, which were acquired by HPIH on June 5, 2019, and are all wholly owned subsidiaries of HPIH. HP, HIIH, Benefytt, TogetherHealth, and ASIA are consolidated subsidiaries of HPIH, which is a consolidated subsidiary of HIIQ.

On January 7, 2019, the Company formed Benefytt a registered Arkansas corporation which is wholly owned by HIIH. On May 1, 2019, the Company received approval from the Arkansas Department of Insurance (“ADOI”) to operate as a special purpose reinsurance captive to reinsure select hospital indemnity products. Benefytt has restricted $600,000 of cash per state regulation and is included within restricted cash on the condensed consolidated balance sheet.

Principles of Consolidation and Basis of Presentation

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 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 GAAP.

In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the financial position, results of operations, stockholders' equity, and cash flows of the Company. The condensed consolidated results for the three and nine months ended September 30, 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.

Reclassifications

The Company previously presented deferred revenue as a separate line item in the condensed consolidated balance sheets however, during the second quarter of 2019 the Company began presenting deferred revenue as a component of other current liabilities.

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 2018 Annual Report on Form 10-K.



10





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 September 30, 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.

Practical expedients

The Company 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.

Business Combinations

Business combinations are accounted for under the acquisition method of accounting. Determining what constitutes a business to qualify as a business combination requires some judgment. Allocating the purchase price requires the Company to identify and estimate the fair values of various assets acquired and liabilities assumed. Management is responsible for determining the appropriate valuation model and estimated fair values, and in doing so, considers a number of factors, including information provided by an outside valuation advisor. Management primarily establishes fair value using the income approach based upon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors. Contingent consideration liabilities are reported at their estimated fair values based upon probability-adjusted present values of the consideration expected to be paid, using significant inputs and estimates. Key assumptions used in these estimates include probability assessments with respect to the likelihood of achieving certain milestones and discount rates consistent with the level of risk of achievement. The fair value of these contingent consideration liabilities are remeasured each reporting period, with changes in the fair value recorded in other expense (income) on the condensed consolidated statements of income. The remeasured liability amount could be significantly different from the amount at the acquisition date, resulting in material charges or credits in future reporting periods.

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 3 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.



11





2. Business Acquisitions

TogetherHealth

On June 5, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with RxHelpline, LLC (“RXH”), TogetherHealth PAP, LLC (“THP”), TogetherHealth Insurance, LLC (“THI” and, collectively with RXH and THP, “TogetherHealth”), TogetherHealth Soup, L.P. (“Seller”) and certain principals of TogetherHealth, pursuant to which HPIH purchased 100% of the outstanding limited liability company interests of TogetherHealth (the “Interests”). The closing of the transactions contemplated by the Purchase Agreement occurred on June 5, 2019, simultaneous with the signing of the Purchase Agreement.
 
The purchase price for the Interests under the Purchase Agreement was approximately $50.0 million in cash, subject to certain closing and post-closing adjustments (the “Cash Consideration”), the issuance of 630,000 shares of the Company’s Class A common stock, and an earn-out agreement pursuant to which the Seller will receive payments over a 5-year post closing period equal to a percentage of the TogetherHealth’s gross margin above specified thresholds. Pursuant to the Purchase Agreement, a portion of the cash consideration consisting of $2.5 million was held back by HPIH in order to fund payment of post-closing adjustments to the cash consideration and post-closing indemnification obligations of the parties of which, $500,000 has since been released. The shares issued pursuant to the Purchase Agreement are subject to lock-up agreements pursuant to which the holders thereof are restricted from selling or transferring such shares for a three-year period, subject to a release from the lock-up of one-third of the subject shares on each of the first three anniversary dates of the Purchase Agreement and subject to other release-acceleration provisions and customary exceptions.
 
During the nine months ended September 30, 2019, we recognized $736,000 in transaction costs related to the acquisition of TogetherHealth. Transaction costs were expensed as incurred and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

This transaction is expected to provide us with additional benefits such as increased and ongoing sales referrals that we will own, which will help facilitate our entry into new markets and revenue streams, such as the market for the sale of Medicare insurance products to individuals 65 years of age or older.

The following table summarizes the revised fair value of the consideration paid for the acquisition as of June 5, 2019 ($ in thousands):
Cash consideration(1)
$
49,852

Class A common stock, at fair value(2)(4)
11,783

Earnout consideration, at fair value(3)(4)
49,298

Settlement of intercompany balances
(560
)
Total consideration
$
110,373


(1)
Cash consideration was $50.0 million, of which $2.5 million was withheld by HPIH for the payment of post-closing adjustments. Measurement period adjustments resulted in $148,000 for working capital adjustments.
(2)
The fair value of the Class A common stock derived from the market price of the stock, adjusted to include a discount for lack of marketability due to the trading restrictions pursuant to the Agreement.
(3)
Represents the updated fair value estimate of income-based contingent consideration, which may be realized by the sellers incrementally over five years after the closing date of the acquisition. The preliminary fair value of the contingent consideration arrangement at the acquisition date was estimated using a risk-adjusted probability analysis as of the acquisition date. Changes to the fair value of the earn out were $35.9 million and relate to accounting for ASC 606 and evaluating the lifetime value of polices. Management estimates the payments to be approximately $57.2 million over the five years however the maximum cash payout is unlimited.
(4) 
Management is currently awaiting additional information to complete the valuation. As additional information, as of the purchase date, becomes available and as management completes its evaluation, the preliminary purchase price allocation may be revised during the remainder of the re-measurement period (which will not exceed 12 months from the purchase acquisition date). Any such revisions or changes to the fair values of tangible and intangible assets acquired or liabilities assumed could be material.

During the third quarter of 2019, the Company updated its preliminary allocation of the purchase price of the assets and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using information and assumptions available which management believes are reasonable.


12






The following table summarizes the revised preliminary allocation of the total purchase price for the acquisition: ($ in thousands):
Cash
$
179

Accounts receivable and other assets(1)
333

Contract asset(2)(3)
13,506

Property, plant and equipment(1)
34

Intangible asset - brand(2)(4)
430

Intangible asset - BPO relationship(2)(5)
23,800

Goodwill(2)(6)
72,852

Accounts payable, accrued expenses, and other liabilities(1)
(761
)
Total
$
110,373


(1) 
The carrying value of accounts receivable, property, plant and equipment, accounts payable and accrued expenses approximated fair value; as such, no adjustments to the accounts were recorded in association with the acquisition.
(2) 
Management is currently awaiting additional information to complete the valuation. As additional information, as of the purchase date, becomes available and as management completes its evaluation, the preliminary purchase price allocation may be revised during the remainder of the re-measurement period (which will not exceed 12 months from the purchase acquisition date). Any such revisions or changes to the fair values of tangible and intangible assets acquired or liabilities assumed could be material.
(3) 
Contract asset increased $5.7 million due to updates related to the accounting for ASC 606 and evaluating lifetime value of polices.
(4) 
Brand decreased by $330,000 due to changes in valuation inputs and assumptions. The impact on amortization expense was $37,000.
(5) 
The value allocated to the BPO relationship increased by $11.6 million due to changes in valuation inputs and assumptions. Amortization expense increased by $1.9 million as a result of the change in value.
(6) 
Goodwill decreased by $18.2 million as a result of the above measurement period adjustments.

The goodwill allocated to the purchase price was calculated as the fair value of the consideration less the assets acquired and liabilities assumed. This value is primarily related to the expected results of future operations of TogetherHealth and the operational synergies we expect to realize as a result of the acquisition. The amount of goodwill that is expected to be deductible for tax purposes is $39.9 million.

As a result of acquiring TogetherHealth, our condensed consolidated results of income include the results of TogetherHealth since the acquisition date. TogetherHealth’s revenues for the three and nine months ended September 30, 2019 were $10.2 million and $11.9 million respectively. For the three and nine months ended September 30, 2019 pre-tax net loss was $76,213 and $4,680, respectively. Pre-tax net loss for the nine months ended September 30, 2019 includes $4.0 million of amortization expense associated with the preliminary valuations of the acquired intangible assets noted above.

The following unaudited pro forma financial information represents the consolidated financial information as if the acquisition had been included in our consolidated results beginning on the first day of the fiscal year prior to the acquisition date. The pro forma results have been calculated after adjusting the results of the acquired entities to remove intercompany transactions and transaction costs incurred and to reflect the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied on the first day of the fiscal year prior to the acquisition, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisitions; the costs to combine the companies' operations; or the costs necessary to achieve these costs savings, operating synergies and revenue enhancements. The pro forma results do not necessarily reflect the actual results of operations of the combined companies under our ownership and operation.


13





 
($ in thousands, except per share data)
Unaudited
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Revenues
$
75,272

 
$
78,981

 
$
240,639

 
$
239,193

Net income before income taxes
1,255

 
1,223

 
16,862

 
16,336

Net income
4,839

 
1,713

 
14,238

 
10,617

Net income attributable to Health Insurance Innovations, Inc.
4,800

 
1,307

 
11,012

 
7,525

Weighted average Class A common shares outstanding
 
 
 
 
 
 
 
Net income per share - basic
0.43

 
0.10

 
0.97

 
0.59

Net income per share - diluted
0.40

 
0.09

 
0.89

 
0.54

Weighted average Class A common shares outstanding
 
 
 
 
 
 
 
Basic
11,156,747

 
13,483,739

 
11,404,200

 
12,760,722

Diluted
11,903,992

 
14,690,453

 
12,311,676

 
13,932,811

Other Acquisitions

On July 29, 2019, the Company entered into a Stock Purchase Agreement to acquire the interests of a corporation, which owned and operated a digital asset in the insurance industry. The acquisition was accounted for as a purchase of an asset and classified as an intangible asset on the balance sheet.

On August 5, 2019, the Company entered into a Membership Interest Purchase Agreement with a distribution company to acquire 100% of the outstanding limited liability company interests. The $10.9 million purchase price of the distribution company was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value with the excess purchase price recorded as goodwill. The purchase price included an earnout with an estimated fair value of $7.9 million, estimated using a risk-based probability analysis. The earnout agreement stipulates payments of $1.0 million per year for the first three years, if certain gross margin thresholds are met, plus a percentage of the acquired company's gross margin above specified thresholds to be paid over five years.

These acquisitions were immaterial in relation to the Company's condensed consolidated balance sheets and statements of income. Additional purchase accounting disclosures have been omitted given the individual and aggregate immateriality of these acquisitions.

3. Leases

The Company has operating leases for real estate and certain equipment. The Company has lease assets of approximately $458,000 reported within other assets on the condensed consolidated balance sheet as of September 30, 2019. Current lease liabilities of approximately $155,000 are reported within other current liabilities and non-current lease liabilities of approximately $238,000 are reported in other liabilities on the condensed consolidated balance sheet as of September 30, 2019. Operating lease expense was $173,000 and $520,000, respectively, for the three and nine months ended September 30, 2019. The difference between the undiscounted cash flows and the operating lease liabilities recorded on the condensed consolidated balance sheet as of September 30, 2019 is approximately $60,000.

Supplemental cash flow information, as of September 30, 2019, related to operating leases was as follows ($ in thousands):
Cash paid within operating cash flows
$
549


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

Weighted-average discount rate
4.41
%

As of September 30, 2019, the Company signed an 7.5 year operating lease for new corporate office space which commences the first quarter of fiscal year 2020.
    


14





4. Goodwill and Intangible Assets

Goodwill

Our goodwill balance as of September 30, 2019 includes the TogetherHealth acquisition, and an immaterial acquisition as described in Note 2, and from previous acquisitions as described in Note 5 of our Form 10-K for the year ended December 31, 2018.

The changes in the carrying amounts of goodwill were as follows ($ in thousands):
Balance as of December 31, 2018
$
41,076

Goodwill acquired
78,323

Balance as of September 30, 2019
$
119,399


Other Intangible Assets
 
Our other intangible assets as of September 30, 2019 arose from acquisitions as described in Note 2, and from previous acquisitions as described in Note 5 of our Form 10-K for the year ended December 31, 2018. Intangible assets consist of brand names, carrier networks, distributor relationships, non-competition arrangements, customer relationships, and capitalized software. Finite-lived intangible assets are amortized over their useful lives from two to fifteen years.
 
Major classes of intangible assets, net consisted of the following ($ in thousands):
 
Weighted-Average Useful Lives Amortization (years)
 
September 30, 2019
 
December 31, 2018
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible Assets, net
 
Gross Carrying Amount
 
Accumulated Amortization
 
Intangible Assets, net
Brand(1)
11.0
 
$
1,879

 
$
(542
)
 
$
1,337

 
$
1,377

 
$
(481
)
 
$
896

Carrier network
 

 

 

 
40

 
(40
)
 

Distributor relationships
0.6
 
4,059

 
(3,957
)
 
102

 
4,059

 
(3,896
)
 
163

Noncompete agreements
 
45

 
(45
)
 

 
987

 
(987
)
 

Customer relationships(1)
2.3
 
29,896

 
(4,563
)
 
25,333

 
1,484

 
(1,183
)
 
301

Capitalized software
7.0
 
8,000

 
(6,000
)
 
2,000

 
8,571

 
(5,714
)
 
2,857

Total definite lived intangible assets
 
 
43,879

 
(15,107
)
 
28,772

 
16,518

 
(12,301
)
 
4,217

Digital asset
 
 
8,133

 

 
8,133

 

 

 

Total intangible assets
 
 
$
52,012

 
$
(15,107
)
 
$
36,905

 
$
16,518

 
$
(12,301
)
 
$
4,217


(1) 
Amounts reported as of September 30, 2019 are subject to measurement period adjustments for intangible assets acquired as described in Note 2.

Amortization expense for the three months ended September 30, 2019 and 2018 was $4.0 million and $464,000, respectively, and for the nine months ended September 30, 2019 and 2018 was $5.2 million and $1.4 million, respectively.

Estimated annual pretax amortization for intangibles assets in for the remainder of 2019 and each of the next five years and thereafter are as follows ($ in thousands): 
Remainder of 2019
$
3,922

2020
15,628

2021
7,947

2022
534

2023
114

2024
114

Thereafter
513

Total
$
28,772




15





5. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following ($ in thousands):
 
September 30, 2019
 
December 31, 2018
Carriers and vendors payable
$
16,575

 
$
17,352

Accrued wages
3,654

 
5,045

Accounts payable
47

 
688

Accrued professional fees
3,842

 
1,676

Accrued interest
109

 
28

Accrued credit card/ACH fees
463

 
550

Other accrued expenses
8,446

 
7,058

Total accounts payable and accrued expenses
$
33,136

 
$
32,397


Accrued wages 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. Accrued professional fees increased due to increased legal fees and expenses. Other accrued expenses include amounts for general accounts payable, employee leasing, and other miscellaneous accruals.

6. Debt
    
On June 5, 2019 (the “Closing Date”), the Company, through its subsidiary, HPIH, entered into a Credit Agreement (the “Credit Agreement”) among HPIH, as the Borrower, the Company and certain of the Company’s affiliates as guarantors (the “Guarantors”), Bank of America, N.A., as Administrative Agent, Swingline Lender and L/C Issuer (the “Administrative Agent”), SunTrust Bank, as Syndication Agent, Royal Bank of Canada, as Co-Documentation Agent, and the other parties identified therein as Lenders (the “Lenders”).

The Credit Agreement provides for an aggregate principal amount of up to $215.0 million, which consists of: (i) a $65.0 million, three-year revolving credit facility (the “Revolving Credit Facility”), which includes a $10 million sublimit for the issuance of standby letters of credit (each, a “Letter of Credit”) and a $5.0 million sublimit for swingline loans (each, a “Swingline Loan”), and (ii) a $150.0 million term loan facility, all of which was drawn on the Closing Date (the “Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Credit Facility”).
 
The proceeds of the Senior Credit Facility shall be used for: (i) general corporate purposes, including to fund ongoing working capital needs, capital expenditures, and other lawful corporate purposes, (ii) to refinance the Company's previous Credit Agreement, dated as of July 17, 2017, and (iii) to finance permitted acquisitions. On June 5, 2019, the Company used approximately $65.0 million of the proceeds to refinance the prior credit facility with SunTrust and approximately $50.0 million to fund the cash portion of the purchase price under the TogetherHealth acquisition as detailed in Note 2.
 
The Revolving Credit Facility matures on the third anniversary of the Closing Date, June 5, 2022 (the “Maturity Date”), and the Term Loan Facility is subject to quarterly amortization of principal, with 5% of the initial aggregate term loan to be payable in the first year, 7.5% of the initial aggregate term loan to be payable in the second year, 10% of the initial aggregate term loan to be payable in the final year, and final payment of all amounts outstanding, plus accrued interest, due on the Maturity Date.
 
Borrowings under the Senior Credit Facility (other than for Swingline Loans) can either be, at HPIH’s election: (i) at the Base Rate (which is the highest of the Bank of America prime rate, the federal funds rate plus 0.50%, and LIBOR index rate plus 1.00%) plus the Applicable Margin, or (ii) at LIBOR (as defined in the Credit Agreement) plus the Applicable Margin. The “Applicable Margin” as defined under the Credit Agreement means, (a) until receipt by the Administrative Agent of the compliance certificate for the fiscal quarter ending September 30, 2019, 2.00% per annum, in the case of LIBOR loans, and 1.00% per annum, in the case of Base Rate loans, and (b) thereafter, a percentage determined based upon HPIH’s Consolidated Total Leverage Ratio (as defined in the Credit Agreement) ranging from 1.50% to 2.00%, in the case of LIBOR loans, and .50% to 1.00%, in the case of Base Rate loans. Interest accrued on each Base Rate Loan (as defined in the Credit Agreement) is payable in arrears on the last day of each calendar quarter and on the Maturity Date. Interest accrued on each LIBOR Loan (as defined in the Credit Agreement) is payable on the last day of the applicable interest period, or every three months, whichever comes sooner, and on the Maturity Date. Interest accrued on the unused Revolving Credit Facility is 0.30% per annum.
 


16





The Senior Credit Facility is secured by a valid and perfected first priority lien and security interest in each of the following: (i) all present and future shares of capital stock of (or other ownership or profits interests in) each of HPIHs’ present and future subsidiaries (subject to certain exceptions), (ii) all present and future intercompany debt of HPIH and each Guarantor, (iii) all of the present and future personal property and assets of HPIH and each Guarantor, and (iv) all proceeds and products of the property and assets described in clauses (i), (ii) and (iii) above.

The Credit Agreement contains customary covenants, including, but not limited to, (i) a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio and (ii) restrictions on the incurrence of debt, investments, fundamental changes, sale and leaseback transactions, transactions with affiliates, hedging transactions, restrictive agreements, mergers, consolidations, and sales of assets. The Credit Agreement also includes customary representations and warranties and events of default.

The debt maturity schedule for our long-term debt is as follows ($ in thousands):
 
 
 
 
 
As of
 
 
 
Issuance Date
 
Maturity Date
 
September 30, 2019
 
December 31, 2018
 
Rate
Line of credit
June 2019
 
2022
 
$
12,000

 
$
15,000

 
4.24
%
Non-current portion of term loan
June 2019
 
2020 - 2022
 
139,688

 

 
4.10
%
Non-current portion of unamortized debt issuance costs
 
 
 
 
(1,071
)
 

 
 
 
 
 
 
 
$
150,617

 
$
15,000

 
 
Current portion of term loan
June 2019
 
2019 - 2020
 
8,438

 

 
4.10
%
Current portion of unamortized debt issuance costs
 
 
 
 
(643
)
 

 
 
Total
 
 
 
 
$
158,412

 
$
15,000

 
 

The aggregate contractual maturities of debt for the remainder of 2019 and each of the five fiscal years thereafter are as follows ($ in thousands):
 
Remainder of 2019
 
2020
 
2021
 
2022
 
2023
 
2024
Debt repayments
$
1,875

 
$
9,375

 
$
13,125

 
$
135,750

 
$

 
$


As of September 30, 2019, and December 31, 2018, there was $96,000 and $28,000, respectively, of accrued interest included in accounts payable and accrued expenses on the condensed consolidated balance sheets. As of September 30, 2019, we had a $148.1 million outstanding balance from borrowings under the Term Loan Facility and there was $53.0 million available to be drawn upon under the Revolving Credit Facility. As of December 31, 2018, we had a $15.0 million outstanding balance from draws on the prior credit facility. The Company is in compliance with all debt covenants.

7. Stockholders’ Equity

Except for the items detailed below, there have been no material changes to Stockholders' Equity as reported in the Company’s Annual Report on Form 10-K 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 have been granted from shares in treasury.

During the three and nine months ended September 30, 2019 there were 13,096 and 81,641 shares, respectively, transferred to treasury for statutory tax withholding obligations as a result of exercises of stock appreciation rights and vested restricted stock awards. For the three and nine months ended September 30, 2018, respectively, there were 45,400 and 83,700 shares transferred to treasury for statutory tax withholding obligations as a result of vested restricted stock awards.



17





During the three months ended September 30, 2019, no shares were forfeited to treasury. During the nine months ended September 30, 2019, there were 21,939 restricted shares transferred to treasury as a result of forfeitures. During the three and nine months ended September 30, 2018, there were no restricted shares forfeited to treasury. For the three and nine months ended September 30, 2019, there were cash outflows of $240,000 and $2.1 million, respectively, for shares redeemed to cover the tax obligations for the settlement of vested restricted stock and exercise of stock appreciation rights. During the three and nine months ended September 30, 2018, there was $2.2 million and $3.5 million, of respective cash outflows for such net settlements.

Share Repurchase Program 

During the nine months ended September 30, 2019 we repurchased 1,981,241 shares of our registered Class A common stock under the current share repurchase program at an average price per share of $32.23. During the nine months ended September 30, 2018 we repurchased 426,135 shares of our registered Class A common stock at an average price per share of $45.77.

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.

On July 3, 2019, under the Exchange Agreement, HPI exchanged 495,000 shares of Class B common stock and 495,000 membership interests of HPIH for 495,000 shares of Class A common stock. On the same date, HPIS exchanged 5,000 shares of Class B common stock and 5,000 membership interests of HPIH for 5,000 shares of Class A common stock. See Note 8 of our 2018 Annual Report on Form 10-K for further information on the Exchange Agreement.

8. Revenue

The following provides updates to our revenue disclosures as provided in our Annual Report on Form 10-K for the year ended December 31, 2018.

TogetherHealth

TogetherHealth operates in two aspects of the Medicare insurance business; consumer engagement, and Medicare insurance sales. The consumer engagement business is through a direct-to-consumer platform which connects individuals with licensed insurance distributors serving the Medicare insurance market through inbound live telephone calls via a telephony platform which transfers inbound calls in real time. The Company typically receives a fixed rate for each inbound call that meets agreed upon standards.

In the Medicare insurance business, THP routes inbound calls to HIIQ’s captive distribution and to THI's business process outsourcing partners ("BPO"), who sell Medicare-related health insurance plans on our behalf. The products being sold include Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans. The Company recognizes revenue for Medicare and consumer engagement sales up front, at the point in-time in which the performance obligations are satisfied. One of THP’s BPO partners is also the same entity for which we have an agency producer agreement, and therefore the BPO labor costs of $2.8 million are classified as a reduction from revenue in the condensed consolidated statement of income.

Remaining Performance Obligations

As of September 30, 2019, approximately $15.3 million of member management revenue is expected to be recognized over the next 60 months from the remaining performance obligations for Individual Family Plan ("IFP") and supplemental contracts.

IFP and Supplemental Products - Reassessment of Variable Consideration

After our initial estimate and constraint of variable consideration is made, in accordance with ASC 606 the Company reassesses its estimate and constraint at the end of each reporting period. As more information about the underlying uncertainties becomes known the Company will make adjustments as required.

For IFP and Supplemental product sales, the Company recognizes approximately 95% of the estimated constrained lifetime value of the product at the point-in-time that the sales and marketing services performance obligation is completed. During the three months ended September 30, 2019, we recognized a $2.1 million increase in revenue primarily as a result of an increase in


18





durations for the majority of product categories. During the nine months ended September 30th, 2019 we recognized a $9.8 million decrease of revenue related to the reassessment of variable consideration including changes in estimate due to the cancellations of a portion of the in-force policies sold by Simple Health.

Commissions Expense - In connection with the reassessment of variable consideration, the Company also had a change in estimate for the three-month period ended September 30, 2019 which decreased previously recorded commissions expense by $6.5 million. The change in estimate primarily related to distribution and product mix within the supplemental category. During the nine-month period ended September 30, 2019, the Company recognized a $27.3 million decrease in commission expense which included changes in estimated duration related to the cancellations of a portion of the in-force policies sold by Simple Health. The remaining commissions reassessment related in part to a favorable negotiation of a distributor's contract and a reassessment of certain commission arrangements.

Disaggregated Revenue

The following table presents our revenue, disaggregated by major product type and timing of revenue recognition, for the three months ended September 30, 2019 and 2018 ($ in thousands):
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
Sales and marketing services
 
Member management
 
Total
 
Sales and marketing services
 
Member management
 
Total
Revenue by Source
 
 
 
 
 
 
 
 
 
 
 
Commission revenue(1)
 
 
 
 
 
 
 
 
 
 
 
STM
$
21,617

 
$
996

 
$
22,613

 
$
12,083

 
$
665

 
$
12,748

HBIP
19,222

 
1,443

 
20,665

 
33,009

 
2,074

 
35,083

Supplemental
19,471

 
1,073

 
20,544

 
18,756

 
1,144

 
19,900

Medicare
7,798

 

 
7,798

 

 

 

Other

 

 

 

 
19

 
19

Services revenue

 
855

 
855

 

 
2,209

 
2,209

Brokerage Revenue

 

 

 
1,210

 

 
1,210

Consumer engagement revenue
2,581

 

 
2,581

 

 

 

Other revenue
216

 

 
216

 
298

 

 
298

Total revenue
$
70,905

 
$
4,367

 
$
75,272

 
$
65,356

 
$
6,111

 
$
71,467

 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point in time
$
70,905

 
$

 
$
70,905

 
$
65,356

 
$

 
$
65,356

Transferred over time

 
4,367

 
4,367

 

 
6,111

 
6,111

Total revenue
$
70,905

 
$
4,367

 
$
75,272

 
$
65,356

 
$
6,111

 
$
71,467




19





The following table presents our revenue, disaggregated by major product type and timing of revenue recognition, for the nine months ended September 30, 2019 and 2018 ($ in thousands):
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
Sales and marketing services
 
Member management
 
Total
 
Sales and marketing services
 
Member management
 
Total
Revenue by Source
 
 
 
 
 
 
 
 
 
 
 
Commission revenue(1)
 
 
 
 
 
 
 
 
 
 
 
STM
$
75,474

 
$
2,894

 
$
78,368

 
$
40,955

 
$
2,082

 
$
43,037

HBIP
61,702

 
4,932

 
66,634

 
101,378

 
6,138

 
107,516

Supplemental
56,608

 
3,328

 
59,936

 
58,716

 
3,384

 
62,100

Medicare
9,001

 

 
9,001

 

 

 

Other

 

 

 

 
57

 
57

Services revenue

 
2,979

 
2,979

 

 
3,096

 
3,096

Brokerage revenue

 

 

 
2,821

 

 
2,821

Customer engagement revenue
3,820

 

 
3,820

 
553

 

 
553

Other
216

 

 
216

 
 
 
 
 
 
Total revenue
$
206,821

 
$
14,133

 
$
220,954

 
$
204,423

 
$
14,757

 
$
219,180

 
 
 
 
 
 
 
 
 
 
 
 
Timing of Revenue Recognition
 
 
 
 
 
 
 
 
 
 
 
Transferred at a point in time
$
206,821

 
$

 
$
206,821

 
$
204,423

 
$

 
$
204,423

Transferred over time

 
14,133

 
14,133

 

 
14,757

 
14,757

Total revenue
$
206,821

 
$
14,133

 
$
220,954

 
$
204,423

 
$
14,757

 
$
219,180


(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.

9. Stock-based Compensation

No stock appreciation rights ("SARs") or stock options were granted during the three and nine months ended September 30, 2019.
The following table summarizes restricted shares granted (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019
 
2018
Restricted shares
23

 
50

 
507

 
63

 
The following table summarizes stock-based compensation expense ($ in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019

2018
 
2019

2018
Restricted shares
$
2,943

 
$
4,165

 
$
7,566

 
$
8,940

SARs
162

 
268

 
506

 
1,996

Less amounts capitalized for internal-use software
(118
)
 
(89
)
 
(352
)
 
(433
)
Total
$
2,987

 
$
4,344

 
$
7,720

 
$
10,503

 


20





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 September 30, 2019 ($ in thousands):
 
Unrecognized Expense
 
Weighted Average Remaining Years
Restricted shares
$
13,149

 
2.1
SARs
496

 
1.4
Total
$
13,645

 
 
 
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 September 30, 2019, there were no SARs exercised. During the nine months ended September 30, 2019, there were 152,632 SARs exercised, resulting in an increase of 74,334 issued shares of Class A common stock, net of shares withheld for taxes. During the three and nine months ended September 30, 2018 there were 143,100 and 163,000 SARs exercised, respectively, resulting in an increase of 111,200 and 125,900 shares of issued Class A common stock, respectively. During the three months ended September 30, 2019 there were no SARs forfeited. During the nine months ended September 30, 2019 there were 9,000 SARs forfeited. During the three and nine months ended September 30, 2018 there were 7,500 outstanding SARs forfeited.

During the three and nine months ended September 30, 2019, there were no options exercised. During the three and nine months ended September 30, 2018 there were 2,500 and 5,800 options exercised, respectively. During the three and nine months ended September 30, 2019 and 2018 there were no options forfeited.

During the three months ended September 30, 2019 and 2018, there were no restricted stock awards issued for performance restricted shares. During the nine months ended September 30, 2019 and 2018, there were 147,000 and 179,400 shares of restricted stock issued for performance restricted shares, respectively. These awards were previously granted in which the performance metrics were contractually satisfied during the period. No performance restricted stock awards were issued in the three months ended September 30, 2019 or 2018. During the three and nine months ended September 30, 2019 and 2018, there were no performance restricted stock awards forfeited.

Our current income tax expense was reduced by $120,000 and $487,000 from stock-based activity for the three and nine months ended September 30, 2019, respectively. For the three and nine months ended September 30, 2018, income tax expense was reduced by $402,000 and $760,000, respectively, from stock-based activity.

10. Net Income per Share

The computations of basic and diluted net income per share attributable to HIIQ for the three and nine months ended September 30, 2019 and 2018 were as follows ($ in thousands, except share and per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Basic net income attributable to Health Insurance Innovations, Inc.
$
4,800

 
$
1,139

 
$
8,418

 
$
7,546

Weighted average shares—basic
11,156,747

 
12,853,739

 
11,404,200

 
12,130,722

Effect of dilutive securities:
 

 
 

 
 
 
 
Restricted shares
435,349

 
573,047

 
503,130

 
597,012

SARs
310,394

 
629,038

 
402,453

 
568,692

Stock options
1,502

 
4,629

 
1,893

 
6,385

Weighted average shares—diluted
11,903,992

 
14,060,453

 
12,311,676

 
13,302,811

Basic net income per share attributable to Health Insurance Innovations, Inc.
$
0.43

 
$
0.09

 
$
0.74

 
$
0.62

Diluted net income per share attributable to Health Insurance Innovations, Inc.
$
0.40

 
$
0.08

 
$
0.68

 
$
0.57




21





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 September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Restricted shares
188

 
50

 
42

 
50

SARs

 

 
5

 
105


Additionally, potential common stock totaling 1,916,667 shares at September 30, 2019 and 2,541,667 shares at September 30, 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.

11. Income Taxes

HIIQ is organized as a corporation and as of September 30, 2019, is an 86.5% owner of HPIH, which is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a result, HPIH is not subject to federal and in most state jurisdictions entity level income taxation; however, any taxable income or loss generated by HPIH is passed through to and included in the taxable income or loss of its members, including HIIQ, on a pro rata basis.

The provision for income taxes for HIIQ, inclusive of its allocable share of net taxable income from HPIH, for the nine months ended September 30, 2019 and 2018 is $1.5 million and $5.7 million, respectively, resulting in an effective tax rate of 12.8% and 35.0%, respectively. The amount of income tax expense and the effective tax rate decreased primarily due to the release of the valuation attributable to HPIH from the adoption of Section 451(b) proposed regulations. The effective tax rate for the nine months ended September 30, 2019 is also lower than the federal statutory rate of 21% due to the Company's change in estimate resulting in an adjustment of the Company’s valuation allowance related to its investment in HPIH, as discussed further below.

HPIH wholly-owns HP, a corporation that reports its U.S. federal and state income taxes separate from HIIQ due to the Company’s ownership structure. 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. The effective tax rate for each of the nine months ended September 30, 2019 and 2018 for HP was 0.0%, as we continue to maintain a full valuation allowance against the net HP deferred tax assets. On a standalone basis, excluding the effects of HP’s effective tax rate, the effective tax rate for the nine months ended September 30, 2019 and 2018 for HIIQ is 10.3% and 25.7%, respectively. The decrease primarily relates to an adjustment of the Company’s valuation allowance related to its investment in HPIH as result of the Company’s change in estimate upon the adoption of Section 451(b) proposed regulations.

Deferred taxes on our investment in HPIH are measured on the difference between the carrying amount of our investment in HPIH and the corresponding tax basis of this investment. We do not measure deferred taxes on differences within HPIH, as those differences inherently comprise our deferred taxes on our external investment in HPIH. Book to tax timing differences that exist in HPIH inherently affect HIIQ’s deferred taxes as the outside basis difference changes.

As previously disclosed, the adoption of ASC 606 in 2018 triggered a deferred tax liability for the additional revenue to be recorded for tax starting in 2018. The Company intended to recognize this adjustment for tax purposes over the four years as allowed under IRC Section 481(a). On September 9, 2019, the IRS and Treasury released Section 451(b) proposed regulations that provide guidance for taxpayers on the timing of recognizing income for tax purposes. The Company currently records book revenue based on members’ expected lifetime collections, not solely current period collections. However, under the proposed Section 451 tax regulations, these forecasted revenues should not be considered for U.S. federal income tax purposes as these forecasted revenues are contingent on the occurrence or nonoccurrence of a future event. While these proposed regulations are not authoritative and are subject to change in the regulatory review process, they can be indicative of current IRS and Treasury views. The Company is electing to adopt these proposed regulations as of the third quarter of 2019, resulting in a change in estimate and the reversal of the IRC Section 481(a) adjustment and other adjustments related to the deferral of revenue for tax purposes during the three months ended September 30, 2019. This change resulted in the release of the previously established valuation allowance on its investment in HPIH. For the three months ended September 30, 2019, this decreased HIIQ’s tax provision by $1.8 million, resulting in a total quarterly tax benefit of $3.6 million and quarterly effective tax benefit of (285.6%).


22






As of September 30, 2019, the Company does not have a balance of gross unrecognized tax benefits. As such, no amount would favorably affect the effective income tax rate in any future periods.

12. Commitments and Contingencies

Health Plan Intermediaries, LLC

HPI and its subsidiary HPIS, which are beneficially owned by Mr. Kosloske, a former director and 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 nine months ended September 30, 2019, HPIH paid cash distributions of $2.3 million for these entities related to estimated federal and state income taxes, pursuant to the operating agreement entered into by HPIH and HPI.

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. As of September 30, 2019, we have no accrued payments recorded in the due to member account on the condensed consolidated balance sheet. On September 9, 2019 the IRS and Treasury released Section 451 (b) proposed regulations that impacted the recorded tax liability of the Company and obligations to HPI and HPIS under this LLC Agreement. Accordingly, we reversed $6.9 million of the remaining accrued distributions within the due to member account as it was no longer probable that the tax liability had been incurred. The reversal is reflected as a contribution from noncontrolling interest as of September 30, 2019 on the condensed consolidated statement of stockholders' equity. See Note 11 for additional information on income taxes and the Section 451 (b) proposed regulations.

Tax Receivable Agreement

As of September 30, 2019, Series B Membership Interests, together with an equal number of shares of Class B common stock have been exchanged for a total of 6,750,000 shares of Class A common stock. As of September 30, 2019, as a result of these exchanges, we have recorded a liability of $30.4 million pursuant to the Tax Receivable Agreement ("TRA"), of which $1.3 million is included in current liabilities and $29.1 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 the Company's founder, if we generate sufficient taxable income in the future. As of September 30, 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:

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 court agreed with the MAG and ordered the Company to produce additional documents and provide further depositions. The Company has asked the court to reconsider its decision, and has also filed an appeal against the decision, based on what the Company believes are factual inaccuracies in the judgment. The court subsequently declined the Company's request however the appeal remains open.


23






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 (the "Department") and following proactive engagement by the Company, the Department withdrew its order and issued a subpoena to the Company and certain insurers to allow it to gather more information. Similar subpoenas have been issued to certain insurers. The subpoenas relate to whether policyholders were eligible to purchase hospital benefit plans. The Company has provided data and documents and continues to liaise with the Department.

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. The Company has been provided with findings and a consequent proposal for resolution. The Company continues to liaise with and provide information to the Commissioner's Office in order to determine an accurate position. The Company believes that based on the nature of the allegations that a loss arising from a civil penalty is probable. However, since the facts relating to the allegations are still being resolved, the Company is currently unable to estimate the amount of any potential civil penalty or determine a range of potential loss under the investigation of the Company.

We are proactively communicating and cooperating with all regulatory agencies involved in the above-described examinations and actions, and we continue to develop and enhance our compliance and control mechanisms. 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 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.

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 answered such complaint and filed an opposition motion, in coordination with all Defendants, to the Plaintiff’s request for leave to amend.

In a case styled as David Diaz, et al. v. Health Plan Intermediaries Holdings, LLC, et al., Case No. 18-cv-04240, U.S. District Court for the District of Arizona, filed on August 21, 2018, the two plaintiffs allege misrepresentation relating to the sale of an insurance policy that later allegedly did not cover hospital bills. The insurance agent who sold the policy was an employee of the Company’s wholly-owned subsidiary, American Service Insurance Agency (“ASIA”) and that agent is also named as a co-defendant. The Company and the individual defendant have answered a subsequently amended complaint and rejected the substantive allegations. Discovery is expected to continue through April 2020.



24





In a case styled as Chisholm v. Companion Life Insurance Company, et. al., Case No. 19-cv-04261, U.S. District Court for the Southern District of Texas, filed on November 9, 2018, the plaintiff filed a claim asserting breach of contract and bad faith claims relating to denial of medical bills.

The Company has also received claims from insureds and indemnification claims from carriers (when the carriers themselves receive claims from insureds) relating to lack of carrier coverage, claims handling, and alleged deceptive sales practices relating to carriers with which we do business. In each of these individual insureds’ claims, the Company attempts to dismiss, challenge, or resolve the claims as quickly as possible. While it is possible that a loss may arise from any of the above matters, the amount of such loss is not known or estimable at this time.

Other

Purported Securities Class Action Lawsuits
    
In September 2017, three putative securities class action lawsuits were filed against the Company and certain of its current and former executive officers. The cases were styled Cioe Investments Inc. v. Health Insurance Innovations, Inc., Gavin Southwell, and Michael Hershberger, Case No. 1:17-cv-05316-NG-ST, filed in the U.S. District Court for the Eastern District of New York on September 11, 2017; Michael Vigorito v. Health Insurance Innovations, Inc., Gavin Southwell, and Michael Hershberger, Case No. 1:17-cv-06962, filed in the U.S. District Court for the Southern District of New York on September 13, 2017; and Shilpi Kavra v. Health Insurance Innovations, Inc., Patrick McNamee, Gavin Southwell, and Michael Hershberger, Case No. 8:17-cv-02186-EAK-MAP, filed in the U.S. District Court for the Middle District of Florida on September 21, 2017. All three of the foregoing actions (the “Securities Actions”) were filed after a decline in the trading price of the Company’s common stock following the release of a report authored by a short-seller of the Company’s common stock raising questions about, among other things, the Company’s public disclosures relating to the Company’s regulatory examinations and regulatory compliance. All three of the Securities Actions contained substantially similar allegations to those raised in the short-seller report alleging that the Company made materially false or misleading statements or omissions relating to regulatory compliance matters, particularly regarding the Company’s application for a third-party administrator license in the State of Florida, which was issued by the State on February 14, 2018.

In November and December 2017, the Cioe Investments and Vigorito cases were transferred to the U.S. District Court for the Middle District of Florida, and on December 28, 2017, they were consolidated with the Kavra matter under the case caption, In re Health Insurance Innovations Securities Litigation, Case No. 8:17-cv-02186-EAK-MAP (M.D. Fla.). On February 6, 2018, the court appointed Robert Rector as lead plaintiff and appointed lead counsel, and lead plaintiff filed a consolidated complaint on March 23, 2018. The consolidated complaint, which dropped Patrick McNamee as a defendant and added Michael Kosloske as a defendant, largely sets forth the same factual allegations as the initially filed Securities Actions filed in September 2017 and added allegations relating to alleged materially false statements and omissions relating to the regulatory proceeding previously initiated against the Company by the Montana State Auditor, Commissioner of Securities and Insurance (the “CSI”) which proceeding was dismissed on October 31, 2017. The complaint also adds allegations regarding insider stock sales by Messrs. Kosloske and Hershberger. The consolidated complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), SEC Rule 10b-5, and Section 20(a) of the Exchange Act. According to the consolidated complaint, the 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. On March 29, 2019, the court sua sponte ordered mandatory mediation before United States Magistrate Judge Christopher Tuite, which did not result in a settlement. On June 28, 2019, the court granted in part, and denied in part, the motion to dismiss, and dismissed all claims against Messrs. Southwell and Kosloske. Discovery is ongoing. The Company intends to vigorously defend against the remaining 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 action is seeking an undetermined amount of damages, interest, attorneys’ fees, and costs on behalf of a putative class of individuals and entities that acquired shares of the Company’s common stock during the period February 28, 2018 through November 27, 2018. The complaint alleges that the Company made materially false and/or misleading statements and/or material omissions during the purported class period relating to the Company’s relationship with third parties, particularly Health Benefits One LLC/Simple Health Plans and affiliates. The complaint alleges that, among other things, the Company failed to disclose to investors that a substantial portion of the Company’s revenues were derived from third parties who allegedly used deceptive tactics to sell the Company’s products and that regulatory scrutiny of such third parties would materially impact the Company’s operations. The complaint alleges violations of Section 10(b) and Section 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated under the Securities Exchange Act. On May 13, 2019, the court appointed lead plaintiff Oklahoma Municipal Retirement Fund and City


25





of Birmingham Retirement and Relief System and lead counsel Saxena White P.A. The lead plaintiff filed a consolidated amended complaint on July 19, 2019. The consolidated complaint incorporated the allegations from the first complaint and added allegations of alleged materially false or misleading statements or material omissions relating to alleged deficiencies in the Company’s compliance and customer service programs and the number of complaints the Company received from consumers relating to third parties, particularly Health Benefits One LLC/Simple Health and affiliates. The complaint also adds allegations regarding insider stock sales by Messrs. Southwell and Hershberger. The plaintiffs are seeking an undetermined amount of damages, interest, attorneys’ fees and costs on behalf of putative classes of individuals and entities that acquired shares of the Company’s common stock during a purported class period of September 25, 2017 through April 11, 2019. On August 28, 2019, the Company moved to dismiss the action, which the court denied on November 4, 2019. The Company intends to vigorously defend against these claims.

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 U.S. District Court for the District of Delaware (Case No. Case No. 1:18-cv-00519) naming most of the Company’s directors and executive officers at such time as defendants. The derivative complaints assert alleged violations of Section 14(a) of the Exchange Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 20(a) of the Exchange Act, and claims for alleged breach of fiduciary duties, alleged unjust enrichment, alleged abuse of control, alleged gross mismanagement, and alleged waste of corporate assets. The factual allegations in the complaints are based largely on the allegations in the above-described In re Health Insurance Innovations Securities Litigation. The plaintiffs are seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, restitution, interest, and attorneys’ fees and costs. On June 5, 2018, the court entered an order staying the litigation pending resolution of the above-described securities litigation (In re Health Insurance Innovations Securities Litigation). Defendants intend to vigorously defend against these claims.

An individual stockholder, Melvyn Klein, filed a derivative action complaint on June 26, 2019, in the U.S. District Court for the District of Delaware naming as defendants Gavin T. Southwell, former director Michael W. Kosloske, director Paul E. Avery, director Anthony J. Barkett, director Paul Gabos, director Robert Murley, former director Bruce Telkamp, former director Sheldon Wang, and officer Michael D. Hershberger (Case No. 1:19-cv-01206). The derivative complaint asserts alleged violations of Section 14(a) of the Securities Exchange Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Section 20(a) of the Exchange Act, and claims for alleged breach of fiduciary duties, alleged unjust enrichment, and alleged waste of corporate assets. The factual allegations in the complaint are largely the same as the allegations in the above-described DiFalco and Daniels derivative action. The Plaintiff is seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, interest, and attorneys’ fees and costs. This action has been consolidated with the above-described DiFalco and Daniels actions and is subject to the stay entered into on June 5, 2018, and the Company intends to vigorously defend against these claims.

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, Kenneth Moser, and more recently by additional groups of Plaintiffs led by Robert Hossfeld, Annette Barnes, Mary Bilek, and Paula Foote. In the Cunningham case, the Company's motion for summary judgment is pending. Moser, like Cunningham, has been a plaintiff in hundreds of similar cases against a variety of types of companies nationwide. On August 7, 2019, the U.S. District Court for the Southern District of California (Case No. 17-CV-1127) certified two classes in the Moser case, and the Company timely appealed the Court’s Order on the Motion for Class Certification. The parties are awaiting a ruling on such.

The Company has received other complaints for alleged TCPA violations from other claimants, the majority of which are not lawsuits. The Company believes many of these individuals to be professional plaintiffs and not common consumers. The Company maintains an internal legal department that, among other things, reviews these claims as they arise, coordinates the Company’s response to such, and supports outside counsel when litigation defense is required. While these types of claims have previously settled, been dismissed, or resolved without any material effect on the Company, there is a possibility in the future that one or more 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.


26






Health Benefits One, LLC (Simple Health)

On November 1, 2018, the Company received notice that a lawsuit styled as Federal Trade Commission v. Simple Health Plans, et al. was filed against an independent third-party distributor and its principal, along with their related companies. The Company is not a party to this case. A temporary restraining order ("TRO") was granted by the United States District Court, Southern District of Florida, against Simple Health Plans, LLC and certain of its affiliates, appointing a receiver (the "Receiver") and imposing other restrictions against the defendants in this case. On November 1, 2018, the Company terminated its relationship with all of the defendants, has been in communication and working cooperatively with the appointed Receiver and the FTC. In coordination with the FTC and the appointed Receiver, the Company has completed its transfer of funds to the Receiver that would otherwise be due to Simple Health, and the Company and FTC successfully notified all consumers of their ongoing insurance options.

Separate from the FTC case against Simple Health, a proposed class action, but not yet certified, styled as Belin et. al. v. Health Insurance Innovations, Inc., et. al., Case No. 19-cv-61430, was filed in the U.S. District Court for the Southern District of Florida on June 7, 2019. The case alleges that the Company conspired with Simple Health using a theory of the Racketeer Influenced and Corrupt Organizations Act along with other claims and seeks unspecified damages. The Company's Motion to Dismiss was partially denied and the Company intends to vigorously defend against the claims.

Other matters

We enter into agreements in the ordinary course of business that may require us to indemnify other parties for claims brought by a third-party. From time to time, we have received requests for indemnification. Presently the Company is managing and responding to both formal 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.

13. Fair Value Measurements

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

Level 1: Quoted prices in active markets for identical assets or liabilities;

Level 2: Quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability; and

Level 3: Unobservable inputs for the asset or liability.

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

We utilize the market approach to measure the fair value of our financial liabilities. As subjectivity exists with respect to many of the valuation techniques, the fair value estimates we have disclosed may not equal prices that we may ultimately realize if the assets are sold or the liabilities are settled with third parties. Below is a description of our valuation methods.

Contingent consideration for business acquisitions. Contingent consideration is related to the acquisition of TogetherHealth and an immaterial acquisition as described in Note 2. These acquisitions include periodic cash payments and are valued using external valuation specialists. The inputs include discount rates reflecting the credit risk, and the probability of the underlying outcome of the results required by TogetherHealth and the other immaterial acquisitions, for us to make payments and the nature of such payments. The underlying outcomes are subject to the target results in the respective instruments or agreement. These liabilities are included in Level 3 of the fair value hierarchy.



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The carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheets for cash and cash equivalents, restricted cash, credit card transactions receivable, accounts receivable, advanced commissions, carriers and vendors payable, commissions payable, accounts payable and accrued expenses, and debt as of September 30, 2019 and December 31, 2018, respectively, approximate fair value because of the short-term duration of these instruments.

The following liabilities measured at fair value are as follows ($ in thousands):
 
Carrying Value
 
Fair Value Measurement as of September 30, 2019
 
as of
September 30, 2019
 
Level 1
 
Level 2
 
Level 3
Liabilities:
 

 
 

 
 

 
 

Contingent acquisition consideration
$
57,176

 
$

 
$

 
$
57,176

 
$
57,176

 
$

 
$

 
$
57,176


The following table sets forth changes in Level 3 financial liabilities ($ in thousands):
 
Three Months Ended September 30,
 
2019
 
2018
Beginning balance
$
13,424

 
$

Increase in contingent consideration liability
7,878

 

Increase due to measurement period adjustments
35,874

 

Ending balance
$
57,176

 
$


14. 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 7 and Note 12 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, integration and synergies of acquisitions, 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.

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.

Executive Overview

We are a cloud-based technology platform and distributor of affordable health and life insurance products that meet the demands and needs of our consumers. These products include Medicare, individual and family health insurance plans (“IFP”)


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which include short-term medical (“STM”) insurance plans and health benefit insurance plans ("HBIP"). We also offer supplemental products which include a variety of additional insurance and non-insurance products that are frequently purchased as supplements to IFPs. We work in concert with carriers to help them develop products for our target markets. We do not process or pay claims. The health insurance products we help develop are underwritten by third-party insurance carriers with whom we have no affiliation apart from our contractual relationships.
For Medicare, we operate in two aspects of the Medicare insurance business: consumer engagement, and Medicare insurance sales. The consumer engagement business is through a direct-to-consumer platform which connects individuals with licensed insurance distributors serving the Medicare insurance market through inbound live telephone calls via a third-party telephony platform which transfers inbound calls in real time. The Company typically receives a fixed rate for each inbound call that meets agreed upon standards. In the Medicare insurance business, we route inbound calls to our captive distribution and to our business process outsourcing partners ("BPO"), who sell Medicare-related health insurance plans on our behalf. The products being sold include Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans.

For IFP, we market products to individuals through e-commerce and other licensed-agent distribution channels, consisting of both our internal distribution network, and an external distribution network of independently owned and operated distributors. For a majority of the IFP products we offer, we collect money and manage the members’ non-claims related experience for the IFPs, non-insurance products, and supplemental products.
On July 29, 2019, the Company entered into a Stock Purchase Agreement to acquire the interests of a corporation, which owned and operated a digital asset in the insurance industry. The acquisition was accounted for as a purchase of an asset and classified as an intangible asset on the balance sheet.

On August 5, 2019, the Company entered into a Membership Interest Purchase Agreement with a captive distribution company to acquire 100% of the outstanding limited liability company interests. The purchase price of the captive distribution company was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value with the excess purchase price recorded as goodwill.

Overview of Operating Results

Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018