hiiq-10q_20150930.htm

 

 

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, 2015

or

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 1-35811

 

Health Insurance Innovations, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

46-1282634

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

15438 N. Florida Avenue, Suite 201

Tampa, FL

 

33613

(Address of Principal Executive Offices)

 

(Zip Code)

(877) 376-5831

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

Non-accelerated filer

 

 

¨  (Do not check if a smaller reporting company)

  

 

Smaller reporting company

 

 

x

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

As of November 9, 2015, the registrant had 7,760,383 shares of Class A common stock, $0.001 par value, outstanding and 6,841,667 shares of Class B common stock, $0.001 par value, outstanding.

 

 

 

 

 

 


 

HEALTH INSURANCE INNOVATIONS, INC.

CONTENTS

 

PART I—FINANCIAL INFORMATION

3

 

ITEM 1—FINANCIAL STATEMENTS

3

 

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2015 (UNAUDITED) AND DECEMBER 31, 2014

3

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

4

 

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 (UNAUDITED) AND YEAR ENDED DECEMBER 31, 2014

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014 (UNAUDITED)

6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7

 

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

28

 

ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

41

 

ITEM 4—CONTROLS AND PROCEDURES

41

 

PART II—OTHER INFORMATION

42

 

ITEM 1—LEGAL PROCEEDINGS

42

 

ITEM 1A—RISK FACTORS

42

 

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

42

 

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

42

 

ITEM 4—MINE SAFETY DISCLOSURES

42

 

ITEM 5—OTHER INFORMATION

42

 

ITEM 6—EXHIBITS

43

 

 SIGNATURES

44

 

 

 

 


 

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, 2015

 

 

December 31, 2014

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

7,929

 

 

$

16,154

 

Cash held on behalf of others

 

5,459

 

 

 

5,744

 

Short-term investments

 

 

 

 

461

 

Accounts receivable, net, prepaid expenses and other current assets

 

1,690

 

 

 

2,332

 

Advanced commissions

 

14,510

 

 

 

5,973

 

Note receivable

 

1,014

 

 

 

 

Income taxes receivable

 

568

 

 

 

12

 

Total current assets

 

31,170

 

 

 

30,676

 

Property and equipment, net

 

1,722

 

 

 

526

 

Goodwill

 

41,076

 

 

 

41,076

 

Intangible assets, net

 

11,502

 

 

 

13,565

 

Other assets

 

782

 

 

 

329

 

Total assets

$

86,252

 

 

$

86,172

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

11,823

 

 

$

11,397

 

Deferred revenue

 

153

 

 

 

64

 

Current portion of contingent acquisition consideration

 

1,246

 

 

 

2,647

 

Deferred tax liability

 

13

 

 

 

13

 

Due to member

 

229

 

 

 

229

 

Other current liabilities

 

199

 

 

 

189

 

Total current liabilities

 

13,663

 

 

 

14,539

 

Revolving line of credit

 

2,500

 

 

 

 

Contingent acquisition consideration

 

 

 

 

1,753

 

Deferred tax liability

 

1,589

 

 

 

2,287

 

Due to member

 

733

 

 

 

387

 

Other liabilities

 

241

 

 

 

494

 

Total liabilities

 

18,726

 

 

 

19,460

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Class A common stock (par value $0.001 per share, 100,000,000 shares authorized; 7,910,085 and 7,900,085 shares issued, respectively; and 7,760,383 and 7,852,941 shares outstanding, respectively)

 

8

 

 

 

8

 

Class B common stock (par value $0.001 per share, 20,000,000 shares authorized; 6,841,667 shares issued and outstanding, respectively)

 

7

 

 

 

7

 

Preferred stock (par value $0.001 per share, 5,000,000 shares authorized; no shares issued and outstanding)

 

 

 

 

 

Additional paid-in capital

 

44,228

 

 

 

42,647

 

Treasury stock, at cost (149,702 and 47,144 shares, respectively)

 

(1,536

)

 

 

(347

)

Accumulated deficit

 

(3,236

)

 

 

(3,694

)

Total Health Insurance Innovations, Inc. stockholders’ equity

 

39,471

 

 

 

38,621

 

Noncontrolling interests

 

28,055

 

 

 

28,091

 

Total stockholders’ equity

 

67,526

 

 

 

66,712

 

Total liabilities and stockholders' equity

$

86,252

 

 

$

86,172

 

 

See accompanying notes to the condensed consolidated financial statements.

3


 

HEALTH INSURANCE INNOVATIONS, INC.

Condensed Consolidated Statements of Operations (unaudited)

($ in thousands, except share and per share data)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues (premium equivalents of $43,404 and $42,240 for the three months ended September 30, 2015 and 2014, respectively and $120,216 and $110,375 for the nine months ended September 30, 2015 and 2014, respectively)

$

25,799

 

 

$

23,364

 

 

$

71,087

 

 

$

62,228

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-party commissions

 

13,243

 

 

 

11,377

 

 

 

35,337

 

 

 

30,577

 

Credit card and ACH fees

 

569

 

 

 

534

 

 

 

1,581

 

 

 

1,367

 

Selling, general and administrative

 

10,845

 

 

 

11,387

 

 

 

32,360

 

 

 

27,875

 

Depreciation and amortization

 

687

 

 

 

907

 

 

 

2,255

 

 

 

1,723

 

Total operating expenses

 

25,344

 

 

 

24,205

 

 

 

71,533

 

 

 

61,542

 

Income (loss) from operations

 

455

 

 

 

(841

)

 

 

(446

)

 

 

686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

(8

)

 

 

-

 

 

 

(25

)

 

 

(17

)

Fair value adjustment to contingent acquisition consideration

 

(438

)

 

 

131

 

 

 

(824

)

 

 

939

 

Other expense (income)

 

83

 

 

 

144

 

 

 

(170

)

 

 

18

 

Net income (loss) before income taxes

 

818

 

 

 

(1,116

)

 

 

573

 

 

 

(254

)

Benefit for income taxes

 

(701

)

 

 

(332

)

 

 

(664

)

 

 

(205

)

Net income (loss)

 

1,519

 

 

 

(784

)

 

 

1,237

 

 

 

(49

)

Net income (loss) attributable to noncontrolling interests

 

788

 

 

 

(172

)

 

 

779

 

 

 

364

 

Net income (loss) attributable to Health Insurance Innovations, Inc.

$

731

 

 

$

(612

)

 

$

458

 

 

$

(413

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.10

 

 

$

(0.09

)

 

$

0.06

 

 

$

(0.07

)

Diluted

$

0.10

 

 

$

(0.09

)

 

$

0.06

 

 

$

(0.07

)

Weighted average Class A common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

7,531,827

 

 

 

6,532,161

 

 

 

7,521,124

 

 

 

5,538,422

 

Diluted

 

7,571,464

 

 

 

6,532,161

 

 

 

7,613,433

 

 

 

5,538,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4


 

HEALTH INSURANCE INNOVATIONS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

($ in thousands, except share data)

 

 

 

Health Insurance Innovations, Inc.

 

 

 

 

 

 

 

 

 

 

 

Class A Common Stock

 

 

Class B Common Stock

 

 

 

 

 

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Additional Paid-in Capital

 

 

Shares

 

 

Amount

 

 

Accumulated Deficit

 

 

Noncontrolling Interests

 

 

Stockholders' Equity

 

Balance as of January 1, 2014

 

 

5,179,713

 

 

$

5

 

 

 

8,566,667

 

 

$

9

 

 

$

28,787

 

 

 

129,881

 

 

$

(1,563

)

 

$

(3,355

)

 

$

33,894

 

 

$

57,777

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(339

)

 

 

762

 

 

 

423

 

Class A common stock issued as acquisition consideration

 

 

815,991

 

 

 

1

 

 

 

 

 

 

 

 

 

6,733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,734

 

Issuance of Class A common stock in private offering

 

 

1,725,000

 

 

 

2

 

 

 

 

 

 

 

 

 

20,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,959

 

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

 

 

 

 

 

 

 

 

(1,725,000

)

 

 

(2

)

 

 

(14,622

)

 

 

 

 

 

 

 

 

 

 

 

(6,301

)

 

 

(20,925

)

Repurchases of Class A common stock

 

 

(43,318

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43,318

 

 

 

(304

)

 

 

 

 

 

 

 

 

(304

)

Issuances of Class A common stock under equity compensation plans

 

 

49,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock withheld in treasury from restricted share vesting

 

 

(12,403

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,403

 

 

 

(142

)

 

 

 

 

 

 

 

 

(142

)

Forfeitures of restricted shares held in treasury

 

 

(11,542

)

 

 

 

 

 

 

 

 

 

 

 

131

 

 

 

11,542

 

 

 

(131

)

 

 

 

 

 

 

 

 

 

Issuances of restricted shares from treasury

 

 

150,000

 

 

 

 

 

 

 

 

 

 

 

 

(1,793

)

 

 

(150,000

)

 

 

1,793

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,454

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(264

)

 

 

(264

)

Balance as of December 31, 2014

 

 

7,852,941

 

 

$

8

 

 

 

6,841,667

 

 

$

7

 

 

$

42,647

 

 

 

47,144

 

 

$

(347

)

 

$

(3,694

)

 

$

28,091

 

 

$

66,712

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

458

 

 

 

779

 

 

 

1,237

 

Repurchases of Class A common stock

 

 

(73,852

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73,852

 

 

 

(520

)

 

 

 

 

 

 

 

 

(520

)

Issuances of Class A common stock under equity compensation plans

 

 

10,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class A common stock withheld in treasury from restricted share vesting

 

 

(15,790

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15,790

 

 

 

(89

)

 

 

 

 

 

 

 

 

(89

)

Forfeitures of restricted shares held in treasury

 

 

(164,132

)

 

 

 

 

 

 

 

 

 

 

 

2,125

 

 

 

164,132

 

 

 

(2,125

)

 

 

 

 

 

 

 

 

 

Issuances of restricted shares from treasury

 

 

151,216

 

 

 

 

 

 

 

 

 

 

 

 

(1,545

)

 

 

(151,216

)

 

 

1,545

 

 

 

 

 

 

 

 

 

 

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,001

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(815

)

 

 

(815

)

Balance as of September 30, 2015 (unaudited)

 

 

7,760,383

 

 

$

8

 

 

 

6,841,667

 

 

$

7

 

 

$

44,228

 

 

 

149,702

 

 

$

(1,536

)

 

$

(3,236

)

 

$

28,055

 

 

$

67,526

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5


 

HEALTH INSURANCE INNOVATIONS, INC.

Condensed Consolidated Statements of Cash Flows (unaudited)

($ in thousands)

 

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

Operating activities:

 

 

 

 

 

 

 

Net income (loss)

$

1,237

 

 

$

(49

)

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

 

 

 

 

 

 

 

Stock-based compensation

 

1,001

 

 

 

1,608

 

Depreciation and amortization

 

2,255

 

 

 

1,723

 

Fair value adjustments to contingent acquisition consideration

 

(824

)

 

 

939

 

Gain on deconsolidation of variable interest entity

 

(189

)

 

 

 

Deferred income taxes

 

(698

)

 

 

(74

)

Gain on sale of available-for-sale securities

 

 

 

 

(20

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Decrease (increase) in cash held on behalf of others

 

285

 

 

 

(1,194

)

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

 

1,002

 

 

 

(575

)

Increase in advanced commissions

 

(9,162

)

 

 

(3,012

)

Increase in income taxes receivable

 

(556

)

 

 

(137

)

Increase in accounts payable, accrued expenses and other liabilities

 

277

 

 

 

4,419

 

Increase (decrease) in deferred revenue

 

89

 

 

 

(902

)

Increase in due to related parties pursuant to tax receivable agreement

 

346

 

 

 

193

 

Net cash (used in) provided by operating activities

 

(4,937

)

 

 

2,919

 

Investing activities:

 

 

 

 

 

 

 

Capitalized internal-use software and website development costs

 

(1,214

)

 

 

 

Issuance of note receivable

 

(1,044

)

 

 

 

Proceeds from repayment of note receivable

 

30

 

 

 

 

Proceeds from sale of available-for sale securities

 

461

 

 

 

33,020

 

Purchases of property and equipment

 

(123

)

 

 

(210

)

Business acquisition, net of cash acquired

 

 

 

 

(21,978

)

Acquisition of available-for-sale securities

 

 

 

 

(18,000

)

Proceeds from maturities of held-to-maturity securities

 

 

 

 

5,494

 

Payments for deposits

 

 

 

 

(500

)

Net cash used in investing activities

 

(1,890

)

 

 

(2,174

)

Financing activities:

 

 

 

 

 

 

 

Proceeds from borrowings under revolving line of credit

 

2,500

 

 

 

 

Payments for contingent acquisition consideration

 

(2,330

)

 

 

(1,350

)

Payments for noncompete obligation

 

(144

)

 

 

(121

)

Class A common stock withheld in treasury from restricted share vesting

 

(89

)

 

 

(126

)

Purchases of treasury stock

 

(520

)

 

 

 

Distributions to member

 

(815

)

 

 

(1,138

)

Issuance of Class A common stock in private offering

 

 

 

 

20,959

 

Purchase of Series B Membership interests

 

 

 

 

(20,959

)

Net cash used in financing activities

 

(1,398

)

 

 

(2,735

)

Net decrease in cash and cash equivalents

 

(8,225

)

 

 

(1,990

)

Cash and cash equivalents at beginning of period

 

16,154

 

 

 

17,054

 

Cash and cash equivalents at end of period

$

7,929

 

 

$

15,064

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities:

 

 

 

 

 

 

 

Capitalized website development costs included in accounts payable

 

50

 

 

 

 

Class A common stock issued as consideration for business acquisition

 

 

 

 

6,734

 

Contingent consideration for business acquisition

 

 

 

 

1,270

 

Consideration for business acquisition included in accrued expenses

 

 

 

 

217

 

Adjustment to consideration for business acquisition included in accounts receivable

 

 

 

 

12

 

 

See accompanying notes to the condensed consolidated financial statements.

6


 

HEALTH INSURANCE INNOVATIONS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

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

In this quarterly report, unless the context suggests otherwise, references to the “Company,” “we,” “us” and “our” refer to Health Insurance Innovations, Inc. and its consolidated subsidiaries. The terms “HII”, “HPIH”, and “ICE” refer to the stand-alone entities Health Insurance Innovations, Inc., Health Plan Intermediaries Holdings, LLC, and Insurance Center for Excellence, LLC, respectively. The term “Secured” refers to Sunrise Health Plans, LLC, Sunrise Group Marketing LLC, and Secured Software Solutions LLC, collectively. The term “SIL” refers to Simple Insurance Leads LLC, a venture that was formed by us and our third-party joint venture partner in June 2013; and with respect to which we sold our interest to our joint venture partner on March 23, 2015. The term “HP” refers to HealthPocket, Inc., a wholly-owned subsidiary which was acquired by HPIH on July 14, 2014.  The term “ASIA” refers to American Service Insurance Agency, LLC, a wholly-owned subsidiary which was acquired by HPIH on August 8, 2014. HPIH, ICE, Secured, HP and ASIA are consolidated subsidiaries of HII, and SIL was a consolidated subsidiary of HII until March 23, 2015.

Business Description and Organizational Structure of the Company

Our Business

We are a developer, distributor and virtual administrator of affordable, cloud-based individual health insurance plans and supplemental products.  Our subsidiary HP operates a comprehensive consumer comparison shopping website for health insurance plans, HealthPocket.com.  We are a developer and distributor of individual and family medical insurance plans (“IFP”), which include short-term medical (“STM”) insurance plans and guaranteed-issue and underwritten hospital indemnity plans.  STM plans provide up to six, eleven or twelve months of health insurance coverage with a wide range of deductible and copay levels.  STM plans generally offer qualifying individuals comparable benefits for fixed short-term durations with premiums that are substantially less than the premiums of individual major medical (“IMM”) plans which offer lifetime renewable coverage.  STM plans feature a streamlined underwriting process offering immediate coverage options. Hospital indemnity plans pay fixed cash benefits for covered procedures and services for individuals under the age of 65.

Our sales of STM products are supplemented with additional product offerings, including a variety of supplemental products such as pharmacy benefit cards, dental plans, vision plans, cancer/critical illness plans, and life insurance policies that are frequently purchased as supplements to IFP plans.  We also offer supplemental deductible and gap protection plans for consumers whose IMM plans may not cover certain medical expenses until high deductibles are met.

We design and structure these products on behalf of insurance carriers and market them to individuals through our internal and external distribution network. We manage member relations via our online member portal, which is available 24 hours a day, seven days a week. Our online enrollment process allows us to aggregate and analyze consumer data and purchasing habits to track market trends and drive product innovation. Our sales are primarily executed online and offer real-time fulfillment through a proprietary web-based technology platform, through which we receive credit card and automated clearing house (“ACH”) payments directly from the purchasing customers, whom are also referred to as members, at the time of sale. The plans are underwritten by contracted insurance carriers, and we assume no underwriting or insurance risk. Our sales of IFP and supplemental products focus on the large and under-penetrated segment of the U.S. population who are uninsured or underinsured.  These respective classes include individuals not covered by employer-sponsored insurance plans, such as the self-employed as well as small business owners and their employees, individuals who are unable to afford IMM premiums, underserved “gap populations” that require insurance due to changes caused by life events: new graduates, divorcees, early retirees, military discharges, the unemployed, part-time and seasonal employees and customers seeking health insurance between the open enrollment periods held each year by the health insurance exchanges created under the Patient Protection and Affordable Care Act (“PPACA”).

We acquired HP in July 2014. HP provides consumers with access to its leading health insurance information search and comparison technology through its website, HealthPocket.com. This free website allows consumers to easily and clearly compare and rank health insurance plans available for an individual, family, or small business, empowering consumers to make health plan decisions and reduce their out of pocket costs. HP also enhances our consolidated business operations by aggregating high-quality product sales referrals for IFP and other health insurance products and supplemental products. In addition, the data aggregated by HP is used to research consumer needs and to measure product demand to help us design and manufacture high-demand insurance products.

 

During the six months ended June 30, 2015, we developed a new website, www.agilehealthinsurance.com (“AHI”), through which consumers can shop for, apply for and purchase IFP products directly via the internet.  We intend for AHI to be a significant direct-to-consumer distribution channel in the future and a strategic complement to our traditional distribution channels.  AHI, as a

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distribution channel, is operated by the consumer division of HPIH; however, AHI was developed primarily by HP employees, the majority of whose time was allocated to the development of AHI during the three and nine months ended September 30, 2015.  

Our History

Our business began operations in 2008, and historically we operated through Health Plan Intermediaries, LLC (“HPI”). HII was incorporated in the State of Delaware in October 2012 to facilitate the initial public offering (“IPO”) of our common stock. In November 2012, through a series of transactions, HPI assigned the operating assets of our business to HPIH, and HPIH assumed the operating liabilities of HPI. Since November 2012, we have operated our business through HPIH and its consolidated subsidiaries.

 

Upon completion of the IPO, HII became a holding company, the principal asset of which is its interest in HPIH. All of HII’s business is conducted through HPIH and HPIH’s subsidiaries. HII is the sole managing member and has 100% of the voting rights and control of HPIH. See Note 7 for more information about the IPO.

Basis of Presentation

The condensed consolidated financial statements reflect the accounts of the Company. Intercompany accounts and transactions have been eliminated in consolidation.

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

As an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), we benefit from certain temporary exemptions from various reporting requirements, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We have also elected under the JOBS Act to delay the adoption of new and revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.  As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. These exemptions will apply for a period of five years following the completion of our IPO. However, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31.

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, 2014.

Reclassifications

Certain amounts in the prior period’s consolidated financial statements have been reclassified to conform to the current period presentation. Such reclassifications include excluding amounts payable for third-party commission expense from cash held on behalf of others and including such amounts in cash and cash equivalents in the accompanying condensed consolidated statements of cash flows, reclassifying certain expenses of HP from cost of goods sold to selling, general and administrative, and including the fair value adjustment for contingent consideration as a separate component in the accompanying condensed consolidated statements of operations, as compared to a component of other income (expense) in the prior period.  

Use of Estimates

The accompanying unaudited interim condensed consolidated financial statements of the Company include all normal recurring accruals and adjustments considered necessary by management for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Preparing financial statements in accordance with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The condensed consolidated results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015 or any future interim period.

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Summary of Significant Accounting Policies

The following is an update to our significant accounting policies described in Note 1, Organization, Basis of Presentation, and Summary of Significant Accounting Policies, in our audited consolidated financial statements for the year ended December 31, 2014 included in our Annual Report on Form 10-K.  

Property and equipment, net

Included in property and equipment, net are certain website development and internally developed software costs. These costs incurred in the development of websites and internal-use software are either expensed as incurred or capitalized depending on the nature of the cost and the stage of development of the project under which a website or internal-use software are developed.  The capitalization policies for website development and internal-use software vary as described below.

Website development

Generally, the costs incurred during the planning stage are expensed as incurred; costs incurred for activities during the website application and infrastructure development stage are capitalized; costs incurred during the graphics development stage are capitalized if such costs are for the creation of initial graphics for the website; subsequent updates to the initial graphics are expensed as incurred, unless they provide additional functionality; costs incurred during the content development stage are expensed as incurred unless they are for the integration of a database with the website, which are capitalized; and the costs incurred during the operating stage are expensed as incurred.

Upon reaching the operating phase of the website application and infrastructure phase, the capitalized costs are amortized over the estimated useful life of the asset, which we generally expect to be five years.  

During the three and nine months ended September 30, 2015, we capitalized $0 and $895,000, respectively, of costs incurred in the development of a website for which the software underlying the website will not be marketed externally.  This balance is included in property and equipment, net on the accompanying condensed consolidated balance sheets.  The operating phase of the development of this website commenced on July 1, 2015.  During the three months ended September 30, 2015, all of the website development costs incurred were part of the operating phase.  As of September 30, 2015, $45,000 of amortization has been recorded related to the capitalized website development costs.  

Internal-use software

Generally, the costs incurred during the preliminary project stage are expensed as incurred; costs incurred for activities during the application development stage are capitalized; and costs incurred during the post-implementation/operation stage are expensed as incurred.

Upon reaching the post-implementation/operation stage of the development of internal-use software, the capitalized costs are amortized over the estimated useful life of the asset, which we generally expect to be three years.  

During each of the three and nine months ended September 30, 2015, we capitalized $369,000 of costs incurred in the application development stage of the internal-use software.  This balance is included in property and equipment, net on the accompanying condensed consolidated balance sheets.  Substantially all of the costs incurred during the period were part of the application development phase and, as of September 30, 2015, the post-implementation/operation phase of development had not commenced.  As such, no amortization has been recorded on the capitalized internal-use software costs.

Goodwill and Other Intangible Assets

Goodwill

As a result of our various acquisitions, we have recorded goodwill which represents the excess of the consideration paid over the fair value of the identifiable net assets acquired in a transaction accounted for as a business combination. An impairment test is performed by us at least annually as of October 1st of each year, or whenever events or circumstances indicate a potential for impairment exists.

As of our last valuation date of October 1, 2014, we had two reporting units, which were our reportable operating segments, Insurance Plan Development and Distribution (“IPD”) and HP.  During the three months ended June 30, 2015, due to a change in the structure of our internal organization, we determined that we have a single reportable operating segment, which includes HII and all its consolidated subsidiaries.  We have determined that, in addition to aggregating HP into our single operating segment, HP has similar economic characteristics, and all consolidated entities should be aggregated for the purposes of goodwill impairment testing.  As of September 30, 2015, we had one reporting segment.

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Recent Accounting Pronouncements

In the following summary of recent accounting pronouncements, all references to effective dates of Financial Accounting Standards Board (“FASB”) guidance relate to nonpublic entities. As noted above, we have elected to delay the adoption of new and revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies under provisions of the JOBS Act.

In April 2015, the FASB issued an update to its accounting guidance related to debt issuance costs as a part of its initiative to reduce complexity in accounting standards.  To simplify presentation of debt issuance costs, the amendments in this update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  This guidance is effective for fiscal years beginning after December 15, 2015.  Early adoption is permitted.  We are currently evaluating the impact of this guidance on our condensed consolidated financial statements.

In February 2015, the FASB issued an amendment to its accounting guidance related to financial statement consolidation.  This guidance affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, it modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with certain VIEs. This guidance is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements.

In May 2014, the FASB issued an amendment to its accounting guidance related to revenue recognition. The amendment clarifies the principles for recognizing revenue. The guidance is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in the judgments and assets recognized from costs incurred to obtain or fulfill a contract. We will adopt this guidance in reporting periods beginning after December 15, 2018. We are currently evaluating the impact of adopting this pronouncement on our condensed consolidated financial statements.  

In April 2014, the FASB issued guidance related to discontinued operations reporting.  The new guidance changes the definition and reporting of discontinued operations to include only those disposals that represent a strategic shift and that have a major effect on an entity's operations and financial results. The new guidance, which also requires additional disclosures, becomes effective for annual periods beginning on or after December 15, 2015 and interim periods within those years and allows for early adoption.  We adopted this guidance as of January 1, 2015, and as a result determined that our disposition of our interest in SIL, which is described in Note 3, was not a strategic shift in, nor did it have a major effect on our operations or financial results.  As such, we did not treat SIL as a discontinued operation in our condensed consolidated financial statements.

2. Business Acquisitions

Acquisition of HealthPocket, Inc.

On July 14, 2014, we entered into an agreement to acquire (the “Merger Agreement”) HP from Mr. Bruce Telkamp (“Telkamp”), Dr. Sheldon Wang (“Wang”) and minority equity holders of HP. The closing of the acquisition occurred on July 14, 2014 simultaneously with the signing of the Merger Agreement.

Pursuant to the Merger Agreement, at the closing, we paid consideration consisting of approximately $21.9 million in cash and 900,900 shares of Class A common stock, $0.001 par value per share, with such shares of Class A common stock having an agreed upon aggregate value of $10.0 million, or $11.10 per share, which had a fair value of approximately $6.7 million as of the acquisition date. A portion of the merger consideration consisting of $3.2 million in cash was deposited with an escrow agent to fund payment obligations with respect to post-closing working capital adjustments, post-closing indemnification obligations of HP’s former equity holders, and fees and expenses of the representative of HP’s former equity holders.  

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All vested options and warrants to acquire shares of HP’s capital stock were terminated in connection with the acquisition, and the holders thereof received in cash a portion of the aggregate consideration upon the terms and subject to the conditions set forth in the Merger Agreement. All unvested options to acquire shares of HP’s capital stock were converted into options to acquire shares of our Class A common stock (“Replacement Options”) upon the terms and subject to the conditions set forth in the Merger Agreement. The total number of Replacement Options was 84,909. Pursuant to the Merger Agreement, this amount offset the total number of shares included in the consolidation. If any Replacement Options are terminated or expire, the value of those options will be classified as an adjustment to the purchase price for the acquisition. The Replacement Options are included as a component of stock-based compensation on the accompanying condensed consolidated statements of operations. See Note 8 for further information on the Replacement Options. As of September 30, 2015, the net amount of shares of Class A common stock issued as a result of the acquisition was 815,991.

Under the terms of the Merger Agreement, the former equity holders of HP had the right to elect to receive cash or shares of our Class A common stock. Telkamp and Wang agreed to accept cash and common stock, including 50% each of any of the shares that were issued as part of the aggregate consideration that were not elected to be received as consideration by other former HP equity holders.

This transaction is expected to provide us with additional benefits such as increased and ongoing sales referrals that we will own, broad consumer and industry data to facilitate our entry into new markets and revenue streams, advanced health information technology to position us to better assist our stakeholders, including customers, insurance brokers and insurance carriers, and other technological and operational synergies.  In addition, significant resources from HP have been utilized in the development of AHI, an e-commerce platform that allows consumers to shop, apply for and purchase our products directly through an internet interface.  AHI represents an expansion of our internal distribution network.

The following table summarizes the fair value of the consideration for the acquisition as of July 14, 2014 ($ in thousands):

  

Cash paid at closing (1)

$

21,901

 

Class A common stock, at fair value (2)

 

6,734

 

Total consideration

$

28,635

 

 

(1)

Cash paid at closing includes $17.0 million in cash, $3.2 million in cash held in escrow, as noted above, $1.2 million for the payoff of outstanding bank debt held by HP, $54,000 for the payoff of HP loans payable to Telkamp and Wang, and $482,000 in estimated acquisition-related expenses incurred by HP.

 

(2)

The fair value of the Class A common stock derived from the market price of the stock, adjusted to include a discount for a lack of marketability, due to trading restrictions pursuant to the Merger Agreement and other factors.

 

The following table summarizes the allocation of the total purchase price for the acquisition as of July 14, 2014 ($ in thousands):

 

Cash

$

1,294

 

Accounts receivable and other assets (1)

 

104

 

Property and equipment (1)

 

6

 

Accounts payable, accrued expenses and other liabilities (1)

 

(480

)

Deferred tax liability – long-term

 

(2,967

)

Intangible asset – technology

 

8,000

 

Intangible asset – brand

 

1,280

 

Intangible asset – customer relationships

 

430

 

Intangible asset – noncompete agreements

 

27

 

Goodwill (2)

 

20,941

 

 

$

28,635

 

 

(1)

The carrying value of accounts receivable, accounts payable, accrued expenses and property and equipment approximated fair value; as such, no adjustments to the accounts were recorded in association with the acquisition.

 

(2)

As of September 30, 2015, we expect none of the goodwill acquired in this transaction to be deductible for income tax purposes.

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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 HP and the operational and technological synergies we expect to realize as a result of the acquisition.    

As a result of acquiring HP, our consolidated results of operations include the results of HP since the acquisition date.  HP’s revenues and pre-tax net loss included in our results of operations since the acquisition were $241,000 and $865,000, respectively, for the three months ended September 30, 2015 and $1.2 million and $2.9 million, respectively, for the nine months ended September 30, 2015.  HP’s revenues and pre-tax net loss included in our results of operations since the acquisition were $370,000 and $1.4 million, respectively, for each of the three and nine months ended September 30, 2014.  For the three and nine months ended September 30, 2015, net loss before taxes included $316,000 and $949,000, respectively, of amortization expense related to the identified intangible assets recorded as a result of the acquisition.  For each of the three and nine months ended September 30, 2014, $459,000 of amortization expense related to identified intangible assets was included in net loss before taxes.  

Effective July 14, 2014, HII's Board of Directors appointed Telkamp as our Chief Operating Officer and we entered into an employment agreement with Telkamp in which he also agreed to continue to serve as HP’s Chief Executive Officer.  Telkamp’s employment agreement provides for, among other things, a noncompetition covenant beginning on July 14, 2014 and ending on the last day of any salary continuation period (as defined in Telkamp’s employment agreement).  In addition, the Merger Agreement provides for, among other things, a noncompetition covenant applicable to Telkamp beginning on July 14, 2014 and ending on July 14, 2017.  On May 4, 2015, Telkamp’s employment agreement was amended, and he became the Chief Executive Officer of our Consumer Division.  Telkamp will continue to serve as Chief Executive Officer of HP.  In addition, effective July 14, 2014, HII’s Board of Directors appointed Wang as our Chief Technology Officer and we entered into an employment agreement with Wang in which he also agreed to continue to serve as HP’s President.  Wang’s employment agreement provides for, among other things, a noncompetition covenant beginning on July 14, 2014 and ending on the last day of any salary continuation period (as defined in Wang’s employment agreement).  In addition, the Merger Agreement provides for, among other things, a noncompetition covenant applicable to Wang beginning on July 14, 2014 and ending on July 14, 2017.

Telkamp was also appointed as a member of HII’s Board of Directors on July 14, 2014 and will rotate being appointed to the Board of Directors annually with Wang pursuant to the Merger Agreement.  Telkamp’s term on the Board of Directors expired on May 19, 2015, at which time Wang was elected to the Board of Directors.

Acquisition of ASIA

On August 8, 2014, we entered into an agreement (the “ASIA Purchase Agreement”) to acquire all of the issued and outstanding membership interests of ASIA, a Texas insurance brokerage, from Mr. Landon Jordan (“Jordan”) for an initial cash payment of $1.8 million, comprised of a prior deposit of $325,000, a closing payment of $1.5 million, and $2.2 million in contingent consideration, as described below.  The closing of the acquisition occurred on August 8, 2014 simultaneously with the signing of the ASIA Purchase Agreement. 

Pursuant to the ASIA Purchase Agreement, Jordan may receive total contingent consideration of $2.2 million, payable in cash.  This amount is payable in two cash payments of $1.2 million and $1.0 million, respectively, if ASIA attains certain amounts of adjusted EBITDA, as defined in the ASIA Purchase Agreement, during each of the periods from September 1, 2014 through August 31, 2015, and September 1, 2015 through August 31, 2016.

During the three months ended March 31, 2015, we determined that it was not probable that ASIA would attain the required amounts of adjusted EBITDA during the period from September 1, 2014 through August 31, 2015 for Jordan to earn the contingent consideration payment of $1.2 million noted above.  During the six months ended June 30, 2015, we believed that it was probable that we would make a contingent consideration payment of $500,000 related to ASIA’s results for the year ended December 31, 2015 in lieu of the existing contingent consideration terms under the ASIA Purchase Agreement.  However, during the three months ended September 30, 2015, we revised our assessed probability for the contractual period ended August 31, 2015, and consequently have made no payment as the required adjusted EBITDA was not obtained.  Accordingly, we reversed the associated liability and expense which resulted in a $424,000 increase in income.  We believe it is probable that Jordan will earn the payment of the contingent consideration of $1.0 million related to the period from September 1, 2015 through August 31, 2016.  As of September 30, 2015, based on our assessed probability of payout, the fair value of the contingent consideration was $440,000 which is included in contingent acquisition consideration on the accompanying condensed consolidated balance sheets.  During the three months ended September 30, 2015, we recorded a $40,000 increase related to updates to discount rates for the amount payable in 2016.  During the three and nine months ended September 30, 2015, we recorded a $424,000 and $926,000 respective reduction to the fair value of the contingent consideration, due to ASIA failing to achieve the adjusted EBITDA thresholds necessary to require payment of the amount payable in 2015. The estimated range of potential total contingent consideration still payable is zero to $1.0 million.

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Effective August 8, 2014, we also entered into an employment agreement with Jordan which provides for, among other things, a noncompetition covenant beginning on August 8, 2014 and ending on the later of August 8, 2017 and one year following the date on which Jordan’s employment with us is terminated.

The following table summarizes the fair value of the consideration for the acquisition as of August 8, 2014 ($ in thousands):

 

Cash paid at closing

$

1,825

 

Contingent consideration, at fair value

 

1,263

 

Total consideration

$

3,088

 

 

The following table summarizes the allocation of the total purchase price for the acquisition as of August 8, 2014 ($ in thousands):

 

Cash

$

105

 

Accounts receivable and other assets (1)

 

271

 

Accounts payable, accrued expenses and other liabilities  (1)

 

(163

)

Intangible asset – customer relationships – distributors

 

449

 

Intangible asset – customer relationships – direct

 

266

 

Intangible asset – brand

 

21

 

Intangible asset – noncompete agreements

 

18

 

Goodwill (2)

 

2,121

 

 

$

3,088

 

 

(1)

The carrying value of accounts receivable, accounts payable, accrued expenses and other liabilities approximated fair value; as such, no adjustments to the accounts were recorded in association with the acquisition.

 

(2)

As of September 30, 2015, the amount of goodwill acquired that we expect to be deductible for income tax purposes is $840,000.

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 expected results of future operations of ASIA and the operational and technological synergies we expect to realize as a result of the acquisition.                

As a result of acquiring ASIA, our consolidated results of operations include the results of ASIA since the acquisition date.  ASIA’s revenues and pre-tax net loss included in our results of operations since the acquisition were $962,000 and $140,000, respectively, for the three months ended September 30, 2015 and $2.8 million and $521,000, respectively, for the nine months ended September 30, 2015.  ASIA’s revenues and pre-tax net loss included in our results of operations since the acquisition were $292,000 and $300,000, respectively, for each of the three and nine months ended September 30, 2014.  For the three and nine months ended September 30, 2015, net loss before taxes included $45,000 and $135,000, respectively, of amortization expense related to the identified intangible assets recorded as a result of the acquisition.  For the each of three and nine months ended September 30, 2014, $29,000 of amortization expense related to identified intangible assets was included in net loss before taxes.

 

Acquisition of Secured

 

On July 17, 2013, we consummated a Stock Purchase Agreement (the “Purchase Agreement”) with Joseph Safina (“Safina”), Howard Knaster (“Knaster”) and Jorge Saavedra (“Saavedra”) (collectively, the “Sellers”), pursuant to which we acquired from the Sellers all of the outstanding equity of each of the Secured entities, which consisted of Sunrise Health Plans, Inc., a licensed insurance broker, Sunrise Group Marketing, Inc., a call center and sales lead management company, and Secured Software Solutions, Inc., an intellectual property holding company, each of which was converted to a limited liability company shortly after closing, for a cash payment of $10.0 million plus approximately $6.6 million of contingent consideration which included contingent stock awards and a note payable.

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Modifications of Secured Contingent Consideration

In November 2013, HPIH and the Sellers reached an agreement to modify the contingent consideration, including the thresholds to earn such contingent consideration, and to terminate the contingent stock awards and note payable.  Instead, the contingent consideration was payable in cash only, and included a one-time payment of $1.0 million, which was paid in November 2013, and fixed and variable components of $250,000 (up to a maximum of $3.0 million) and $200,000 (up to a maximum of $2.4 million), respectively.  Each of the fixed and variable components was to be paid quarterly if certain levels of policies in force, as defined by the modification, were achieved.  In addition, one of the principals severed his employment with Sunrise Health Plans, Inc. and entered into a consulting arrangement with the Company.

In May 2015, we entered into an agreement to modify the remaining contingent consideration.  Pursuant to this modification, the remaining maximum payout under the existing contingent consideration terms allocable to Safina was paid in a lump-sum of $973,000 on May 7, 2015. The remaining payouts allocable to Knaster and Saavedra, which began on May 29, 2015, will continue to be paid ratably and monthly through June 30, 2016.

The fair value of the contingent consideration related to Secured was $806,000 and $3.0 million as of September 30, 2015 and December 31, 2014, respectively, and is included in contingent acquisition consideration on the accompanying condensed consolidated balance sheets. During the three and nine months ended September 30, 2015, we recorded respective decreases and increases to the fair value of the contingent consideration of $15,000 and $101,000, respectively.  During the three and nine months ended September 30, 2014, we recorded increases to the fair value of the consideration of $81,000 and $890,000, respectively.  

As of September 30, 2015, we had made total payments of $5.6 million under the contingent consideration agreement, and the maximum remaining payments under the agreement total $821,000.

 

3. Variable Interest Entities

As of September 30, 2015, we were the primary beneficiary of one entity that constitutes a VIE pursuant to FASB guidance.

HPIH

As of September 30, 2015, we had a variable interest in HPIH. HPIH is a VIE as the voting rights of the investors are not proportional to their obligations to absorb the expected losses of HPIH. We hold 100% of the voting power in HPIH, but 53.1% of the total membership and economic interest, and the other members of HPIH hold no voting rights in HPIH. Further, substantially all of the activities of HPIH are conducted on behalf of a membership with disproportionately few voting rights. We have concluded that we are the primary beneficiary of HPIH and, therefore, should consolidate HPIH since we have power over and receive the benefits of HPIH. We have the power to direct the activities of HPIH that most significantly impact its economic performance. Our equity interest in HPIH obligates us to absorb losses of HPIH and gives us the right to receive benefits from HPIH related to the day-to-day operations of the entity, both of which could potentially be significant to HPIH. As such, our maximum exposure to loss as a result of our involvement in this VIE is the net income or loss allocated to us based on our interest.

SIL

On October 7, 2013, HPIH entered into a Limited Liability Company Operating Agreement (the “SIL LLC Agreement”) with Health Benefits One, LLC (“HBO”) in connection with the formation of SIL, a venture that was intended to procure sales leads for us and our distributors. We made $492,000 in contributions to SIL during the years ended December 31, 2014 and 2013. In addition, we entered into an agreement to loan $185,000 to SIL, which could be repaid via offset of earned commissions of HBO otherwise payable by us. HBO had no obligations to make any initial capital contributions. Per the SIL LLC Agreement, so long as HPIH’s unreturned capital contributions had not been reduced to zero, HPIH could, without the consent of HBO, cause SIL to take any significant actions affecting SIL’s day-to-day operations, including the sale or disposition of SIL assets and entrance into voluntary liquidation or receivership of SIL. As such, we determined that we had the power to control the day-to-day activities of SIL.  

We concluded that we were the primary beneficiary of SIL, and therefore, we consolidated SIL because we had power over and received the benefits of SIL. We had the power to direct the activities of SIL that most significantly impacted its economic performance. Per the terms of the SIL LLC Agreement, we determined that 100% of the operating income or loss of the VIE should be allocated to us.

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On March 23, 2015, we entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) to sell our interests in SIL to HBO in exchange for a note receivable from HBO with a face amount of $246,000 and the right to receive certain contingent consideration.  The parties agreed that this note will be payable with credits against sales commissions due to HBO, and any such commissions earned during the term of the note will be applied against the outstanding balance payable to us under the note.  As such, the note is included in advanced commissions in the accompanying condensed consolidated balance sheets.  In addition, we may receive contingent consideration equal to 10.0% of SIL’s earnings before interest, taxes, depreciation and amortization, as defined in the Unit Purchase Agreement for each of the fiscal years ended December 31, 2015 and 2016.  The amounts receivable as contingent consideration are not estimable nor reasonably assured; as such, we have not recorded the contingent consideration on our condensed consolidated balance sheets.  

 

As a result of the sale of our interest, we no longer have any ownership interest in SIL and have deconsolidated SIL from our condensed consolidated financial statements.  The results of operations of SIL are included in the accompanying condensed consolidated financial statements through the date of the Unit Purchase Agreement.  For the three and nine months ended September 30, 2015, we recorded a respective gain of $0 and $189,000 on the sale, representing the difference between the consideration received and the carrying value of SIL’s net assets at the time of the transaction.

 

4. Goodwill and Intangible Assets

Goodwill

Our goodwill balance as of September 30, 2015 and December 31, 2014 arose from acquisitions as described in Note 2 as well as our goodwill balance existing prior to such acquisitions.

The changes in the carrying amounts of goodwill are as follows ($ in thousands):

 

 

 

 

 

Balance as of January 1, 2014

$

18,014

 

Goodwill acquired

 

23,062

 

Impairment of goodwill

 

 

Balance as of December 31, 2014

 

41,076

 

Goodwill acquired

 

 

Impairment of goodwill