HEALTH INSURANCE INNOVATIONS, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements in Management's Discussion and Analysis of Financial Condition and Results of Operations below, "Part II. -Item 1A. Risk Factors," 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 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 "Part II. - Item 1A. Risk Factors." You should specifically consider the numerous risks outlined under "Part II. - Item 1A. Risk Factors." Although we believe the expectations reflected in the forward-looking statements are reasonable, 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.
Business
In this quarterly report, unless the context suggests otherwise, references in this report to the "Company," "we," "us" and "our" refer (1) prior to theFebruary 13, 2013 initial public offering ("IPO") of the Class A common stock ofHealth Insurance Innovations, Inc. and related transactions, toHealth Plan Intermediaries, LLC ("HPI") and its consolidated subsidiaries and (2) after our IPO and related transactions, toHealth Insurance Innovations, Inc. and its consolidated subsidiaries. The terms "HII", "HPIH" and "ICE" refer to the stand-alone entitiesHealth Insurance Innovations, Inc. ,Health Plan Intermediaries Holdings, LLC , andInsurance Center for Excellence, LLC , respectively. HPIH and ICE are consolidated subsidiaries of HII. We are a leading developer and administrator of affordable, web-based individual health insurance plans and ancillary products. Our highly scalable, proprietary, web-based technology platform allows for mass distribution of and online enrollment in our large and diverse portfolio of affordable health insurance offerings. Our technology platform provides customers, who we refer to as members, immediate access to our products through our distribution partners anytime, anyplace. The health insurance products we develop are underwritten by insurance carrier companies, and we assume no underwriting, insurance or reimbursement risk. Members can price and tailor product selections to meet their needs, buy policies and print policy documents and identification cards in real-time. Our sales are executed online and offer instant electronic fulfillment. Our technology platform uses abbreviated online applications, some with health questionnaires, to provide an immediate accept or reject decision on applications for all products that we offer. Once an application is accepted, individuals can use our automated payment system to complete the enrollment process and obtain instant electronic access to their policy fulfillment documents, including the insurance policy, benefits schedule and identification cards. We receive credit card and Automated Clearing House ("ACH") payments directly from members at the time of sale. Our technology platform provides significant operating leverage as we add members and reduces the costs associated with marketing, selling, underwriting and administering policies. We are an industry leader in the sale of 12-month short-term medical ("STM") insurance plans, an alternative to traditional individual major medical ("IMM") plans which provide lifetime renewable coverage. STM plans generally offer qualifying individuals comparable benefits for fixed short-term durations of six or 12 months at approximately half the cost of IMM plans. While applications for IMM insurance may take up to 60 days to process, STM plans feature a streamlined underwriting process offering immediate coverage options. We also offer guaranteed-issue hospital indemnity plans for individuals under the age of 65, which pay fixed cash benefits for covered procedures and services, and a variety of ancillary products such as pharmacy benefit cards, dental plans, vision plans and cancer/critical illness plans that are frequently purchased as supplements to STM and hospital indemnity plans. We design and structure insurance products on behalf of insurance carrier companies, market them to individuals through our large network of distributors and 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 22
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data and purchasing habits to track market trends and drive product innovation. We have established relationships with several highly rated insurance carriers, includingStarr Indemnity & Liability Company , Companion Life,United States Fire,ING , Markel and CIGNA, among others. We have established a large independent distribution network that consists of 54 licensed agent call centers and 274 wholesalers that work with over 8,965 licensed brokers. Our data-driven product design, technology platform and extensive distribution network have enabled us to grow our revenues from$8.5 million for the three months endedMarch 31, 2012 to$12.5 million for the three months endedMarch 31, 2013 . We focus on the large and under-penetrated segment of the U.S. population who are uninsured or underinsured, which includes individuals who are unable to afford traditional IMM premiums, individuals not covered by employer-sponsored insurance plans, such as those who are self-employed as well as small business owners and their employees, and underserved "gap populations" that require insurance due to changes caused by life events, such as new graduates, divorcees, early retirees, military discharges, the unemployed, part-time and seasonal employees and temporary workers. Our target market consists of approximately 64 million Americans, including approximately 50 million Americans who were uninsured in 2010, according to theU.S. Census Bureau , and approximately 14 million non-elderly Americans who purchased individual health insurance plans in 2010, according to a 2010Kaiser Family Foundation survey. As ofMarch 31, 2013 , we had approximately 24,000 STM members. We expect the number of uninsured and underinsured to significantly increase due to the rising costs and burdensome underwriting requirements of traditional IMM plans and a decline in employer-sponsored health insurance programs due to rising benefit plan costs. As ofMarch 31, 2013 , we had approximately 24,000 STM plans in force, compared with approximately 20,000 onMarch 31, 2012 , with an average monthly retention rate of 79% fromMarch 31, 2012 toMarch 31, 2013 . We earn our revenues from commissions and fees related to the sale of products to our members. Our ancillary products have created several additional revenue streams and resulted in a significant portion of our business being generated by monthly member renewals. For the three months endedMarch 31, 2013 , our premium equivalents and revenue were$22.1 million and$12.5 million , respectively, compared to$15.7 million and$8.5 million for the three months endedMarch 31, 2012 , representing increases of 41% and 47% in premium equivalents and revenues, respectively. For the three months endedMarch 31, 2013 , EBITDA was$(6.1) million , compared to$1.2 million for the three months endedMarch 31, 2012 .
For more detail about the use of premium equivalents and EBITDA as business metrics and a reconciliation of premium equivalents to revenues, see "Key Business Metrics" below.
Participants in the health insurance industry are focused on the potential implications of the Patient Protection and Affordable Care Act ("PPACA" or "Healthcare Reform") legislation inJanuary 2014 . This legislation is expected to have extensive impacts on the provisions of health insurance plans that can be sold to individuals and the resulting economics to insurers. Starting in the second quarter of 2013, some industry participants are taking advantage of a PPACA loophole and modifying individual major medical policy terms, premiums and commissions paid to distributors. Some of these actions have had the effect of increasing competition with our insurance products or simply causing confusion among health plan distributors and consumers. It is unclear when and to what extent these factors will abate, but management expects this loophole to close asJanuary 2014 approaches. Very positive year over year growth is still expected but the rate of growth in our core medical policy sales has slowed. However, we remain confident in the appeal of our product offerings, and expect increased growth once PPACA is fully implemented.
Our Corporate Structure
Overview
Health Insurance Innovations, Inc. is a holding company that was incorporated as aDelaware corporation onOctober 26, 2012 for the purpose of facilitating an initial public offering of common equity and to become the sole managing member ofHealth Plan Intermediaries Holdings, LLC and subsidiaries ("Holdings"). Its principal asset is a controlling equity interest in Holdings. OnFebruary 7, 2013 , a registration statement filed with theU.S. Securities and Exchange Commission ("SEC") related to shares of Class A common stock of HII was declared effective and the price of such shares was set at$14.00 per share. The IPO closed onFebruary 13, 2013 . Prior to the IPO, HII had not engaged in any business or other activities except in connection with its formation and the IPO. After the effective date of the registration statement but prior to the completion of the IPO, the limited liability company agreement of Holdings was amended and restated to modify its capital structure by replacing the different classes of interests previously held by the Holdings owners to a single new class of units called "Series B Membership Interests." In addition, each Series B Membership Interest holder received one share of the HII's Class B common stock. We and our then-existing owners also entered into an exchange agreement under which (subject to the terms of the exchange agreement) they have the right to exchange their Series B Membership Interests together with an equal number of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These transactions are collectively referred to as the "Reorganization Transactions." The Company, as a result of the IPO and the related Reorganization Transactions, became the sole managing member of, and has a controlling equity interest in, Holdings. As the sole managing member of Holdings, HII operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts our business. HII consolidates the financial results of Holdings and its subsidiaries, and records non-controlling interest for the economic interest in Holdings held by the non-controlling Series B Membership Interests holders. As ofMarch 31, 2013 , the non-controlling Series B Membership Interests holders' ownership percentage is 61.8%. 23
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History
The Company was formed as HPI, aFlorida limited liability company. InAugust 2008 , theNaylor Group Partners, LLC ("Naylor") made a capital contribution to HPI in exchange for a 50% ownership interest in HPI. InSeptember 2011 , HPI purchased all of the units owned by Naylor for$5.3 million plus financing costs of$135,000 (the "Naylor Acquisition"). HPI financed a portion of the purchase price by entering into a loan agreement with a bank for$4.3 million . The remaining purchase price was funded with HPI cash and a contribution fromMichael Kosloske ("Mr. Kosloske"), our chairman, president and chief executive officer and the sole member of HPI. InJune 2012 , we and a minority partner acquired theInsurance Center for Excellence ("ICE"), which conducts call center sales operations and trains third-party insurance agents to sell our products. We own an 80% interest in ICE, which has been consolidated in the accompanying consolidated financial statements. See Note 2 of the accompanying consolidated financial statements for further information related to this acquisition.
In
OnNovember 7, 2012 , interests in the assets and liabilities of HPI were transferred to two subsidiaries, HPIH (99.0099%) andHealth Plan Intermediaries Sub, LLC ("HPIS") (0.9901%), each of which was created inOctober 2012 . OnNovember 8, 2012 , a capital contribution of$12,010 was made toHPIS fromHealth Plan Intermediaries II, LLC , a related party, and that cash along with the 0.9901% interest was contributed byHPIS to HPIH in exchange for a 1.0% interest in HPIH. We expect that future exchanges of Series B Membership Interests (together with an equal number of our Class B common shares) for shares of our Class A common stock (which Series B Membership Interests will immediately be recapitalized into Series A Membership Interests) will result in increases in the tax basis in our share of the tangible and intangible assets of HPIH. We expect that these increases in tax basis, which would not have been available but for our new holding company structure, will reduce the amount of tax that we would otherwise be required to pay in the future. We will be required to pay a portion of the cash savings we actually realize from such increase (or are deemed to realize in the case of an early termination payment by us, a change in control or a material breach by us of our obligations under a tax receivable agreement to the existing and certain future holders of Series B Membership Interests (HPI andHPIS , which are beneficially owned byMr. Kosloske ), pursuant to the tax receivable agreement. Furthermore, payments under the tax receivable agreement will give rise to additional tax benefits and therefore additional payments under the tax receivable agreement itself. HPIH is currently taxed as a partnership for federal income tax purposes; as a result, the members of HPIH pay taxes with respect to their allocable shares of its net taxable income. The earnings of HII are subject to federal income taxation.
Factors Affecting Our Results of Operations
As the managing general underwriter of our individual health insurance plans and ancillary products, we receive all amounts due in connection with our plans on behalf of the providers of the services. We refer to these total collections as premium equivalents, which typically represent a combination of premiums, fees for discount benefit plans (a non-insurance benefit product that supplements or enhances an insurance product), fees for distributors and our enrollment fees. From premium equivalents, we remit risk premium, representing the amounts we collect and remit to carriers on their behalf, and amounts earned by discount benefit plan providers, who we refer to as third-party obligors, such carriers and third-party obligors being the ultimate parties responsible for providing the insurance coverage or discount benefits to the member. Our revenues consist of the balance of the premium equivalents. We collect premium equivalents upon the initial sale of the plan and then monthly upon each subsequent periodic payment under such plan. We receive most premium equivalents through online credit card or ACH processing. As a result, we have limited accounts receivable. We remit the risk premium to the applicable carriers and the amounts earned by third-party obligors on a monthly basis based on the respective compensation arrangements. Commission revenue and fees attributable to revenues from STM plans and hospital indemnity policies represented substantially all of our revenues for the periods presented. Our commissions represent premiums and fees for discount benefit plans, net of risk premium and amounts earned by third-party obligors, respectively. We recognize commissions as we collect the premiums and fees for discount benefit plans. Commission rates for all insurance plans are approved in advance by the relevant carrier. Our commission rates and the length of the commission period typically vary by carrier and plan type. Under our carrier compensation arrangements, the commission rate schedule that is in effect on the policy effective date will govern the commissions over the life of the plan. We continue to receive a commission payment until the plan expires or is terminated. Accordingly, a portion of our monthly revenues is predictable on a month-to-month basis and revenues increase in direct proportion to the growth we experience in the number of plans in force. 24
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We pay fees to distributors for their services in selling our plans, which are included in our operating costs and expenses.
Key Business Metrics
In addition to traditional financial metrics, we rely upon the following key business metrics to evaluate our business performance and facilitate long-term strategic planning: Premium equivalents We define this metric as the cash received from our members to purchase our products. All amounts not paid out as risk premium to carriers or paid out to other third-party obligors are considered to be revenues for financial reporting purposes. We have included premium equivalents in this report because it is a key measure used by our management to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the inclusion of premium equivalents can provide a useful measure for period-to-period comparisons of our business. However, premium equivalents does not represent, and should not be considered as, an alternative to revenues, as determined in accordance with U.S. generally accepted accounting principles ("GAAP"). Premium equivalents has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
The following table presents a reconciliation of premium equivalents to revenues for the three months ended
Three Months Ended March 31, 2013 2012 Premium equivalents$ 22,084 $ 15,733 Less risk premium (9,100 ) (6,889 ) Less amounts earned by third-party obligors (513 ) (321 ) Revenues$ 12,471 $ 8,523 Plans in force We consider a plan to be in force when we have issued a member his or her insurance policy or discount benefit plan and have collected the applicable premium payments and/or discount benefit fees. Our plans in force are an important indicator of our expected revenues, as we receive a monthly commission for up to six months for our six-month STM plan, up to 12 months for our 12-month STM plan and often more than 12 months for our hospital indemnity and discount benefit plans, provided that the policy or discount benefit plan is not cancelled. A member may be enrolled in more than one policy or discount benefit plan simultaneously. A plan becomes inactive upon notification to us of termination of its policy or discount benefit plan, when the member's policy or discount benefit plan expires or following non-payment of premiums or discount benefit fees when due. The following table presents the number of our policies in force by product type as ofMarch 31, 2013 and 2012: As of March 31, 2013 2012 Change (%) (in thousands, except percentages) STM 24,459 20,044 22.0 % Hospital indemnity 8,714 5,370 62.3 % Ancillary products 26,372 13,631 93.5 % Total 59,545 39,045 52.5 % EBITDA We define this metric as net income before interest expense, income taxes and depreciation and amortization. We have included EBITDA in this report because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short- and long-term operational plans. In particular, the exclusion of certain expenses in calculating EBITDA can provide a useful measure for period-to-period comparisons of our business. However, EBITDA does not represent, and should not be considered as, an alternative to net income or cash flows from operations, each as determined in accordance with GAAP. Other companies may calculate EBITDA differently than we do. EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. 25
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The following table presents a reconciliation of net (loss) income to EBITDA for the three months ended
Three Months Ended March 31, 2013 2012 Net (loss) income (1)$ (7,402 ) $ 820 Interest expense 38 65 Depreciation and amortization 244 271 Provision for income taxes 1,053 - EBITDA$ (6,067 ) $ 1,156
(1) Net loss for the three months ended
of
managing general agent of the Company. For further information, see
"Comparison of the Three Months Ended
2 of the accompanying consolidated financial statements.
Key Components of Our Statements of Operations
Revenues
Our revenues consist primarily of commissions earned for our insurance policies and discount benefit plans issued to members, enrollment fees paid by members and administration fees paid by members as a direct result of our enrollment services. We recognize revenues upon the member's acceptance of a policy. We expect our revenues to increase as we add new members.
Operating Costs and Expenses
Operating costs and expenses consist of fees and commissions paid to distributors for selling our products to members, credit card or ACH processing fees and general and administrative expenses. We expect our operating costs and expenses to represent a decreasing percentage of our revenues due to the scalable nature of our technology platform that allows for mass distribution and online enrollment of our products, requiring less maintenance and incremental costs. Third-party Commissions Our third-party commissions consist of fees and commissions paid to distributors for selling our products to members, which we pay monthly for existing members and on a weekly basis for new members. We expect third-party commissions as a percentage of revenue to remain generally consistent with prior periods.
Credit Card and ACH Fees
Our credit card and ACH fees are fees paid to our banks and processors for the collection of credit card and ACH payments. We expect credit card and ACH fees as a percentage of revenue to remain generally consistent with prior periods.
General and Administrative Expenses
Our general and administrative expenses primarily consist of personnel costs, which represent salaries, bonuses, commissions, stock-based compensation, payroll taxes and benefits. General and administrative expenses also include selling and marketing expenses and travel costs associated with obtaining new distributor relationships. In addition, these expenses also include expenses for outside professional services and technology expenses, including legal, audit and financial services and the maintenance of our administrative technology platform. General and administrative expenses have increased due to the anticipated growth of our business and infrastructure and the costs associated with becoming a public company, including costs associated withSEC reporting and compliance, developing and maintaining internal controls over financial reporting, insurance, investor relations and other related costs.
Contract Termination Expense
Contract termination expense relates to a payment of$5.5 million to terminate certain contract rights withTSG Agency, LLC ("TSG"), a managing general agent for the Company. This transaction was treated as a current period expense on the accompanying consolidated statement of operations pursuant toFinancial Accounting Standards Board ("FASB") guidance.
Depreciation and Amortization
Depreciation and amortization expense is primarily a function of amortization of the intangible assets acquired as a result of the Acquisition described above as well as depreciation of property and equipment used in our business. 26
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Interest Expense
Interest expense primarily consists of interest incurred on our outstanding bank note. OnFebruary 13, 2013 , we repaid our term loan with a portion of the net proceeds raised from the IPO.
Other Expense (Income)
Other income includes expenses payable toMr. Kosloske pursuant to the tax receivable agreement, fees charged to distributors for advanced commissions, whereby we pay distributors commissions on policies sold in advance of when they would ordinarily be due to the distributor. These advanced commissions are made to distributors with an established track record of selling our products. Advanced commission fees range from 0% up to 2% of the premiums for each month that we advance commissions. Advanced commissions to a distributor are based upon the number of future months of expected premium equivalent multiplied by a distributor's commission rate. We expect other income to increase as we expand our advanced commission structure with the application of the net proceeds of the IPO. Provision for Income Taxes Our former operating entity, HPI, is taxed as an S corporation for income tax purposes. Therefore, we have not been subject to entity-level federal or state income taxation prior to the IPO. HPIH is currently taxed as a partnership for federal income tax purposes; and as a result, the members pay taxes with respect to their allocable shares of HPIH's respective net taxable income.
Following the IPO, HPIH continues to operate in
Noncontrolling Interests
Upon completion of the IPO, we became a holding company, the principal asset of which is our interest in HPIH. All of our business is conducted through HPIH. We are the sole managing member of HPIH and have 100% of the voting rights and control. As ofMarch 31, 2013 , we have a 38.2% economic interest in HPIH, and HPI possesses a 61.8% economic interest in HPIH. Net loss attributable to HII includes$774,000 of stock-based compensation and our income tax provision of$1.1 million . HPI's interest in HPIH is reflected as a noncontrolling interest on our accompanying financial statements. OnJune 1, 2012 , we and TSG acquired ICE. ICE is a call center training facility for our distributors. Pursuant to the terms of the transaction, we contributed$80,000 in cash, and TSG contributed$20,000 in cash to the newly created limited liability company. In connection with the transaction, we received an 80% controlling interest in ICE and TSG received a 20% noncontrolling interest in ICE. The intent of this transaction was to attract potential call center managers and educate them on our model and best practices with the ultimate goal of these call centers joining our distribution network. During the three months endedMarch 31, 2013 , we contributed$40,000 , and TSG contributed$10,000 , to ICE. As ofMarch 31, 2013 , our total investment in ICE is$360,000 , representing an 80% controlling interest. 27
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Results of Operations
The following table is a summary of our statements of operations as a percentage of our total revenues. Three Months Ended March 31, 2013 2012 Revenues 100.0 % 100.0 % Third-party commissions 64.4 % 67.3 % Credit cards and ACH fees 2.1 % 2.5 % Contract termination expense 44.1 % 0.0 % General and administrative expenses 34.5 % 16.7 % Depreciation and amortization 2.0 %
3.2 %
Total operating costs and expenses 147.1 % 89.7 % Other expense (income): Interest expense 0.3 % 0.8 % Other expense (income) 3.4 % -0.1 % Net (loss) income before income taxes -50.8 % 9.6 % Provision for income taxes 8.4 % 0.0 % Net (loss) income -59.2 % 9.6 % Net loss attributable to noncontrolling interests -26.8 %
0.0 %
Net (loss) income attributable to
9.6 %
(1) As of
approximately 38.2% of the Membership Interests in HPIH, and our only
business is to act as the sole managing member of HPIH. Accordingly, we
consolidate the financial results of HPIH into our financial statements. The
remaining 61.8% ownership interests held by the other members of HPIH,
consisting of HPI and
in our consolidated financial statements. Additionally, TSG's 20%
non-controlling interest in ICE is accounted for as a non-controlling
interest in our consolidated financial statements. See Note 1 of the
accompanying consolidated financial statements for further information on our
basis of presentation.
Comparison of Three Months Ended
The following table presents our historical results of operations and the changes in these results in dollars and as a percentage for the periods presented: Three Months Ended March 31, 2013 2012 Changes ($) Change (%) (in thousands, except percentages) Revenues$ 12,471 $ 8,523 $ 3,948 46.3 % Third-party commissions 8,037 5,740 2,297 40.0 % Credit cards and ACH fees 265 210 55 26.2 % Contract termination expense 5,500 - 5,500 - General and administrative expenses 4,308 1,423 2,885 202.7 % Depreciation and amortization 244 271 (27 ) -10.0 % Total operating costs and expenses 18,354 7,644 10,710 140.1 % Other expense (income): Interest expense 38 65 (27 ) -41.5 % Other expense (income): 428 (6 ) 434 - Net (loss) income before income taxes (6,349 ) 820 (7,169 ) - Income tax expense 1,053 - 1,053 - Net (loss) income (7,402 ) 820 (8,222 ) - Net loss attributable to noncontrolling interests (3,343 ) - (3,343 ) - Net (loss) income attributable to Health Insurance Innovations, Inc.$ (4,059 ) $ 820 $ (4,879 ) - Revenues
Revenues for the three months ended
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compared to three months ended
Third-party Commissions
Third-party commissions for the three months endedMarch 31, 2013 were$8.0 million , an increase of$2.3 million , or 40.0%, compared to three months endedMarch 31, 2012 . The increase in third-party commissions was primarily due to an increase in the number of plans in force. Third-party commissions represented 64.4% of revenues for the three months endedMarch 31, 2013 as compared to 67.3% of revenues for the three months endedMarch 31, 2012 . This decrease is primarily due to higher revenues from STM policies, which generally have lower commissions. Credit Card and ACH Fees Credit card and ACH fees for the three months endedMarch 31, 2013 were$265,000 , an increase of$55,000 or 26.2%, compared to the three months endedMarch 31, 2012 . The increase in credit card and ACH fees was primarily due to the increase in the number of plans in force. Credit card and ACH fees represented 2.1% and 2.5% of revenues for the three months endedMarch 31, 2013 and 2012, respectively.
General and Administrative Expenses
General and administrative expenses for the three months endedMarch 31, 2013 were$4.3 million , an increase of$2.9 million , compared to three months endedMarch 31, 2012 . The increase in general and administrative expenses was attributable to the expansion of our business, our preparations for our IPO and our subsequent status as a publicly-traded company. Professional fees increased$1.1 million for the three months endedMarch 31, 2013 as compared to the three months endedMarch 31, 2012 , including a$414,000 increase in legal fees, a$334,000 increase in other professional fees and a$325,000 increase in accounting and financial consulting costs. We incurred$774,000 in stock-based compensation expense as a result of the long-term incentive plan that was implemented during the three months endedMarch 31, 2013 and is based on grants tied to our Class A common stock. In addition, as the result of the expansion of our board of directors, director and officer insurance expense increased by$96,000 , as compared to the three months endedMarch 31, 2012 , and we incurred$49,000 in director compensation. Personnel costs, exclusive of stock-based compensation expense, increased$464,000 as the result of an increase in our payroll in conjunction with our business expansion and other administrative expenses associated with operating "ICE" of approximately$317,000 .
Depreciation and Amortization
Depreciation and amortization expense for the three months endedMarch 31, 2013 were$244,000 , a decrease of$27,000 , compared to three months endedMarch 31, 2012 . The decrease in depreciation and amortization expense occurred as the three months endedMarch 31, 2012 included amortization of intangible assets that were fully amortized as ofJune 2012 . This decrease was partially offset by the acquisition of amortizable intellectual property rights inAugust 2012 .
Other Expense (Income)
Interest expense for the three months ended
Other expense for three months endedMarch 31, 2013 was$428,000 , as compared to other income of$6,000 for three months endedMarch 31, 2012 . Other expense for the three months endedMarch 31, 2013 included$377,000 of expense payable toMr. Kosloske under the tax receivable agreement, a$71,000 loss on extinguishment of debt, offset by$19,000 of fees charged to distributors for advanced commissions. See Notes 1 and 13 of the accompanying consolidated financial statements for further information on the tax receivable agreement.
Provision for Income Taxes
Provision for income taxes was$1.1 million for the three months endedMarch 31, 2013 , reflecting a (16.6%) effective tax rate, as compared to no provision for income taxes during the three months endedMarch 31, 2012 , at which time we operated a limited liability company.
HII's effective tax rate includes a rate benefit attributable to the fact that HPIH and
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companies which are not subject to federal or state income tax. Accordingly, a portion of HII's earnings attributable to the noncontrolling interest are not subject to corporate level taxes. Additionally, our effective tax rate includes a valuation allowance placed on a portion of our deferred tax assets, as our belief is that it is more likely than not that a portion of our deferred tax assets will not be realized to offset future taxable income, and we project to have a current tax liability for the current year.
Liquidity and Capital Resources
General
As ofMarch 31, 2013 , we had$31.1 million of cash and cash equivalents and$18.9 million of short-term investments. Our balance of cash and cash equivalents increased as a result of the IPO. Historically, we have funded our operations cash flows from operations and, to a lesser extent, working capital and borrowings, as described below. We experienced negative cash flows from operations during the three months endedMarch 31, 2013 . We expect that we will generate positive cash flows from operations in future periods and on an annual basis, although this may fluctuate significantly on a quarterly basis. We believe that our available cash and cash flows expected to be generated from operations will be adequate to satisfy our current and planned operations for at least the next 12 months.
Prior to the IPO, during the three months ended
OnFebruary 13, 2013 , we completed the IPO by issuing 4,666,667 shares of our Class A common stock, par value$0.001 , to the public at a price of$14.00 per share common stock. Upon completion of the IPO, HII obtained a 35% membership interest, a 35% economic interest and 100% of the voting interest in HPIH. The aggregate gross proceeds from the shares of Class A common stock sold by us were$65.3 million . The aggregate net proceeds to us from the offering were approximately$60.8 million , after deducting an aggregate of$4.5 million in underwriting discounts and commissions paid to the underwriters and incurred in connection with the offering. See Note 6 of the accompanying unaudited consolidated financial statements for further information on the IPO. OnMarch 14, 2013 , we entered into an agreement to terminate certain contract rights with TSG, a managing general agent of the Company, for an aggregate cash price of$5.5 million . Pursuant to FASB guidance, the full amount plus transaction costs were expensed during the three months endedMarch 31, 2013 . We do not expect to incur any material future expenses associated with the transaction.
Our Indebtedness
Term Loan Agreement. InSeptember 2011 , we entered into a bank loan agreement with a third-party bank with a principal amount of$4.3 million . The purpose of this bank loan was to finance the acquisition of the remaining 50% interest in HPI. For further information on this acquisition see Note 1. "Overview-History" and Note 2 of the accompanying unaudited consolidated financial statements. Borrowings under the loan were secured by all of our assets and by a personal unlimited guarantee byMr. Kosloske andLori Kosloske ("Mrs. Kosloske"), our Chief Broker Compliance Officer andMr. Kosloske's wife, and certain real properties owned byMr. Kosloske and Mrs. Kosloske.
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GTJ REIT, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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