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SELECTQUOTE, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and result of operations together with our consolidated financial statements and footnotes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled "Risk Factors" in Part I, Item 1A above.
Company Overview
We are a leading technology-enabled, direct-to-consumer ("DTC") distribution
platform for insurance products and healthcare services that provides consumers
with a transparent and convenient venue to shop for complex senior health, life,
and auto & home insurance policies from a curated panel of the nation's leading
insurance carriers. As an insurance distributor, we do not insure the consumer,
but rather identify consumers looking to acquire insurance products and place
these consumers with insurance carrier partners that provide these products and,
in return, earn commissions from our insurance carrier partners for the policies
we sell on their behalf. Because we are not the issuer of the insurance policy
to the consumer, we bear no underwriting risks. Our proprietary technology
allows us to take a broad funnel approach to marketing by analyzing and
identifying high quality consumer leads sourced from a wide variety of online
and offline marketing channels. Our primary sources of leads include search
engine marketing, radio, television, and third-party marketing partners. We
monitor our acquisition costs to dynamically allocate our marketing spend to the
most attractive channel, benefiting from over thirty years of data accumulated
through our proprietary, purpose-built technologies. Our advanced workflow
processing system scores each acquired lead in real-time, matching it with an
agent whom we determine is best suited to meet the consumer's need. Our platform
then captures and utilizes our experience to further build upon the millions of
data points that feed our marketing algorithms, which further enhances our
ability to deploy subsequent marketing dollars efficiently and target more
high-quality consumer leads. We have built our business model to maximize
commissions collected over the life of an approved policy less the cost of
acquiring the business, a metric we refer to as policyholder lifetime value and
which is a key component to our overall profitability.
Our unique platform has enabled us to expand our distribution business in recent
years to include additional products beyond insurance policies. In interacting
with thousands of consumers over the years, we identified a large opportunity to
leverage our existing database and distribution model to improve access to
healthcare services. In addition to improving consumers' health outcomes, this
service creates deeper relationships with our insurance carrier partners by
increasing policy persistency and, in turn, reducing their overall costs.
Additionally, we now offer pharmacy services through our closed-door, long-term
care pharmacy, which offers essential prescription medications, OTC medications,
customized medication packaging, medication therapy management, and other
consultative services.
We evaluate our business using the following three segments:
SelectQuote Senior ("Senior"), our fastest growing and largest segment, was launched in 2010 and provides unbiased comparison shopping for Medicare Advantage ("MA") and Medicare Supplement ("MS") insurance plans as well as prescription drug and dental, vision, and hearing ("DVH") plans, and critical illness products. We represent approximately 21 leading, nationally-recognized insurance carrier partners, including UnitedHealthcare, Wellcare, and Humana. MA and MS plans accounted for 82%, 78%, and 77% of our approved Senior policies for the years endedJune 30, 2022 , 2021, and 2020, respectively, with other ancillary type policies accounting for the remainder. Additionally, InsideResponse (our lead generation business acquired in 2020) is included in Senior for segment reporting purposes. 45 -------------------------------------------------------------------------------- Table of Contents In 2021, we expanded our Senior product offering with the introduction ofPopulation Health and SelectRx (together, "Healthcare Services"). ThroughPopulation Health , consumers receive one-on-one assistance from our CSAs who help patients understand the benefits available under their health plans and connect them with additional healthcare related resources. We believe that offering this service to our existing MA consumers helps drive customer satisfaction and increase policy persistency, which, in turn, reduces costs for our insurance carrier partners. Through SelectRx, our closed-door, long-term care pharmacy, we provide simple solutions for prescription drug management and support with a personalized approach to streamline the process of managing multiple medications for seniors with chronic conditions. SelectRx uses a high-touch, technology-driven approach to provide superior customer service and achieve improved medication adherence. SelectRx has developed a pill pack solution that is customized to the unique needs of each patient, focusing on individual multi-dosages by day and time. SelectQuote Life ("Life") is one of the country's largest and most established DTC insurance distributors for term life insurance, having sold over 2.1 million policies nationwide since our founding in 1985. Our platform provides unbiased comparison shopping for life insurance products such as term life, final expense, and other ancillary products like critical illness, accidental death, and juvenile insurance. We represent approximately 22 leading, nationally-recognized insurance carrier partners, with many of these relationships exceeding 15 years. Term life policies accounted for 36%, 46%, and 68% of new premium within the Life segment for the years endedJune 30, 2022 , 2021, and 2020, respectively, with final expense policies accounting for 64%, 54%, and 32% for the years endedJune 30, 2022 , 2021, and 2020, respectively. SelectQuote Auto & Home ("Auto & Home") was founded in 2011 as an unbiased comparison shopping platform for auto, home, and specialty insurance lines. Our platform provides unbiased comparison shopping for insurance products such as homeowners, auto, dwelling fire, and other ancillary insurance products underwritten by approximately 22 leading, nationally recognized insurance carrier partners. Homeowners and 12-month auto products accounted for 76%, 79%, and 78% of new premium within the Auto & Home segment for years endedJune 30, 2022 , 2021, and 2020, respectively, with six-month auto, dwelling fire, and other products accounting for a majority of the remainder.
Industry Trends
We estimate that the total addressable market for the insurance products we distribute is greater than$180 billion . Further, while these markets are already substantial, they are also growing, in part due to a number of highly attractive demographic trends. Our Senior segment serves consumers predominantly in the over 65 age category. The over 65 age category grew at a 3.4% CAGR from 2010 to 2016, and grew from 12.9% of the total population to 15.2% of the total population according to theUnited States Census Bureau . The over 65 age category, growing at a 3.2% CAGR from 2016 to 2025, accounted for 15.6% of the population in 2020 and is expected to account for 18.9% of the population by 2025 according to theUnited States Census Bureau . On average, 11,000 "Baby Boomers" are expected to turn 65 every day or nearly 4.2 million per year, for the next 10 years. As a result, Medicare enrollment is growing steadily, with the number of Medicare enrollees expected to grow from 63 million in 2021 (up from 59 million in 2018 and 52.5 million in 2013), to approximately 82 million in 2030, according to CSG Actuarial, with 55% of people above 65 and older making online purchases monthly. Of this, Medicare Advantage plans are representing an increasing share of the Medicare market. At the end of 2019, there were approximately 34 million Medicare Advantage enrollees, representing approximately 44% penetration of the Medicare market. According toLEK Consulting , in 2021, 42% of all Medicare beneficiaries were enrolled in Medicare Advantage plans and between 2020 and 2021, total Medicare Advantage enrollment grew by about 2.4 million individuals. According to estimates, Medicare Advantage penetration is likely to reach 50% penetration for all Medicare-eligible individuals by 2025 and could reach as high as 60% to 70% between 2030 and 2040, highlighting the pace with which this already large segment of the Medicare market is growing. The degree to which we will realize a corresponding increase in revenue will be determined by our ability to continue to successfully place new Medicare policies for this enlarged potential consumer base. Our Life segment is one of the country's largest DTC insurance distributors for term life insurance and provides unbiased comparison shopping for final expense and ancillary products. TheU.S. life insurance market is mature and has experienced annual premium growth of 1.4% since 2013, according to S&P Global. Growth in the 46 -------------------------------------------------------------------------------- Table of Contents life insurance sector is driven by a number of macro-economic factors including population growth, general economic growth and individual wealth accumulation. Our Auto & Home segment predominantly sells automobile and homeowners insurance. The auto insurance industry has grown at an annual rate of 6.3% from 2013-2018 based on Statutory Direct Premiums Written, according to S&P Global, with 2018 written premium totaling$247 billion . Industry growth is driven by growth in the number of registered vehicles, increases in insurance premium rates and general economic growth. The homeowners insurance industry has grown at an annual rate of 3.8% from 2013-2018 based on Statutory Direct Premiums Written, according to S&P Global, with 2018 written premium totaling$99 billion . Industry growth is driven by growth in housing supply, increases in insurance premium rates and general economic growth. Technological innovations, including the development of machine learning for business applications and the proliferation of smart mobile devices as a means of consumer purchasing, are changing the insurance distribution landscape. As the composition of theU.S. population gradually shifts to the mobile-first generation, consumers are becoming more tech-savvy and comfortable shopping online. The internet plays a role in 8 out of 10 life insurance purchases, according to LIMRA. Additionally, 71% ofU.S. auto insurance shoppers obtain online quotes annually, according to Comscore. We believe our proprietary technology platform, vast datasets and use of machine learning in all aspects of our business put us in an excellent position to take advantage of these consumer trends.
Factors Affecting Our Results of Operations
Our primary source of revenue is commission revenue from selling policies in the senior health, life, and auto and home markets on behalf of our insurance carrier partners, the majority of which compensate us through first year and renewal commissions. We use our proprietary technology and processes to generate and obtain consumer leads and allocate those leads to agents who are best suited for those consumers. As a result, one of the primary factors affecting our growth is our total number of agents, comprised of both existing core agents and the number of new flex agents that we hire and train to sell new policies. We view agents as a critical component of helping consumers through the purchasing process to enable them to identify the most appropriate coverage that suits their needs. Through our years of experience, we have expanded our recruiting efforts and enhanced our training programs, both of which have allowed us to expand our agent force. We have also developed proprietary technologies and processes that enable us to expand our lead acquisition efforts to keep pace with our expanding sales force and maintain agent productivity despite the significant growth in number of agents. The amount of revenue we expect to recognize per policy is based on multiple factors, including our commission rates with our insurance carrier partners and the expected retention rates of different types of policies. The higher our retention rates, the more revenue we expect to generate pursuant to our carrier agreements, which generally entitle us to receive annual renewal commissions for so long as the policyholder renews their policy. Additionally, we earn certain volume-based bonuses from some carriers on first-year policies sold, which we refer to as both production bonuses and marketing development funds, based on attaining various predetermined target sales levels or other agreed upon objectives, as presented in the consolidated statements of comprehensive income as production bonus revenue. These commissions that we expect to generate over the life of an approved policy less the cost of acquiring the business is a key component to our overall profitability. Our goal is to maximize policyholder lifetime value by increasing retention rates, which starts by providing consumers with a transparent, valuable and best-in-class consumer experience and making sure consumers are buying a policy that meets their specific needs.
Recent Events
As previously disclosed in our Current Reports on Form 8-K filed with theSEC onFebruary 7 andMay 5, 2022 , respectively, we updated our operating strategy in the second half of the 2022 fiscal year in response to significant changes in the insurance distribution market observed in late 2021. Our updated strategy is designed to improve short-term cash efficiency and long-term profitability by stabilizing the growth of our MA distribution business and focusing additional efforts on the growth of Healthcare Services. One key element of this strategy is mitigating our operational risk by embracing a growth strategy that reduces our operating leverage and prioritizes our returns. At the core of this approach is a planned pullback in our Medicare policy production to allow us to 47 -------------------------------------------------------------------------------- Table of Contents refine our sales, marketing, and operational approach to place greater emphasis on cash efficiency, profitability, and writing business with greater potential to persist over the long term. Additionally, our strategic direction provides a differentiated approach to broader healthcare services that we believe will create a significant competitive advantage in the years ahead. For additional information about our updated strategy, please refer to our Current Report on Form 8-K filed with theSEC onAugust 18, 2022 .
Immaterial Correction of Prior Period Financial Statements
Subsequent to the issuance of our financial statements as of and for the year endedJune 30, 2021 , we determined that the provision for first year commission revenue for certain final expense policies offered by certain of our insurance carrier partners should have been accrued based on a higher lapse rate. This misstatement was initially thought to be isolated to an error in the lapse rate for one of our insurance carrier partners, as disclosed in the Company's Quarterly Report on Form 10-Q for the quarter endedDecember 31, 2021 . However, during the three months endedJune 30, 2022 , it was determined that the lapse rate for other insurance carrier partners were also incorrect, resulting in an additional misstatement being identified. See note 1 to the consolidated financial statements for further details. As a result of the misstatements found, we have corrected certain previously reported financial information for the year endedJune 30, 2021 and 2020, in this Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Key Business and Operating Metrics by Segment
In addition to traditional financial metrics, we rely upon certain business and operating metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate our operations. In Senior, our primary product, Medicare Advantage, pays us flat commission rates based on the number of policies we sell on behalf of our insurance carrier partners. Therefore, we have determined that units and unit metrics are the most appropriate measures to evaluate the performance of Senior. In Life and Auto & Home, we are typically paid a commission that is a percent of the premium that we generate for our insurance carrier partners. Therefore, we have determined that premium-based metrics are the most relevant measures to evaluate the performance of these segments. Below are the most relevant business and operating metrics for each segment: Senior Submitted Policies Submitted policies are counted when an individual completes an application with our licensed agent and provides authorization to them to submit it to the insurance carrier partner. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier. The following table shows the number of submitted policies for the years endedJune 30 : 2022 2021 2020 Medicare Advantage 808,116 550,321 264,546 Medicare Supplement 7,208 26,785 24,085 Dental, Vision and Hearing 145,716 132,106 70,018 Prescription Drug Plan 6,842 11,436 13,513 Other 14,776 16,487 5,890 Total 982,658 737,135 378,052 2022 compared to 2021-Total submitted policies increased by 33% for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 . The increase was driven primarily by a 47% increase in MA submitted policies and a 10% increase in DVH submitted policies, partially offset by a 73% decrease in MS submitted policies. The overall increase in submitted policies for Senior products was primarily due to increases in the number of agents 48 -------------------------------------------------------------------------------- Table of Contents we employ, partially offset by lower agent productivity. During the year endedJune 30, 2022 , we increased the number of average productive agents by 100% and average productivity per agent declined by 29%. 2021 compared to 2020-Total submitted policies increased by 95% for the year endedJune 30, 2021 , compared to the year endedJune 30, 2020 . The increase was driven primarily by a 108% increase in MA submitted policies and an 89% increase in DVH submitted policies. The overall increase in submitted policies for Senior products was primarily due to an increase in the number of agents we employ and an increase in productivity per agent. During the year endedJune 30, 2021 , we increased the number of average productive agents by approximately 75% and increased the productivity per productive agent by 16% from the year endedJune 30, 2020 . The increase in productivity was driven by improvements in agent close rates and enhancements to our agent workflow and desktop.
Approved Policies
Approved policies represents the number of submitted policies that were approved
by our insurance carrier partners for the identified product during the
indicated period. Not all approved policies will go in force.
The following table shows the number of approved policies for the years endedJune 30 : 2022 2021 2020 Medicare Advantage 661,738 467,585 225,404 Medicare Supplement 5,461 21,911 18,102 Dental, Vision and Hearing 124,989 111,015 55,556 Prescription Drug Plan 6,124 10,747 13,009 Other 12,407 14,089 4,654 Total 810,719 625,347 316,725 In general, the relationship between submitted policies and approved policies has been steady over time. Therefore, factors impacting the number of submitted policies also impact the number of approved policies. 2022 compared to 2021-Total approved policies increased by 30% for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 . The increase was driven primarily by a 42% increase in MA approved policies and a 13% increase in DVH approved policies, partially offset by a 75% decrease in MS approved policies. Fluctuations in approved policies are in direct correlation to submitted policies; however, this year we experienced a 4% decrease in MA submitted-to-approved conversion rates for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 , driven by higher consumer switching behavior. This resulted in MA approved policies growing at a slower rate than MA submitted policies. 2021 compared to 2020-Total approved policies increased by 97% for the year endedJune 30, 2021 , compared to the year endedJune 30, 2020 . The increase was driven primarily by a 107% increase in MA approved policies, 100% increase in DVH approved policies, and a 21% increase in MS approved policies. Fluctuations in approved policies are in direct correlation to submitted policies; therefore, the increases in the number of agents and the increased agent productivity noted above also resulted in the increase in approved policies compared to the year endedJune 30, 2020 .
Lifetime Value of Commissions per Approved Policy
The lifetime value of commissions (the "LTV") per approved policy represents
commissions estimated to be collected over the estimated life of an approved
policy based on multiple factors, including but not limited to, contracted
commission rates, carrier mix and expected policy persistency with applied
constraints. The LTV per approved policy is equal to the sum of the commission
revenue due upon the initial sale of a policy, and when applicable, an estimate
of future renewal commissions. The estimate of the future renewal commissions is
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determined using contracted renewal commission rates constrained by a
persistency-adjusted 10-year renewal period based on a combination of our
historical experience and available insurance carrier historical experience to
estimate renewal revenue only to the extent probable that a material reversal in
revenue would not be expected to occur. These factors may result in varying
values from period to period. The LTV per approved policy represents commissions
only from policies sold during the period. That figure excludes renewals during
the period from policies originally sold in a prior period with insurance
carrier partners whose contracts preclude us from recognizing variable
consideration for estimated renewal commissions and updated estimates of prior
period variable consideration based on actual policy renewals in the current
period.
The following table shows the LTV per approved policy for the years ended
June 30 :
2022 2021 2020
Medicare Advantage $ 925 $ 1,260 $ 1,287
Medicare Supplement 1,270 1,269 1,376
Dental, Vision and Hearing 123 136 140
Prescription Drug Plan 234 224 229
Other 73 113 34
2022 compared to 2021-The LTV per MA approved policy decreased 27% for the year
ended June 30, 2022 , compared to the year ended June 30, 2021 . The LTV per MA
approved policy was negatively impacted by lower MA persistency rates, which
includes an increase in constraint and higher provision for renewal year lapse
rates; higher provision for first year lapse rates; carrier mix; and the switch
to policy level persistency, somewhat offset by higher commission rates.
2021 compared to 2020-The LTV per MA and MS approved policy decreased 2% and 8%,
respectively, for the year ended June 30, 2021 , compared to the year ended June
30, 2020 . The LTV per MA approved policy was negatively impacted by lower MA
persistency rates, higher intra-year lapse rates and carrier mix, somewhat
offset by higher commission rates. The LTV per MS approved policy was negatively
impacted by a carrier mix shift of policies to a direct carrier pod that pays us
lower commissions but has lower marketing costs.
Per Unit Economics
Per unit economics represents total MA and MS commissions, other product
commissions, other revenues, and costs associated with Senior, each shown per
number of approved MA and MS approved policies over a given time period.
Management assesses the business on a per-unit basis to help ensure that the
revenue opportunity associated with a successful policy sale is attractive
relative to the marketing acquisition cost. Because not all acquired leads
result in a successful policy sale, all per-policy metrics are based on approved
policies, which is the measure that triggers revenue recognition.
The MA and MS commission per MA/MS policy represents the LTV for policies sold
in the period. Other commission per MA/MS policy represents the LTV for other
products sold in the period, including DVH prescription drug plan, and other
products, which management views as additional commission revenue on our agents'
core function of MA/MS policy sales. Other per MA/MS policy represents the
production bonuses, marketing development funds, lead generation revenue from
InsideResponse, revenue generated through Healthcare Services, and updated
estimates of prior period variable consideration based on actual policy renewals
in the current period. Total operating expenses per MA/MS policy represents all
of the operating expenses within Senior. The Revenue to customer acquisition
cost ("CAC") multiple represents total revenue per MA/MS policy as a multiple of
total marketing acquisition cost, which represents the direct costs of acquiring
leads. These costs are included in marketing and advertising expense within the
total operating expenses per MA/MS policy.
The following table shows per unit economics for the periods presented. Based on
the seasonality of Senior and the fluctuations between quarters, we believe that
the most relevant view of per unit economics is on a rolling
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12-month basis. All per MA/MS policy metrics below are based on the sum of
approved MA/MS policies, as both products have similar commission profiles.
These metrics are the basis on which management assesses the business.
Twelve Months Ended June 30,
(dollars per approved policy): 2022 2021 2020
MA and MS approved policies 667,199 489,496 243,506
MA and MS commission per MA / MS policy $ 928 $ 1,260 $ 1,293
Other commission per MA/MS policy 27 39 45
Other per MA / MS policy (62) 190 147
Total revenue per MA / MS policy 893 1,489 1,485
Total operating expenses per MA / MS policy (1,183) (991) (887)
Adjusted EBITDA per MA / MS policy (1) $ (290) $ 498 $ 598
Adjusted EBITDA Margin per MA / MS policy (1) (32) % 33 % 40 %
Revenue / CAC multiple 1.8X 3X 3.5X
(1) These financial measures are not calculated in accordance with GAAP. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Non-GAAP Financial Measures" for information regarding our use of
these non-GAAP financial measures and a reconciliation of such measures to their
nearest comparable financial measures calculated and presented in accordance
with GAAP.
2022 compared to 2021-Total revenue per policy decreased 40% for the twelve
months ended June 30, 2022 , compared to the twelve months ended June 30, 2021 ,
with the decrease driven by the lower LTV of MA policies, the $193.3 million
adjustment from a change in estimate of MA cohort transaction prices, and the
decrease in overall MS revenue, somewhat offset by higher marketing development
funds received per approved MA/MS policy and the addition of revenue from
SelectRx. Total costs per policy increased 19% for the twelve months ended
June 30, 2022 , compared to the twelve months ended June 30, 2021 , due to higher
fulfillment costs associated with scaling Healthcare Services, higher sales
expenses driven by a reduction in agent productivity during AEP, and an increase
in our marketing and advertising expense driven by lower close rates during AEP.
2021 compared to 2020-Total revenue per policy stayed flat for the twelve months
ended June 30, 2021 , compared to the twelve months ended June 30, 2020 , due to
lower MA/MS commissions driven by lower persistency, a decrease in the amount of
other ancillary insurance policies sold as a percent of MA/MS policies, and
lower marketing development funds received per approved MA/MS policy due to a
shift in mix towards carriers that do not pay us marketing development funds,
offset by higher lead generation revenue associated with InsideResponse. Total
cost per policy increased 12% for the twelve months ended June 30, 2021 ,
compared to the twelve months ended June 30, 2020 , due to an increase in our
marketing and advertising expense consistent with our strategy to drive higher
absolute revenue and Adjusted EBITDA with slightly lower Adjusted EBITDA margin.
Life
Life premium represents the total premium value for all policies that were approved by the relevant insurance carrier partner and for which the policy document was sent to the policyholder and payment information was received by the relevant insurance carrier partner during the indicated period. Because our commissions are earned based on a percentage of total premium, total premium volume for a given period is the key driver of revenue for Life.
The following table shows term and final expense premiums for years ended
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Table of Contents (in thousands): 2022 2021 2020 Term Premiums$ 62,364 $ 76,833 $ 76,800 Final Expense Premiums 109,218 90,878 35,997 Total$ 171,582 $ 167,711 $ 112,797 2022 compared to 2021-Total term premiums decreased 19% for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 . The number of policies sold declined 27%, driven by lower agent headcount, which was somewhat offset by a 12% increase in the average premium per policy sold. Final expense premiums increased 20% for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 , due to an increase in the number of agents selling final expense policies. 2021 compared to 2020-Total core premiums were flat for the year endedJune 30, 2021 , compared to the year endedJune 30, 2020 . The number of policies sold declined 24%, which was somewhat offset by a 22% increase in the average premium per policy sold. Final expense premiums increased 152% for the year endedJune 30, 2021 , compared to the year endedJune 30, 2020 , due to a significant increase in the number of agents selling final expense policies.
Auto & Home
Auto & Home premium represents the total premium value of all new policies that were approved by our insurance carrier partners during the indicated period. Because our commissions are earned based on a percentage of total premium, total premium volume for a given period is the key driver of revenue for our Auto & Home segment.
The following table shows premiums for the years ended
(in thousands): 2022 2021 2020 Premiums$ 50,114 $ 55,596 $ 70,087 2022 compared to 2021-Total premiums decreased 10% for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 , primarily due to our strategy to reduce the growth in Auto & Home. 2021 compared to 2020-Total premiums decreased 21% for the year endedJune 30, 2021 compared to the year endedJune 30, 2020 , primarily due to our strategic shift of agents from Auto & Home to our Senior and Life divisions.
Non-GAAP Financial Measures
To supplement our financial statements presented in accordance with GAAP and to
provide investors with additional information regarding our GAAP financial
results, we have presented in this Annual Report on Form 10-K Adjusted EBITDA
and Adjusted EBITDA Margin, which are non-GAAP financial measures. These
non-GAAP financial measures are not based on any standardized methodology
prescribed by GAAP and are not necessarily comparable to similarly titled
measures presented by other companies.
Adjusted EBITDA. We define Adjusted EBITDA as income (loss) before interest
expense, income tax expense (benefit), depreciation and amortization, and
certain add-backs for non-cash or non-recurring expenses, including
restructuring, share-based compensation expenses, and any impairment charges.
The most directly comparable GAAP measure is net income (loss). We monitor and
have presented in this Annual Report on Form 10-K Adjusted EBITDA because it is
a key measure used by our management and Board of Directors to understand and
evaluate our operating performance, to establish budgets, and to develop
operational goals for managing our business. In particular, we believe that
excluding the impact of these expenses in calculating Adjusted EBITDA can
provide a useful measure for period-to-period comparisons of our core operating
performance.
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We believe that this non-GAAP financial measure helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of this non-GAAP financial measure. Accordingly, we believe that this financial measure provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects. Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of this non-GAAP financial measure rather than net income (loss), which is the most directly comparable financial measure calculated and presented in accordance with GAAP. These limitations include the fact that Adjusted EBITDA excludes interest expense, depreciation and amortization expense, share-based compensation expense, income tax expense (benefit), and other non-recurring expenses that are one-time in nature. In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. The following tables reconcile Adjusted EBITDA and net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, for the periods presented:
Year Ended
(in thousands) Senior Life Auto & Home Corp & Elims Consolidated Net loss$ (297,504) Share-based compensation expense 7,052 Non-recurring expenses (1) 4,730 Depreciation and amortization 24,724 Loss on disposal of property, 1,456 equipment, and software, net Goodwill impairment 44,596 Impairment of long-lived assets 3,147 Interest expense, net 43,595 Income tax benefit (92,302) Adjusted EBITDA$ (193,799) $ (129) $ 5,433 $ (72,011) $ (260,506) (1) These expenses primarily consist of costs incurred for amendments to the Senior Secured Credit Facility, costs related to acquisitions, and severance expenses. 53
-------------------------------------------------------------------------------- Table of Contents Year EndedJune 30, 2021 : Senior Life Auto & Home Corp & Elims Consolidated Net income$ 124,859 Share-based compensation expense 5,165 Non-recurring expenses (1) 6,065 Fair value adjustments to 1,488 contingent earnout obligations Depreciation and amortization 16,142 Loss on disposal of property, 686 equipment, and software Interest expense 29,320 Loss on extinguishment of debt 3,315 Income tax expense 33,156 Adjusted EBITDA$ 243,777 $ 22,542 $ 8,178 $ (54,301) $ 220,196 (1) These expenses primarily consist of costs incurred for the First Amendment to the Senior Secured Credit Facility, recent acquisitions, re-designation of the hedge, and the Secondary Offering.
Year Ended
Senior Life Auto & Home Corp & Elims Consolidated
Net income $ 79,484
Share-based compensation expense 9,498
Non-recurring expenses (1) 3,721
Fair value adjustments to
contingent earnout obligations 375
Depreciation and amortization 7,993
Loss on disposal of property,
equipment, and software 360
Restructuring expenses (2) 153
Interest expense, net 24,595
Loss on extinguishment of debt 1,166
Income tax expense 24,502
Adjusted EBITDA $ 145,738 $ 25,635 $ 8,699 $ (28,225) $ 151,847
(1) These expenses consist of one-time consulting expenses associated with
adopting ASC 606, non-recurring compensation to certain former board members,
non-restructuring severance expenses, employer payroll taxes on the one-time
Distribution to stock option holders, costs related to our IPO, cost related to
the acquisition of InsideResponse, and expenses related to business continuity
in response to the COVID-19 pandemic.
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Key Components of our Results of Operations
The following table sets forth our operating results and related percentage of
total revenues for the years ended
(in thousands) 2022 2021 2020 Revenue Commission$ 587,518 77 %$ 818,772 88 %$ 474,429 90 % Production bonus 89,057 12 % 70,653 8 % 50,308 10 % Other 87,470 11 % 40,556 4 % 4,601 - % Total revenue 764,045 100 % 929,981 100 % 529,338 100 % Operating costs and expenses Cost of revenue 466,808 61 % 270,715 29 % 167,399 32 % Marketing and advertising 484,084 63 % 385,291 41 % 184,157 35 % General and administrative 89,837 12 % 63,114 7 % 35,283 7 % Technical development 24,729 3 % 18,623 2 % 12,347 2 % Goodwill Impairment 44,596 6 % - - % - - % Total operating costs and 1,110,054 145 % 737,743 79 % 399,186 76 %
expenses
Income (loss) from operations (346,009) (45) % 192,238 21 % 130,152 25 % Interest expense, net (43,595) (6) % (29,320) (3) % (24,595) (5) % Loss on extinguishment of debt - - % (3,315) - % (1,166) - % Other expense, net (202) - % (1,588) - % (405) - % Income (loss) before income tax (389,806) (51) % 158,015 18 % 103,986 20 % expense (benefit) Income tax expense (benefit) (92,302) (12) % 33,156 4 % 24,502 5 % Net income (loss)$ (297,504) (39) %$ 124,859 14 %$ 79,484 15 % Revenue Our primary source of revenue are the commissions earned for the sale of first year and renewal policies from our insurance carrier partners, which are presented in our consolidated statements of comprehensive income as commission revenue. Additionally, we earn certain volume-based bonuses from some carriers on first-year policies sold, which we refer to as both production bonuses and marketing development funds, based on attaining various predetermined target sales levels or other agreed upon objectives, as presented in the consolidated statements of comprehensive income as production bonus revenue. Other revenue includes the lead generation revenue from InsideResponse and the revenue generated through Healthcare Services. Our commission contracts with our insurance carrier partners contain a single performance obligation satisfied at the point in time to which we allocate the total transaction price. The transaction price is identified as the first year commission due upon the initial sale of a policy as well as an estimate of future renewal commissions and production bonus revenue when applicable. After a policy is sold, we have no material additional or recurring obligations to the policyholder or the insurance carrier partner. Therefore, we do not incur any additional expense related to our receipt of future renewal commissions or production bonus revenue. All of the costs associated with the sale of an individual policy are incurred prior to or at the time of the initial sale of an individual policy. Revenue is recognized at different milestones for each segment based on the contractual enforceable rights, our historical experience, and established customer business practices. Refer to Note 1 to the consolidated financial statements for further details by segment. InsideResponse's lead generation revenue is recognized when the generated lead is accepted by our customers, which is the point of sale, and we have no performance obligation after the delivery. 55 -------------------------------------------------------------------------------- Table of Contents Revenues generated from SelectRx are recognized upon shipment. At the time of shipment, we have performed substantially all of our performance obligations and do not experience a significant level of returns or re-shipments. There are no future revenue streams associated as patients have the option to cancel their service at any time with no further payments due. The following table presents our commission, production bonus, other, and total revenue for the years endedJune 30 and the percentage changes from the prior year: Percent Change (dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Commission$ 587,518 $ 818,772 $ 474,429 (28)% 73% Production bonus 89,057 70,653 50,308 26% 40% Other 87,470 40,556 4,601 116% 781% Total revenue$ 764,045 $ 929,981 $ 529,338 (18)% 76% 2022 compared to 2021-Commission revenue decreased$231.3 million , or 28%, which included decreases in Senior, Life, and Auto & Home commission revenues of$203.9 million ,$21.0 million , and$1.8 million , respectively. For Senior, the revenue decline was driven by the 27% reduction in LTV's of approved MA policies and a$193.3 million downward adjustment from a change in estimate of Senior MA cohort transaction prices. Life's revenue decline was driven by a$15.0 million decrease in term life revenue, driven by lower agent headcount, and a$5.9 million decrease in final expense revenue, driven by an$9.5 million downward adjustment from provision for loss and a change in estimate of cohort transaction price, which was partially offset by an increase in the number of agents selling final expense policies. The revenue decline for Auto & Home was driven by our strategy to reduce the growth in that division. Production bonus revenue increased$18.4 million , which was primarily driven by a$22.4 million increase in marketing development funds received for Senior, partially offset by decreases of$2.7 million and$1.3 million for Life and Auto & Home, respectively. The$46.9 million increase in other revenue was primarily driven by$65.8 million of new revenue from Healthcare Services, partially offset by a reduction of$18.3 million in external lead generation revenue from InsideResponse, as more of their leads were consumed within Senior than in the prior year. 2021 compared to 2020-Commission revenue increased$344.3 million , or 73%, which included increases in Senior and Life commission revenues of$307.1 million and$49.1 million , respectively, offset by a decrease in Auto & Home commission revenue of$10.4 million . For Senior, the revenue growth was driven by the significant increase in our agent count that led to a 108% increase in Medicare Advantage commission revenue. Life's$49.1 million revenue growth was driven by$45.1 million growth in final expense revenue which was a result of the investment we have made in agents to grow sales of these policies, and a slight increase in core term life revenue. The revenue decline for Auto & Home was driven by our strategic shift in agents from Auto & Home to our Senior and Life divisions. The$20.3 million increase in production bonus revenue was primarily driven by$19.5 million in marketing development funds received for Senior, and the$36.0 million increase in other revenue was primarily driven by$35.8 million of lead generation revenue from InsideResponse.
Operating Costs and Expenses
Cost of Revenue
Cost of revenue primarily represents the direct costs associated with fulfilling
our obligations to our insurance carrier partners for the sale of insurance
policies. Such costs primarily consist of compensation and related benefit costs
for agents, fulfillment specialists and others directly engaged in servicing
policy holders. It also includes licensing costs for our agents and allocations
for facilities, telecommunications and software maintenance costs, which are all
based on headcount. Facilities costs include rent and utilities expenses and
other costs to maintain our office locations. Telecommunications and software
maintenance costs includes costs related to the internal phone systems and
various software applications that our agents use to make sales. These costs
directly
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correlate to the number of agents we have as we are primarily charged based on
per person usage for the phone systems and software applications. For SelectRx,
cost of revenue represents the direct costs associated with inventory used to
fulfill pharmacy patient orders.
The following table presents our cost of revenue for the years ended
the percentage changes from the prior year:
Percent Change
(dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Cost of revenue $ 466,808 $ 270,715 $ 167,399 72% 62%
2022 compared to 2021-Cost of revenue increased $196.1 million , or 72%, in 2022
compared to 2021, primarily due to a $123.6 million increase in compensation
costs driven by the growth in the number of employees within Senior. The
increase in headcount also drove increases in the allocations of $13.7 million
for facilities, telecommunications, and software maintenance costs, and $8.4
million for licensing costs. Additionally, there was $43.8 million of new
inventory costs for SelectRx.
2021 compared to 2020-Cost of revenue increased $103.3 million , or 62%, in 2021
compared to 2020, primarily due to a $86.0 million increase in compensation
costs driven by the growth in the number of agents within the Senior segment and
to a lesser extent the Life segment to support the sale of final expense
policies. The increase in headcount also drove increases in the allocations of
$10.1 million for facilities, telecommunications, and software maintenance
costs, and $4.3 million for licensing costs.
Marketing and Advertising
Marketing and advertising expenses consist primarily of the direct costs associated with marketing and advertising of our services, such as television and radio commercials and online advertising. These direct costs generally represent the vast majority of our marketing and advertising expenses. Other costs consist of compensation and other expenses related to marketing, business development, partner management, public relations, carrier relations personnel who support our offerings, and allocations for facilities, telecommunications, and software maintenance costs. Our marketing and advertising costs increase during AEP and OEP to generate more leads during these high-volume periods.
The following table presents our marketing and advertising expenses for the
years ended
Percent Change
(dollars in thousands) 2022 2021 2020 2021 vs. 2020 2020 vs. 2019
Marketing and advertising $ 484,084 $ 385,291 $ 184,157 26% 109%
2022 compared to 2021-Marketing and advertising expenses increased $98.8
million , or 26%, in 2022 compared to 2021, primarily due to a $88.4 million
increase in lead costs associated with generating more leads for our larger
agent base to consume and lower overall close rates which impacted our marketing
efficiency, and a $7.7 million increase in compensation costs, as we increased
the number of employees supporting our marketing organization to produce more
leads. Additionally, there was a $2.1 million increase in depreciation and
amortization expense due to additional fixed assets and software in service.
2021 compared to 2020-Marketing and advertising expenses increased $201.1
million , or 109%, in 2021 compared to 2020, primarily due to a $138.6 million
increase in Senior marketing and advertising costs associated with generating
more leads for our larger agent base to consume. Marketing and advertising costs
also increased $32.9 million in our Life segment driven by an increase in leads
specifically for our final expense policies.
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Additionally, compensation costs related to our marketing personnel increased
$30.4 million as we increased the number of people supporting our marketing
organization to produce more leads to support the growth of the business.
General and Administrative
General and administrative expenses include compensation and benefits costs for staff working in our executive, finance, accounting, recruiting, human resources, administrative, business intelligence and data science departments. These expenses also include fees paid for outside professional services, including audit, tax and legal fees and allocations for facilities, telecommunications, and software maintenance costs.
The following table presents our general and administrative expenses for the
years ended
Percent Change
(dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
General and administrative $ 89,837 $ 63,114 $ 35,283 42% 79%
2022 compared to 2021-General and administrative expenses increased
$26.7 million , or 42%, in 2022 compared to 2021, primarily due to $13.7 million
in higher compensation costs due to additional headcount to support the growth
in the business; $4.3 million in depreciation and amortization expenses due to
additional fixed assets and software in service; $4.5 million in professional
services fees due to increases in recruiting, accounting and legal, and
insurance costs; and $3.1 million of charges related to the impairment of
long-lived intangible assets as described in Note 7 to the consolidated
financial statements.
2021 compared to 2020-General and administrative expenses increased
$27.8 million , or 79%, in 2021 compared to 2020, primarily due to $10.2 million
in higher compensation costs due to additional headcount to support the growth
of the business; $4.2 million in corporate development charges, primarily
related to the First Amendment to the Senior Secured Credit Facility, the recent
acquisitions, and the Secondary Offering; and $7.1 million in higher
professional fees and insurance costs.
Technical development expenses consist primarily of compensation and benefits costs for internal and external personnel associated with developing, maintaining and enhancing our applications, infrastructure and other IT-related functions as well as allocations for facilities, telecommunications and software maintenance costs.
The following table presents our technical development expenses for the years
ended
Percent Change
(dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Technical development $ 24,729 $ 18,623 $ 12,347 33% 51%
2022 compared to 2021-Technical development expenses increased $6.1 million , or
33%, in 2022 compared to 2021, primarily due to a $3.4 million increase in
compensation costs related to our technology personnel as we increased the
number of people in our desktop support and development efforts to support the
increase in total headcount. The increase in headcount also drove increases in
the allocations of $1.6 million for facilities, telecommunications, and software
maintenance costs.
2021 compared to 2020-Technical development expenses increased
51%, in 2021 compared to 2020, primarily due to a
compensation costs related to our technology
58 -------------------------------------------------------------------------------- Table of Contents personnel as we increased the number of people in our desktop support and development efforts to support the increase in total headcount and the growth in the business, offset by a$2.3 million decrease in professional fees as we decreased our cost of external application developers.
Interest Expense, Net
The following table presents our interest expense, net for the years ended
Percent Change
(dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Interest expense, net $ (43,595) $ (29,320) $ (24,595) 49% 19%
2022 compared to 2021-Interest expense increased $14.3 million , or 49%, in 2022
compared to 2021, primarily as a result of the increase in our outstanding
balances on the Term Loans and DDTL Facility, amortization of additional
deferred financing costs associated with the amendments to the Senior Secured
Credit Facility, and the ticking fee interest assessed on the remaining
available borrowing capacity of the DDTL Facility.
2021 compared to 2020-Interest expense increased $4.7 million , or 19%, in 2021
compared to 2020, primarily as a result of increases in interest incurred on the
Term Loans prior to the First Amendment to the Senior Secured Credit Facility,
partially offset by interest related to our non-recourse debt, which was
terminated on June 8, 2020 .
Income Tax Expense (Benefit)
The following table presents our provision for income taxes for the years ended
Percent Change
(dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020
Income tax expense (benefit) $ (92,302) $ 33,156 $ 24,502 (378)% 35%
Effective tax rate 23.7 % 21.0 % 23.6 %
2022 compared to 2021-For the year ended June 30, 2022 , we recognized an income
tax benefit of $92.3 million , representing an effective tax rate of 23.7%. The
differences from our federal statutory tax rate to the effective tax rate for
the year ended June 30, 2022 , were primarily related to state income taxes.
2021 compared to 2020-For the year ended June 30, 2021 , we recognized income tax
expense of $33.2 million , representing an effective tax rate of 21.0%. The
differences from our federal statutory tax rate to the effective tax rate for
the year ended June 30, 2021 , were primarily due to the net effects of state
income taxes partially offset by Kansas High Performance Incentive Program
("HPIP") tax credits and the exercise of non-qualified stock options.
Segment Information
We currently have three reportable segments: i) Senior, ii) Life, and iii) Auto & Home. Senior primarily sells senior Medicare-related health insurance products and also includesPopulation Health , SelectRx, and InsideResponse. Life primarily sells term life and final expense products, and Auto & Home primarily sells individual automobile and homeowners' insurance. In addition, we account for non-operating activity, share-based compensation expense, certain intersegment eliminations, and the costs of providing corporate and other administrative services in our administrative division, Corporate & Eliminations. These services are not directly 59 -------------------------------------------------------------------------------- Table of Contents identifiable with our reportable segments and are shown in the tables below to reconcile the reportable segments to the consolidated financial statements. We have not aggregated any operating segments together to represent a reportable segment. We report segment information based on how our chief operating decision maker ("CODM") regularly reviews our operating results, allocates resources, and makes decisions regarding business operations. The performance measures of the segments include total revenue and Adjusted EBITDA because management believes that such information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industries. Costs of revenue, marketing and advertising, and technical development operating expenses that are directly attributable to a segment are reported within the applicable segment. Indirect costs of revenue, marketing and advertising, and technical development operating expenses are allocated to each segment based on varying metrics such as headcount. Adjusted EBITDA is calculated as total revenue for the applicable segment less direct and allocated costs of revenue, marketing and advertising, technical development, and general and administrative operating costs and expenses, excluding depreciation and amortization expense; gain or loss on disposal of property, equipment, and software; share-based compensation expense; restructuring expenses; and non-recurring expenses such as severance payments and transaction costs. Our CODM does not separately evaluate assets by segment; therefore, assets by segment are not presented. EffectiveJuly 1, 2022 , we will realign our reportable segments as a result of the change in strategic direction established for fiscal year 2023. This realignment will separate the Healthcare Services business, which includesSelectRx and Population Health , out of the Senior reportable segment and into its own operating and reporting segment. The CODM will review discrete financial information for the Healthcare Services business, separate from the Senior segment, to make operational and financial decisions and allocate resources beginningJuly 1, 2022 . The tables presented below have not been adjusted to reflect this change in reportable segments. All prior-period comparative segment information will be recast in the Company's first quarter of fiscal 2023 Quarterly Report on Form 10-Q to reflect the change in reportable segments. The updated strategy is designed to stabilize the growth of the MA distribution business, focus additional efforts on the growth of the Healthcare Services business, and enhance our competitive value proposition. Additionally, the strategy is designed to improve short-term cash efficiency and long-term profitability. Key elements of our strategic direction include committing to a growth strategy that prioritizes our returns and mitigates our operational risk to reduce our operating leverage. This includes a planned pullback in our Medicare policy production which allows us to refine our sales, marketing and operational approach, placing greater focus on cash efficiency, profitability, and writing business with greater potential to persist over the long term. Additionally, our strategic direction provides a differentiated approach to broader healthcare services that we believe will create a significant competitive advantage in the years ahead.
The following tables present information about the reportable segments for the
periods presented:
60 -------------------------------------------------------------------------------- Table of Contents Year EndedJune 30, 2022 (in thousands) Senior Life Auto & Home Corp & Elims Consolidated Revenue$ 595,375 $ 153,973 $ 27,881 $ (13,184) $ 764,045 Operating expenses (789,174) (154,102) (22,448) (58,625) (1) (1,024,349) Other expenses, net - - - (202) (202) Adjusted EBITDA$ (193,799) $ (129) $ 5,433 $ (72,011) (260,506) Share-based compensation expense (7,052) Non-recurring expenses (2) (4,730) Depreciation and amortization (24,724) Loss on disposal of property, equipment, and software, net (1,456) Goodwill impairment (44,596) Impairment of long-lived assets (3,147) Interest expense, net (43,595) Income tax benefit 92,302 Net loss$ (297,504)
(1) Operating expenses in the Corp & Elims division primarily include
IT related departments, and
(2) These expenses primarily consist of costs incurred for amendments to the Senior Secured Credit Facility, costs related to acquisitions, and severance expenses. Year EndedJune 30, 2021 Senior Life Auto & Home Corp & Elims Consolidated Revenue$ 728,701 $ 177,669 $ 30,913 $ (7,302) $ 929,981 Operating expenses (484,924) (155,127) (22,735) (46,899) (1) (709,685) Other expenses, net - - - (100) (100) Adjusted EBITDA$ 243,777 $ 22,542 $ 8,178 $ (54,301) 220,196 Share-based compensation expense (5,165) Non-recurring expenses (2) (6,065) Fair value adjustments to contingent earnout obligations (1,488) Depreciation and amortization (16,142) Loss on disposal of property, equipment, and software (686) Interest expense, net (29,320) Loss on extinguishment of debt (3,315) Income tax expense (33,156) Net income$ 124,859
(1) Operating expenses in the Corp & Elims division primarily include
IT related departments, and
(2) These expenses primarily consist of costs incurred for the First Amendment
to the Senior Secured Credit Facility, recent acquisitions, re-designation of
the hedge, and the Secondary Offering.
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Year Ended June 30, 2020
Senior Life Auto & Home Corp & Elims Consolidated
Revenue $ 361,673 $ 127,790 $ 41,189 $ (1,314) $ 529,338
Operating expenses (215,935) (102,155) (32,490) (26,881) (1) (377,461)
Other expenses, net - - - (30) (30)
Adjusted EBITDA $ 145,738 $ 25,635 $ 8,699 $ (28,225) 151,847
Share-based compensation expense (9,498)
Non-recurring expenses (2) (3,721)
Fair value adjustments to contingent
earnout obligations (375)
Depreciation and amortization (7,993)
Loss on disposal of property,
equipment and software (360)
Restructuring expenses (153)
Interest expense, net (24,595)
Loss on extinguishment of debt (1,166)
Income tax expense (24,502)
Net income $ 79,484
(1) Operating expenses in the Corp & Elims division primarily include
million
related departments, and
(2) These expenses consist of one-time consulting expenses associated with
adopting ASC 606, non-recurring compensation to certain former board members,
non-restructuring severance expenses, employer payroll taxes on the one-time
Distribution to stock option holders, costs related to our IPO, cost related to
the acquisition of InsideResponse, and expenses related to business continuity
in response to the COVID-19 pandemic.
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The following table depicts the disaggregation of revenue by segment and product
for the years ended June 30 :
(dollars in thousands) 2022 $ % 2021 $ % 2020
Senior:
Commission revenue:
Medicare advantage $ 409,090 $ (186,042) (31) % $ 595,132 $ 309,175 108 % $ 285,957
Medicare supplement 5,224 (18,207) (78) % 23,431 (10,870) (32) % 34,301
Prescription drug plan (170) (1,822) (110) % 1,652 (1,215) (42) % 2,867
Dental, vision, and health 15,056 (913) (6) % 15,969 8,211 106 % 7,758
Other commission revenue 5,257 3,101 144 % 2,156 1,794 496 % 362
Total commission revenue 434,457 (203,883) (32) % 638,340 307,095 93 % 331,245
Total production bonus revenue 66,888 22,381 50 % 44,507 19,460 78 % 25,047
Total other revenue 94,030 48,176 105 % 45,854 40,473 752 % 5,381
Total Senior revenue 595,375 (133,326) (18) % 728,701 367,028 101 % 361,673
Life:
Commission revenue:
Term 65,539 (15,049) (19) % 80,588 4,024 5 % 76,564
Final expense 68,295 (5,932) (8) % 74,227 45,104 155 % 29,123
Total commission revenue 133,834 (20,981) (14) % 154,815 49,128 46 % 105,687
Total production bonus revenue 20,139 (2,715) (12) % 22,854 751 3 % 22,103
Total other revenue - - - % - - - % -
Total Life revenue 153,973 (23,696) (13) % 177,669 49,879 39 % 127,790
Auto & Home:
Total commission revenue 25,851 (1,770) (6) % 27,621 (10,410) (27) % 38,031
Total production bonus revenue 2,030 (1,262) (38) % 3,292 134 4 % 3,158
Total other revenue - - - % - - - % -
Total Auto & Home revenue 27,881 (3,032) (10) % 30,913 (10,276) (25) % 41,189
Eliminations:
Total commission revenue (6,624) (4,620) 231 % (2,004) (1,470) 275 % (534)
Total production bonus revenue - - - % - - - % -
Total other revenue (6,560) (1,262) 24 % (5,298) (4,518) 579 % (780)
Total Elimination revenue (13,184) (5,882) 81 % (7,302) (5,988) 456 % (1,314)
Total commission revenue 587,518 (231,254) (28) % 818,772 344,343 73 % 474,429
Total production bonus revenue 89,057 18,404 26 % 70,653 20,345 40 % 50,308
Total other revenue 87,470 46,914 116 % 40,556 35,955 781 % 4,601
Total revenue $ 764,045 $ (165,936) (18) % $ 929,981 $ 400,643 76 % $ 529,338
Revenue by Segment
2022 compared to 2021-Revenue from our Senior segment was $595.4 million for the
year ended June 30, 2022 , a $133.3 million , or 18%, decrease compared to revenue
of $728.7 million for the year ended June 30, 2021 . The decrease was primarily
due to a $186.0 million , or 31%, decrease in MA commission revenue driven by a
$193.3 million downward adjustment from the change in estimate of cohort
transaction prices, a $18.2 million decrease in MS commission revenue, and a
reduction of $18.3 million in external lead generation revenue from
InsideResponse, partially offset by $65.8 million of new revenue from Healthcare
Services and a $22.4 million increase in marketing development funds received.
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Revenue from our Life segment was$154.0 million for the year endedJune 30, 2022 , a$23.7 million , or 13%, decrease compared to revenue of$177.7 million for the year endedJune 30, 2021 . The decrease was primarily due to a$15.0 million decrease in term life revenue, driven by lower agent headcount, and a$5.9 million decrease in final expense revenue, which was the result of an$9.5 million downward adjustment from provision for loss and a change in estimate of cohort transaction price, which was partially offset by an increase in the number of agents selling final expense policies. Revenue from our Auto & Home segment was$27.9 million for the year endedJune 30, 2022 , a$3.0 million , or 10%, decrease compared to revenue of$30.9 million for the year endedJune 30, 2021 , primarily due to our strategy to reduce the growth in Auto & Home. 2021 compared to 2020-Revenue from our Senior segment was$728.7 million for the year endedJune 30, 2021 , a$367.0 million , or 101%, increase compared to revenue of$361.7 million for the year endedJune 30, 2020 . The increase was primarily due to a$309.2 million , or 108%, increase in MA commission revenue,$19.5 million in marketing development funds received, and$35.8 million of lead generation revenue from InsideResponse included in other revenue. This was partially offset by a$10.9 million , or 32%, decrease in MS commission revenue primarily due to the recognition of$9.0 million of renewal year revenue from a certain MS carrier whose contract was amended during the year endedJune 30, 2020 . Revenue from our Life segment was$177.7 million for the year endedJune 30, 2021 , a$49.9 million , or 39%, increase compared to revenue of$127.8 million for the year endedJune 30, 2020 . The increase was primarily due to a$45.1 million , or 155%, increase in final expense revenue which was the result of our increased focus on selling final expense policies. Revenue from our Auto & Home segment was$30.9 million for the year endedJune 30, 2021 , a$10.3 million , or 25%, decrease compared to revenue of$41.2 million for the year endedJune 30, 2020 . The decrease was primarily due to a 21% decrease in premium sold.
Adjusted EBITDA by Segment
2022 compared to 2021--Adjusted EBITDA from our Senior segment was$(193.8) million for the year endedJune 30, 2022 , a$437.6 million , or 179%, decrease compared to Adjusted EBITDA of$243.8 million for the year endedJune 30, 2021 . The decrease in Adjusted EBITDA was primarily due to a$304.3 million increase in operating costs and expenses, driven by a$98.7 million increase in variable marketing expenses as discussed above, a$96.2 million increase in personnel costs associated with additional headcount,$51.0 million higher fulfillment costs associated with scalingPopulation Health and SelectRx, and$43.8 million in pharmaceutical costs for SelectRx. In addition, there was a$133.3 million decrease in total Senior revenue, driven by the$193.3 million downward adjustment from a change in estimate of MA cohort transaction prices discussed above. Adjusted EBITDA from our Life segment was$(0.1) million for the year endedJune 30, 2022 , a$22.7 million , or 101%, decrease compared to Adjusted EBITDA of$22.5 million for the year endedJune 30, 2021 . The decrease in Adjusted EBITDA was primarily due to a$23.7 million decrease in revenue as a result of the decreases in term life and final expense revenue discussed above. Adjusted EBITDA from our Auto & Home segment was$5.4 million for the year endedJune 30, 2022 , a$2.7 million , or 34%, decrease compared to Adjusted EBITDA of$8.2 million for the year endedJune 30, 2021 . The decrease in Adjusted EBITDA was due to a$3.0 million decrease in revenue partially offset by a$0.3 million decrease in operating costs and expenses. The revenue decline for Auto & Home was driven by our strategy to reduce the growth in that division. 2021 compared to 2020-Adjusted EBITDA from our Senior segment was$243.8 million for the year endedJune 30, 2021 , a$98.0 million , or 67%, increase compared to Adjusted EBITDA of$145.7 million for the year endedJune 30, 2020 . The increase in Adjusted EBITDA was due to a$367.0 million increase in revenue 64 -------------------------------------------------------------------------------- Table of Contents partially offset by a$269.0 million increase in operating costs and expenses primarily attributable to an increase in variable marketing expenses and personnel costs associated with higher headcount that was driven by a significant increase in policies submitted and approved and an increase in the number of licensed agents. Adjusted EBITDA from our Life segment was$22.5 million for the year endedJune 30, 2021 , a$3.1 million , or 12%, decrease compared to Adjusted EBITDA of$25.6 million for the year endedJune 30, 2020 . The decrease in Adjusted EBITDA was primarily due to a$53.0 million increase in operating costs and expenses primarily attributable to an increase in variable marketing expenses and variable sales commission expenses to agents driven by an increase in the amount of premium sold for final expense policies, partially offset by a$49.9 million increase in revenue. Adjusted EBITDA was also impacted by flexing a significant amount of our Life and Health Advisor ("LHA") agents that sell final expense policies into Senior to sell during AEP as we incurred expense to hire and train some of these agents but didn't realize the full benefit of revenue within our Life business for the quarter. Adjusted EBITDA from our Auto & Home segment was$8.2 million for the year endedJune 30, 2021 , a$0.5 million , or 6%, decrease compared to Adjusted EBITDA of$8.7 million for the year endedJune 30, 2020 . The decrease in Adjusted EBITDA was primarily due to a$10.3 million decrease in revenue partially offset by a$9.8 million decrease in operating costs and expenses. Revenue was negatively impacted by our shift of agents to 1) the Senior segment to maximize the opportunity of the AEP and OEP seasonal increase in demand and 2) the Life segment to sell final expense policies.
Liquidity and Capital Resources
Our liquidity needs primarily include working capital and debt service requirements. We believe that the cash available under the Senior Secured Credit Facility will be sufficient to meet our projected operating and debt service requirements for at least the next 12 months. To the extent that our current liquidity is insufficient to fund future activities, we may need to raise additional funds. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations.
Risks and Uncertainties Regarding Liquidity and Compliance with our Senior
Secured Credit Facility Covenant
Under the Senior Secured Credit Facility, we are required to maintain a certain asset coverage ratio, as discussed further in Note 10 to the consolidated financial statements. In our Quarterly Report on Form 10-Q for the three months endedMarch 31, 2022 , we disclosed that there was substantial doubt about our ability to continue as a going concern as a result of conditions that existed as ofMarch 31, 2022 . Specifically, our financial projections indicated that we would not be in compliance with a certain asset coverage ratio under the Senior Secured Credit Facility within one year after the date that the consolidated financial statements were issued. Subsequently, we entered into the Fourth Amendment to the Senior Secured Credit Facility (as defined and discussed further in Note 10 to the consolidated financial statements) to amend the required debt covenants throughOctober 31, 2024 . Based on our financial projections, we believe we will remain in compliance with the revised debt covenants within one year after the date that the consolidated financial statements are issued. Our future compliance is dependent upon the successful implementation of our new strategic direction discussed above, and we will need to continue to stay in compliance in the future with these revised covenants for one year after the date our consolidated financial statements are issued. As ofJune 30, 2022 andJune 30, 2021 , our cash and cash equivalents totaled$141.0 million and$286.5 million , respectively. Additionally, the following table presents a summary of our cash flows for the years endedJune 30 : 65 -------------------------------------------------------------------------------- Table of Contents (in thousands) 2022 2021
2020
Net cash used in operating activities
Net cash used in investing activities (42,576) (64,016)
(51,370)
Net cash provided by financing activities 235,433 97,042
481,446 Operating Activities Cash used in operating activities primarily consists of net income, adjusted for certain non-cash items including depreciation; amortization of intangible assets and internally developed software; deferred income taxes; share-based compensation expense; impairment charges; and the effect of changes in working capital and other activities. Collection of commissions receivable depends upon the timing of our receipt of commission payments and associated commission statements from our insurance carrier partners. If we were to experience a delay in receiving a commission payment from an insurance carrier partner within a quarter, our operating cash flows for that quarter could be adversely impacted. A significant portion of our marketing and advertising expenses is driven by the number of leads required to generate the insurance applications we submit to our insurance carrier partners. Our marketing and advertising costs are expensed and generally paid as incurred and since commission revenue is recognized upon approval of a policy but commission payments are paid to us over time there are working capital requirements to fund the upfront cost of acquiring new policies. During AEP, we experience an increase in the number of submitted Senior insurance applications and marketing and advertising expenses compared to periods outside of AEP. The timing of AEP affects the positive or negative impacts of our cash flows during each quarter. Year EndedJune 30 , 2022-Cash used in operating activities was$338.3 million , consisting of net loss of$297.5 million , adjustments for non-cash items of$2.2 million , and cash used in operating assets and liabilities of$38.6 million . Adjustments for non-cash items primarily consisted of$92.7 million in deferred income taxes as the Company defers revenue related to certain commissions receivable into following years until it is collected, partially offset by$44.6 million of goodwill impairment charges,$24.7 million of depreciation and amortization related to additional fixed assets purchases to accommodate our growth in headcount and internally developed software in service,$7.1 million of share-based compensation expense,$5.5 million in amortization of debt issuance costs and debt discount, and$4.1 million of non-cash lease expense. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of$25.7 million in accounts receivable, net related to the increase in approved policies, increases of$10.9 million in other assets primarily related to increases in prepaid balances and SelectRx inventory, and decreases of$5.1 million in operating lease liabilities, partially offset by a decrease of$7.3 million in commissions receivable. Year EndedJune 30 , 2021-Cash used in operating activities was$115.4 million , consisting of net income of$124.9 million and adjustments for non-cash items of$66.2 million , offset by cash used in operating assets and liabilities of$306.5 million . Adjustments for non-cash items primarily consisted of$33.0 million in deferred income taxes as the Company defers revenue related to certain commissions receivable into following years until it is collected,$16.1 million of depreciation and amortization related to additional fixed assets purchases to accommodate our growth in headcount and internally developed software in service,$5.2 million of share-based compensation expense, and$3.8 million of non-cash lease expense. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of$332.9 million in commissions receivable and$20.0 million in accounts receivable, net related to the increase in approved policies, partially offset by increases of$19.7 million in accounts payable and accrued expenses and$25.6 million in other liabilities, which consists primarily of commission advances and accrued compensation and benefits, all driven by the increased marketing and personnel costs required to produce our increased revenue. 66 -------------------------------------------------------------------------------- Table of Contents Year EndedJune 30 , 2020-Cash used in operating activities was$61.8 million , consisting of net income of$79.5 million and adjustments for non-cash items of$45.2 million , offset by cash used in operating assets and liabilities of$186.5 million . Adjustments for non-cash items primarily consisted of$24.5 million of deferred income taxes as the Company defers revenue related to certain commissions receivable into following years until it is collected,$9.5 million of stock compensation expense primarily for the distribution to stock option holders, and$8.0 million of depreciation and amortization related to the additional fixed assets purchases and internally developed software in service. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of$13.4 million and$197.4 million in accounts receivable, net and commissions receivable, respectively, partially offset by increases of$15.7 million in accounts payable and accrued expenses and$9.2 million in accrued compensation and benefits, all driven by the increased marketing and personnel costs required to produce our increased revenue.
Investing Activities
Our investing activities primarily consist of purchases of furniture and
fixtures, computer hardware, leasehold improvements related to facilities
expansion, and capitalized salaries related to the development of internal-use
software.
Year EndedJune 30 , 2022-Net cash used in investing activities of$42.6 million was primarily due to$24.8 million of purchases of property and equipment primarily to support AEP and OEP and the growth of SelectRx infrastructure,$9.9 million in purchases of software and capitalized internal-use software,$6.9 million of net cash paid to acquire Simple Meds, and a$1.0 million non-controlling interest equity investment. Year EndedJune 30 , 2021-Net cash used in investing activities of$64.0 million was primarily due to$41.0 million of cash paid net of the cash acquired for the acquisitions of a lead distribution company andExpress Med Pharmaceuticals as well as$14.9 million of purchases of property and equipment and$8.1 million in purchases of software and capitalized internal-use software spent to develop and enhance new and existing systems to efficiently accommodate our increased volumes. Year EndedJune 30 , 2020-Net cash used in investing activities of$51.4 million was primarily due to$35.8 million of cash paid net of the cash acquired for the acquisition of InsideResponse as well as$9.4 million of purchases of property and equipment and$6.1 million in purchases of software and capitalized internal-use software spent to develop new programs and systems to efficiently accommodate our increased volumes.
Acquisitions
OnMay 1, 2020 , we acquired 100% of the outstanding membership units of InsideResponse for an aggregate purchase price of up to$65.0 million (subject to customary adjustments). The purchase price was comprised of$32.7 million that was paid in cash at the closing of the transaction and an earnout of$32.3 million that was paid in cash during the year endedJune 30, 2021 . OnFebruary 1, 2021 , we acquired substantially all of the assets of a lead distribution company for an aggregate purchase price of up to$33.5 million (subject to customary adjustments), comprised of$24.0 million in cash paid at the closing of the transaction,$6.0 million of holdback for, if any, indemnification claims, net working capital adjustments, and underperformance, and an earnout of up to$3.5 million . The minimum earnout target was not achieved; however, the remaining holdback was earned in full, and the Company paid the remaining holdback of$5.5 million , with interest, after the net working capital true-up of$0.5 million , during the year endedJune 30, 2022 . OnApril 30, 2021 , we acquired 100% of the outstanding shares ofExpress Med Pharmaceuticals for an aggregate purchase price of up to$24.0 million (subject to customary adjustments), comprised of$17.5 million in cash paid at the closing of the transaction, an additional$2.5 million of holdback for indemnification claims, if any, and an earnout of up to$4.0 million , if any. As ofJune 30, 2022 , the Company has accrued compensation expense of$1.0 million with respect to the earnout. 67 -------------------------------------------------------------------------------- Table of Contents OnAugust 31, 2021 , SelectRx acquired 100% of the outstanding equity interests of Simple Meds for an aggregate purchase price of$7.0 million (subject to customary adjustments). The aggregate purchase price of$7.0 million was paid in cash at the closing of the transaction.
Refer to Note 2 to the consolidated financial statements for further details
concerning our recent acquisitions.
Financing Activities
Our financing activities primarily consist of proceeds from the issuance of debt
and equity and proceeds and payments related to stock-based compensation.
Year EndedJune 30 , 2022-Net cash provided by financing activities of$235.4 million was primarily due to$242.0 million in net proceeds from the DDTL Facility and$3.2 million in proceeds from common stock options exercised and the employee stock purchase plan, partially offset by a holdback settlement of$5.5 million for acquisition of a lead distribution company, principal payments of$2.4 million and$1.2 million on the Term Loans and DDTL Facility, respectively, and$0.3 million in debt issuance costs related to the amendments to the Senior Secured Credit Facility. Year EndedJune 30 , 2021-Net cash provided by financing activities of$97.0 million was primarily due to$228.8 million in net proceeds from the Term Loans as a result of the First Amendment, partially offset by payments of$84.1 million related to the partial extinguishment of the Term Loans prior to the First Amendment,$32.3 million of earnout for the InsideResponse acquisition, and$10.4 million for withholding taxes related to net share settlements of employee stock option awards. Year EndedJune 30 , 2020-Net cash provided by financing activities of$481.4 million was primarily due to$416.5 million in net proceeds from the Term Loans,$340.2 million in proceeds from our initial public offering, net of underwriters' discounts and commissions, and$135.0 million in proceeds from the issuance of preferred stock, partially offset by$275.0 million for the Distribution,$100.0 million payment on our Term Loans with proceeds from the IPO, and$31.4 million in payments on non-recourse debt, primarily to pay off the Receivables Financing Agreement.
Senior Secured Credit Facility
We entered into the Senior Secured Credit Facility to provide access to cash, in a variety of methods, when necessary to fund the operations of the business. As ofJune 30, 2022 , there was$469.6 million outstanding under the Term Loans and$243.8 million outstanding under the DDTL Facility and no amounts outstanding under the Revolving Credit Facility. Refer to Note 10 to the consolidated financial statements for further details and defined terms.
Our risk management strategy includes entering into interest rate swap
agreements to protect against unfavorable interest rate changes relating to
forecasted debt transactions. The Company's Amended Interest Rate Swap is
designated as a cash flow hedge of the interest payments on
principal of the Term Loans. Refer to Note 9 to the consolidated financial
statements for further details and defined terms.
Delayed Draw Credit Facilities
OnDecember 14, 2018 , we entered into a senior secured delayed draw credit facility in which we had access to a senior secured delayed draw credit facility consisting of up to$30.0 million aggregate principal amount of commitments, with the commissions receivable from the Auto & Home insurance policies sold as collateral. Over the life of the agreement, we received$32.8 million in proceeds from seven draws on the facility and made principal payments of$4.5 million . OnJune 8, 2020 , we repaid in full all indebtedness and other obligations due totaling$29.3 million , and all security interests and liens were terminated and released and the agreement was terminated. We repaid the outstanding debt using proceeds from the IPO. 68
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Series E Preferred Shares Private Placement
OnApril 17, 2020 andMay 6, 2020 , we issued and sold an aggregate of 100,000 shares and 35,000 shares, respectively, of our Series E preferred stock to certain "accredited investors" (as defined in Regulation D promulgated under the Securities Act), at a purchase price of$1,000 per share, for aggregate proceeds of$135.0 million and net proceeds to the Company of$129.4 million , after deducting commissions and expenses. A portion of the net proceeds was used to complete our acquisition of InsideResponse and the remaining was used for general corporate purposes. Upon the closing of the IPO, all outstanding shares of Series E preferred stock automatically converted into shares of common stock at a fixed discount. Refer to Note 12 to the consolidated financial statements for further details. Initial Public Offering OnMay 26, 2020 , we completed our IPO whereby 18,000,000 shares of common stock were sold to the public at$20.00 per share (in addition to shares sold by selling stockholders). Net proceeds to us from the offering, after deducting underwriting discounts and commissions and offering expenses, were$333.1 million .
Contractual Obligations
Our principal commitments consist of obligations under our outstanding operating leases for office facilities; our Senior Secured Credit Facility which includes the Term Loans, DDTL Facility, and Revolving Credit Facility (as defined in Note 10 to the consolidated financial statements); and our Amended Interest Rate Swap (as defined in Note 9 to the consolidated financial statements). In addition, we have outstanding service and licensing agreements with various vendors for connectability, maintenance, and other services, including minimum purchase requirements for pharmaceuticals. We believe that we will be able to fund these obligations through our existing cash and cash equivalents and cash generated from operations.
Recent Accounting Pronouncements
For a discussion of new accounting pronouncements recently adopted and not yet
adopted, see the notes to our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities in our financial statements. We regularly assess these estimates; however, actual amounts could differ from those estimates. The impact of changes in estimates is recorded in the period in which they become known. An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: revenue recognition for commissions revenue, commissions receivable, accounting for income taxes, share-based compensation, the valuation of assets and liabilities acquired from acquisitions, and the impairment of intangible assets and goodwill.
Commission Revenue Recognition and Commissions Receivable
In accordance with Accounting Standards Codification ("ASC") 606, Revenue from
Contracts with Customers ("ASC 606"), revenue is recognized when a customer
obtains control of promised goods or services and
69 -------------------------------------------------------------------------------- Table of Contents is recognized in an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. We apply the following five-step model in order to determine this amount: (i) identification of the promised goods in the contract; (ii) determination of whether the promised goods are performance obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) we satisfy each performance obligation. Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result. The accounting estimates and judgments related to the recognition of revenue require us to make assumptions about numerous factors such as the determination of performance obligations and determination of the transaction price. The estimate of renewal commission revenue is considered variable consideration and requires significant judgment to determine the renewal commission revenue to be recognized at the time the performance obligation is met and in the reassessment of the transaction price each reporting period. This includes determining the number of periods in which a renewal will occur and the value of those renewal commissions to be received if renewed, which includes estimating persistency, the renewal year provision, and an additional product specific constraint applied to account for trends such as industry volatility or uncertainty of consumer behavior patterns. Persistency is the estimate of policies expected to renew each year and renewal year provision is the estimate of policies expected to lapse during each renewal period. The estimated average duration of expected renewals for our cohorts used in the calculation of LTV is ten years. Effective for policies sold during the three months endedDecember 31, 2021 , and thereafter, the Company increased the product specific constraint for our largest product, Medicare Advantage, from 6% to 15%. The assumptions used in the Company's calculation of renewal commission revenue are based on a combination of the Company's historical experience for renewals, lapses, and payment data; available insurance carrier data; other industry or consumer behavior patterns; and expectations for future retention rates. The estimate of variable consideration is recognized only to the extent it is probable that a material reversal in revenue would not be expected to occur when the uncertainty associated with future commissions receivables is subsequently resolved when the policy renews or lapses. The Company is continuously reviewing and monitoring the assumptions and inputs into the Company's calculation of renewal commission revenue, including reviewing changes in the data used to estimate LTV's as well as monitoring the cash received for each cohort as compared to the original estimates at the time the policy was sold. The Company assesses the actual renewal data and historical data to identify trends and updates assumptions when a sufficient amount of evidence would suggest that the expectation underlying the assumption has changed and a change in estimate of the transaction price is warranted. The differences in actual cash received for current period renewals may result in an adjustment by cohort ("cohort adjustment") to revenue and commissions receivable. Cohort adjustments can be positive or negative and are recognized using actual experience from policy renewals. The Company analyzes cohort adjustments to determine if they are indicative of changes needed in our estimates of future renewal commissions ("tail adjustments") that remain unresolved as of the reporting period. The Company recognizes revenue for both first year and renewal commissions when it has completed its performance obligation, which is at different milestones for each segment based on the contractual enforceable rights, the Company's historical experience, and established customer business practices: •Senior-Commission revenue is recognized at the earliest of when the insurance carrier has approved the policy sold, when a commission payment is received from the insurance carrier, or when the policy sold becomes effective. •Life-Term commission revenue is recognized when the insurance carrier has approved the policy sold and payment information has been obtained from the policyholder. Final expense commission revenue is recognized when the carrier provides confirmation the policy is active.
•Auto & Home-Commission revenue is recognized when the policy sold becomes
effective.
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Commissions receivable are contract assets that represent estimated variable
consideration for performance obligations that have been satisfied but payment
is not due as the underlying policy has not renewed yet and are therefore
subject to the same assumptions, judgements, and estimates used when recognizing
revenue as noted above. The current portion of commissions receivable are future
renewal commissions expected to be renewed and collected in cash within one
year, while the non-current portion of commissions receivable are expected to be
collected beyond one year. Contract assets are reclassified as accounts
receivable, net when the rights to the renewal commissions become unconditional,
which is primarily upon renewal of the underlying policy, typically on an annual
basis.
Income Taxes
The Company applies ASC 740, Income Taxes ("ASC 740"), in accounting for
uncertainty in income taxes recognized in the Company's consolidated financial
statements. ASC 740 requires a "more-likely-than-not" ("MLTN") threshold for
financial statement recognition and measurement of tax positions taken or
expected to be taken in a tax return. The Company records a liability for the
difference between the benefit recognized and measured pursuant to ASC 740 and
the tax position taken or expected to be taken on the Company's tax return. To
the extent that the assessment of such tax positions changes, the change in
estimate is recorded in the period in which the determination is made.
In accordance with ASC 740, we account for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities result from
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the consolidated financial statements that will result in
taxable or deductible amounts in future years. The Company continues to
recognize its deferred tax assets as of June 30, 2022 , as it believes it is MLTN
that the deferred tax assets will be realized. The Company recognizes a
significant deferred tax liability due to the timing of recognizing revenue when
a policy is sold, while revenue for tax purposes is not recognized until future
renewal commission payments are received. This deferred tax liability is a
source of income that can be used to support the realizability of the Company's
deferred tax assets. As such, the Company does not believe a valuation allowance
is necessary as of June 30, 2022 , and will continue to evaluate in the future as
circumstances may change.
Share-Based Compensation
We recognize share-based compensation expense in the consolidated statements of
comprehensive income based on the fair value of our stock-based awards over
their respective vesting periods, depending on the plan. The estimated grant
date fair value of our stock options is determined using the
Black-Scholes-Merton pricing model. The expected term for stock options granted
is determined using the simplified method, which deems the expected term to be
the midpoint between the vesting date and the contractual life of the
stock-based awards. The dividend yield is determined by dividing the expected
per share dividend during the coming year by the grant date stock price,
however, we do not expect to pay any dividends in the foreseeable future. We
base the risk-free interest rate on the implied yield currently available on
U.S. Treasury zero-coupon issues with a remaining term equal to the expected
term of our stock options. Expected volatility is determined using historical
stock prices for a combination of publicly traded peer group companies and our
stock price. The estimated attainment of performance-based awards and related
expense is based on the expectations of target achievement. The assumptions used
in calculating the fair value of stock-based payment awards and expected
attainment of performance-based awards represent our best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. We will continue to use judgment in evaluating the expected term and
volatility related to our own stock-based awards on a prospective basis, and
incorporating these factors into the model. Changes in key assumptions could
significantly impact the valuation of such instruments.
Fair Value of Assets Acquired and Liabilities Assumed from Acquisitions
We account for business combinations using the acquisition method of accounting. Identifiable assets acquired and liabilities assumed are recognized and measured as of the acquisition date at fair value. Additionally, any contingent consideration is recorded at fair value on the acquisition date and classified as a liability.Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred 71 -------------------------------------------------------------------------------- Table of Contents exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired and liabilities assumed requires management's judgment and often involves the use of significant estimates and assumptions, including, but not limited to, the selection of appropriate valuation methodology, projected revenue, expenses and cash flows, weighted average cost of capital, discount rates, estimates of customer turnover rates, estimates of terminal values, and assessment of the probabilities of the earnout metrics.
Impairment of Long-Lived Assets and
The Company accounts for long-lived assets in accordance with the provisions of
ASC 360, Property, Plant and Equipment ("ASC 360"). ASC 360 requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset or asset group may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset or asset group to its expected
future undiscounted cash flows. If the carrying amount exceeds its expected
future undiscounted cash flows, an impairment charge is recognized in the amount
by which the carrying amount of the asset or asset group exceeds its fair value.
For purposes of this test, long-lived assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities.
For the year ended June 30, 2022 , the Company recorded impairment charges of
$3.1 million in general and administrative expense in the consolidated statement
of comprehensive income related to write-offs of previously acquired
definite-lived intangible assets from which the Company does not expect to
receive future economic benefit. There were no impairment charges recorded on
the Company's long-lived assets for the years ended June 30, 2021 and 2020.
Refer to Note 7 to the consolidated financial statements for additional details.
Goodwill represents the excess of the purchase price over the estimated fair
values of identifiable assets and liabilities acquired in a business combination
as of the acquisition date. Goodwill is not amortized in accordance with the
requirements of ASC 350, Intangibles-Goodwill and Other ("ASC 350"), rather,
goodwill is tested for impairment on an annual basis and whenever events or
circumstances indicate that the asset may be impaired. Further, goodwill is
allocated, and evaluated for impairment, at the reporting unit level, which is
defined as an operating segment or one level below an operating segment.
We have the option to perform a qualitative assessment to determine if it is
more likely than not that the fair value of a reporting unit has declined below
its carrying value. This assessment considers various financial, macroeconomic,
industry and segment specific qualitative factors. If we determine that it is
more likely than not that the fair value of a reporting unit is less than its
carrying value, a quantitative test is then performed by estimating the fair
value of the reporting unit and comparing it with its carrying value, including
goodwill. If the carrying amount of a reporting unit is greater than its
estimated fair value, goodwill is written down by the excess amount, limited to
the total amount of goodwill allocated to that reporting unit.
The Company estimates the fair value of reporting units under ASC 350 by using
an income approach, a market approach, or a combination thereof, which involves
the use of significant unobservable inputs, or Level 3 inputs, as defined by the
fair value hierarchy of ASC 820, Fair Value Measurement ("ASC 820"), and require
us to make various judgmental assumptions around future revenues and operating
costs, growth rates, and discount rates which consider our budgets, business
plans, and economic projections. As such, these estimates are uncertain and may
vary from actual results. Under the income approach, we utilize the discounted
cash flow method while under the market approach, we utilize a peer-based
guideline public company method based on published multiples of earnings of
comparable entities with similar operations and economic characteristics.
As a result of our annual goodwill impairment test as of April 1, 2022 , the
Company recorded goodwill impairment charges of $44.6 million in goodwill
impairment in the consolidated statement of comprehensive income for the year
ended June 30, 2022 . There were no goodwill impairment charges recorded for the
years ended June 30, 2021 and 2020. Refer to Note 7 to the consolidated
financial statements for additional details.
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