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SelectQuote, Inc. - Quarter Report: 2022 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from   to

001-39295
(Commission File Number)

SelectQuote, Inc.
(Exact name of registrant as specified in its charter)
Delaware94-3339273
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
6800 West 115th StreetSuite 251166211
Overland ParkKansas(Zip Code)
(Address of principal executive offices)
(913) 599-9225
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareSLQTNew York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒   No  ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

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

The registrant had outstanding 164,401,645 shares of common stock as of April 30, 2022.



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SELECTQUOTE, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS

PART I FINANCIAL INFORMATIONPAGE
Item 1.
Item 2.
Item 3.
Item 4.
PART II OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

March 31, 2022June 30, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$199,359 $286,454 
Accounts receivable168,735 105,298 
Commissions receivable-current77,158 89,120 
Other current assets13,246 4,486 
Total current assets458,498 485,358 
COMMISSIONS RECEIVABLE761,138 756,777 
PROPERTY AND EQUIPMENT—Net45,558 29,510 
SOFTWARE—Net15,558 12,611 
OPERATING LEASE RIGHT-OF-USE ASSETS29,018 31,414 
INTANGIBLE ASSETS—Net36,022 40,670 
GOODWILL73,732 68,019 
OTHER ASSETS15,790 1,436 
TOTAL ASSETS$1,435,314 $1,425,795 
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$27,445 $34,079 
Accrued expenses35,593 20,676 
Accrued compensation and benefits46,229 40,909 
Operating lease liabilities—current5,181 5,289 
Current portion of long-term debt7,169 2,360 
Other current liabilities2,079 5,504 
Total current liabilities123,696 108,817 
LONG-TERM DEBT, NET—less current portion699,386 459,043 
DEFERRED INCOME TAXES76,806 139,240 
OPERATING LEASE LIABILITIES35,301 38,392 
OTHER LIABILITIES3,533 11,743 
Total liabilities938,722 757,235 
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS’ EQUITY:
Common stock, $0.01 par value
1,644 1,635 
Additional paid-in capital554,045 544,771 
Retained earnings (accumulated deficit)(68,684)121,925 
Accumulated other comprehensive income9,587 229 
Total shareholders’ equity496,592 668,560 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,435,314 $1,425,795 
See accompanying notes to condensed consolidated financial statements.
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SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
REVENUE:
Commission$222,538 $235,216 $495,494 $660,631 
Production bonus and other52,575 30,130 132,127 85,054 
Total revenue275,113 265,346 627,621 745,685 
OPERATING COSTS AND EXPENSES:
Cost of revenue119,459 71,439 359,732 206,605 
Marketing and advertising125,082 116,690 409,005 298,696 
General and administrative21,031 19,251 64,570 44,496 
Technical development6,436 4,860 18,675 13,458 
Total operating costs and expenses272,008 212,240 851,982 563,255 
INCOME (LOSS) FROM OPERATIONS3,105 53,106 (224,361)182,430 
INTEREST EXPENSE, NET(12,179)(7,355)(31,300)(20,898)
LOSS ON EXTINGUISHMENT OF DEBT — (3,315)— (3,315)
OTHER EXPENSE, NET(23)(349)(177)(1,545)
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)(9,097)42,087 (255,838)156,672 
INCOME TAX EXPENSE (BENEFIT)(2,649)6,852 (65,229)31,846 
NET INCOME (LOSS)$(6,448)$35,235 $(190,609)$124,826 
NET INCOME (LOSS) PER SHARE:
Basic$(0.04)$0.21 $(1.16)$0.77 
Diluted$(0.04)$0.21 $(1.16)$0.75 
WEIGHTED-AVERAGE COMMON STOCK OUTSTANDING USED IN PER SHARE AMOUNTS:
Basic164,083 163,023 163,914 162,705 
Diluted164,083 165,731 163,914 165,495 
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Gain on cash flow hedge7,589 1,810 9,358 1,669 
OTHER COMPREHENSIVE INCOME7,589 1,810 9,358 1,669 
COMPREHENSIVE INCOME (LOSS)$1,141 $37,045 $(181,251)$126,495 
See accompanying notes to the condensed consolidated financial statements.
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SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)

Three Months Ended March 31, 2022
Common StockAdditional
Paid-In
Capital
Accumulated DeficitAccumulated Other Comprehensive IncomeTotal
Shareholders'
Equity
SharesAmount
BALANCES-December 31, 2021164,013 $1,640 $551,002 $(62,236)$1,998 $492,404 
Net loss— — — (6,448)— (6,448)
Gain on cash flow hedge, net of tax— — — — 7,421 7,421 
Amount reclassified into earnings, net tax— — — — 168 168 
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings10 — 14 — — 14 
Issuance of common stock pursuant to employee stock purchase plan376 889 — — 893 
Vesting of restricted stock unit awards net of shares withheld to cover tax withholdings— (3)— — (3)
Share-based compensation expense— — 2,143 — — 2,143 
BALANCES-March 31, 2022164,401 $1,644 $554,045 $(68,684)$9,587 $496,592 

Three Months Ended March 31, 2021
Common StockAdditional
Paid-In
Capital
Retained EarningsAccumulated Other Comprehensive Income/(Loss)Total
Shareholders'
Equity
SharesAmount
BALANCES-December 31, 2020162,774 $1,628 $545,441 $85,296 $(1,395)$630,970 
Net income— — — 35,235 — 35,235 
Gain on cash flow hedge, net of tax— — — — 1,675 1,675 
Amount reclassified into earnings, net tax— — — — 135 135 
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings552 (4,331)— — (4,326)
Issuance of common stock pursuant to employee stock purchase plan56 985 — — 986 
Share-based compensation expense— — 1,429 — — 1,429 
BALANCES-March 31, 2021163,382 $1,634 $543,524 $120,531 $415 $666,104 

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Nine Months Ended March 31, 2022
Common StockAdditional
Paid-In
Capital
Retained Earnings/(Accumulated Deficit)Accumulated Other Comprehensive IncomeTotal
Shareholders'
Equity
SharesAmount
BALANCES-June 30, 2021163,510 $1,635 $544,771 $121,925 $229 $668,560 
Net loss— — — (190,609)(190,609)
Gain on cash flow hedge, net of tax— — — — 8,844 8,844 
Amount reclassified into earnings, net of tax— — — — 514 514 
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings349 1,293 — — 1,296 
Issuance of common stock pursuant to employee stock purchase plan466 1,877 — — 1,882 
Vesting of restricted stock unit awards net of shares withheld to cover tax withholdings76 (148)— — (147)
Share-based compensation expense— — 6,252 — — 6,252 
BALANCES-March 31, 2022164,401 $1,644 $554,045 $(68,684)$9,587 $496,592 

Nine Months Ended March 31, 2021
Common StockAdditional
Paid-In
Capital
Retained Earnings/(Accumulated Deficit)Accumulated Other Comprehensive Income/(Loss)Total
Shareholders'
Equity
SharesAmount
BALANCES-June 30, 2020162,191 $1,622 $548,113 $(4,295)$(1,254)$544,186 
Net income— — — 124,826 — 124,826 
Gain on cash flow hedge, net of tax— — — — 1,301 1,301 
Amount reclassified into earnings, net tax— — — — 368 368 
Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings1,135 11 (9,244)— — (9,233)
Issuance of common stock pursuant to employee stock purchase plan56 985 — — 986 
Share-based compensation expense— — 3,670 — — 3,670 
BALANCES-March 31, 2021163,382 $1,634 $543,524 $120,531 $415 $666,104 
See accompanying notes to the condensed consolidated financial statements.

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SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended March 31,
20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$(190,609)$124,826 
Adjustments to reconcile net income (loss) to net cash and cash equivalents used in operating activities:
Depreciation and amortization17,957 11,260 
Loss on disposal of property, equipment, and software741 261 
Share-based compensation expense6,252 3,689 
Deferred income taxes(65,623)31,702 
Amortization of debt issuance costs and debt discount4,217 2,482 
Write-off of debt issuance costs— 2,570 
Fair value adjustments to contingent earnout obligations— 1,487 
Non-cash lease expense3,065 2,869 
Changes in operating assets and liabilities:
Accounts receivable(62,803)(49,224)
Commissions receivable7,601 (251,188)
Other assets(8,275)4,349 
Accounts payable and accrued expenses8,096 26,223 
Operating lease liabilities(3,868)(2,631)
Other liabilities(1,113)30,378 
Net cash used in operating activities(284,362)(60,947)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment(24,515)(6,520)
Purchases of software and capitalized software development costs(7,570)(5,807)
Acquisition of business(6,927)(23,879)
Investment in equity securities(1,000)— 
Net cash used in investing activities(40,012)(36,206)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Revolving Credit Facility50,000 — 
Payments on Revolving Credit Facility(50,000)— 
Proceeds from DDTL Facility242,000 — 
Payments on DDTL Facility(613)— 
Net proceeds from Term Loans— 228,753 
Payments on Term Loans(1,180)(84,118)
Payments on other debt(130)(189)
Proceeds from common stock options exercised and employee stock purchase plan3,179 1,778 
Payments of tax withholdings related to net share settlement of equity awards(148)(10,026)
Payments of debt issuance costs(328)(885)
Payments of costs incurred in connection with private placement— (1,771)
Payments of costs incurred in connection with initial public offering— (3,911)
Payment of contingent earnout liability— (32,300)
Payment of acquisition holdback(5,501)— 
Net cash provided by financing activities237,279 97,331 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(87,095)178 
CASH AND CASH EQUIVALENTS—Beginning of period286,454 368,870 
CASH AND CASH EQUIVALENTS—End of period$199,359 $369,048 
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net$(27,010)$(18,309)
Income taxes paid, net(67)(121)
See accompanying notes to condensed consolidated financial statements.
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SELECTQUOTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business—SelectQuote, Inc. (together with its subsidiaries, the “Company” or “SelectQuote”) contracts with insurance carriers to sell senior health, life, and auto and home insurance policies by telephone to individuals throughout the United States through the use of multi-channel marketing and advertising campaigns. The Company obtains leads from, among other sources, InsideResponse, a wholly-owned subsidiary that provides sales leads to the consumer insurance industry. The Company also coordinates various healthcare-related services through its Population Health platform, which includes SelectRx, a closed-door, long-term care pharmacy that offers pharmacy services, including essential prescription medications, OTC medications, customized medication packaging, medication therapy management, and other consultative services under the Patient Centered Pharmacy Home (PCPH) model. SelectQuote’s Senior division sells Medicare Advantage, Medicare Supplement, Medicare Part D, and other ancillary senior health insurance related products, and along with Population Health and InsideResponse, is referred to as “Senior”. SelectQuote’s Life division (“Life”) sells term life, final expense, and other ancillary products, and SelectQuote’s Auto & Home division (“Auto & Home”) primarily sells non-commercial auto and home property and casualty insurance products. SelectQuote’s licensed insurance agents provide comparative rates from a variety of insurance carriers relying on our technology distribution channel with a combination of proprietary and commercially available software to perform its quote service and sell insurance policies on behalf of the insurance carriers. The Company primarily earns revenue in the form of commission payments from the insurance carriers. Commission payments are received both when the initial policy is sold (“first year”) and when the underlying policyholder renews their policy in subsequent years (“renewal”). The Company also receives certain volume-based bonuses from some carriers on first-year policies sold based on attaining various predetermined target sales levels or other agreed upon objectives. These bonuses are referred to as “production bonuses” or “marketing development funds.” Additionally, the Company earns revenue from its Population Health platform, mail-order prescription revenue from SelectRx, and lead generation revenue from InsideResponse.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements include the accounts of SelectQuote, Inc. and its wholly owned subsidiaries: SelectQuote Insurance Services, SelectQuote Auto & Home Insurance Services, LLC (“SQAH”), ChoiceMark Insurance Services, Inc., Tiburon Insurance Services, InsideResponse, LLC, and SelectQuote Ventures, Inc. The unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with those rules and regulations and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended June 30, 2021, as amended by the Form 10-K/A filed with the SEC on February 14, 2022 (the “2021 Annual Report”) and include all adjustments necessary for the fair presentation of our financial position for the periods presented. Our results for the periods presented in our financial statements are not necessarily indicative of the results to be expected for any subsequent period, including for the year ending June 30, 2022, and therefore should not be relied upon as an indicator of future results. The accompanying unaudited condensed consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements for the year ended June 30, 2021. Certain reclassifications have been made to prior periods to conform with current year presentation.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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. The Company regularly assesses these estimates; however, actual amounts could differ from those estimates. The most significant items involving management’s estimates include estimates of revenue recognition, accounts receivable, commissions receivable, the provision for income taxes, share-based
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compensation, and valuation of intangible assets and goodwill. The impact of changes in estimates is recorded in the period in which they become known.

Going Concern—The accompanying condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplate the realization of assets and the satisfaction of liabilities in the normal course of business.

Under the Senior Secured Credit Facility, the Company is required to maintain a certain asset coverage ratio, as discussed further in Note 7 to the condensed consolidated financial statements. As of March 31, 2022, the Company is in compliance with all of its debt covenants; however, our financial projections indicate that, based on our current business plan, we will not maintain the required asset coverage ratio within one year after the date that the condensed consolidated financial statements are issued. Failure to maintain the required ratio would constitute a violation of our obligations under the Senior Secured Credit Facility and would permit our lenders to declare us in default. In the event of a default, our lenders could accelerate all amounts owing under the Senior Secured Credit Facility. We do not currently have sufficient liquidity to repay such indebtedness. We have commenced discussions of a covenant waiver or modification with our lenders; however, the Company cannot provide any assurances that it will be successful in obtaining such a waiver or modification on acceptable terms, or at all. As a result, there is substantial doubt about the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

Seasonality—Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year during the Medicare annual enrollment period (“AEP”), which runs from October through December each year, and are allowed to switch plans from an existing plan during the open enrollment period (“OEP”), which runs from January through March each year. As a result, commission revenue for our Senior segment is highest in the second quarter and to a lesser extent, the third quarter during OEP. Most policies sold during AEP are effective as of and renew annually on January 1.

Significant Accounting Policies—There have been no material changes to the Company’s significant accounting policies as described in our 2021 Annual Report.

Recent Accounting Pronouncements Not Yet Adopted—In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if the acquirer had originated the contracts. Prior to this ASU, an acquirer generally recognizes contract assets acquired and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The ASU is to be applied prospectively to business combinations occurring on or after the effective date of the amendment (or if adopted early as of an interim period, as of the beginning of the fiscal year that includes the interim period of early application). The Company will continue to evaluate the impact of this guidance, which will depend on the contract assets and liabilities acquired in future business combinations.

Recent Accounting Pronouncements Adopted—In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies and changes the accounting for certain income tax transactions, among other minor improvements. This standard was effective for the Company on July 1, 2021, and did not have a material impact on the condensed consolidated financial statements and related disclosures.

Immaterial Correction of Prior Period Financial Statements—Subsequent to the issuance of the Company’s financial statements as of and for the year ended June 30, 2021 and as previously disclosed in our Form 10-Q for the three and six months ended December 31, 2021, the Company discovered that the provision for first
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year commission revenue for certain final expense policies offered by one of its insurance carrier partners should have been accrued based on a higher lapse rate. The error in the lapse rate resulted in commission revenue being misstated by $6.1 million and $2.0 million, for the years ended June 30, 2021 and 2020, and $2.4 million for the three months ended September 30, 2021, respectively. Accounts receivable was misstated by $8.1 million and $2.0 million as of June 30, 2021 and 2020, respectively. The impact of the error on net income for the year ended June 30, 2021, was a decrease of $4.8 million. Management evaluated this misstatement and concluded it was not material to prior periods, individually or in aggregate. However, correcting the cumulative effect of the error in the three and six months ended December 31, 2021, would have had a significant effect on the results of operations. Therefore, the Company elected to correct the relevant prior period condensed consolidated financial statements and related footnotes for this error for comparative purposes.

The following tables reflect the effects of the correction on all affected line items of the Company’s previously reported condensed consolidated financial statements presented in this Form 10-Q:

CORRECTED CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
June 30, 2021
(in thousands)As Previously ReportedAdjustmentAs Corrected
Accounts receivable$113,375 $(8,077)$105,298 
Total current assets493,435 (8,077)485,358 
Total assets1,433,872 (8,077)1,425,795 
Deferred income taxes140,988 (1,748)139,240 
Total liabilities758,983 (1,748)757,235 
Retained earnings (accumulated deficit)128,254 (6,329)121,925 
Total shareholders’ equity674,889 (6,329)668,560 
Total liabilities and shareholders’ equity$1,433,872 $(8,077)$1,425,795 

CORRECTED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended March 31, 2021Nine Months Ended March 31, 2021
(in thousands)As Previously ReportedAdjustmentAs CorrectedAs Previously ReportedAdjustmentAs Corrected
Commission revenue$236,793 $(1,577)$235,216 $664,312 $(3,681)$660,631 
Total revenue266,923 (1,577)265,346 749,366 (3,681)745,685 
Income (loss) from operations54,683 (1,577)53,106 186,111 (3,681)182,430 
Income (loss) before income tax expense (benefit)43,664 (1,577)42,087 160,353 (3,681)156,672 
Income tax expense (benefit)7,183 (331)6,852 32,619 (773)31,846 
Net income (loss)36,481 (1,246)35,235 127,734 (2,908)124,826 
Net income (loss) per share:
Basic0.22 (0.01)0.21 0.79 (0.02)0.77 
Diluted0.22 (0.01)0.21 0.77 (0.02)0.75 
Comprehensive income (loss)$38,291 $(1,246)$37,045 $129,403 $(2,908)$126,495 
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CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Three Months Ended March 31, 2021
(in thousands)(Accumulated Deficit)/Retained EarningsTotal
Shareholders'
Equity
As Previously Reported
BALANCES-December 31, 2020$88,461 $634,135 
Net Income36,481 36,481 
BALANCES-March 31, 2021124,942 670,515 
Adjustments
BALANCES-December 31, 2020(3,165)(3,165)
Net Loss(1,246)(1,246)
BALANCES-March 31, 2021(4,411)(4,411)
As Corrected
BALANCES-December 31, 202085,296 630,970 
Net Income35,235 35,235 
BALANCES-March 31, 2021$120,531 $666,104 

CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Nine Months Ended March 31, 2021
(in thousands)(Accumulated Deficit)/Retained EarningsTotal
Shareholders'
Equity
As Previously Reported
BALANCES-June 30, 2020$(2,792)$545,689 
Net Income127,734 127,734 
BALANCES-March 31, 2021124,942 670,515 
Adjustments
BALANCES-June 30, 2020(1,503)(1,503)
Net Loss(2,908)(2,908)
BALANCES-March 31, 2021(4,411)(4,411)
As Corrected
BALANCES-June 30, 2020(4,295)544,186 
Net Income124,826 124,826 
BALANCES-March 31, 2021$120,531 $666,104 
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CORRECTED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Nine Months Ended March 31, 2021
(in thousands)As Previously ReportedAdjustmentAs Corrected
Net income (loss)$127,734 $(2,908)$124,826 
Deferred income taxes32,475 (773)31,702 
Accounts receivable(52,905)3,681 (49,224)
Net cash used in operating activities$(60,947)$— $(60,947)

2.ACQUISITIONS

In accordance with ASC Topic 805, Business Combinations, the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities, and intangible assets acquired based on fair values. Any excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is supported by valuations using estimates and assumptions provided by management. Based on the valuation inputs, the Company has recorded assets acquired and liabilities assumed according to the following fair value hierarchy:

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.
Level 3Unobservable inputs for the asset or liability
    

Lead distribution company—On February 1, 2021, the Company 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), as set forth in the Asset Purchase Agreement, dated February 1, 2021 (the “Asset Purchase Agreement”). The purchase price is comprised of $30.0 million, of which $24.0 million was paid in cash at the closing of the transaction, with an additional $6.0 million of holdback for indemnification claims, net working capital adjustments, and underperformance. Additionally, the purchase price includes an earnout of up to $3.5 million. The primary purpose of the acquisition was to secure and incorporate the exclusive publisher relationships into the lead generation business of InsideResponse. The Company recorded $0.4 million of acquisition-related costs in general and administrative operating costs and expenses in the condensed consolidated statement of comprehensive income.

During calendar year 2021, the lead distribution company did not achieve the minimum earnout target as set forth in the Asset Purchase Agreement. However, the remaining holdback was earned in full, as the lead distribution company did not fall below the underperformance thresholds as set forth in the Asset Purchase Agreement. The Company settled the remaining holdback of $5.5 million, with interest, after the net working capital true-up of $0.5 million, during the three months ended March 31, 2022.

Under the terms of the Asset Purchase Agreement, the total consideration for the acquisition consisted of the following as of the acquisition date (in thousands):

Base purchase price$30,000 
Net working capital true-up(499)
Total Purchase Consideration$29,501 

At the date of acquisition, the fair value of net tangible assets acquired approximated their carrying value. The non-compete agreements were valued using the income approach, and the customer relationships were valued
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using the multiple period excess earnings method. As such, all aforementioned intangible assets were valued using Level 3 inputs.

Goodwill resulting from the transaction constitutes the excess of the consideration paid over the fair values of the assets acquired and liabilities assumed and primarily represents the benefits of leveraging the exclusive publisher relationships in the business. This acquired goodwill is allocated to Senior (which is also the reporting unit), and $1.6 million will be deductible for tax purposes after adding back acquisition costs and having settled the remaining holdback.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

DescriptionEstimated LifeAmount
Accounts receivable$1,301 
Total tangible assets acquired1,301 
Non-compete agreements5 years1,000 
Vendor relationships9 years23,700 
GoodwillIndefinite3,500 
Total intangible assets acquired28,200 
Net Assets Acquired$29,501 

The Company will amortize the intangible assets acquired on a straight-line basis over their estimated remaining lives, ranging from five to nine years.    

Express Med Pharmaceuticals—On April 30, 2021, the Company acquired 100% of the outstanding shares of Express Med Pharmaceuticals, Inc., now SelectRx, a closed-door, long term care pharmacy provider, for an aggregate purchase price of up to $24.0 million (subject to customary adjustments), as set forth in the Stock Purchase Agreement dated April 30, 2021 (the “Stock Purchase Agreement”). The aggregate purchase price of up to $24.0 million is 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. The primary purpose of the acquisition was to take advantage of the Company's technology and customer base to facilitate better patient care through coordination of strategic, value-based care partnerships. The Company recorded $0.3 million of acquisition-related costs in general and administrative operating costs and expenses in the condensed consolidated statement of comprehensive income. In addition, as a result of the acquisition, the Company has entered into an operating lease with the former President and Chief Executive Officer of Express Med Pharmaceuticals, now our Executive Vice President of SelectRx. Refer to Note 6 in the condensed consolidated financial statements for further details.

The earnout of up to $4.0 million is comprised of two separate provisions. The first provision provides for an earnout of up to $3.0 million and is contingent upon achievement of the following within the first 20 months following the acquisition: facility updates that would allow for processing a minimum of 75,000 active patients, the issuance of pharmacy licenses in all 50 states, and active patients of 15,000 or more. The second provision provides for an earnout of up to $1.0 million and is contingent upon achievement of the following within 36 months following the acquisition: construction of a new facility to accommodate the servicing of additional active patients or 75,000 or more active patients as of the last day of any month prior to the end of the second earnout provision period or as of the end of the second earnout provision period. As the earnout payment is contingent upon continued employment of certain individuals, the Company will recognize the earnout as compensation expense in general and administrative operating costs and expenses in the condensed consolidated statement of comprehensive income in the period in which it is earned. As of March 31, 2022, the Company has not accrued an earnout payment based on performance to date. The $2.5 million of holdback will be due upon the 15-month anniversary of the closing date of the acquisition.
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Under the terms of the Stock Purchase Agreement, total consideration in the acquisition consisted of the following as of the acquisition date (in thousands):

Base purchase price$20,000 
Net working capital true-up(483)
Closing cash20 
Total purchase consideration$19,537 

At the date of acquisition, the fair value of net tangible assets acquired, excluding property and equipment, approximated their carrying value. The property and equipment was valued primarily using the cost and sales comparison approach to value. For the proprietary software acquired, the replacement cost method under the cost approach was used, estimating the cost to rebuild the software. The non-compete agreement was valued using the income approach, and the customer relationships were valued using the multiple period excess earnings method. As such, all aforementioned intangible assets were valued using Level 3 inputs.

Goodwill resulting from the transaction constitutes the excess of the consideration paid over the fair values of the assets acquired and liabilities assumed and primarily represents the additional value of the synergies of combining the SelectRx business with the Company's technology and existing customer base. This acquired goodwill is allocated to Senior (which is also the reporting unit), and the Company expects approximately $16.3 million to be deductible for tax purposes after adding back acquisition costs and excluding the holdback not yet paid.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

DescriptionEstimated LifeAmount
Cash and cash equivalents$20 
Accounts receivable 613 
Other current assets28 
Property and equipment, net287 
Accounts payable(280)
Accrued expenses, including compensation and benefits(45)
Net tangible assets acquired623 
Proprietary Software3 years550 
Non-compete agreements5 years100 
Customer relationships1 year200 
GoodwillIndefinite18,064 
Total intangible assets acquired18,914 
Net assets acquired$19,537 

The Company will amortize the intangible assets acquired on a straight-line basis over their estimated remaining lives, ranging from one to five years.    

Simple Meds—On August 31, 2021, SelectRx acquired 100% of the outstanding equity interests of Simple Meds, a full-service pharmaceutical distributor, for an aggregate purchase price of $7.0 million (subject to
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customary adjustments), as set forth in the Membership Interest Purchase Agreement dated August 31, 2021. The aggregate purchase price of $7.0 million was paid in cash at the closing of the transaction. The primary purpose of the acquisition was to accelerate the expansion of the prescription drug management business by combining the operations and existing infrastructure of Simple Meds into SelectRx.

Under the terms of the Membership Interest Purchase Agreement, total consideration in the acquisition consisted of the following as of the acquisition date (in thousands):

Base purchase price$7,000 
Net working capital true-up347 
Closing cash61 
Total purchase consideration$7,408 

At the date of acquisition, the fair value of net tangible assets acquired approximated their carrying value. The customer relationships were valued using the multiple period excess earnings method, and as such, were valued using Level 3 inputs.

Goodwill resulting from the transaction constitutes the excess of the consideration paid over the fair values of the assets acquired and liabilities assumed and primarily represents the additional value of the synergies of combining the Simple Meds business with the Company's technology and existing customer base. This acquired goodwill is allocated to Senior (which is also the reporting unit), and the Company expects approximately $5.6 million to be deductible for tax purposes after adding back acquisition costs.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):

DescriptionEstimated LifeAmount
Cash and cash equivalents$61 
Accounts receivable 634 
Other current assets474 
Property and equipment, net415 
Accounts payable(259)
Net tangible assets acquired1,325 
Customer relationships1 year370 
GoodwillIndefinite5,713 
Total intangible assets acquired6,083 
Net assets acquired$7,408 

From the date of acquisition, August 31, 2021, through March 31, 2022, Simple Meds generated $8.6 million of pharmacy prescription revenue.

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3.PROPERTY AND EQUIPMENT—NET

Property and equipment—net consisted of the following:

(in thousands)
March 31, 2022June 30, 2021
Computer hardware$25,405 $13,351 
Machinery and equipment(1)
8,883 2,667 
Leasehold improvements19,276 18,525 
Furniture and fixtures4,623 5,004 
Work in progress11,200 7,220 
Total69,387 46,767 
Less accumulated depreciation(23,829)(17,257)
Property and equipment—net$45,558 $29,510 
(1) Includes financing lease right-of-use assets.

Work in progress as of March 31, 2022 primarily represents computer equipment and machinery not yet put into service and not yet being depreciated. Work in progress as of June 30, 2021, primarily represents computer equipment and machinery not yet put into service and not yet being depreciated. Depreciation expense for the three months ended March 31, 2022 and 2021, was $3.3 million and $2.0 million, respectively, and $8.4 million and $5.6 million for the nine months ended March 31, 2022 and 2021, respectively.

4.SOFTWARE—NET

Software—net consisted of the following:

(in thousands)
March 31, 2022June 30, 2021
Software$24,147 $16,530 
Work in progress3,658 3,826 
Total27,805 20,356 
Less accumulated amortization(12,247)(7,745)
Software—net$15,558 $12,611 

Work in progress as of March 31, 2022 and June 30, 2021, represents costs incurred for software not yet put into service and are not yet being amortized. For each of the three months ended March 31, 2022 and 2021, the Company capitalized internal-use software and website development costs of $2.2 million and recorded amortization expense of $1.6 million and $1.0 million, respectively. For the nine months ended March 31, 2022 and 2021, the Company capitalized internal-use software and website development costs of $6.6 million and $5.4 million, respectively, and recorded amortization expense of $4.5 million and $2.7 million, respectively.

5.INTANGIBLE ASSETS AND GOODWILL

Intangible assetsThe Company's intangible assets include those acquired as part of the acquisitions listed in the table below (refer to Note 2 to the condensed consolidated financial statements for further details). The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Based on the Company’s third quarter analysis, no impairment was recorded on the Company’s long-lived assets.

Goodwill—The Company recorded as goodwill the excess of the purchase price over the estimated fair values of identifiable assets and liabilities acquired as part of the acquisitions listed in the table below (refer to Note
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2 to the condensed consolidated financial statements for further details). The Company performs its annual goodwill impairment assessment as of April 1, or more frequently if it believes that indicators of impairment exist. During each of the three and nine months ended March 31, 2022 and 2021, there were no such indicators.

Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date and becomes identified with that reporting unit in its entirety. As such, the reporting unit as a whole supports the recovery of its goodwill. For the following acquisitions, the reporting units to which goodwill has been assigned and the associated reportable segments are as follows:

AcquisitionReporting UnitReportable Segment
Auto & Home-controlling interestAuto & HomeAuto & Home
InsideResponseSeniorSenior
Lead distribution companySeniorSenior
Express Med PharmaceuticalsSeniorSenior
Simple MedsSeniorSenior

The carrying amounts, accumulated amortization, net carrying value, and weighted average remaining life of our definite-lived amortizable intangible assets as well as our goodwill are presented in the tables below (dollars in thousands, useful life in years):

March 31, 2022June 30, 2021
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountWeighted-Average Remaining Useful LifeGross Carrying AmountAccumulated AmortizationNet Carrying AmountWeighted-Average Remaining Useful Life
Total intangible assets subject to amortization
Customer relationships$17,492 $(5,542)$11,950 $17,122 $(3,448)$13,674 
Trade name2,680 (1,027)1,653 2,680 (625)2,055 
Proprietary software1,592 (719)873 1,592 (382)1,210 
Non-compete agreements1,292 (374)918 1,292 (163)1,129 
Vendor relationships23,700 (3,072)20,628 23,700 (1,098)22,602 
Total intangible assets$46,756 $(10,734)$36,022 6.4$46,386 $(5,716)$40,670 7.1
Total indefinite-lived assets
Goodwill-Auto & Home$5,364 $5,364 
Goodwill-Senior68,368 62,655 
Total goodwill$73,732 $68,019 

For the three months ended March 31, 2022 and 2021, amortization expense related to intangible assets totaled $1.7 million and $1.3 million, respectively, and $5.0 million and $2.9 million for the nine months ended March 31, 2022 and 2021, respectively.

Changes in the balance of goodwill for the nine months ended March 31, 2022, are as follows (in thousands):

Balance, June 30, 2021
$68,019 
Goodwill from the acquisition of Simple Meds5,713 
Balance, March 31, 2022
$73,732 
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As of March 31, 2022, expected amortization expense in future fiscal periods is as follows (in thousands):

Trade NameProprietary SoftwareNon-compete agreementsVendor RelationshipsCustomer relationshipsTotal
Remainder fiscal 2022$134 $96 $71 $660 $690 $1,651 
2023536 339 273 2,633 2,385 6,166 
2024536 308 220 2,633 2,319 6,016 
2025447 130 220 2,633 2,316 5,746 
2026— — 134 2,633 2,313 5,080 
Thereafter— — — 9,436 1,927 11,363 
Total$1,653 $873 $918 $20,628 $11,950 $36,022 

6.LEASES

The majority of the Company’s leases are operating leases related to office space for which the Company recognizes lease expense on a straight-line basis over the respective lease term. The Company leases office facilities in the United States in San Diego, California; Centennial, Colorado; Jacksonville, Florida; Overland Park, Kansas; Des Moines, Iowa; Oakland, California; Indianapolis, Indiana; and Monaca, Pennsylvania (note that SelectRx leases the Monaca facility from an Executive Vice President of SelectRx. The Company expects to incur $3.6 million in total rental payments over the initial ten-year term plus an additional five-year extension option that it is reasonably certain to exercise). The Company's operating leases have remaining lease terms of less than one year up to fourteen years.

On February 7, 2022 and April 6, 2022, the Company executed noncancelable subleases for a portion of its office facilities in Overland Park, Kansas. The former commenced March 23, 2022, while the latter commences September 2, 2022. These subleases run through the remaining term of their primary leases, which terminate July 31, 2029, and are expected to generate $11.9 million in sublease income, which will be recorded as a reduction of lease expense in the condensed consolidated statement of comprehensive income. The Company may consider entering into additional sublease arrangements in the future.

In addition, during the three months ended March 31, 2022, the Company exercised an early termination option for the Des Moines, Iowa office lease, with a new termination date of September 30, 2022, resulting in an early termination penalty of $0.3 million, which was recorded as part of the remeasurement of the operating lease liability and will result in accelerated amortization of the right-of-use asset over the shortened remaining term of the lease.

Lease Costs—The components of lease costs were as follows periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Finance lease costs(1)
$48 $69 $132 $194 
Operating lease costs(2)
1,998 1,980 6,056 5,859 
Short-term lease costs40 42 69 168 
Variable lease costs(3)
227 201 696 915 
Sublease income(23)(403)(488)(638)
Total net lease costs$2,290 $1,889 $6,465 $6,498 
(1) Primarily consists of amortization of finance lease right-of-use assets and an immaterial amount of interest on finance lease liabilities recorded in operating costs and expenses and interest expense, net in the condensed consolidated statements of comprehensive income.
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(2) Recorded in operating costs and expenses in the condensed consolidated statements of comprehensive income.
(3) Variable lease costs are not included in the measurement of the lease liability or right-of-use asset as they are not based on an index or rate and primarily represents common area maintenance charges and real estate taxes recorded in operating costs and expenses in the condensed consolidated statements of comprehensive income.

Maturities of Lease Liabilities—As of March 31, 2022, remaining maturities of lease liabilities for each of the next five fiscal years and thereafter are as follows:

(in thousands)Operating leasesFinance leasesTotal
Remainder fiscal 20222,212 57 2,269 
20238,710 147 8,857 
20249,032 38 9,070 
20259,203 38 9,241 
20267,040 38 7,078 
20275,666 32 5,698 
Thereafter12,885 — 12,885 
     Total undiscounted lease payments54,748 350 55,098 
Less: interest14,266 30 14,296 
     Present value of lease liabilities$40,482 $320 $40,802 

As of March 31, 2022, the Company had $3.5 million of undiscounted future payments for operating leases expected to commence between the fourth quarter of fiscal 2022 and the first quarter of fiscal 2023, with lease terms ranging from seven to ten years. These amounts are excluded from the tables above and not yet recognized in the condensed consolidated balance sheets.

7.DEBT

Debt consisted of the following:

(in thousands)March 31, 2022June 30, 2021
Term Loans $470,732 $471,912 
DDTL Facility244,388 — 
Unamortized debt issuance costs(3,163)(4,081)
Unamortized debt discount(5,402)(6,428)
Total debt706,555 461,403 
Less current portion of long-term debt:(7,169)(2,360)
Long-term debt$699,386 $459,043 

On November 5, 2019, the Company entered into a credit agreement with UMB Bank N.A. (“UMB”) as a lender and revolving agent and Morgan Stanley Capital Administrators, Inc. as a lender and the administrative agent for a syndicate of lenders party to the agreement (replaced by Wilmington Trust as administrative agent effective February 24, 2022). On February 24, 2021, November 2, 2021, and December 23, 2021, the Company entered into amendments to the credit agreement (individually, the “First Amendment”, “Second Amendment”, and “Third Amendment”, together with the original credit agreement and any subsequent amendments, the “Senior Secured Credit Facility”) with certain of its existing lenders and new lenders. The First Amendment provided for an additional $231.0 million in term loans (together with the initial $425.0 million, the “Term Loans”) and added a $145.0 million senior secured delayed draw term loan facility (the "DDTL Facility"). The Second Amendment provided for additional commitments of $25.0 million, in addition to the initial $75.0 million, for the secured
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revolving loan facility (the “Revolving Credit Facility”) and an additional $200.0 million under the DDTL Facility. The Third Amendment provided for additional commitments of $35.0 million under the Revolving Credit Facility. After giving effect to the amendments, in aggregate, the Senior Secured Credit Facility provides for (1) an aggregate principal amount of up to $135.0 million under the Revolving Credit Facility (2) Term Loans in an aggregate principal amount of $656.0 million, of which $470.7 million is outstanding as of March 31, 2022, and (3) a $345.0 million DDTL Facility, of which $244.4 million is outstanding as of March 31, 2022. As of May 5, 2022, the available borrowing capacities under the Revolving Credit Facility and DDTL Facility were $135.0 million and $100.0 million, respectively.

In accordance with ASC 470-50-40 “Debt Modification and Extinguishments”, the Second and Third Amendments were accounted for as debt modifications, and the $3.0 million original issue discount paid to the two lenders of the DDTL Facility was capitalized and is being amortized on a straight-line basis over the remaining life of the agreement through interest expense. Additionally, the Company paid $1.2 million in costs as part of the transaction that were included in general and administrative expense in the condensed consolidated statements of comprehensive income. As a result of the Third Amendment, the Company incurred $0.3 million of costs related to the new commitments, which costs were capitalized and are being amortized on a straight-line basis over the remaining life of the agreement through interest expense.

The Revolving Credit Facility accrues interest on amounts drawn at a rate per annum equal to either (a) LIBOR plus 4.0% or (b) a base rate plus 3.0%, at the Company’s option, and the Company pays an unused commitment fee of 0.15% in respect of the unutilized commitments under the Revolving Credit Facility. The Term Loans and the DDTL Facility bear interest on the outstanding principal amounts thereof at a rate per annum equal to either (a) LIBOR (subject to a floor of 0.75%) plus 5.00% or (b) a base rate plus 4.00%, at the Company’s option, and the Company pays a ticking fee based on the average daily balance of the unused amount of the aggregate DDTL Facility commitments during the preceding fiscal quarter, multiplied by 1% per annum. The Senior Secured Credit Facility has a maturity date of November 5, 2024, with the Term Loans becoming mandatorily repayable as of March 31, 2022, in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount of the Term Loans, with the remaining balance payable on the maturity date. The DDTL Facility also became mandatorily repayable beginning March 31, 2022, in equal quarterly installments equal to 0.25% of all DDTL Facility loans that have been outstanding for a full fiscal quarter prior to each such repayment date, with the remaining balance payable on the maturity date. As of March 31, 2022, the Company has made principal payments of $1.2 million and $0.6 million on the Term Loans and DDTL Facility, respectively. The remaining $100.0 million of the DDTL Facility may be drawn from time to time, subject to certain conditions, until January 15, 2023.

The Senior Secured Credit Facility contains customary affirmative and negative covenants and events of default and a financial covenant requiring the Company and certain of its subsidiaries to maintain a minimum asset coverage ratio. As of March 31, 2022, the Company was in compliance with all of the required covenants. The obligations of the Company are guaranteed by certain of the Company’s subsidiaries and secured by a security interest in all assets of the Company, subject to certain exceptions.

The Company has incurred a total of $27.1 million in debt issuance costs and debt discounts related to the Senior Secured Credit Facility, of which $22.9 million was capitalized and is being amortized on a straight-line basis over the remaining life of the Senior Secured Credit Facility. Total amortization was $1.2 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively, and $4.2 million and $2.5 million for the nine months ended March 31, 2022 and 2021, respectively, which was included in interest expense, net in the Company’s condensed consolidated statements of comprehensive income.
The Company uses derivative financial instruments to hedge against its exposure to fluctuations in interest rates associated with the Term Loans. As of March 31, 2022, the Company had an outstanding receive-variable, pay-fixed interest rate swap on the notional amount of $325.0 million of the Company’s total outstanding Term Loans balance with a fixed rate of 5.00% plus 1.03% (the “Amended Interest Rate Swap”), which terminates on November 5, 2024. As of March 31, 2022, the Amended Interest Rate Swap had a fair value of $12.3 million and was recorded in other assets in the condensed consolidated balance sheet. The Company classifies its Amended Interest Rate Swap as a Level 2 on the fair value hierarchy as the majority of the inputs used to value it primarily includes other than
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quoted prices that are observable and it uses standard calculations and models that use readily observable market data as their basis. As of March 31, 2022, the Company estimates that $2.7 million will be reclassified into interest expense during the next twelve months.


8.COMMITMENTS AND CONTINGENCIES

Lease Obligations—Refer to Note 6 to the condensed consolidated financial statements for commitments related to our operating leases.

Legal Contingencies and Obligations—From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. Such matters may include insurance regulatory claims; commercial, tax, employment, or intellectual property disputes; matters relating to competition and sales practices; and claims for damages arising out of the use of the Company’s services. The Company may also become subject to lawsuits related to past or future acquisitions, divestitures, or other transactions, including matters related to representations and warranties, indemnities, and assumed or retained liabilities. The Company is not currently aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition, operating results, or cash flows; however, in the event of unexpected developments, it is possible that the ultimate resolution of certain ongoing matters, if unfavorable, could be materially adverse to our business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels.

Securities Class Actions

As previously disclosed, the Company and certain of its executive officers and current and former directors have been named as defendants in two putative securities class actions lawsuits filed in the U.S. District Court for the Southern District of New York on August 17 and October 7, 2021, respectively. There have been no material developments in either of these matters since their disclosure in the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2021.

Stockholder Derivative Suit

On March 25, 2022, a stockholder derivative action was filed in the U.S. District Court for the District of Delaware by an alleged stockholder of the Company, purportedly on the Company’s behalf. The lawsuit was brought against certain of the Company’s current and former directors and officers (together, the “Defendants”), and against the Company, as nominal defendant. The complaint, captioned Jadlow v. Danker, et al., Case No. 1:22-cv-00391-RGA, alleges that certain of the Defendants violated Section 14(a) of the Exchange Act by making materially false and misleading statements and failing to disclose material adverse facts about the Company’s business, operations, and prospects. The complaint also asserts claims against all Defendants for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets based on the same general underlying conduct. The complaint also seeks contribution under Sections 10(b) and 21D of the Exchange Act and Section 11(f) of the Securities Act from the individual defendants named in the Securities Class Actions. The complaint seeks unspecified damages for the Company, restitution, reformation and improvement of its corporate governance and internal procedures regarding compliance with laws, and reimbursement of costs and attorneys’ fees. The Company does not currently believe this matter will have a material adverse effect on our results of operations, financial condition, or liquidity; however, this matter could be costly to defend and could divert the attention of management and other resources from operations.

9.SHAREHOLDERS' EQUITY

Common Stock—As of March 31, 2022, the Company has reserved the following authorized, but unissued, shares of common stock:

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Employee Stock Purchase Plan877,092 
Stock awards outstanding under 2020 Plan4,752,141 
Stock awards available for grant under 2020 Plan9,571,645 
Options outstanding under 2003 Plan1,701,424 
Total16,902,302 

Share-Based Compensation Plans

The Company has awards outstanding from two share-based compensation plans: the 2003 Stock Incentive Plan (the “2003 Stock Plan”) and the 2020 Omnibus Incentive Plan (the “2020 Stock Plan” and, collectively with the 2003 Stock Plan, the “Stock Plans”). However, no further awards will be made under the 2003 Stock Plan. The 2020 Stock Plan provides for the grant of incentive stock options (“ISO's”), nonstatutory stock options (“NSO's”), stock appreciation rights, restricted stock awards, restricted stock unit awards (“RSU's”), performance-based restricted stock units (“PSU's”), and other forms of equity compensation (collectively, “stock awards”). All awards (other than ISOs, which may be granted only to current employees of the Company) may be granted to employees, non-employee directors, and consultants of the Company and its subsidiaries and affiliates.

The number of shares of common stock available for issuance as of March 31, 2022, pursuant to future awards under the Company's 2020 Stock Plan is 9,571,645. The number of shares of the Company's common stock reserved under the 2020 Stock Plan is subject to an annual increase on the first day of each fiscal year, beginning on July 1, 2021, equal to 3% of the total outstanding shares of common stock as of the last day of the immediately preceding fiscal year. The maximum number of shares of common stock that may be issued upon the exercise of ISO's will be 4,000,000. The shares of common stock covered by any award (including any award granted pursuant to the 2003 Stock Plan) that is forfeited, terminated, expired, or lapsed without being exercised or settled for cash will again become available for issuance under the 2020 Stock Plan. With respect to any award, if the exercise price and/or tax withholding obligations are satisfied by delivering shares to the Company (by actual delivery or attestation), or if the exercise price and/or tax withholding obligations are satisfied by withholding shares otherwise issuable pursuant to the award, the share reserve shall nonetheless be reduced by the gross number of shares subject to the award.

The Company accounts for its share-based compensation awards in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”) which requires all share-based compensation to be recognized in the income statement based on fair value and applies to all awards granted, modified, canceled, or repurchased after the effective date.

Total share-based compensation for stock awards included in general and administrative expense in the condensed consolidated statements of comprehensive income was as follows for the periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Share-based compensation related to:
Equity classified stock options$805 $451 $2,429 $1,269 
Equity classified RSU's993 648 3,073 1,608 
Equity classified PSU's231 190 318 512 
Total $2,029 $1,289 $5,820 $3,389 

Stock OptionsThe stock options outstanding under the 2003 Stock Plan vest as to one-third after the vesting commencement date and as to 1/24 of the remaining shares subject to the stock option monthly thereafter, subject to the award recipient’s continued employment through the applicable vesting date. Upon a termination of employment for any reason other than for “Cause” (as defined in the 2003 Stock Plan), any unvested and
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outstanding stock options would generally be forfeited for no consideration, and any vested and outstanding stock options would remain exercisable for 90 days following the date of termination (and, in the case of a termination of employment due to death or disability, for 12 months following the date of termination). Stock options expire 10 years from the date of grant. The terms for ISO's and NSO's awarded in the 2020 Stock Plan are the same as in the 2003 Stock Plan with the exception that the options generally shall vest and become exercisable in four equal installments on each of the first four anniversaries of the grant date, subject to the award recipient’s continued employment through the applicable vesting date. Stock options are granted with an exercise price that is no less than 100% of the fair market value of the underlying shares on the date of the grant.

The fair value of each option (for purposes of calculation of share-based compensation expense) is estimated using the Black-Scholes-Merton option pricing model that uses assumptions determined as of the date of the grant. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company's common stock price over the expected term (“volatility”), the number of options that will ultimately not complete their vesting requirements (“assumed forfeitures”), the risk-free interest rate that reflects the interest rate at grant date on zero-coupon United States governmental bonds that have a remaining life similar to the expected term (“risk-free interest rate”), and the dividend yield assumption which is based on the Company's dividend payment history and management's expectations of future dividend payments (“dividend yield”). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the condensed consolidated statements of comprehensive income.

The Company used the following weighted-average assumptions for the stock options granted during the periods presented below:

Nine Months Ended March 31,
20222021
Volatility
36.0%25.0%
Risk-free interest rate
1.4%0.4%
Dividend yield
—%—%
Assumed forfeitures
—%—%
Expected term (in years)
6.256.24
Weighted-average fair value (per share)
$3.36$4.89

The following table summarizes stock option activity under the Stock Plans for the nine months ended March 31, 2022:

Number of OptionsWeighted- Average Exercise PriceWeighted- Average Remaining Contractual Term (in Years)Aggregate Intrinsic Value (in Thousands)
Outstanding—June 30, 2021
3,398,513 $8.60 
Options granted
2,460,675 10.23 
Options exercised
(350,222)3.74 
Options forfeited/expired/cancelled
(122,994)17.81 
Outstanding—March 31, 2022
5,385,972 $9.45 7.27$3,449 
Vested and exercisable—March 31, 2022
2,005,527 $3.93 3.94$3,140 

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As of March 31, 2022, there was $10.3 million in unrecognized compensation cost related to unvested stock options granted, which is expected to be recognized over a weighted-average period of 3.01 years.

The Company received cash of $0.9 million and $1.4 million in connection with stock options exercised during the three months ended March 31, 2022 and 2021, respectively, and $3.2 million and $1.8 million in connection with stock options exercised, net of cashless exercises, during the nine months ended March 31, 2022 and 2021, respectively.

Restricted StockThe following table summarizes restricted stock unit activity under the 2020 Stock Plan for the nine months ended March 31, 2022:

Number of Restricted Stock UnitsWeighted-Average Grant Date Fair Value
Unvested as of June 30, 2021
356,285 $19.12 
Granted505,729 15.42 
Vested(84,348)19.72 
Forfeited(37,324)17.86 
Unvested as of March 31, 2022
740,342 $16.59 

As of March 31, 2022, there was $9.5 million of unrecognized compensation cost related to unvested restricted stock units granted, which is expected to be recognized over a weighted-average period of 2.75 years.

Performance StockThe following table summarizes performance stock unit activity under the 2020 Stock Plan for the nine months ended March 31, 2022:

Number of Performance Stock UnitsWeighted-Average Grant Date Fair Value
Unvested as of June 30, 2021(1)
132,921 $17.97 
Granted(1)
196,080 17.80 
Vested— — 
Forfeited(1,750)17.89 
Performance adjustment(2)
(163,626)
Unvested as of March 31, 2022
163,625 $17.87 
(1) Reflects PSU’s at 100% achievement of predefined financial performance targets. If performance metrics are met, PSU’s will vest, at the end of a three-year performance period. The number of shares that could be earned for the fiscal year 2021 tranche will range from 0% to 150% of the target, and the number of shares that could be earned for the fiscal year 2022 tranche will range from 0% to 200% of the target.
(2) Represents adjustments to previously granted PSU’s to reflect changes in estimates of future financial performance against targets.

As of March 31, 2022, there was $1.9 million of unrecognized compensation cost related to unvested performance stock units granted, which is expected to be recognized over a weighted-average period of 2.07 years.

ESPPThe purpose of the Company’s employee stock purchase plan (“ESPP”) is to provide eligible employees an opportunity to purchase shares of the Company’s common stock at a discounted price through accumulated payroll deductions. Pursuant to the terms of the ESPP, which was amended and restated effective as of April 1, 2022, participants may purchase shares on the exercise date at a price equal to 85% of the fair market value of the Company’s common stock as of either the exercise date or the first day of the relevant offering period, whichever is lesser. During the nine months ended March 31, 2022, the Company issued 466,468 shares to its
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employees, and as of March 31, 2022, there are 877,092 shares reserved for future issuance under the plan. The Company recorded share-based compensation expense related to the ESPP of $0.1 million for each of the three months ended March 31, 2022 and 2021, respectively, and $0.4 million and $0.3 million for the nine months ended March 31, 2022 and 2021, respectively.

10.REVENUES FROM CONTRACTS WITH CUSTOMERS

Disaggregation of Revenue from Contracts with Customers—The disaggregation of revenue by segment and product is depicted for the periods presented below, and is consistent with how the Company evaluates its financial performance:

Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Senior:
Commission revenue:
Medicare advantage$176,603 $181,040 $355,949 $493,745 
Medicare supplement912 2,981 4,849 23,716 
Prescription drug plan393 449 1,393 2,166 
Dental, vision, and health4,150 4,671 12,285 13,041 
Other commission revenue1,415 619 4,269 1,822 
Total commission revenue183,473 189,760 378,745 534,490 
Production bonus and other revenue49,699 25,840 118,714 69,819 
Total Senior revenue233,172 215,600 497,459 604,309 
Life:
Commission revenue:
Term15,779 19,777 48,151 59,549 
Final expense19,626 20,088 55,100 46,362 
Total commission revenue35,405 39,865 103,251 105,911 
Production bonus and other revenue3,995 4,958 16,361 16,006 
Total Life revenue39,400 44,823 119,612 121,917 
Auto & Home:
Total commission revenue6,539 5,910 19,187 21,014 
Production bonus and other revenue613 1,063 1,568 2,738 
Total Auto & Home revenue7,152 6,973 20,755 23,752 
Eliminations:
Total commission revenue(2,879)(319)(5,689)(784)
Production bonus and other revenue(1,732)(1,731)(4,516)(3,509)
Total Elimination revenue(4,611)(2,050)(10,205)(4,293)
Total commission revenue222,538 235,216 495,494 660,631 
Total production bonus and other revenue52,575 30,130 132,127 85,054 
Total revenue$275,113 $265,346 $627,621 $745,685 

Contract Balances—After a policy is sold, the Company has no material additional or recurring obligations to the policyholder or the insurance carrier. As such, there are no contract liabilities recorded in the condensed consolidated balance sheets. During the nine months ended March 31, 2021, there was no activity in the
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contract asset balances other than the movement over time between long-term and short-term commissions receivable and accounts receivable as the policy is renewed, as shown on the balance sheet. A roll forward of commissions receivable (current and long term) is shown below for the nine months ended March 31, 2022:

(in thousands)
Balance as of June 30, 2021
$845,897 
Commission revenue from revenue recognized318,399 
Net commission revenue adjustment from change in estimate(157,368)
Amounts recognized as accounts receivable(168,632)
Balance as of March 31, 2022
$838,296 

The $157.4 million adjustment from change in estimate includes adjustments from the Company’s reassessment of each of its cohorts’ transaction prices. $145.0 million of the total adjustment was due to the increase in actual lapse rates for Senior MA policies during calendar year 2021 and overall lower persistency from early data received for the January 2022 renewals and was recorded during the three months ended December 31, 2021. Approximately 62%, 28%, and 8% of the adjustment from the change in estimate were from approved policies sold in fiscal years 2021, 2020, and 2019, respectively. In addition, there was a $6.1 million adjustment during the three months ended March 31, 2022, for renewal year lapses for calendar year 2022 for Senior MA policies.

Production Bonuses and Other—During the nine months ended March 31, 2022, the Company received advance payments of marketing development funds, which are amortized over the course of the appropriate fiscal year based on policies sold. As of March 31, 2022, there was an unamortized balance remaining of $0.4 million of fiscal year 2022 and 2023 marketing development funds recorded in other current liabilities in the condensed consolidated balance sheet.

11.INCOME TAXES

For the three months ended March 31, 2022 and 2021, we recognized income tax benefit of $2.6 million and income tax expense of $6.9 million, respectively, representing effective tax rates of 29.1% and 16.3%, respectively. The differences from our federal statutory tax rate to the effective tax rate for the three months ended March 31, 2022, were primarily related to state income taxes. The differences from our federal statutory tax rate to the effective tax rate for the three months ended March 31, 2021, were primarily related to state income taxes, partially offset by state tax credits such as the Kansas High Performance Incentive Program (“HPIP”) and discrete items for the period related to the exercise of non-qualified stock options.

For the nine months ended March 31, 2022 and 2021, we recognized income tax benefit of $65.2 million and income tax expense of $31.8 million, respectively, representing effective tax rates of 25.5% and 20.3%, respectively. The differences from our federal statutory tax rate to the effective tax rate for the nine months ended March 31, 2022, were primarily related to state income taxes. The differences from our federal statutory tax rate to the effective tax rate for the nine months ended March 31, 2021, were primarily related to state income taxes, partially offset by state tax credits such as HPIP and discrete items for the period related to the exercise of non-qualified stock options.

Assessing the realizability of the Company’s deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. The Company forecasts taxable income by considering all available positive and negative evidence, including historical data and future plans and estimates. These assumptions require significant judgment about future taxable income. As a result, the amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change. The Company continues to recognize its deferred tax assets as of March 31, 2022, as it believes it is more likely than not that the net deferred tax assets will be realized. The Company recognizes a significant deferred tax liability due to the difference in the timing of revenue recognition for financial statement and tax purposes. For financial statement
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purposes, revenue is recognized when a policy is sold, while revenue recognition for tax purposes occurs when 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 March 31, 2022, and will continue to evaluate in the future as circumstances may change.

12.NET INCOME (LOSS) PER SHARE

The Company calculates net income (loss) per share as defined by ASC Topic 260, “Earnings per Share”. Basic net income (loss) per share (“Basic EPS”) is computed by dividing net income (loss) attributable to common shareholders by the weighted-average common stock outstanding during the respective period. Diluted net income (loss) per share (“Diluted EPS”) is computed by dividing net income (loss) attributable to common and common equivalent shareholders by the total of the weighted-average common stock outstanding and common equivalent shares outstanding during the respective period. For the purpose of calculating the Company’s Diluted EPS, common equivalent shares outstanding include common shares issuable upon the exercise of outstanding employee stock options, unvested RSU's, PSU’s assuming the performance conditions are satisfied as of the end of the reporting period, and common shares issuable upon the conclusion of each ESPP offering period. The number of common equivalent shares outstanding has been determined in accordance with the treasury stock method for employee stock options, RSU's, PSU’s, and common stock issuable pursuant to the ESPP to the extent they are dilutive. Under the treasury stock method, the exercise price paid by the option holder and future share-based compensation expense that the Company has not yet recognized are assumed to be used to repurchase shares.

The following table sets forth the computation of net income (loss) per share for the periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
(in thousands, except per share amounts)
2022202120222021
Basic:
Numerator:
Net income (loss) attributable to common shareholders$(6,448)$35,235 $(190,609)$124,826 
Denominator:
Weighted-average common stock outstanding164,083 163,023 163,914 162,705 
Net income (loss) per share—basic:$(0.04)$0.21 $(1.16)$0.77 
Diluted:
Numerator:
Net income (loss) attributable to common and common equivalent shareholders$(6,448)$35,235 $(190,609)$124,826 
Denominator:
Weighted-average common stock outstanding164,083 163,023 163,914 162,705 
Stock options outstanding to purchase shares of common stock including unvested RSU's and from the ESPP(1)
— 2,708 — 2,790 
Total common and common equivalent shares outstanding164,083 165,731 163,914 165,495 
Net income (loss) per share—diluted:$(0.04)$0.21 $(1.16)$0.75 
(1) Excluded from the computation of net income (loss) per share-diluted for the three and nine months ended March 31, 2022, because the effect would have been anti-dilutive.

The weighted average potential shares of common stock that were excluded from the calculation of net income (loss) per share-diluted for the periods presented because including them would have been anti-dilutive are as follows for the periods presented:
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Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Stock options outstanding to purchase shares of common stock including unvested RSU's and from the ESPP5,393 322 5,069 918 
Shares subject to outstanding PSU's(1)
164 132 219 117 
Total5,557 454 5,288 1,035 
(1) The weighted-average number of shares excluded from the computation of net income (loss) per share-diluted because the performance conditions associated with these awards were not met.

13.SEGMENT INFORMATION

The Company’s reportable segments have been determined in accordance with ASC 280, Segment Reporting (“ASC 280”). The Company currently has three reportable segments: i) Senior, ii) Life, and iii) Auto & Home. Senior primarily sells senior Medicare-related health insurance products and also includes Population Health and InsideResponse. Life primarily sells term life and final expense products, and Auto & Home primarily sells individual automobile and homeowners’ insurance. In addition, the Company accounts for non-operating activity, share-based compensation expense, certain intersegment eliminations, and the costs of providing corporate and other administrative services in its administrative division, Corporate & Eliminations. These services are not directly identifiable with the Company’s reportable segments and are shown in the tables below to reconcile the reportable segments to the condensed consolidated financial statements. The Company has not aggregated any operating segments together to represent a reportable segment.

The Company reports segment information based on how its chief operating decision maker (“CODM”) regularly reviews its 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.

The following table presents information about the reportable segments for the three months ended March 31, 2022:

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(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Revenue$233,172 $39,400 $7,152 $(4,611)$275,113 
Operating expenses(200,990)(41,288)(6,002)(13,819)(1)(262,099)
Other expenses, net— — — (23)(23)
Adjusted EBITDA$32,182 $(1,888)$1,150 $(18,453)12,991 
Share-based compensation expense
(2,143)
Non-recurring expenses (2)
(703)
Depreciation and amortization
(6,679)
Loss on disposal of property, equipment, and software, net(384)
Interest expense, net(12,179)
Income tax benefit2,649 
Net loss$(6,448)
(1) Operating expenses in the Corp & Elims division primarily include $12.0 million in salaries and benefits for certain general, administrative, and IT related departments, and $4.1 million in professional services fees.

(2) These expenses primarily consist of costs related to the change in administrative agent with respect to the Senior Secured Credit Facility and severance expenses.

The following table presents information about the reportable segments for the three months ended March 31, 2021:

(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Revenue$215,600 $44,823 $6,973 $(2,050)$265,346 
Operating expenses(140,111)(43,225)(5,877)(12,507)(1)(201,720)
Other expenses, net— — — (15)(15)
Adjusted EBITDA$75,489 $1,598 $1,096 $(14,572)63,611 
Share-based compensation expense
(1,429)
Non-recurring expenses (2)
(4,667)
Fair value adjustments to contingent earnout obligations(334)
Depreciation and amortization
(4,323)
Loss on disposal of property, equipment, and software(101)
Interest expense, net(7,355)
Loss on extinguishment of debt(3,315)
Income tax expense(6,852)
Net income$35,235 
(1) Operating expenses in the Corp & Elims division primarily include $9.8 million in salaries and benefits for certain general, administrative, and IT related departments and $3.2 million in professional services fees.

(2) These expenses primarily consist of costs incurred for the First Amendment, the acquisition of a lead distribution company, re-designation of the hedge, and the Secondary Offering.

The following table presents information about the reportable segments for the nine months ended March 31, 2022:

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(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Revenue$497,459 $119,612 $20,755 $(10,205)$627,621 
Operating expenses(646,883)(117,347)(16,798)(43,149)(1)(824,177)
Other expenses, net— — — (177)(177)
Adjusted EBITDA$(149,424)$2,265 $3,957 $(53,531)(196,733)
Share-based compensation expense
(6,252)
Non-recurring expenses (2)
(2,857)
Depreciation and amortization
(17,957)
Loss on disposal of property, equipment, and software, net(739)
Interest expense, net(31,300)
Income tax benefit65,229 
Net loss$(190,609)
(1) Operating expenses in the Corp & Elims division primarily include $33.6 million in salaries and benefits for certain general, administrative, and IT related departments, and $13.1 million in professional services fees.

(2) These expenses primarily consist of costs incurred for the Second Amendment, costs related to the acquisitions of Express Med Pharmaceuticals and Simple Meds, costs related to the change in administrative agent with respect to the Senior Secured Credit Facility, and severance expenses.

The following table presents information about the reportable segments for the nine months ended March 31, 2021:

(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Revenue$604,309 $121,917 $23,752 $(4,293)$745,685 
Operating expenses(385,363)(105,532)(16,889)(34,771)(1)(542,555)
Other expenses, net— — — (58)(58)
Adjusted EBITDA$218,946 $16,385 $6,863 $(39,122)203,072 
Share-based compensation expense
(3,689)
Non-recurring expenses (2)
(5,490)
Fair value adjustments to contingent earnout obligations(1,487)
Depreciation and amortization
(11,260)
Loss on disposal of property, equipment, and software(261)
Interest expense, net(20,898)
Loss on extinguishment of debt(3,315)
Income tax expense(31,846)
Net income$124,826 
(1) Operating expenses in the Corp & Elims division primarily include $24.8 million in salaries and benefits for certain general, administrative, and IT related departments and $9.5 million in professional services fees.

(2) These expenses primarily consist of costs incurred for the First Amendment, the acquisition of a lead distribution company, re-designation of the hedge, and the Secondary Offering as well as non-recurring compensation to a former executive, severance expenses, and expenses related to business continuity in response to the COVID-19 pandemic.

Revenues from each of the reportable segments are earned from transactions in the United States and follow the same accounting policies used for the Company’s condensed consolidated financial statements. All of the
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Company’s long-lived assets are located in the United States. For the three months ended March 31, 2022, three insurance carrier customers from Senior accounted for 25%, 23%, and 14% of total revenue, respectively. For the three months ended March 31, 2021, three insurance carrier customers from Senior accounted for 25%, 20%, and 15% of total revenue, respectively. For the nine months ended March 31, 2022, three insurance carrier customers from Senior accounted for 22%, 18%, and 13% of total revenue, respectively. For the nine months ended March 31, 2021, three insurance carrier customers from Senior accounted for 26%, 20%, and 15% of total revenue, respectively.

ITEM 2. 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 condensed consolidated financial statements and footnotes included elsewhere in this Quarterly Report on Form 10-Q. 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. Please refer to a discussion of the Company’s forward-looking statements and associated risks in “Cautionary Note Regarding Forward-Looking Statements” in our 2021 Annual Report. 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 discussed in the section titled “Risk Factors” in our 2021 Annual Report and in Part II, Item 1A hereof.

Correction of Previously Issued Condensed Consolidated Financial Statements

Subsequent to the issuance of the Company’s financial statements as of and for the year ended June 30, 2021, the Company determined that first year provision for certain final expense policies offered by one of its insurance carrier partners should have been accrued based on a higher lapse rate. See Note 1 to the condensed consolidated financial statements for additional information related to the correction, including descriptions of the misstatements and the impacts to our condensed consolidated financial statements. In addition, we have corrected certain previously reported financial information for the three and nine months ended March 31, 2021, in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Company Overview

COVID-19. While the ongoing pandemic has caused disruptions to the economy both domestically and globally, including limitations on various businesses and activities that could have an indirect effect on our business, travel restrictions, and the extended shutdown of certain industries in various countries, due to the nature of our products and technology-enabled business model, these disruptions have not had a material adverse impact on our business on a consolidated basis. We will continue to evaluate the potential impacts and closely monitor developments as they arise.

Our Business. We are a leading technology-enabled, direct-to-consumer (“DTC”) distribution platform 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
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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. Recently through acquisitions, we've begun expanding into lead generation sales, closed-door, long-term care prescription pharmacies, and overall health services through our Population Health platform.

We evaluate our business using the following three segments:

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 20 leading, nationally-recognized insurance carrier partners, including UnitedHealthcare, Wellcare, and Humana. MA and MS plans accounted for 83% and 77% of our approved Senior policies for the three months ended March 31, 2022 and 2021, respectively, and 83% and 80% for the nine months ended March 31, 2022 and 2021, respectively, with other ancillary type policies accounting for the remainder. Additionally, InsideResponse and Population Health (which includes SelectRx) are included in Senior for segment reporting purposes.

Life is one of the country’s largest and most established DTC insurance distributors for term life insurance, having sold over 2.0 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 20 leading, nationally-recognized insurance carrier partners, with many of these relationships exceeding 15 years. Term life policies accounted for 34% and 43% of new premium within Life for the three months ended March 31, 2022 and 2021, respectively, with final expense policies accounting for 66% and 57% for the three months ended March 31, 2022 and 2021, respectively. For the nine months ended March 31, 2022 and 2021, term life policies accounted for 35% and 50% of new premium within Life, respectively, with final expense policies accounting for 65% and 50%, respectively.

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 30 leading, nationally-recognized insurance carrier partners. Homeowners and 12-month auto products accounted for 74% and 80% of new premium within Auto & Home for the three months ended March 31, 2022 and 2021, respectively, and 76% and 79% for the nine months ended March 31, 2022 and 2021, respectively, with six-month auto, dwelling fire, and other products accounting for a majority of the remainder.

The three and nine months ended March 31 referenced throughout the commentary below refers to the third quarter and fiscal year-to-date performance of our fiscal years ending on June 30, 2022 and 2021. Note that certain reclassifications have been made to prior periods to conform with current year presentation.

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:


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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 periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
Medicare Advantage242,721 160,233 678,827 454,772 
Medicare Supplement1,389 3,738 6,318 24,287 
Dental, Vision, and Hearing40,178 38,757 122,214 101,819 
Prescription Drug Plan1,079 1,568 6,193 10,243 
Other4,907 6,781 11,436 12,603 
Total290,274 211,077 824,988 603,724 

Total submitted policies increased by 38% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was driven primarily by a 51% increase in MA submitted policies and a 4% increase in DVH submitted policies, partially offset by a 63% decrease in MS submitted policies. The overall increase in submitted policies for Senior products was primarily due to increases in the number of agents we employ and overall close rates, which was partially driven by increased training for flex agents. During the three months ended March 31, 2022, we increased the number of average productive agents by 72%.

Total submitted policies increased by 37% for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021. The increase was driven primarily by a 49% increase in MA submitted policies and a 20% increase in DVH submitted policies, partially offset by a 74% decrease in MS submitted policies. The overall increase in submitted policies for Senior products was primarily due to increases in the number of agents we employ, partially offset by lower agent productivity. During the nine months ended March 31, 2022, we increased the number of average productive agents by 100% and average productivity per agent declined by 29%.

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 periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
Medicare Advantage196,377 132,950 546,031 384,137 
Medicare Supplement1,159 3,073 4,654 19,849 
Dental, Vision and Hearing34,486 34,517 101,251 84,370 
Prescription Drug Plan1,095 2,109 5,315 9,556 
Other3,836 5,129 9,199 10,209 
Total236,953 177,778 666,450 508,121 

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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.

Total approved policies increased by 33% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was driven primarily by a 48% increase in MA approved policies, partially offset by a 62% decrease in MS approved policies. Total approved policies increased by 31% for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021. The increase was driven primarily by a 42% increase in MA approved policies and a 20% increase in DVH approved policies, partially offset by a 77% decrease in MS approved policies. Fluctuations in approved policies are normally in direct correlation to submitted policies; however, this year we experienced a 2% and 5% decrease in MA submitted-to-approved conversion rates for the three and nine months ended March 31, 2022, compared to the three and nine months ended March 31, 2021, respectively, driven by higher consumer switching behavior. This resulted in MA approved policies growing at a slower rate than MA submitted policies.

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 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 periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
2022202120222021
Medicare Advantage$933 $1,362 $935 $1,290 
Medicare Supplement949 1,345 1,275 1,263 
Dental, Vision and Hearing120 129 123 140 
Prescription Drug Plan229 213 235 230 
Other95 60 77 95 

The LTV per MA approved policy decreased 31% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The MA LTV was negatively impacted by lower MA persistency rates, increase in constraint, the switch to policy level persistency, carrier mix, and higher provision for first year and renewal year lapse rates, somewhat offset by higher commission rates. The LTV per MS approved policy decreased 29% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The MS LTV was negatively impacted by an increase in provision for intra-year lapses and a shift in carrier mix towards carriers that pay us more upfront but less over time.

The LTV per MA approved policy decreased 28% while the LTV per MS approved policy increased 1% for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021. The MA LTV was negatively impacted by lower MA persistency rates, increase in constraint, the switch to policy level persistency,
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carrier mix, and higher provision for first year and renewal year lapse rates, somewhat offset by higher commission rates.

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 sales revenue from InsideResponse, revenue generated through the Population Health platform, 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 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 March 30,
(dollars per approved policy):20222021
Medicare Advantage and Medicare Supplement approved policies636,195 464,653 
Medicare Advantage and Medicare Supplement commission per MA/MS policy$963 $1,286 
Other commission per MA/MS policy29 38 
Other per MA/MS policy(14)166 
Total revenue per MA/MS policy978 1,490 
Total operating expenses per MA/MS policy(1,173)(947)
Adjusted EBITDA per MA/MS policy (1)
$(195)$543 
Adjusted EBITDA Margin per MA/MS policy (1)
(20)%36 %
Revenue/CAC multiple1.8X3.1X
(1) These financial metrics 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.

Total revenue per policy decreased 34% for the twelve months ended March 31, 2022, compared to the twelve months ended March 31, 2021. Approximately 50% of the decrease was due to the lower LTV of MA policies. Approximately 40% of the decrease was due to the $145.0 million adjustment from a change in estimate of primarily Senior MA cohort transaction prices, discussed further below in “Key Components of our Results of Operations”, and the remainder was due to a 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 cost per
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policy increased 24% for the twelve months ended March 31, 2022, compared to the twelve months ended March 31, 2021, due to higher fulfillment costs associated with scaling Population Health and SelectRx, 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.

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 the periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
(in thousands):2022202120222021
Term Premiums$14,933 $19,043 $45,990 $56,784 
Final Expense Premiums28,532 24,817 83,718 56,269 
Total$43,465 $43,860 $129,708 $113,053 

Total term premiums decreased 22% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The number of policies sold declined 30% driven by lower agent headcount, which was somewhat offset by a 12% increase in the average premium per policy sold. Final expense premiums increased 15% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, due to an increase in the number of agents selling final expense policies.

Total term premiums decreased 19% for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021. The number of policies sold declined 28% driven by lower agent headcount, which was somewhat offset by a 12% increase in the average premium per policy sold. Final expense premiums increased 49% for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021, due to an 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 Auto & Home.

The following table shows premiums for the periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
(in thousands):2022202120222021
Premiums$12,516 $12,010 $36,358 $42,165 

Total premiums increased 4% for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, as our agent force was relatively flat year over year.

Total premiums decreased 14% for the nine months ended March 31, 2022, compared to the nine months ended March 31, 2021, primarily due to our strategy to reduce the growth in Auto & Home.

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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 Quarterly Report on Form 10-Q 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 and share-based compensation expenses. The most directly comparable GAAP measure is net income (loss). We monitor and have presented in this Quarterly Report on Form 10-Q 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.

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:

Three Months Ended March 31, 2022:

(in thousands)
Senior
Life
Auto & Home
Corp & Elims
Consolidated
Net loss$(6,448)
Share-based compensation expense2,143 
Non-recurring expenses (1)
703 
Depreciation and amortization6,679 
Loss on disposal of property, equipment, and software, net384 
Interest expense, net12,179 
Income tax benefit(2,649)
Adjusted EBITDA$32,182 $(1,888)$1,150 $(18,453)$12,991 
(1) These expenses primarily consist of costs related to the change in administrative agent with respect to the Senior Secured Credit Facility and severance expenses.

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Three Months Ended March 31, 2021:
(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Net income$35,235 
Share-based compensation expense1,429 
Non-recurring expenses (1)
4,667 
Fair value adjustments to contingent earnout obligations334
Depreciation and amortization4,323 
Loss on disposal of property, equipment, and software101 
Interest expense, net7,355 
Loss on extinguishment of debt3,315 
Income tax expense6,852 
Adjusted EBITDA$75,489 $1,598 $1,096 $(14,572)$63,611 
(1) These expenses primarily consist of costs incurred for the First Amendment, the acquisition of a lead distribution company, re-designation of the hedge, and the Secondary Offering.

Nine months ended March 31, 2022:

(in thousands)
Senior
Life
Auto & Home
Corp & Elims
Consolidated
Net loss$(190,609)
Share-based compensation expense6,252 
Non-recurring expenses (1)
2,857 
Depreciation and amortization17,957 
Loss on disposal of property, equipment, and software, net739 
Interest expense, net31,300 
Income tax benefit(65,229)
Adjusted EBITDA$(149,424)$2,265 $3,957 $(53,531)$(196,733)
(1) These expenses primarily consist of costs incurred for the Second Amendment, costs related to the acquisitions of Express Med Pharmaceuticals and Simple Meds, costs related to the change in administrative agent with respect to the Senior Secured Credit Facility, and severance expenses.

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Nine Months Ended March 31, 2021:

(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Net income$124,826 
Share-based compensation expense3,689 
Non-recurring expenses (1)
5,490 
Fair value adjustments to contingent earnout obligations1,487
Depreciation and amortization11,260 
Loss on disposal of property, equipment, and software261 
Interest expense, net20,898 
Loss on extinguishment of debt3,315 
Income tax expense31,846 
Adjusted EBITDA$218,946 $16,385 $6,863 $(39,122)$203,072 
(1) These expenses primarily consist of costs incurred for the First Amendment, the acquisition of a lead distribution company, re-designation of the hedge, and the Secondary Offering as well as non-recurring compensation to a former executive, severance expenses, and expenses related to business continuity in response to the COVID-19 pandemic.

Key Components of our Results of Operations

The following table sets forth our operating results and related percentage of total revenues for the periods presented:
Three Months Ended March 31,Nine Months Ended March 31,
(in thousands)2022202120222021
Revenue
Commission$222,538 81 %$235,216 89 %$495,494 79 %$660,631 89 %
Production bonus and other52,575 19 %30,130 11 %132,127 21 %85,054 11 %
Total revenue275,113 100 %265,346 100 %627,621 100 %745,685 100 %
Operating costs and expenses
Cost of revenue119,459 43 %71,439 27 %359,732 57 %206,605 28 %
Marketing and advertising125,082 45 %116,690 44 %409,005 65 %298,696 40 %
General and administrative21,031 %19,251 %64,570 10 %44,496 %
Technical development6,436 %4,860 %18,675 %13,458 %
Total operating costs and expenses272,008 98 %212,240 80 %851,982 135 %563,255 76 %
Income (loss) from operations3,105 %53,106 20 %(224,361)(36)%182,430 24 %
Interest expense, net(12,179)(4)%(7,355)(3)%(31,300)(5)%(20,898)(3)%
Loss on extinguishment of debt— — %(3,315)(1)%— — %(3,315)— %
Other expense, net(23)— %(349)— %(177)— %(1,545)— %
Loss before income tax benefit(9,097)(3)%42,087 16 %(255,838)(41)%156,672 21 %
Income tax benefit(2,649)(1)%6,852 %(65,229)(10)%31,846 %
Net income (loss) $(6,448)(2)%$35,235 13 %$(190,609)(31)%$124,826 17 %



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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 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 and other revenue (“other revenue”). Furthermore, the production bonus and other revenue also includes the lead generation revenue from InsideResponse and the revenue generated through the Population Health platform.

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 other 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 other 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. Commission and other revenue are recognized at different milestones for each segment based on the contractual enforceable rights, our historical experience, and established customer business practices. InsideResponse's lead sales 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. 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 revenue, production bonus and other revenue, and total revenue for the periods presented and the percentage changes from the prior year:

Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
Commission$222,538 $235,216 (5)%$495,494 $660,631 (25)%
Production bonus and other52,575 30,130 74%132,127 85,054 55%
Total revenue$275,113 $265,346 4%$627,621 $745,685 (16)%

Three Months Ended March 31, 2022 and 2021–Commission revenue decreased $12.7 million, or 5%, for the three months ended March 31, 2022, and included decreases in Senior and Life of $6.3 million and $4.5 million, respectively, partially offset by an increase in Auto & Home of $0.6 million. For Senior, despite a 33% increase in approved policies, the reduction in revenue was driven by a 31% reduction in LTV’s of approved MA policies, as discussed above. Life’s revenue decline was primarily driven by a $4.0 million decrease in term life revenue. The $22.4 million increase in production bonus and other revenue was primarily driven by $18.4 million of new pharmacy prescription revenue from SelectRx and a $6.1 million increase in marketing development funds received for Senior, partially offset by a reduction of $4.5 million in external lead generation revenue from InsideResponse, as more of their leads were consumed within the Senior division than in the prior year.

Nine Months Ended March 31, 2022 and 2021–Commission revenue decreased $165.1 million, or 25%, for the nine months ended March 31, 2022, which included decreases in Senior, Life, and Auto & Home of $155.7 million, $2.7 million, and $1.8 million, respectively. For Senior, the revenue decline was driven by the 28% reduction in LTV’s of approved MA policies and the $145.0 million downward adjustment from a change in estimate of Senior MA cohort transaction prices made during the three months ended December 31, 2021. Life’s revenue decline was driven by an $11.4 million decrease in term life revenue, partially offset by an $8.7 million
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increase in final expense revenue, which was a result of the investment we have made in agents to grow sales of these policies. The revenue decline for Auto & Home was driven by our strategy to reduce the growth in that division. The $47.1 million increase in production bonus and other revenue was primarily driven by $31.6 million of new pharmacy prescription revenue from SelectRx and a $21.7 million increase in marketing development funds received for Senior, partially offset by a reduction of $13.1 million in external lead generation revenue from InsideResponse, as more of their leads were consumed within Senior than in the prior year.

Operating Costs and Expenses

Cost of Revenue

Cost of revenue 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 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 prescriptions for senior medication management.

The following table presents our cost of revenue for the periods presented and the percentage changes from the prior year:

Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
Cost of revenue$119,459 $71,439 67%$359,732 $206,605 74%

Three Months Ended March 31, 2022 and 2021–Cost of revenue increased $48.0 million, or 67%, for the three months ended March 31, 2022, primarily due to a $29.2 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 $2.8 million for facilities, telecommunications, and software maintenance costs and $0.7 million for licensing costs. Additionally, there was $13.6 million of new medication costs in cost of revenue for SelectRx.

Nine Months Ended March 31, 2022 and 2021–Cost of revenue increased $153.1 million, or 74%, for the nine months ended March 31, 2022, primarily due to a $104.3 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 $13.1 million for facilities, telecommunications, and software maintenance costs and $7.8 million for licensing costs. Additionally, there was $23.8 million of new medication costs in cost of revenue for SelectRx.

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.

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The following table presents our marketing and advertising expenses for the periods presented and the percentage changes from the prior year:

Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
Marketing and advertising$125,082 $116,690 7%$409,005 $298,696 37%

Three Months Ended March 31, 2022 and 2021–Marketing and advertising expenses increased $8.4 million, or 7%, for the three months ended March 31, 2022, primarily due to a $6.9 million increase in lead costs associated with generating more leads for our larger agent base to consume and a $0.5 million increase in compensation costs, as we increased the number of employees supporting our marketing organization to produce more leads. Additionally, there was a $0.7 million increase in depreciation and amortization expense due to additional fixed assets and software in service.

Nine Months Ended March 31, 2022 and 2021–Marketing and advertising expenses increased $110.3 million, or 37%, for the nine months ended March 31, 2022, primarily due to a $101.0 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 $6.8 million increase in compensation costs, as we increased the number of employees supporting our marketing organization to produce more leads. Additionally, there was a $1.8 million increase in depreciation and amortization expense due to additional fixed assets and software in service.

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 periods presented and the percentage changes from the prior year:

Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
General and administrative$21,031 $19,251 9%$64,570 $44,496 45%

Three Months Ended March 31, 2022 and 2021–General and administrative expenses increased $1.8 million, or 9%, for the three months ended March 31, 2022, primarily due to a $3.5 million increase in compensation costs due to additional headcount to support the growth in the business, offset by a $4.5 million decrease in corporate development costs primarily related to one-time costs which were incurred in the prior year for the First Amendment to the Senior Secured Credit Facility.

Nine Months Ended March 31, 2022 and 2021–General and administrative expenses increased $20.1 million, or 45%, for the nine months ended March 31, 2022, primarily due to increases of $13.9 million in compensation costs due to additional headcount to support the growth in the business, $3.5 million in depreciation and amortization expenses due to additional fixed assets and software in service, and $3.2 million in professional services fees due to increases in recruiting, accounting and legal, and insurance costs. The increase was partially offset by a $2.8 million decrease in corporate development costs primarily related to one-time costs which were incurred in the prior year for the First Amendment to the Senior Secured Credit Facility.

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Technical Development

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 periods presented and the percentage changes from the prior year:

Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
Technical development$6,436 $4,860 32%$18,675 $13,458 39%

Three Months Ended March 31, 2022 and 2021–Technical development expenses increased $1.6 million, or 32%, for the three months ended March 31, 2022, primarily due to a $0.7 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 $0.5 million for facilities, telecommunications, and software maintenance costs.

Nine Months Ended March 31, 2022 and 2021–Technical development expenses increased $5.2 million, or 39%, for the nine months ended March 31, 2022, primarily due to a $2.9 million increase in compensation costs related to our technology personnel noted above. The increase in headcount also drove increases in the allocations of $1.3 million for facilities, telecommunications, and software maintenance costs.

Interest Expense, Net

The following table presents our interest expense, net for the periods presented and the percentage changes from the prior year:

Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
Interest expense, net$(12,179)$(7,355)66%$(31,300)$(20,898)50%

Three Months Ended March 31, 2022 and 2021–Interest expense increased $4.8 million, or 66%, 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.

Nine Months Ended March 31, 2022 and 2021–Interest expense increased $10.4 million, or 50%, 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.

Income Taxes

The following table presents our provision for income taxes for the periods presented and the percentage changes from the prior year:

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Three Months Ended March 31,Percent ChangeNine Months Ended March 31,Percent Change
(dollars in thousands)202220212021 vs. 2020202220212021 vs. 2020
Income tax expense (benefit)$(2,649)$6,852 (139)%$(65,229)$31,846 (305)%
Effective tax rate29.1 %16.3 %25.5 %20.3 %

Three Months Ended March 31, 2022 and 2021–For the three months ended March 31, 2022 and 2021, we recognized income tax benefit of $2.6 million and income tax expense of $6.9 million, respectively, representing effective tax rates of 29.1% and 16.3%, respectively. The differences from our federal statutory tax rate to the effective tax rate for the three months ended March 31, 2022, were primarily related to state income taxes. The differences from our federal statutory tax rate to the effective tax rate for the three months ended March 31, 2021, were primarily related to state income taxes, partially offset by state tax credits such as HPIP and discrete items for the period related to the exercise of non-qualified stock options.

Nine Months Ended March 31, 2022 and 2021–For the nine months ended March 31, 2022 and 2021, we recognized income tax benefit of $65.2 million and income tax expense of $31.8 million, respectively, representing effective tax rates of 25.5% and 20.3%, respectively. The differences from our federal statutory tax rate to the effective tax rate for the nine months ended March 31, 2022, were primarily related to state income taxes. The differences from our federal statutory tax rate to the effective tax rate for the nine months ended March 31, 2021, were primarily related to state income taxes, partially offset by state tax credits such as HPIP and discrete items for the period related to the exercise of non-qualified stock options.

Segment Information

We currently have three reportable segments: 1) Senior 2) Life, and 3) Auto & Home. InsideResponse and Population Health are also included in Senior. 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.

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 identifiable with our reportable segments and are shown in the tables below to reconcile the reportable segments to the condensed consolidated financial statements.

Costs of revenue, marketing and advertising and technical development operating costs and 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 costs and 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; 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.

The following tables present information about the reportable segments for the periods presented:







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Three Months Ended March 31, 2022:

(in thousands)
Senior
Life
Auto & Home
Corp & Elims
Consolidated
Revenue$233,172 $39,400 $7,152 $(4,611)$275,113 
Operating expenses(200,990)(41,288)(6,002)(13,819)(1)(262,099)
Other expenses, net— — — (23)(23)
Adjusted EBITDA$32,182 $(1,888)$1,150 $(18,453)12,991 
Share-based compensation expense(2,143)
Non-recurring expenses (2)
(703)
Depreciation and amortization(6,679)
Loss on disposal of property, equipment, and software, net(384)
Interest expense, net(12,179)
Income tax benefit2,649 
Net loss$(6,448)
(1) Operating expenses in the Corp & Elims division primarily include $12.0 million in salaries and benefits for certain general, administrative, and IT related departments and $4.1 million in professional services fees.

(2) These expenses primarily consist of costs related to the change in administrative agent with respect to the Senior Secured Credit Facility and severance expenses.

Three Months Ended March 31, 2021:

(in thousands)
Senior
Life
Auto & Home
Corp & Elims
Consolidated
Revenue$215,600 $44,823 $6,973 $(2,050)$265,346 
Operating expenses(140,111)(43,225)(5,877)(12,507)(1)(201,720)
Other expenses, net— — — (15)(15)
Adjusted EBITDA$75,489 $1,598 $1,096 $(14,572)63,611 
Share-based compensation expense(1,429)
Non-recurring expenses (2)
(4,667)
Fair value adjustments to contingent earnout obligations(334)
Depreciation and amortization(4,323)
Loss on disposal of property, equipment, and software(101)
Interest expense, net(7,355)
Loss on extinguishment of debt(3,315)
Income tax expense(6,852)
Net income$35,235 
(1) Operating expenses in the Corp & Elims division primarily include $9.8 million in salaries and benefits for certain general, administrative, and IT related departments and $3.2 million in professional services fees.

(2) These expenses primarily consist of costs incurred for the First Amendment, the acquisition of a lead distribution company, re-designation of the hedge, and the Secondary Offering.



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Nine Months Ended March 31, 2022:

(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Revenue$497,459 $119,612 $20,755 $(10,205)$627,621 
Operating expenses(646,883)(117,347)(16,798)(43,149)(1)(824,177)
Other expenses, net— — — (177)(177)
Adjusted EBITDA$(149,424)$2,265 $3,957 $(53,531)(196,733)
Share-based compensation expense(6,252)
Non-recurring expenses (2)
(2,857)
Depreciation and amortization(17,957)
Loss on disposal of property, equipment, and software, net(739)
Interest expense, net(31,300)
Income tax benefit65,229 
Net loss$(190,609)
(1) Operating expenses in the Corp & Elims division primarily include $33.6 million in salaries and benefits for certain general, administrative, and IT related departments, and $13.1 million in professional services fees.

(2) These expenses primarily consist of costs incurred for the Second Amendment, costs related to the acquisitions of Express Med Pharmaceuticals and Simple Meds, costs related to the change in administrative agent with respect to the Senior Secured Credit Facility, and severance expenses.

Nine Months Ended March 31, 2021:

(in thousands)SeniorLifeAuto & HomeCorp & ElimsConsolidated
Revenue$604,309 $121,917 $23,752 $(4,293)$745,685 
Operating expenses(385,363)(105,532)(16,889)(34,771)(1)(542,555)
Other expenses, net— — — (58)(58)
Adjusted EBITDA$218,946 $16,385 $6,863 $(39,122)203,072 
Share-based compensation expense(3,689)
Non-recurring expenses (2)(5,490)
Fair value adjustments to contingent earnout obligations(1,487)
Depreciation and amortization(11,260)
Loss on disposal of property, equipment, and software(261)
Interest expense, net(20,898)
Loss on extinguishment of debt(3,315)
Income tax expense(31,846)
Net income$124,826 
(1) Operating expenses in the Corp & Elims division primarily include $24.8 million in salaries and benefits for certain general, administrative, and IT related departments and $9.5 million in professional services fees.

(2) These expenses primarily consist of costs incurred for the First Amendment, the acquisition of a lead distribution company, re-designation of the hedge, and the Secondary Offering as well as non-recurring compensation to a former executive, severance expenses, 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 periods presented:

Three Months Ended March 31,Nine Months Ended March 31,
(dollars in thousands)20222021$%20222021$%
Senior:
Commission revenue:
Medicare advantage$176,603 $181,040 $(4,437)(2)%$355,949 $493,745 $(137,796)(28)%
Medicare supplement912 2,981 (2,069)(69)%4,849 23,716 (18,867)(80)%
Prescription drug plan393 449 (56)(12)%1,393 2,166 (773)(36)%
Dental, vision, and health4,150 4,671 (521)(11)%12,285 13,041 (756)(6)%
Other commission revenue1,415 619 796 129 %4,269 1,822 2,447 134 %
Total commission revenue183,473 189,760 (6,287)(3)%378,745 534,490 (155,745)(29)%
Production bonus and other revenue49,699 25,840 23,859 92 %118,714 69,819 48,895 70 %
Total Senior revenue233,172 215,600 17,572 %497,459 604,309 (106,850)(18)%
Life:
Commission revenue:
Term15,779 19,777 (3,998)(20)%48,151 59,549 (11,398)(19)%
Final expense19,626 20,088 (462)(2)%55,100 46,362 8,738 19 %
Total commission revenue35,405 39,865 (4,460)(11)%103,251 105,911 (2,660)(3)%
Production bonus and other revenue3,995 4,958 (963)(19)%16,361 16,006 355 %
Total Life revenue39,400 44,823 (5,423)(12)%119,612 121,917 (2,305)(2)%
Auto & Home:
Total commission revenue6,539 5,910 629 11 %19,187 21,014 (1,827)(9)%
Production bonus and other revenue613 1,063 (450)(42)%1,568 2,738 (1,170)(43)%
Total Auto & Home revenue7,152 6,973 179 %20,755 23,752 (2,997)(13)%
Eliminations:
Total commission revenue(2,879)(319)(2,560)803 %(5,689)(784)(4,905)626 %
Production bonus and other revenue(1,732)(1,731)(1)— %(4,516)(3,509)(1,007)29 %
Total Elimination revenue(4,611)(2,050)(2,561)125 %(10,205)(4,293)(5,912)138 %
Total commission revenue222,538 235,216 (12,678)(5)%495,494 660,631 (165,137)(25)%
Total production bonus and other revenue52,575 30,130 22,445 74 %132,127 85,054 47,073 55 %
Total revenue$275,113 $265,346 $9,767 %$627,621 $745,685 $(118,064)(16)%

Revenue by Segment

Three Months Ended March 31, 2022 and 2021–Revenue from Senior was $233.2 million for the three months ended March 31, 2022, a $17.6 million, or 8%, increase compared to revenue of $215.6 million for the three months ended March 31, 2021. The increase was due to $18.4 million of new pharmacy prescription revenue from SelectRx and a $6.1 million increase in marketing development funds received, partially offset by a reduction of
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$4.5 million of external lead generation revenue from InsideResponse and a $4.4 million, or 2%, decrease in MA commission revenue.

Revenue from Life was $39.4 million for the three months ended March 31, 2022, a $5.4 million, or 12%, decrease compared to revenue of $44.8 million for the three months ended March 31, 2021. The decrease included $4.0 million from term life, $0.5 million from final expense, and $1.0 million from production bonus and other revenue.

Revenue from Auto & Home was $7.2 million for the three months ended March 31, 2022, a $0.2 million, or 3%, increase compared to revenue of $7.0 million for the three months ended March 31, 2021, primarily due to improvements in agent productivity.

Nine Months Ended March 31, 2022 and 2021–Revenue from Senior was $497.5 million for the nine months ended March 31, 2022, a $106.9 million, or 18%, decrease compared to revenue of $604.3 million for the nine months ended March 31, 2021. The decrease was due to a $137.8 million, or 28%, decrease in MA commission revenue primarily from the $145.0 million adjustment from the change in estimate of cohort transaction prices discussed above, a $18.9 million decrease in MS commission revenue, and a reduction of $13.1 million in external lead generation revenue from InsideResponse, partially offset by $31.6 million of new pharmacy prescription revenue from SelectRx and a $21.7 million increase in marketing development funds received.

Revenue from Life was $119.6 million for the nine months ended March 31, 2022, a $2.3 million, or 2%, decrease compared to revenue of $121.9 million for the nine months ended March 31, 2021. The decrease was primarily due to an $11.4 million decrease in term life revenue, partially offset by an $8.7 million increase in final expense revenue.

Revenue from Auto & Home was $20.8 million for the nine months ended March 31, 2022, a $3.0 million, or 13%, decrease compared to revenue of $23.8 million for the nine months ended March 31, 2021, primarily due to our strategy to reduce the growth in Auto & Home.

Adjusted EBITDA by Segment

Three Months Ended March 31, 2022 and 2021–Adjusted EBITDA from Senior was $32.2 million for the three months ended March 31, 2022, a $43.3 million decrease compared to Adjusted EBITDA of $75.5 million for the three months ended March 31, 2021. The decrease in Adjusted EBITDA was due to a $60.9 million increase in operating costs and expenses primarily from a $18.2 million increase in personnel costs associated with additional headcount, $14.3 million higher fulfillment costs associated with scaling Population Health and SelectRx, $13.6 million in pharmaceutical costs for SelectRx, and $11.2 million increase in variable marketing expenses as discussed above. The increase in operating costs and expenses was partially offset by a $17.6 million increase in revenue as discussed above.

Adjusted EBITDA from Life was $(1.9) million for the three months ended March 31, 2022, a $3.5 million decrease compared to Adjusted EBITDA of $1.6 million for the three months ended March 31, 2021. The decrease in Adjusted EBITDA was primarily due to the $5.4 million decrease in revenue discussed above, partially offset by a $1.9 million decrease in operating costs and expenses primarily attributable to lower headcount and marketing costs.

Adjusted EBITDA from Auto & Home was $1.2 million for the three months ended March 31, 2022, a $0.1 million, or 5%, increase compared to Adjusted EBITDA of $1.1 million for the three months ended March 31, 2021. The increase in Adjusted EBITDA was primarily due to the $0.2 million increase in revenue discussed above and a reduction in operating costs and expenses due to lower headcount.

Nine Months Ended March 31, 2022 and 2021–Adjusted EBITDA from Senior was $(149.4) million for the nine months ended March 31, 2022, a $368.4 million decrease compared to Adjusted EBITDA of $218.9 million for the nine months ended March 31, 2021. The decrease in Adjusted EBITDA was primarily due to a $261.5 million increase in operating costs and expenses primarily from a $102.7 million increase in variable marketing
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expenses as discussed above, an $81.1 million increase in personnel costs associated with additional headcount, $40.5 million higher fulfillment costs associated with scaling Population Health and SelectRx, and $23.8 million in pharmaceutical costs for SelectRx. In addition, there was a $106.9 million decrease in revenue primarily as a result of the $145.0 million adjustment from a change in estimate of cohort transaction prices discussed above.

Adjusted EBITDA from Life was $2.3 million for the nine months ended March 31, 2022, a $14.1 million, or 86%, decrease compared to Adjusted EBITDA of $16.4 million for the nine months ended March 31, 2021. The decrease in Adjusted EBITDA was primarily due to a $11.8 million increase in operating costs and expenses primarily attributable to an increase in variable marketing expenses related to final expense.

Adjusted EBITDA from Auto & Home was $4.0 million for the nine months ended March 31, 2022, a $2.9 million, or 42%, decrease compared to Adjusted EBITDA of $6.9 million for the nine months ended March 31, 2021. The decrease in Adjusted EBITDA was primarily due to a $3.0 million decrease in revenue.

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.

To date, systemic economic disruptions related to the COVID-19 pandemic have not had a substantial effect on our financial standing; however, given the unpredictable nature of the virus and its effects on the global economy, we will continue to evaluate our financial position and liquidity needs in light of the ongoing pandemic as developments arise.

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 7 to the condensed consolidated financial statements. As of March 31, 2022, we are in compliance with all of our debt covenants; however, our financial projections indicate that, based on our current business plan, we will not maintain the required asset coverage ratio within one year after the date that the condensed consolidated financial statements are issued. Failure to maintain the required ratio would constitute a violation of our obligations under the Senior Secured Credit Facility and would permit our lenders to declare us in default. In the event of a default, our lenders could accelerate all amounts owing under the Senior Secured Credit Facility. We do not currently have sufficient liquidity to repay such indebtedness. We have commenced discussions of a covenant waiver or modification with our lenders; however, we cannot provide any assurances that we will be successful in obtaining such a waiver or modification on acceptable terms, or at all. As a result, there is substantial doubt about our ability to continue as a going concern.

Cash Flows

As of March 31, 2022 and June 30, 2021, our cash and cash equivalents totaled $199.4 million and $286.5 million, respectively. Additionally, the following table presents a summary of our cash flows for the periods presented below:
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Nine Months Ended March 31,
(in thousands)20222021
Net cash used in operating activities$(284,362)$(60,947)
Net cash used in investing activities(40,012)(36,206)
Net cash provided by financing activities237,279 97,331 

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 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.

Nine Months Ended March 31, 2022—Cash used in operating activities was $284.4 million, consisting of net loss of $190.6 million, adjustments for non-cash items of $33.4 million, and cash used in operating assets and liabilities of $60.4 million. Adjustments for non-cash items primarily consisted of $65.6 million in deferred income taxes, offset by $18.0 million of depreciation and amortization related to additional fixed assets purchases to accommodate our growth in headcount, internally developed software in service, and SelectRx infrastructure, $6.3 million of share-based compensation expense, $4.2 million of amortization of debt issuance costs and debt discount as a result of amendments to the Senior Secured Credit Facility, and $3.1 million of non-cash lease expense. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of $62.8 million in accounts receivable and $8.3 million in other assets related to an increase in inventory for SelectRx and an increase in prepaid expenses, partially offset by a decrease of $7.6 million in commissions receivable and increases of $8.1 million in accounts payable and accrued expenses, all driven by the increased marketing and personnel costs for AEP and OEP.

Nine Months Ended March 31, 2021—Cash used in operating activities was $60.9 million, consisting of net income of $124.8 million and adjustments for non-cash items of $56.3 million, offset by cash used in operating assets and liabilities of $242.1 million. Adjustments for non-cash items primarily consisted of $31.7 million in deferred income taxes as the Company defers revenue related to certain commissions receivable into following years until it is collected, $11.3 million of depreciation and amortization related to additional fixed assets purchases to accommodate our growth in headcount and internally developed software in service, $3.7 million of share-based compensation expense, and $2.9 million of non-cash lease expense. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of $251.2 million in commissions receivable and $49.2 million in accounts receivable related to the increase in approved policies partially offset by increases of $26.2 million in accounts payable and accrued expenses and $30.4 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.

Investing Activities
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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.

Nine Months Ended March 31, 2022—Net cash used in investing activities of $40.0 million was due to $24.5 million of purchases of property and equipment primarily to support AEP and OEP and the growth of SelectRx infrastructure, $7.6 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.

Nine Months Ended March 31, 2021—Net cash used in investing activities of $36.2 million was due to $6.5 million of purchases of property and equipment and $5.8 million in purchases of software and capitalized internal-use software spent to develop new programs and systems to efficiently accommodate our increased volumes. Additionally, we used $24.0 million of cash related to the acquisition of a lead distribution company.

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.

Nine Months Ended March 31, 2022—Net cash provided by financing activities of $237.3 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 $1.2 million and $0.6 million on the Term Loans and DDTL Facility, respectively, and $0.3 million in debt issuance costs related to the Second Amendment and Third Amendment to the Senior Secured Credit Facility.

Nine Months Ended March 31, 2021—Net cash provided by financing activities of $97.3 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, $32.3 million of earnout for the InsideResponse acquisition, and $10.0 million for withholding taxes related to net share settlements of employee stock option awards.

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. There were no amounts outstanding under the Revolving Credit Facility as of March 31, 2022. As of March 31, 2022, there was $470.7 million outstanding under the Term Loans and $244.4 million outstanding under the DDTL Facility. Refer to Note 7 to the condensed consolidated financial statements for further details.

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 $325.0 million in principal of the Term Loans. Refer to Note 7 to the condensed consolidated financial statements for further details.

Contractual Obligations

Other than the discussion in Note 8 to the condensed consolidated financial statements, as of March 31, 2022, there have been no material changes to our contractual obligations as previously described in our 2021 Annual Report.

Off-Balance Sheet Arrangements

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We did not have any off-balance sheet arrangements during the period covered by this report.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements recently adopted and not yet adopted, see the notes to our condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are primarily exposed to the market risk associated with unfavorable movements in interest rates. The risk inherent in our market risk-sensitive instruments and positions is the potential loss or increased expense arising from adverse changes in those factors. There have been no material changes to our market risk policies or our market risk-sensitive instruments and positions as described in our annual report on our 2021 Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Our Disclosure Controls and Procedures

The Company completed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), carried out by our management, with the participation of our chief executive officer (principal executive officer) and our chief financial officer (principal financial and accounting officer). Based upon our management's evaluation, our chief executive officer and our chief financial officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were not effective, because of a material weakness in our internal controls over financial reporting described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, an error was identified during the three months ended December 31, 2021, relative to the Life first year commission revenue provision for certain final expense policies. As a result of the error, management concluded that our controls addressing the completeness and accuracy of carrier and policy information utilized to determine the first year provision were not designed effectively. This material weakness resulted in the correction of an error in the Company’s interim financial statements for the quarters ended December 31, 2020, and March 31, 2021, for which we have concluded such errors are not material to those previously reported financial statements.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable level of assurance of achieving their desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management’s Plan to Remediate the Material Weakness

As a result of this material weakness identified, we have made significant progress on implementing remediation measures including, but not limited to, obtaining complete and accurate carrier information feeds to support first year provision for final expense policies, reviewing policies as applicable to ensure additional risk mitigation, and enhancing procedures to assess the ongoing completeness and accuracy of carrier information utilized in supporting provisioning control activities. The initiatives we are implementing to remediate the material weakness are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. However, we cannot be certain that the measures we have taken or may take in the future will ensure that we will establish and maintain adequate controls over our financial processes and reporting in the future.
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Notwithstanding the material weakness, our management has concluded that the financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that the Company’s controls are operating effectively.

Changes in Internal Control over Financial Reporting

Except for the material weakness noted above, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A discussion of legal proceedings to which the Company is a party is included in Part I, Item 1 hereof under “Note 8, Commitments and Contingencies – Legal Contingencies and Obligations,” which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

Except as discussed below, there have been no material changes to the risk factors disclosed in our 2021 Annual Report. Realization of any of these risks could have a material adverse effect on our business financial condition or results of operations. Additional risks and uncertainties not currently known to us or that we deem to be immaterial could also materially adversely affect our business, financial condition, or results of operations.

Our ability to continue as a going concern is dependent upon our ability to obtain a waiver or modification of certain of our debt covenants from our lenders.

Pursuant to the terms of our Senior Secured Credit Facility, we are required to maintain a certain asset coverage ratio. Our financial projections indicate that, based on our current business plan, our asset coverage ratio will fall below the required level within one year of the date of issuance of our financial statements for the three months ended March 31, 2022. If we are unable to maintain the required asset coverage ratio, our lenders could declare us in default of our obligations and accelerate all amounts owing under the Senior Secured Credit Facility. We do not expect we would have sufficient liquidity to repay such indebtedness. As a result, we would not be able to continue as a going concern if we cannot obtain a waiver or modification of the covenant concerning our asset coverage ratio from our lenders. While we have commenced discussions with our lenders regarding such a waiver or modification, we cannot assure you we will be successful in obtaining such a waiver or modification on acceptable terms, or at all.

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

The following documents listed below are incorporated by reference or are filed or furnished, as applicable, with this Quarterly Report on Form 10-Q.

Exhibit NumberExhibit Description
SelectQuote, Inc. 2020 Employee Stock Purchase Plan (as Amended and Restated Effective as of April 1, 2022)
Certification of Chief Executive Officer of SelectQuote, Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer of SelectQuote, Inc. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer of SelectQuote, Inc. Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer of SelectQuote, Inc. Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

†     The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the SEC and are not to be incorporated by reference into any filing of SelectQuote, Inc. under the Securities Act or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SELECTQUOTE, INC.
May 5, 2022By: /s/ Tim Danker
Name: Tim Danker
Title: Chief Executive Officer
By: /s/ Raffaele Sadun
Name: Raffaele Sadun
Title: Chief Financial Officer

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