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 September 30, 2024
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
(Commission File Number)
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (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 class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
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 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 171,504,499 shares of common stock as of October 31, 2024.
SELECTQUOTE, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
| PART I FINANCIAL INFORMATION | PAGE | |||||||
| 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. | ||||||||
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
| September 30, 2024 | June 30, 2024 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
| Commissions receivable-current | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| COMMISSIONS RECEIVABLE—Net | |||||||||||
| PROPERTY AND EQUIPMENT—Net | |||||||||||
| SOFTWARE—Net | |||||||||||
| OPERATING LEASE RIGHT-OF-USE ASSETS | |||||||||||
| INTANGIBLE ASSETS—Net | |||||||||||
| GOODWILL | |||||||||||
| OTHER ASSETS | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued expenses | |||||||||||
| Accrued compensation and benefits | |||||||||||
| Operating lease liabilities—current | |||||||||||
| Current portion of long-term debt | |||||||||||
| Contract liabilities | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| LONG-TERM DEBT, NET—less current portion | |||||||||||
| DEFERRED INCOME TAXES | |||||||||||
| OPERATING LEASE LIABILITIES | |||||||||||
| OTHER LIABILITIES | |||||||||||
| Total liabilities | |||||||||||
COMMITMENTS AND CONTINGENCIES (Note 7) | |||||||||||
| SHAREHOLDERS’ EQUITY: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive income | |||||||||||
| Total shareholders’ equity | |||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | |||||||||
See accompanying notes to the condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(In thousands)
| Three Months Ended September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| REVENUE: | ||||||||||||||
Commissions and other services | $ | $ | ||||||||||||
| Pharmacy | ||||||||||||||
| Total revenue | ||||||||||||||
| OPERATING COSTS AND EXPENSES: | ||||||||||||||
Cost of commissions and other services revenue | ||||||||||||||
| Cost of goods sold—pharmacy revenue | ||||||||||||||
| Marketing and advertising | ||||||||||||||
| Selling, general, and administrative | ||||||||||||||
| Technical development | ||||||||||||||
| Total operating costs and expenses | ||||||||||||||
LOSS FROM OPERATIONS | ( | ( | ||||||||||||
| INTEREST EXPENSE, NET | ( | ( | ||||||||||||
| OTHER EXPENSE, NET | ( | ( | ||||||||||||
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT) | ( | ( | ||||||||||||
INCOME TAX EXPENSE (BENEFIT) | ( | |||||||||||||
NET LOSS | $ | ( | $ | ( | ||||||||||
NET LOSS PER SHARE: | ||||||||||||||
| Basic | $ | ( | $ | ( | ||||||||||
| Diluted | $ | ( | $ | ( | ||||||||||
| WEIGHTED-AVERAGE COMMON STOCK OUTSTANDING USED IN PER SHARE AMOUNTS: | ||||||||||||||
| Basic | ||||||||||||||
| Diluted | ||||||||||||||
OTHER COMPREHENSIVE LOSS NET OF TAX: | ||||||||||||||
Change in cash flow hedge | $ | ( | $ | ( | ||||||||||
OTHER COMPREHENSIVE LOSS | ( | ( | ||||||||||||
COMPREHENSIVE LOSS | $ | ( | $ | ( | ||||||||||
See accompanying notes to the condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(In thousands)
| Three Months Ended September 30, 2024 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Retained Earnings / (Accumulated Deficit) | Accumulated Other Comprehensive Income | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| BALANCES-June 30, 2024 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Gain on cash flow hedge, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Amount reclassified into earnings, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Exercise of employee stock options, net of shares withheld for cashless exercises and to cover tax withholdings | — | — | |||||||||||||||||||||||||||||||||
| Vesting of restricted stock unit awards and performance stock unit awards net of shares withheld to cover tax withholdings | ( | — | — | ( | |||||||||||||||||||||||||||||||
Vesting of price vested unit awards net of shares withheld to cover tax withholdings | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCES-September 30, 2024 | ( | ||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2023 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income | Total Shareholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| BALANCES-June 30, 2023 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Gain on cash flow hedge, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Amount reclassified into earnings, net tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
Vesting of restricted stock unit awards and performance stock unit awards net of shares withheld to cover tax withholdings | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| BALANCES-September 30, 2023 | ( | ||||||||||||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
SELECTQUOTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Three Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
Net loss | $ | ( | $ | ( | |||||||
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss on disposal of property, equipment, and software | |||||||||||
| Share-based compensation expense | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Amortization of debt issuance costs and debt discount | |||||||||||
| Accrued interest payable in kind | |||||||||||
| Non-cash lease expense | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, net | |||||||||||
| Commissions receivable | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable and accrued expenses | |||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Other liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sales of property and equipment | |||||||||||
| Purchases of software and capitalized software development costs | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Payments on Term Loans | ( | ( | |||||||||
| Payments on other debt | ( | ( | |||||||||
| Proceeds from common stock options exercised and employee stock purchase plan | |||||||||||
| Payments of tax withholdings related to net share settlement of equity awards | ( | ( | |||||||||
| Payments of debt issuance costs | ( | ||||||||||
Net cash used in financing activities | ( | ( | |||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | ( | ( | |||||||||
| CASH AND CASH EQUIVALENTS—Beginning of period | |||||||||||
| CASH AND CASH EQUIVALENTS—End of period | $ | $ | |||||||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | |||||||||||
| Interest paid, net | $ | ( | $ | ( | |||||||
| Payment of income taxes, net | ( | ( | |||||||||
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures in accounts payable and accrued expenses | |||||||||||
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”) is a leading technology-enabled, direct-to-consumer distribution platform for selling insurance policies and healthcare services. We contract 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. SelectQuote’s Senior division (“Senior”) sells Medicare Advantage, Medicare Supplement, Medicare Part D, and other ancillary senior health insurance related products, and also includes a small lead generation business, InsideResponse, LLC (“InsideResponse”). 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. The Healthcare Services division (“Healthcare Services”) includes SelectRx, Population Health, and most recently, SelectPatient Management (“SPM”). SelectRx is a Patient-Centered Pharmacy HomeTM (“PCPH”) accredited pharmacy, which offers essential prescription medications, OTC medications, customized medication packaging, and medication therapy management. Population Health uses data from personal Health Risk Assessments completed by our agents (“HRAs) to connect the consumer to the relevant health-related service, like SelectRx, SPM, or one of our many health-related partners. SelectPatient Management, launched in 2024 from the acquisition of an existing chronic care management platform, helps patients navigate their chronic conditions and manage them using a comprehensive treatment plan.
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”) in October through December and are allowed to switch plans from an existing plan during the open enrollment period (“OEP”) in January through March each year. As a result, the Senior segment’s revenue is highest in the second and third quarters.
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, net, commissions receivable, the provision for income taxes, share-based
compensation, and valuation of intangible assets and goodwill. The impact of changes in estimates is recorded in the period in which they become known.
Significant Accounting Policies—There have been no material changes to the Company’s significant accounting policies as described in our Annual Report.
Recent Accounting Pronouncements—In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07 – Segment Reporting (Topic ASC 280) Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosure about significant segment expenses. The enhancements under this update 1) require disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, 2) require disclosure of other segment items by reportable segment and a description of the composition of other segment items 3) require annual disclosures to also be provided in interim periods, 4) clarify use of more than one measure of segment profit or loss by the CODM, 5) require that the title of the CODM be disclosed and an explanation of how the CODM uses the reported measures of segment profit or loss to make decisions, and 6) require that entities with a single reportable segment provide all disclosures required by this update and required under ASC 280. ASU 2023-07 is effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial statements.
2.PROPERTY AND EQUIPMENT—NET
Property and equipment—net consisted of the following:
(in thousands) | September 30, 2024 | June 30, 2024 | |||||||||
| Computer hardware | $ | $ | |||||||||
Machinery and equipment(1) | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture and fixtures | |||||||||||
| Work in progress | |||||||||||
| Total | |||||||||||
| Less accumulated depreciation | ( | ( | |||||||||
| Property and equipment—net | $ | $ | |||||||||
(1) Includes financing lease right-of-use assets.
3.SOFTWARE—NET
Software—net consisted of the following:
(in thousands) | September 30, 2024 | June 30, 2024 | |||||||||
| Software | $ | $ | |||||||||
| Work in progress | |||||||||||
| Total | |||||||||||
| Less accumulated amortization | ( | ( | |||||||||
| Software—net | $ | $ | |||||||||
Work in progress represents costs incurred for software not yet put into service and not yet being amortized. For the three months ended September 30, 2024 and 2023, the Company capitalized internal-use software and website development costs of $2.3 million and $2.0 million, respectively, and recorded amortization expense of $2.0 million and $2.1 million, respectively.
4.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, CA; Centennial, CO; Overland Park, KS; Oakland, CA; Indianapolis, IN; and Monaca, PA. The Company's operating leases have remaining lease terms of less than one year up to twelve years . 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.
During the three months ended September 30, 2024, the Company entered into four finance leases for equipment with commencement dates August 1, 2024 and September 19, 2024, resulting in new right-of-use assets obtained in exchange for new lease liabilities of $1.3 million.
Lease Costs—The components of lease costs were as follows for the periods presented:
| Three Months Ended September 30, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
Finance lease costs(1) | $ | $ | |||||||||
Operating lease costs(2) | |||||||||||
| Short-term lease costs | |||||||||||
Variable lease costs(3) | |||||||||||
| Sublease income | ( | ( | |||||||||
| Total net lease costs | $ | $ | |||||||||
(1) Primarily consists of amortization of finance lease right-of-use assets and an immaterial amount of interest on finance lease liabilities recorded in selling, general, and administrative expense and interest expense, net in the condensed consolidated statements of comprehensive loss.
(2) Recorded in selling, general, and administrative expense in the condensed consolidated statements of comprehensive loss.
(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 loss.
Maturities of Lease Liabilities—As of September 30, 2024, remaining maturities of lease liabilities for each of the next five fiscal years and thereafter are as follows:
| (in thousands) | Operating leases | Finance leases | Total | |||||||||||||||||
| Remainder fiscal 2025 | $ | $ | $ | |||||||||||||||||
| 2026 | ||||||||||||||||||||
| 2027 | ||||||||||||||||||||
| 2028 | ||||||||||||||||||||
| 2029 | ||||||||||||||||||||
| Thereafter | ||||||||||||||||||||
| Total undiscounted lease payments | ||||||||||||||||||||
| Less: interest | ||||||||||||||||||||
| Present value of lease liabilities | $ | $ | $ | |||||||||||||||||
Sublease income—The Company executed noncancelable subleases for portions of its office facilities in Overland Park, KS and Centennial, CO, which commenced during the fiscal years ended June 30, 2023 and 2022, and run through July 31, 2029, and November 30, 2026, respectively. Sublease income is recorded on a straight-line basis as a reduction of lease expense in the condensed consolidated statements of comprehensive loss. The Company may consider entering into additional sublease arrangements in the future.
As of September 30, 2024, the future minimum fixed sublease receipts under non-cancelable operating lease agreements are as follows:
| (in thousands) | Total | |||||||
| Remainder fiscal 2025 | $ | |||||||
| 2026 | ||||||||
| 2027 | ||||||||
| 2028 | ||||||||
| 2029 | ||||||||
| Thereafter | ||||||||
| Total sublease income | $ | |||||||
5.INTANGIBLE ASSETS AND GOODWILL
Intangible assets—The carrying amounts, accumulated amortization, net carrying value, and weighted average remaining life of our definite-lived amortizable intangible assets are presented below (dollars in thousands, useful life in years):
| September 30, 2024 | June 30, 2024 | ||||||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Trade name | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Proprietary software | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Non-compete agreements | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
The Company's intangible assets include those long-lived intangible assets acquired as part of acquisitions. 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. There were no
For the three months ended September 30, 2024 and 2023, amortization expense related to intangible assets totaled $1.0 million and $0.8 million, respectively, recorded in selling, general and administrative expense in the condensed consolidated statements of comprehensive loss. The weighted-average remaining useful life of intangible assets was 2.47 and 2.69 years as of September 30, 2024 and June 30, 2024, respectively.
As of September 30, 2024, expected amortization expense in future fiscal periods were as follows (in thousands):
| Trade Name | Proprietary Software | Non-compete agreements | Customer relationships | Total | |||||||||||||||||||||||||
| Remainder fiscal 2025 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2026 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2027 | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
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 prior period acquisitions. 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. As of September 30, 2024, the Company’s goodwill balance of $29.4 million was related to the acquisitions of Express Meds, Simple Meds, and SelectPatient Management and is all assigned to the Healthcare Services reporting unit and reportable segment.
The Company performs its annual goodwill impairment testing as of April 1, or more frequently if it believes that indicators of impairment exist. During the three months ended September 30, 2024 and 2023, there were no
6.DEBT
Debt consisted of the following:
| (in thousands) | September 30, 2024 | June 30, 2024 | |||||||||
Term Loans (effective interest rate | $ | $ | |||||||||
| Unamortized debt issuance costs and debt discount | ( | ( | |||||||||
| Total debt | |||||||||||
| Less current portion of long-term debt: | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
Senior Secured Credit Facility—On November 5, 2019, the Company entered into a credit agreement (together with any subsequent amendments, the “Senior Secured Credit Facility”) with Wilmington Trust, National Association, as administrative agent, UMB Bank, N.A., as revolver agent and revolving lender, and the other lenders party thereto. The Senior Secured Credit Facility, through additional amendments in subsequent years, has provided for total proceeds from borrowings of $887.3 million (the “Term Loans”), with aggregate principal amount outstanding as of September 30, 2024, of $685.0 million, and a revolving credit facility, with the full amount of $71.7 million available to borrow as of September 30, 2024 (the “Revolving Credit Facility”).
As of July 1, 2023, the Term Loans are mandatorily repayable in equal quarterly installments of $8.5 million, with the remaining balance payable due on the maturity dates (see below). The Senior Secured Credit Facility contains customary affirmative and negative covenants and events of default and financial covenants requiring the Company and certain of its subsidiaries to maintain a minimum asset coverage ratio and minimum liquidity requirements. During the year ended June 30, 2024, there were amendments to the Senior Secured Credit Facility on September 11, 2023, November 1, 2023, February 7, 2024, and May 8, 2024, that modified or added financial covenant ratios required to be maintained by the Company for various reporting dates to allow the Company to stay in compliance with the required covenants. Additionally, in order to extend the original maturity date of November 5, 2024, the amendment on February 7, 2024, (the “Eighth Amendment”) (1) established a new class of extended term loans (the “Extended Term Loans”) and (2) created a class of non-extended term loans (the “Non-Extended Term Loans”). The amendment on May 8, 2024, (the “Ninth Amendment”) again extended the maturity date on the Extended Term Loans to May 15, 2025. The Company paid fees of $1.4 million to its lenders during the year ended June 30, 2024, pursuant to the Eighth and Ninth Amendments. The amendment on September 12, 2024 (the “Tenth Amendment”) (1) established a new class of consenting term loans and extended the maturity date to September 15, 2025, (2) established a second class of non-extended term loans with a maturity date of May 15, 2025, and (3) modified or added financial covenant ratios required to be maintained by the Company for various reporting dates to allow the Company to stay in compliance with the required covenants. Pursuant to the amendment, the Company paid fees of $0.7 million to its lenders. As of September 30, 2024, the Company was in compliance with all of the current required covenants. The obligations of the Company under the Senior Secured Credit Agreement continue to be 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 Term Loans bear interest on the outstanding principal amount thereof at a rate per annum equal to either (a) SOFR (subject to a floor of 0.75 %) plus 6.50 % in cash plus 3.00 % payable in kind or (b) a base rate plus 5.50 % in cash plus 3.00 % payable in kind, at the Company’s option. The Revolving Credit Facility accrues interest on amounts drawn at a rate per annum equal to either (a) SOFR (subject to a floor of 1.0 %) plus 5.0 % or (b) a base rate plus 4.0 %, at the Company’s option.
The Company has incurred a total of $42.5 million in debt issuance costs and debt discounts related to the Senior Secured Credit Facility, of which $35.2 million was capitalized. The costs associated with the Revolving Credit Facility are being amortized on a straight-line basis over the remaining life of the Senior Secured Credit Facility and the costs associated with the Term Loans are being amortized using the effective interest method over the same term. Total amortization of debt issuance costs was $1.1 million and $1.6 million for the three months ended September 30, 2024 and 2023, respectively, which is included in interest expense, net in the Company’s consolidated statements of comprehensive loss.
The Company uses derivative financial instruments to hedge against its exposure to fluctuations in interest rates associated with the Term Loans. On September 30, 2022, as a result of the Fourth Amendment, the Company terminated its existing interest rate swap indexed to 1-month LIBOR and executed a new interest rate swap indexed to 1-month SOFR. In accordance with ASC 848, Reference Rate Reform, the Company did not de-designate the interest rate swap when it was amended from LIBOR to SOFR as the Company is permitted to maintain the designation as part of the transitional relief. As of September 30, 2024, the Company’s interest rate swap is a 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 6.00 % plus 0.931 % (the “Amended Interest Rate Swap”), which terminates on November 5, 2024. As of September 30, 2024, the Amended Interest Rate Swap had a fair value of $1.3 million and was recorded in other current 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 quoted prices that are observable and it uses standard calculations and models that use readily observable market data as their basis. The Company estimates that through the maturity date of November 5, 2024, $1.3 million will be reclassified into interest expense.
7.COMMITMENTS AND CONTINGENCIES
Lease Obligations—Refer to Note 4 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 governmental inquiries 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; 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 and Stockholder Derivative Suit
On August 16, 2021, a putative securities class action lawsuit captioned Hartel v. SelectQuote, Inc., et al., Case No. 1:21-cv-06903 (“the Hartel Action”) was filed against the Company and two of its executive officers in the U.S. District Court for the Southern District of New York. The complaint asserts securities fraud claims on behalf of a putative class of plaintiffs who purchased or otherwise acquired shares of the Company’s common stock between February 8, 2021 and May 11, 2021 (the "Hartel Relevant Period"). Specifically, the complaint alleges the defendants violated Sections 10(b) and 20(a) and Rule 10b-5 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, allegedly causing the Company’s common stock to trade at artificially inflated prices during the Hartel Relevant Period. The plaintiffs seek unspecified damages and reimbursement of attorneys’ fees and certain other costs.
On October 7, 2021, a putative securities class action lawsuit captioned West Palm Beach Police Pension Fund v. SelectQuote, Inc., et al., Case No. 1:21-cv-08279 (“the WPBPPF Action”), was filed in the U.S. District Court for the Southern District of New York against the Company, two of its executive officers, and six current or former members of the Company’s Board of Directors, along with the underwriters of the Company’s initial public offering of common stock (the "Offering"). The complaint asserts claims for securities law violations on behalf of a putative class of plaintiffs who purchased shares of the Company’s common stock (i) in or traceable to the Offering or (ii) between May 20, 2020 and August 25, 2021 (the "WPB Relevant Period"). Specifically, the complaint alleges the defendants violated Sections 10(b) and 20(a) and Rule 10b-5 of the Exchange Act by making materially false and misleading statements and failing to disclose material adverse facts about the Company’s financial well-being and prospects, allegedly causing the Company’s common stock to trade at artificially inflated prices during the WPB Relevant Period. The complaint also alleges the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by making misstatements and omissions of material facts in connection with the Offering, allegedly causing a decline in the value of the Company’s common stock. The plaintiffs seek unspecified damages, rescission, and reimbursement of attorneys’ fees and certain other costs.
On October 15, 2021, a motion to consolidate the Hartel Action and the WPBPPF Action was filed. On September 2, 2022, the court entered an order consolidating the Hartel and WPBPPF Actions under the caption In re SelectQuote, Inc. Securities Litigation, Case No. 1:21-cv-06903 (the “Securities Class Action”) and appointing the West Palm Beach Police Pension Fund and City of Fort Lauderdale Police & Fire Retirement System as lead plaintiffs. On November 19, 2022, plaintiffs filed an amended complaint asserting similar allegations to those alleged in the Hartel and WPBPPF Actions in addition to new allegations regarding certain defendants’ purported violation of Section 20A of the Exchange Act. The amended complaint also added Brookside Equity Partners LLC, one of the Company’s principal stockholders, as a defendant. On January 27, 2023, the Company filed a motion to dismiss the amended complaint on behalf of itself and certain of its current and former officers and directors. Plaintiffs filed an opposition to the motion to dismiss on April 5, 2023, and the Company filed its reply to plaintiffs’ opposition on May 10, 2023. On March 28, 2024, the court granted the Company’s motion to dismiss, with leave to
amend. Plaintiffs filed their second amended complaint on May 31, 2024. On July 31, 2024, the Company filed a motion to dismiss the second amended complaint. Plaintiffs filed their opposition to the Company’s motion to dismiss on October 2, 2024, and the Company filed its reply to Plaintiffs’ opposition on November 1, 2024.
On March 25, 2022, a stockholder derivative action captioned Jadlow v. Danker, et al., Case No. 1:22-cv-00391 (“the Jadlow 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, and against the Company, as nominal defendant. The complaint 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 and 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. On July 25, 2022, the Jadlow action was transferred to the U.S. District Court for the Southern District of New York, where it was assigned Case No. 1:22-cv-06290 and referred to Judge Alvin K. Hellerstein as possibly related to the Hartel Action. On August 4, 2022, Judge Hellerstein accepted the Jadlow action as related to the Hartel Action and, on August 10, 2022, granted the parties’ joint stipulation to stay the Jadlow action pending the resolution of the motion to dismiss the Securities Class Action.
The Company currently believes that these matters will not have a material adverse effect on its operations, financial condition or liquidity; however, depending on how the matters progress, they could be costly to defend and could divert the attention of management and other resources from operations. The Company has not concluded that a loss related to these matters is probable and, therefore, has not accrued a liability related to these matters.
8.SHAREHOLDERS' EQUITY
Common Stock—As of September 30, 2024, the Company has reserved the following authorized, but unissued, shares of common stock:
| ESPP | ||||||||
| Stock awards outstanding under 2020 Plan | ||||||||
| Stock awards available for grant under 2020 Plan | ||||||||
| Options outstanding under 2003 Plan | ||||||||
| Total | ||||||||
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 Company's Board of Directors adopted, and shareholders approved, the 2020 Stock Plan in connection with the Company’s IPO, which 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”), price-vested restricted stock units (“PVU’s”) and other forms of equity compensation (collectively, “stock awards”). All stock 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 September 30, 2024, pursuant to future awards under the Company's 2020 Stock Plan is 6,809,433 . 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 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 selling, general and administrative expense in the condensed consolidated statements of comprehensive loss was as follows for the periods presented:
| Three Months Ended September 30, | |||||||||||||||||
| (in thousands) | 2024 | 2023 | |||||||||||||||
| Share-based compensation related to: | |||||||||||||||||
| Equity classified stock options | $ | $ | |||||||||||||||
| Equity classified RSU's | |||||||||||||||||
| Equity classified PSU's | |||||||||||||||||
| Equity classified PVU's | |||||||||||||||||
| Total | $ | $ | |||||||||||||||
Stock Options—The 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 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 consolidated statements of comprehensive loss.
During the three months ended September 30, 2024 and 2023, there were no The following table summarizes stock option activity under the Stock Plans for the three months ended September 30, 2024:
| Number of Options | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term (in Years) | Aggregate Intrinsic Value (in Thousands) | |||||||||||
Outstanding—June 30, 2024 | $ | |||||||||||||
| Options granted | ||||||||||||||
| Options exercised | ( | |||||||||||||
| Options forfeited/expired/cancelled | ( | |||||||||||||
Outstanding—September 30, 2024 | $ | $ | ||||||||||||
Vested and exercisable—September 30, 2024 | $ | $ | ||||||||||||
As of September 30, 2024, there was $1.5 million in unrecognized share-based compensation cost related to unvested stock options granted, which is expected to be recognized over a weighted-average period of 1 year.
The Company received less than $0.1 million of cash in connection with stock options exercised during the three months ended September 30, 2024. During the three months ended September 30, 2023, there were no stock options exercised.
Restricted Stock—The Company grants RSU's to eligible employees, non-employee directors, and contractors. These awards generally vest over a period of to four years . Fair value of the RSU's is determined based on the market price of the Company’s common stock at the grant date and share-based compensation expense is recognized over the requisite service period.
The following table summarizes restricted stock unit activity under the 2020 Stock Plan for the three months ended September 30, 2024:
| Number of Restricted Stock Units | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested as of June 30, 2024 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
Unvested as of September 30, 2024 | $ | ||||||||||
As of September 30, 2024, there was $14.8 million of unrecognized share-based compensation cost related to unvested restricted stock units granted, which is expected to be recognized over a weighted-average period of 2.06 years.
Performance Stock—Based upon the terms of the PSU’s granted, if certain performance metrics are met, PSU’s vest at the end of a three-year performance period. The fiscal year 2021 tranche vested on September 13,
2023, at 13 % of the target and 14,477 shares were issued. The fiscal year 2022 tranche did not reach the target as of June 30, 2024, and no shares vested thus all PSU’s were forfeited back to the 2020 Stock Plan. As of September 30, 2024, there were no remaining PSU’s granted thus there was no unrecognized compensation cost related to unvested performance stock units granted.
Price-Vested Units—During the three months ended September 30, 2024 and 2023, the Company issued PVU’s for which vesting is subject to the fulfillment of both a service period and the achievement of stock price hurdles during the relevant performance period. For the awards granted during the three months ended September 30, 2024 and 2023, they are divided into three and four separate tranches, each with a different price hurdle which is measured as the average trading price over 60 calendar days on a rolling daily basis, over a performance period of five years . An employee is eligible to vest in one-third of the awards in each tranche after each year of service, but subject to the achievement of the stock-price hurdle attached to each tranche. As a result, share-based compensation will be recognized on a straight-line basis across nine or twelve tranches over each tranche’s requisite service period, which is the greater of the derived service period and the explicit service period.
The following table summarizes the number of shares, stock price hurdles, service periods, and performance periods for each tranche, for the PVU’s granted during the three months ended September 30, 2024:
| Number of Shares per Tranche | Grant Date Fair Value (per Share) | Stock Price Hurdle (per Share) | Performance Period | Requisite Service Period | ||||||||||||||||||||||||||||
| Tranche 1 | $ | $ | August 1, 2024 - August 1, 2029 | |||||||||||||||||||||||||||||
| Tranche 2 | $ | $ | August 1, 2024 - August 1, 2029 | |||||||||||||||||||||||||||||
| Tranche 3 | $ | $ | August 1, 2024 - August 1, 2029 | |||||||||||||||||||||||||||||
The following table summarizes the number of shares, stock price hurdles, service periods, and performance periods for each tranche, for the PVU’s awarded during the three months ended September 30, 2023:
| Number of Shares per Tranche | Grant Date Fair Value (per Share) | Stock Price Hurdle (per Share) | Performance Period | Requisite Service Period | ||||||||||||||||||||||||||||
| Tranche 1 | $ | $ | August 1, 2023 - August 1, 2028 | |||||||||||||||||||||||||||||
| Tranche 2 | $ | $ | August 1, 2023 - August 1, 2028 | |||||||||||||||||||||||||||||
| Tranche 3 | $ | $ | August 1, 2023 - August 1, 2028 | |||||||||||||||||||||||||||||
| Tranche 4 | $ | $ | August 1, 2023 - August 1, 2028 | |||||||||||||||||||||||||||||
The fair value of each PVU (for purposes of calculation of share-based compensation expense) is estimated using a Monte Carlo simulation valuation model that uses assumptions determined as of the date of the grant. Use of this model requires the input of subjective assumptions and changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation recognized in the condensed consolidated statements of comprehensive loss. These assumptions include estimating the volatility of the Company's common stock price over the expected term, 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, the cost of equity, and the dividend yield assumption which is based on the Company's dividend payment history and management's expectations of future dividend payments.
| Three Months Ended September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Share price as of grant date | $ | $ | ||||||||||||
| Volatility | ||||||||||||||
| Risk-free interest rate | ||||||||||||||
| Cost of Equity | ||||||||||||||
| Dividend yield | ||||||||||||||
The following table summarizes price-vested stock unit activity under the 2020 Stock Plan for the three months ended September 30, 2024:
| Number of Price-Vested Units | Weighted-Average Grant Date Fair Value | ||||||||||
Unvested as of June 30, 2024 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | |||||||||||
Unvested as of September 30, 2024 | $ | ||||||||||
During the three months ended September 30, 2024 , the $2.50 stock price hurdle was achieved. As a result, one-third of the awards in the first tranche of PVU’s granted during the three months ended September 30, 2023 vested.
As of September 30, 2024, there was $4.7 million of unrecognized share-based compensation cost related to unvested PVU’s granted, which is expected to be recognized over a weighted-average period of 1.5 years.
ESPP—The purpose of the Company’s employee stock purchase plan (“ESPP”) is to provide the Company's eligible employees with an opportunity to 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. The ESPP was suspended effective April 1, 2023, and as of September 30, 2024, there are 159 shares reserved for future issuance under the plan.
9.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 September 30, | ||||||||||||||
| (dollars in thousands) | 2024 | 2023 | ||||||||||||
| Senior: | ||||||||||||||
| Medicare advantage commissions | $ | $ | ||||||||||||
| Medicare supplement commissions | ||||||||||||||
| Prescription drug plan commissions | ||||||||||||||
| Dental, vision, and health commissions | ||||||||||||||
| Other commissions | ||||||||||||||
| Other services | ||||||||||||||
| Total Senior revenue | ||||||||||||||
| Healthcare Services: | ||||||||||||||
| Pharmacy | ||||||||||||||
| Other services | ||||||||||||||
| Total Healthcare Services revenue | ||||||||||||||
| Life: | ||||||||||||||
| Term commissions | ||||||||||||||
| Final expense commissions | ||||||||||||||
| Other services | ||||||||||||||
| Total Life revenue | ||||||||||||||
| All other: | ||||||||||||||
| Commissions | ||||||||||||||
| Other services | ||||||||||||||
Total All other revenue | ||||||||||||||
| Eliminations: | ||||||||||||||
| Commissions | ( | ( | ||||||||||||
| Other services | ( | ( | ||||||||||||
| Total Elimination revenue | ( | ( | ||||||||||||
| Total Commissions and other services revenue | ||||||||||||||
| Total Pharmacy revenue | ||||||||||||||
| Total Revenue | $ | $ | ||||||||||||
Contract Balances—The Company has contract assets related to commissions receivable from its insurance carrier partners, with the movement over time as the policy is renewed between long-term and short-term commissions receivable and accounts receivable, net being the main activity, along with commission revenue adjustments from changes in estimates.
A roll forward of commissions receivable (current and long-term) is shown below for the period presented:
| (in thousands) | ||||||||
Balance as of June 30, 2024 | $ | |||||||
Commission revenue from revenue recognized | ||||||||
| Net commission revenue adjustment from change in estimate | ||||||||
| Amounts recognized as accounts receivable, net | ( | |||||||
Balance as of September 30, 2024 | $ | |||||||
For the three months ended September 30, 2024, the $1.1 million net commission revenue adjustment from change in estimate includes adjustments related to revenue recognized in prior fiscal years, based on the Company’s reassessment of each of its cohorts’ transaction prices. It includes a negative adjustment of $0.1 million for Senior and a positive adjustment of $0.1 million for Life. The remaining $1.1 million relates to the Company’s All other non-reportable segment. Refer to Note 12 to the condensed consolidated financial statements for further details on the Company’s reportable segments.
The Company’s contract liabilities on the condensed consolidated balance sheets represent unamortized upfront payments received as of September 30, 2024, for commission revenue for which the performance obligations have not yet been met and are anticipated to be recognized over the next twelve months.
A roll forward of contract liabilities (current and long-term) is shown below for the period presented:
Balance as of June 30, 2024 | $ | |||||||
Commission and other services revenue recognized | ( | |||||||
| Amounts recognized as contract liabilities | ||||||||
Balance as of September 30, 2024 | $ | |||||||
10.INCOME TAXES
For the three months ended September 30, 2024 and 2023, the Company recognized income tax expense and benefit of $9.5 million and $12.8 million, respectively, representing effective tax rates of (27.2 )% and 29.2 %, respectively. The differences from the federal statutory tax rate to the effective tax rates for the three months ended September 30, 2024, were primarily related to state income taxes and the recording of a valuation allowance for federal tax attributes that the Company does not expect to utilize prior to expiration, and vesting of restricted stock units. The differences from our federal statutory tax rate to the effective tax rate for the three months ended September 30, 2023, were primarily related to state income taxes.
11.NET LOSS PER SHARE
The Company calculates net loss per share as defined by ASC Topic 260, Earnings per Share (“ASC 260”). Basic net loss per share (“Basic EPS”) is computed by dividing net loss attributable to common shareholders by the weighted-average common stock outstanding during the respective period. Diluted net loss per share
The following table sets forth the computation of net loss per share for the periods presented:
| Three Months Ended September 30, | ||||||||||||||
(in thousands, except per share amounts) | 2024 | 2023 | ||||||||||||
| Basic: | ||||||||||||||
| Numerator: | ||||||||||||||
Net loss attributable to common shareholders | $ | ( | $ | ( | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average common stock outstanding | ||||||||||||||
Net loss per share—basic: | $ | ( | $ | ( | ||||||||||
| Diluted: | ||||||||||||||
| Numerator: | ||||||||||||||
Net loss attributable to common and common equivalent shareholders | $ | ( | $ | ( | ||||||||||
| Denominator: | ||||||||||||||
| Weighted-average common stock outstanding | ||||||||||||||
Stock options outstanding to purchase shares of common stock including unvested RSU's and from the ESPP(1) | ||||||||||||||
| Total common and common equivalent shares outstanding | ||||||||||||||
Net loss per share—diluted: | $ | ( | $ | ( | ||||||||||
(1) Excluded from the computation of net loss per share-diluted for the three months ended September 30, 2024 and, 2023 because the effect would have been anti-dilutive.
The weighted average potential shares of common stock that were excluded from the calculation of net loss per share-diluted for the periods presented because including them would have been anti-dilutive consisted of the following:
| Three Months Ended September 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Stock options outstanding to purchase shares of common stock including unvested RSU's and from the ESPP | ||||||||||||||
The weighted average potential shares of common stock that were excluded from the calculation of net loss per share-diluted because the performance or market conditions associated with these awards were not met are as follows for the periods presented:
| Three Months Ended September 30, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Shares subject to outstanding PVU’s | ||||||||||||||
12.SEGMENT INFORMATION
As of July 1, 2024, the Company has realigned its reportable segments for fiscal year 2025. The Auto & Home business does not meet the quantitative thresholds to be required to continue to be separately disclosed as a reportable segment in accordance with ASC 280, Segment Reporting (“ASC 280”). As a result, the Auto & Home business will be included in an “All Other” category. Prior period information has been recast to conform to the current presentation.
The Company’s operating segments have been determined in accordance with ASC 280. We currently have three reportable segments: i) Senior, ii) Healthcare Services, and iii) Life. Senior primarily sells senior Medicare-related health insurance products. Healthcare Services includes SelectRx, Population Health, and SelectPatient Management. Healthcare Services provides products and services to our Medicare policyholders, which are focused on improving patient health outcomes. Life primarily sells term life and final expense products. The All Other category is reflective of the revenue generated from selling individual automobile and homeowners’ insurance. Additionally, the Company accounts for non-operating activity, share-based compensation expense, depreciation and amortization, goodwill, long-lived asset and intangible asset impairments, 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 consolidated financial statements. We have not aggregated any operating segments together to represent a reportable segment.
Our operating segments are determined based on how our chief executive officer, who also serves as our CODM manages our business, regularly accesses information, and evaluates performance for operating decision-making purposes, including allocation of resources. Adjusted EBITDA is our segment profit measure and a key measure used by our CODM and Board of Directors to understand and evaluate the operating performance of our business and on which internal budgets and forecasts are based and approved. We define Adjusted EBITDA as net loss plus: (i) interest expense, net; (ii) expense (benefit) for income taxes; (iii) depreciation and amortization; (iv) share-based compensation; (v) goodwill, long-lived asset, and intangible assets impairments; (vi) transaction costs; (vii) loss on disposal of property, equipment and software, net; and (viii) other non-recurring expenses and income.
The following tables present information about the reportable segments for the periods presented. We do not report total assets by segment as our CODM does not use this information to evaluate operating segment performance. Accordingly, we do not regularly provide such information by segment to our CODM.
Our segment disclosure includes intersegment revenues, which consist of affiliate marketing fees for services provided by our Senior segment to our Healthcare Services and Life segments as well as services provided by Life to other segments. These intersegment transactions are recorded by each segment at amounts that we believe approximate fair value as if the transactions were between third parties and, therefore, impact segment performance. However, the revenue and corresponding expense are eliminated in consolidation. The elimination of such intersegment transactions is included within the “Eliminations of intersegment revenues” and “Corporate & elimination of intersegment profits’ captions in the tables below.
The following table presents information about the reportable segments for the three months ended September 30, 2024:
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
| External revenue | $ | $ | $ | $ | |||||||||||||||||||
| Intersegment revenue | |||||||||||||||||||||||
Total revenue from reportable segments | $ | $ | $ | $ | |||||||||||||||||||
All other revenue | |||||||||||||||||||||||
Eliminations of intersegment revenues | ( | ||||||||||||||||||||||
Total consolidated revenue | $ | ||||||||||||||||||||||
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
| Adjusted Segment EBITDA | $ | $ | $ | $ | |||||||||||||||||||
All other Adjusted EBITDA | |||||||||||||||||||||||
| Corporate & elimination of intersegment profits | ( | ||||||||||||||||||||||
| Share-based compensation expense | ( | ||||||||||||||||||||||
Transaction costs (1) | ( | ||||||||||||||||||||||
| Depreciation and amortization | ( | ||||||||||||||||||||||
| Loss on disposal of property, equipment, and software, net | ( | ||||||||||||||||||||||
| Interest expense, net | ( | ||||||||||||||||||||||
| Loss before income tax expense (benefit) | $ | ( | |||||||||||||||||||||
(1) These expenses primarily consist of non-restructuring severance expenses ($0.5 million) and financing transaction costs ($0.3 million).
The following table presents information about the reportable segments for the three months ended September 30, 2023:
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
| External revenue | $ | $ | $ | $ | |||||||||||||||||||
| Intersegment revenue | |||||||||||||||||||||||
Total revenue from reportable segments | $ | $ | $ | $ | |||||||||||||||||||
All other revenue | |||||||||||||||||||||||
Eliminations of intersegment revenues | ( | ||||||||||||||||||||||
Total consolidated revenue | $ | ||||||||||||||||||||||
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
Adjusted Segment EBITDA | $ | ( | $ | $ | $ | ||||||||||||||||||
All other Adjusted EBITDA | |||||||||||||||||||||||
| Corporate & elimination of intersegment profits | ( | ||||||||||||||||||||||
| Share-based compensation expense | ( | ||||||||||||||||||||||
Transaction costs (1) | ( | ||||||||||||||||||||||
| Depreciation and amortization | ( | ||||||||||||||||||||||
| Loss on disposal of property, equipment, and software | ( | ||||||||||||||||||||||
Interest expense, net | ( | ||||||||||||||||||||||
| Loss before income tax expense (benefit) | $ | ( | |||||||||||||||||||||
(1) These expenses primarily consist of non-restructuring severance expenses ($0.2 million) and financing transaction costs ($1.8 million).
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 Company’s long-lived assets are located in the United States. For the three months ended September 30, 2024, three insurance carrier customers accounted for 30 % (UHC), 12 % (Humana), and 19 % (Aetna) of total revenue. For the three months ended September 30, 2023, two customers accounted for 32 % (UHC) and 17 % (Humana) of total revenue. For all periods presented, the revenue was provided by both the Senior and Healthcare Services segments.
13. SUBSEQUENT EVENTS
Management has evaluated subsequent events pursuant to the requirements of ASC Topic 855, Subsequent Events, from the balance sheet date through the date the financial statements were issued and has determined that there are the following material subsequent events.
On October 15, 2024, the Company entered into an Eleventh Amendment (the “Eleventh Amendment”) to its Credit Agreement to (1) extend the scheduled maturity date of the existing Tern Loans, (2) modify financial covenant ratios required to be maintained by the Company for various reporting dates to allow the Company to stay in compliance with the required covenants, and (3) allow the Company to enter into the ABS Facility (the “ABS Facility”).
In accordance with the Eleventh Amendment, the Term Loans accrue cash and payable in kind interest on the outstanding principal amount thereof ranging from (A) at a rate per annum equal to either (1) SOFR (subject to a floor of 3.0 %%) plus 6.0 % to 6.5 % or (2) a base rate plus 5.0 % to 5.50 %, at the Company’s option for cash interest and (B) payable in kind interest ranging from — % to 3.0 % per annum through September 30, 2026. If the Company fails to achieve certain milestone payments by March 31, 2025 and June 30, 2025, the interest rate may increase in accordance with the Eleventh Amendment.
Prior to the Eleventh Amendment, the Company fully repaid the non-extended Term Loans in the amount of $14.2 million on October 15, 2024.
October 15, 2024, the Company issued warrants to purchase 5,568,360 shares of common stock (the “Warrants”) of the Company to certain of the Company’s existing lenders in conjunction with the Eleventh Amendment.
On October 15, 2024, the Company and certain of its subsidiaries, including special purpose entities created in connection with the ABS Facility, entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with the purchasers party thereto (the “Purchasers”). Pursuant to the Note Purchase agreement, a wholly-owned subsidiary of the Company, SQ ABS Issuer, LLC (the “Issuer”) issued $60.0 million of senior secured class A 7.8 % Notes and $40.0 million of senior secured 9.65 % Class B Notes (collectively, the “Notes”) to the Purchasers. The Notes are secured by a pool of commission receivables sold to the Issuer and are solely obligations of the Issuer and its special purpose holding company, SQ ABS Holdings, LLC. In connection with the Note Purchase Agreement, the Company paid fees of $4.7 million to third-party providers.
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 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 Annual Report and in Part II, Item 1A hereof.
Company Overview
SelectQuote, Inc. (together with its subsidiaries, “SelectQuote”, the “Company”, “we”, “us”) is a leading technology-enabled, direct-to-consumer (“DTC”) distribution and engagement platform for selling insurance policies and healthcare services. Our insurance distribution business, which has operated continuously for nearly 40 years, allows consumers to transparently and conveniently shop for senior health, life, and automobile and 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. In return, we earn commissions from our insurance carrier partners for the policies we sell on their behalf. 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 including digital marketing, radio, television, and third-party marketing partners. We monitor our acquisition costs to dynamically allocate our marketing spend to the most attractive channels, benefiting from nearly 40 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 a sales agent whom we determine is best suited to meet the consumer’s need. Our platform then captures and utilizes our experience to further build upon the millions of data points that feed our marketing algorithms, further enhancing 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, a metric we refer to as “ lifetime value of commissions” or “LTV”, which is a key component to our overall profitability.
Our proprietary routing and workflow system is a key competitive advantage and driver of our business performance. Our systems analyze and intelligently route consumer leads to agents and allow us to monitor, segment, and enhance our agents’ performance. This technological advantage also allows us to rapidly conduct a needs-based, tailored analysis for each consumer that maximizes sales, enhances customer retention, and ultimately maximizes LTV’s. Our expertise and value add stems from the coupling of our technology with our skilled agents, which provides greater transparency in pricing terms and choice and an overall better consumer experience. When customers are satisfied, their propensity to switch policies decreases, thereby improving retention rates (“persistency”), increasing LTV’s and, ultimately, optimizing our financial performance and shareholder value.
SelectQuote has a long history of successful DTC product distribution and consumer engagement, and we bring this same capability to healthcare services. We saw a large opportunity to leverage our existing customer base and distribution model to improve education and access to healthcare services for our senior consumers and to create value for our shareholders and insurance carrier partners. SelectQuote’s value lies in our ability to engage the consumer, capture critical self-reported information in real-time, and then take action on that information to offer each consumer personalized solutions. Our healthcare services business seeks to provide consumers with a wide breadth of products supporting their needs, such as SelectRx, our Patient-Centered Pharmacy HomeTM (“PCPH”) accredited pharmacy, which has already demonstrated SelectQuote’s ability to leverage our strong consumer engagement to drive immediate value using our existing operational infrastructure. Whether through acquisitions or
new partnerships, we continue to look for more opportunities to leverage our strengths to expand our healthcare services business.
We evaluate our business using the following three reportable segments:
Senior 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 25 leading, nationally-recognized insurance carrier partners, including UHC, Humana, Aetna, and Wellcare. MA and MS plans accounted for 88% and 89% of our approved Senior policies for the three months ended September 30, 2024 and 2023, respectively, with other ancillary type policies accounting for the remainder.
Healthcare Services, launched in 2021, offers various health-related products and services through SelectRx, Population Health, and most recently, SelectPatient Management. SelectRx offers essential prescription medications, OTC medications, customized medication packaging, and medication therapy management, providing long-term pharmacy care that enables patients to optimize medication adherence to drive positive health outcomes, while enabling patients managing polypharmacy and multiple chronic conditions to remain at home. Through Population Health, we utilize our excellent consumer engagement capabilities to capture valuable self-reported information in real-time for our insurance carrier partners by completing Health Risk Assessments (“HRAs”). We then use that data to take a real-time, proactive, and personalized approach to offer various health-related products and services to the consumer, such as our pharmacy services from SelectRx. In 2024, we launched SelectPatient Management (“SPM”), via a $4.0 million acquisition of an existing chronic care management platform, which offers providers, payers, and Accountable Care Organizations scalable, technology-enhanced services for patients living with chronic conditions. Through consistent, trust-based patient engagement, SPM helps patients navigate the care continuum, focusing on non-clinical factors so physicians can focus on the more critical needs of their patients. We believe that offering these services enables healthcare to be more accessible, convenient, and personalized for our members.
Life is one of the country’s largest and most established DTC insurance distributors for term life insurance, having sold over 2.4 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 20 years. Term life policies accounted for 38% and 48% of new premium within the Life segment for the three months ended September 30, 2024 and 2023, respectively, with final expense policies accounting for 62% and 52% for the three months ended September 30, 2024 and 2023, respectively.
Our other operations which do not meet the criteria to be a separate reportable segment are consolidated and reported as “All other” which represents a shopping platform for auto, home, and specialty insurance lines.
The three months ended September 30 referenced throughout the commentary below refers to the first quarter and fiscal year-to-date performance of our fiscal years ending on June 30, 2025 and 2024.
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 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. For Healthcare Services, our primary source of revenue is pharmacy revenue from SelectRx, so the total number of SelectRx members and the prescriptions shipped per day are the most appropriate measures used to evaluate the performance of Healthcare Services as these metrics drive top-line revenue. In Life, 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 the segment. Below are the most relevant business and operating metrics for each segment:
Senior
Submitted Policies
Submitted policies are counted when an individual completes an application with our licensed agent and provides authorization to them to submit it to the insurance carrier partner. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier.
The following table shows the number of submitted policies for the periods presented:
| Three Months Ended September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Medicare Advantage | 102,281 | 104,532 | ||||||||||||
All other (1) | 16,256 | 14,920 | ||||||||||||
| Total | 118,537 | 119,452 | ||||||||||||
(1) Represents the submitted policies for medicare supplement, dental, vision and hearing, prescription drug plan and other.
Total submitted policies for all products decreased 1% for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. This was driven by a 1% decrease in overall close rates and a 2% decrease in production per productive agent.
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 September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Medicare Advantage | 91,680 | 97,681 | ||||||||||||
All other (1) | 12,979 | 12,195 | ||||||||||||
| Total | 104,659 | 109,876 | ||||||||||||
(1) Represents the approved policies for medicare supplement, dental, vision and hearing, prescription drug plan and other.
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 for all products decreased by 5% for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. Fluctuations in approved policies are normally in direct correlation to submitted policies; however, primarily related to carrier mix, we experienced a slight decrease in the submitted-to-approved conversion rates for the three months ended September 30, 2024, compared to the three months ended September 30, 2023.
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, which does not include marketing development funds or production bonuses, 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 significant 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; it does not include any 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 September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Medicare Advantage | $ | 812 | $ | 761 | ||||||||||
All other (1) | 165 | 164 | ||||||||||||
(1) Represents the weighted average LTV per approved policy.
The LTV per MA approved policy increased 7% for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to carrier mix.
Healthcare Services
The total number of SelectRx members represents the amount of active customers to which an order has been shipped and the prescriptions per day represents the total average prescriptions shipped per business day. These two metrics are the primary drivers of revenue for Healthcare Services.
SelectRx Members
The following table shows the total number of SelectRx members as of the date presented:
| September 30, 2024 | September 30, 2023 | ||||||||||||||||
| Total SelectRx Members | 86,521 | 52,750 | |||||||||||||||
The total number of SelectRx members increased by 64% as of September 30, 2024, compared to September 30, 2023, due to our continued operating strategy to grow SelectRx.
Prescriptions Per Day
The following table shows the average prescriptions shipped per day for the periods presented:
| Three Months Ended September 30, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
Prescriptions Per Day | 24,998 | 15,479 | ||||||||||||
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 September 30, | ||||||||||||||
| (in thousands): | 2024 | 2023 | ||||||||||||
| Term Premiums | $ | 15,218 | $ | 18,190 | ||||||||||
| Final Expense Premiums | 24,473 | 19,699 | ||||||||||||
| Total | $ | 39,691 | $ | 37,889 | ||||||||||
Total term premiums decreased 16% for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, due to a 17% decrease in the number of policies sold, offset by less than a 1% increase in the average premium per policy sold. Final expense premiums increased 24% for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, due to a 1% increase in the average premium per policy sold and a 23% increase in the number of policies sold.
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 September 30, | ||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||
Commissions and other services | $ | 139,380 | 48 | % | $ | 137,942 | 59 | % | ||||||||||||||||||
| Pharmacy | 152,883 | 52 | % | 94,788 | 41 | % | ||||||||||||||||||||
| Total revenue | 292,263 | 100 | % | 232,730 | 100 | % | ||||||||||||||||||||
| Operating costs and expenses | ||||||||||||||||||||||||||
| Cost of commissions and other services revenue | 65,733 | 22 | % | 72,511 | 31 | % | ||||||||||||||||||||
| Cost of goods sold—pharmacy revenue | 129,524 | 44 | % | 84,008 | 36 | % | ||||||||||||||||||||
| Marketing and advertising | 63,764 | 22 | % | 62,323 | 28 | % | ||||||||||||||||||||
| Selling, general, and administrative | 36,145 | 12 | % | 28,666 | 12 | % | ||||||||||||||||||||
| Technical development | 9,074 | 3 | % | 7,637 | 3 | % | ||||||||||||||||||||
| Total operating costs and expenses | 304,240 | 103 | % | 255,145 | 110 | % | ||||||||||||||||||||
Loss from operations | (11,977) | (4) | % | (22,415) | (10) | % | ||||||||||||||||||||
| Interest expense, net | (23,031) | (8) | % | (21,397) | (9) | % | ||||||||||||||||||||
Other expense, net | (12) | — | % | (38) | — | % | ||||||||||||||||||||
Loss before income tax expense (benefit) | (35,020) | (12) | % | (43,850) | (19) | % | ||||||||||||||||||||
Income tax expense (benefit) | 9,526 | — | % | (12,799) | (6) | % | ||||||||||||||||||||
Net loss | $ | (44,546) | (12) | % | $ | (31,051) | (13) | % | ||||||||||||||||||
Revenue
We earn revenue in the form of commission payments from our insurance carrier customers, for the initial year the insurance policy is in effect (“first year”) and, where applicable, for each subsequent year the policy renews (“renewal year”), in addition to production bonuses and marketing development funds received from some insurance carriers. Production bonuses are based on attaining various predetermined target sales levels or other agreed upon objectives, whereas marketing development funds may or may not contain such predetermined targets and are used to purchase leads. These, along with other services revenue from Healthcare Services (excluding SelectRx revenue discussed below) and our lead generation business, InsideResponse (of which the majority is eliminated as intersegment revenue), are presented in our consolidated statements of comprehensive loss as commissions and other services revenue. Pharmacy revenue on the consolidated statements of comprehensive loss includes revenue from the sale of prescription and OTC medication products from SelectRx.
Revenue is recognized at different milestones for Senior and Life and is based on the contractual enforceable rights, our historical experience, and established customer business practices. Other services revenues from our Healthcare Services segment (excluding SelectRx revenue discussed below) is recognized when the performance obligation has been met, which is at different times for our various services (e.g. the HRA has been performed, a transfer has been made to a health-related partner, or SPM has provided care management services to a member), the transaction price is known based on volume and contractual prices, and we have no further performance obligations. Lead generation revenue is recognized when the generated lead is accepted by our customers, which is the point of sale, and we have no performance obligation after the delivery. Revenues generated from SelectRx are recognized upon shipment. At the time of shipment, we have performed all of our performance obligations and control of the product has been transferred to the customer. There are no future revenue streams or
variable consideration associated as the transaction price is fixed at time of shipment, and any subsequent new order is its own performance obligation.
The following table presents our revenue for the periods presented and the percentage changes from the prior year:
| Three Months Ended September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
Commissions and other services | $ | 139,380 | $ | 137,942 | 1% | ||||||||||||
| Pharmacy | 152,883 | 94,788 | 61% | ||||||||||||||
| Total revenue | $ | 292,263 | $ | 232,730 | 26% | ||||||||||||
Three Months Ended September 30, 2024 and 2023–Commissions and other services revenue increased $1.4 million, or 1%, for the three months ended September 30, 2024 primarily due to increases in Senior and Life of $3.0 million and $1.5 million, respectively. Senior’s increase was primarily due to a $0.9 million increase in commissions revenue driven by a 5% increase in LTV’s. Life’s increase was driven by a $4.2 million increase in final expense revenue offset by a $2.8 million decrease in term revenue. The increase in Commissions and other services revenue was partially offset by a $3.1 million decrease in Auto & Home. Pharmacy revenue increased $58.1 million, or 61%, primarily due to the 64% increase in members from the growth of the SelectRx business.
Operating Costs and Expenses
Cost of Commissions and Other Services Revenue
Cost of commissions and other services revenue represents the direct costs associated with fulfilling our obligations to our customers in Senior, Life, and Healthcare Services (excluding SelectRx discussed below); primarily compensation, benefits, and licensing for sales agents, customer success agents, fulfillment specialists, and others directly engaged in serving customers. It also includes 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.
The following table presents our cost of commissions and other services revenue for the periods presented and the percentage change from the prior year:
| Three Months Ended September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
Cost of commissions and other services revenue | $ | 65,733 | $ | 72,511 | (9)% | ||||||||||||
Three Months Ended September 30, 2024 and 2023—Cost of commissions and other service revenue decreased $6.8 million, or 9%, for the three months ended September 30, 2024, primarily due to a $5.5 million decrease in compensation costs, combined with a $0.9 million decrease in fulfillment costs for licensing fees in Senior. The $5.5 million decrease in compensation costs is primarily made up of a $6.9 million decrease in costs for our sales and customer care agents in Senior, offset by a $0.5 million increase in costs for sales and customer care agents in Life.
Cost of Goods Sold-Pharmacy Revenue
Cost of goods sold-pharmacy revenue represents the direct costs associated with fulfilling pharmacy patient orders for SelectRx. Such costs primarily consist of medication costs and compensation costs for licensed pharmacists, pharmacy technicians, and other employees directly associated with fulfilling orders such as packaging and shipping clerks. It also includes shipping, supplies, other order fulfillment costs including part of the one-time customer onboarding costs, and certain facilities overhead costs such as rent, maintenance, and depreciation related to the pharmacy production process.
The following table presents our cost of goods sold-pharmacy revenue for the periods presented and the percentage change from the prior year:
| Three Months Ended September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Cost of goods sold—pharmacy revenue | $ | 129,524 | $ | 84,008 | 54% | ||||||||||||
Three Months Ended September 30, 2024 and 2023–Cost of goods sold-pharmacy revenue increased $45.5 million, or 54%, for the three months ended September 30, 2024, primarily due to a $38.2 million increase in medication costs as the number of SelectRx members increased 64% over the prior year as well as a $5.3 million increase in compensation costs due to a nearly 79% increase in the number of employees directly associated with fulfilling pharmacy orders.
Marketing and Advertising
Marketing and advertising expenses consist primarily of the direct costs associated with marketing and advertising of our services, such as television and radio commercials and online advertising. These direct costs generally represent the vast majority of our marketing and advertising expenses. Other costs consist of compensation and other expenses related to marketing, business development, partner management, public relations, carrier relations personnel who support our offerings, and allocations for facilities, telecommunications, and software maintenance costs. Our marketing and advertising costs increase during AEP and OEP to generate more leads during these high-volume periods.
The following table presents our marketing and advertising expenses for the periods presented and the percentage changes from the prior year:
| Three Months Ended September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Marketing and advertising | $ | 63,764 | $ | 62,323 | 2% | ||||||||||||
Three Months Ended September 30, 2024 and 2023–Marketing and advertising expenses increased $1.4 million, or 2%, for the three months ended September 30, 2024, primarily due to a $0.8 million increase in lead costs and a $0.3 million increase in other marketing costs to generate additional senior and life commissions revenue as noted above.
Selling, General, and Administrative
Selling, general, and administrative expenses include compensation and benefits costs for staff working in our executive, finance, accounting, recruiting, human resources, administrative, business intelligence, data science,
and part of the SelectRx customer onboarding 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 selling, general, and administrative expenses for the periods presented and the percentage changes from the prior year:
| Three Months Ended September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
Selling, general, and administrative | $ | 36,145 | $ | 28,666 | 26% | ||||||||||||
Three Months Ended September 30, 2024 and 2023–Selling, general, and administrative expenses increased $7.5 million, or 26%, for the three months ended September 30, 2024, primarily due to a $5.2 million increase in compensation costs and a $2.2 million increase in bad debt expense related to SelectRx. The increase in compensation costs was primarily related to a $3.5 million increase in Healthcare Services compensation attributable to the growth of SelectRx.
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 September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Technical development | $ | 9,074 | $ | 7,637 | 19% | ||||||||||||
Three Months Ended September 30, 2024 and 2023–Technical development expenses increased $1.4 million, or 19%, for the three months ended September 30, 2024, primarily due to a $1.6 million increase in compensation costs due to an increase in headcount for technology personnel, partially offset by a $0.2 million decrease in costs related to trainings and seminars 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 September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
| Interest expense, net | $ | 23,031 | $ | 21,397 | 8% | ||||||||||||
Three Months Ended September 30, 2024 and 2023–Interest expense increased $1.6 million, or 8%, for the three months ended September 30, 2024, as a result of higher interest rates during the period.
Income Taxes
The following table presents our provision for income taxes for the periods presented and the percentage changes from the prior year:
| Three Months Ended September 30, | Percent Change | ||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | 2024 vs. 2023 | ||||||||||||||
Income tax expense (benefit) | $ | 9,526 | $ | (12,799) | (174)% | ||||||||||||
| Effective tax rate | (27.2) | % | 29.2 | % | |||||||||||||
Three Months Ended September 30, 2024 and 2023–For the three months ended September 30, 2024 and 2023, we recognized income tax expense of $9.5 million and and income tax benefit of $(12.8) million, respectively, representing effective tax rates of (27.2)% and 29.2%, respectively. The differences from the federal statutory tax rate to the effective tax rates for the three months ended September 30, 2024, were primarily related to state income taxes and the recording of a valuation allowance for federal tax attributes that the Company does not expect to utilize prior to expiration, and vesting of restricted stock units. The differences from our federal statutory tax rate to the effective tax rate for the three months ended September 30, 2023, were primarily related to state income taxes.
Segment Information
As of July 1, 2024, the Company has realigned its reportable segments for fiscal year 2025. The Auto & Home business does not meet the quantitative thresholds to be required to continue to be separately disclosed as a reportable segment in accordance with ASC 280. As a result, the Auto & Home business will be included in an “All Other” category. Prior period information has been recast to conform to the current presentation.
The Company’s operating segments have been determined in accordance with ASC 280. We currently have three reportable segments: i) Senior, ii) Healthcare Services, and iii) Life. Senior primarily sells senior Medicare-related health insurance products. Healthcare Services includes SelectRx, Population Health, and most recently, SelectPatient Management. Healthcare Services provides products and services to our Medicare policyholders, which are focused on improving patient health outcomes. Life primarily sells term life and final expense products. The All Other category is reflective of the revenue generated from selling individual automobile and homeowners’ insurance. Additionally, the Company accounts for non-operating activity, share-based compensation expense, depreciation and amortization, goodwill, long-lived asset and intangible asset impairments, 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 consolidated financial statements. We have not aggregated any operating segments together to represent a reportable segment.
Our operating segments are determined based on how our chief executive officer, who also serves as our CODM manages our business, regularly accesses information, and evaluates performance for operating decision-making purposes, including allocation of resources. Adjusted EBITDA is our segment profit measure and a key measure used by our CODM and Board of Directors to understand and evaluate the operating performance of our business and on which internal budgets and forecasts are based and approved. We define Adjusted EBITDA as net loss plus: (i) interest expense, net; (ii) expense (benefit) for income taxes; (iii) depreciation and amortization; (iv) share-based compensation; (v) goodwill, long-lived asset, and intangible assets impairments; (vi) transaction costs; (vii) loss on disposal of property, equipment and software, net; and (viii) other non-recurring expenses and income.
The following tables present information about the reportable segments for the periods presented. We do not report total assets by segment as our CODM does not use this information to evaluate operating segment performance. Accordingly, we do not regularly provide such information by segment to our CODM.
Our segment disclosure includes intersegment revenues, which consist of affiliate marketing fees for services provided by our Senior segment to our Healthcare Services and Life segments as well as services provided
by Life to other segments. These intersegment transactions are recorded by each segment at amounts that we believe approximate fair value as if the transactions were between third parties and, therefore, impact segment performance. However, the revenue and corresponding expense are eliminated in consolidation. The elimination of such intersegment transactions is included within the “Eliminations of intersegment revenues” and “Corporate & elimination of intersegment profits’ captions in the tables below.
Three Months Ended September 30, 2024:
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
| External revenue | $ | 91,364 | $ | 155,667 | $ | 39,266 | $ | 286,297 | |||||||||||||||
| Intersegment revenue | 1,544 | 72 | 24 | 1,640 | |||||||||||||||||||
Total revenue from reportable segments | $ | 92,908 | $ | 155,739 | $ | 39,290 | $ | 287,937 | |||||||||||||||
All other revenue | 5,966 | ||||||||||||||||||||||
Eliminations of intersegment revenues | (1,640) | ||||||||||||||||||||||
Total consolidated revenue | $ | 292,263 | |||||||||||||||||||||
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
| Adjusted Segment EBITDA | $ | 7,724 | $ | 4,878 | $ | 5,960 | $ | 18,562 | |||||||||||||||
All other Adjusted EBITDA | 3,797 | ||||||||||||||||||||||
| Corporate & elimination of intersegment profits | (24,042) | ||||||||||||||||||||||
| Share-based compensation expense | (3,846) | ||||||||||||||||||||||
Transaction costs (1) | (826) | ||||||||||||||||||||||
| Depreciation and amortization | (5,599) | ||||||||||||||||||||||
| Loss on disposal of property, equipment, and software, net | (35) | ||||||||||||||||||||||
| Interest expense, net | (23,031) | ||||||||||||||||||||||
| Loss before income tax expense (benefit) | $ | (35,020) | |||||||||||||||||||||
(1) These expenses primarily consist of financing transaction costs ($0.3 million) and non-restructuring severance expenses ($0.5 million).
Three Months Ended September 30, 2023
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
| External revenue | $ | 88,561 | $ | 97,368 | $ | 37,774 | $ | 223,703 | |||||||||||||||
| Intersegment revenue | 1,357 | — | 29 | 1,386 | |||||||||||||||||||
Total revenue from reportable segments | $ | 89,918 | $ | 97,368 | $ | 37,803 | $ | 225,089 | |||||||||||||||
All other revenue | 9,027 | ||||||||||||||||||||||
Eliminations of intersegment revenues | (1,386) | ||||||||||||||||||||||
Total consolidated revenue | $ | 232,730 | |||||||||||||||||||||
| (in thousands) | Senior | Healthcare Services | Life | Total | |||||||||||||||||||
Adjusted Segment EBITDA | $ | (1,335) | $ | 2,322 | $ | 5,240 | $ | 6,227 | |||||||||||||||
All other Adjusted EBITDA | 3,319 | ||||||||||||||||||||||
| Corporate & elimination of intersegment profits | (20,922) | ||||||||||||||||||||||
| Share-based compensation expense | (3,175) | ||||||||||||||||||||||
Transaction costs (1) | (1,904) | ||||||||||||||||||||||
| Depreciation and amortization | (5,989) | ||||||||||||||||||||||
| Loss on disposal of property, equipment, and software | (9) | ||||||||||||||||||||||
Interest expense, net | (21,397) | ||||||||||||||||||||||
| Loss before income tax expense (benefit) | $ | (43,850) | |||||||||||||||||||||
(1) These expenses primarily consist of financing transaction costs ($0.2 million) and non-restructuring severance expenses ($1.8 million).
The following table depicts the disaggregation of revenue by segment and product for the periods presented:
| Three Months Ended September 30, | |||||||||||||||||||||||
| (dollars in thousands) | 2024 | 2023 | $ | % | |||||||||||||||||||
| Senior: | |||||||||||||||||||||||
| Medicare advantage commissions | $ | 74,471 | $ | 74,372 | $ | 99 | — | % | |||||||||||||||
| Medicare supplement commissions | 527 | 313 | 214 | 68 | % | ||||||||||||||||||
| Prescription drug plan commissions | 68 | 71 | (3) | (4) | % | ||||||||||||||||||
| Dental, vision, and health commissions | 1,285 | 1,049 | 236 | 22 | % | ||||||||||||||||||
| Other commissions | 701 | 359 | 342 | 95 | % | ||||||||||||||||||
| Other services | 15,856 | 13,754 | 2,102 | 15 | % | ||||||||||||||||||
| Total Senior revenue | 92,908 | 89,918 | 2,990 | 3 | % | ||||||||||||||||||
| Healthcare Services: | |||||||||||||||||||||||
| Pharmacy | 152,883 | 94,788 | 58,095 | 61 | % | ||||||||||||||||||
| Other services | 2,856 | 2,580 | 276 | 11 | % | ||||||||||||||||||
| Total Healthcare Services revenue | 155,739 | 97,368 | 58,371 | 60 | % | ||||||||||||||||||
| Life: | |||||||||||||||||||||||
| Term commissions | 16,364 | 19,114 | (2,750) | (14) | % | ||||||||||||||||||
| Final expense commissions | 18,324 | 14,120 | 4,204 | 30 | % | ||||||||||||||||||
| Other services | 4,602 | 4,569 | 33 | 1 | % | ||||||||||||||||||
| Total Life revenue | 39,290 | 37,803 | 1,487 | 4 | % | ||||||||||||||||||
All other: | |||||||||||||||||||||||
| Commissions | 5,795 | 8,815 | (3,020) | (34) | % | ||||||||||||||||||
| Other services | 171 | 212 | (41) | (19) | % | ||||||||||||||||||
Total All other revenue | 5,966 | 9,027 | (3,061) | (34) | % | ||||||||||||||||||
| Eliminations: | |||||||||||||||||||||||
| Commissions | (642) | (457) | (185) | 40 | % | ||||||||||||||||||
| Other services | (998) | (929) | (69) | 7 | % | ||||||||||||||||||
| Total Elimination revenue | (1,640) | (1,386) | (254) | 18 | % | ||||||||||||||||||
| Total Commissions and other services revenue | 139,380 | 137,942 | 1,438 | 1 | % | ||||||||||||||||||
| Total Pharmacy revenue | 152,883 | 94,788 | 58,095 | 61 | % | ||||||||||||||||||
| Total Revenue | $292,263 | $232,730 | $59,533 | 26 | % | ||||||||||||||||||
Revenue by Segment
Three Months Ended September 30, 2024 and 2023–Revenue from our Senior segment was $92.9 million for the three months ended September 30, 2024, a $3.0 million, or 3%, increase compared to revenue of $89.9 million for the three months ended September 30, 2023. The increase was due to a $0.9 million, or 1%, increase in commissions revenue and a $2.1 million increase in other services revenue.
Revenue from Healthcare Services was $155.7 million for the three months ended September 30, 2024, a $58.4 million, or 60%, increase compared to revenue of $97.4 million for the three months ended September 30, 2023, primarily due to a $58.1 million increase in SelectRx pharmacy revenue.
Revenue from our Life segment was $39.3 million for the three months ended September 30, 2024, a $1.5 million, or 4%, increase compared to revenue of $37.8 million for the three months ended September 30, 2023, primarily due to an $1.5 million increase in commissions revenue.
Adjusted EBITDA by Segment
Three Months Ended September 30, 2024 and 2023–Adjusted EBITDA from our Senior segment was $7.7 million for the three months ended September 30, 2024, a $9.1 million, or 678%, increase compared to Adjusted EBITDA of $(1.3) million for the three months ended September 30, 2023. The increase was due to a $3.0 million increase in revenue, a $6.1 million decrease in operating costs and expenses, primarily due to a $6.3 million decrease in compensation costs due to a decrease in the number of agents, partially offset by increases in lead costs.
Adjusted EBITDA from Healthcare Services was $4.9 million for the three months ended September 30, 2024, a $2.6 million increase compared to Adjusted EBITDA of $2.3 million for the three months ended September 30, 2023. The increase was due to a $58.4 million increase in revenue, offset by a $55.8 million increase in operating costs and expenses primarily as a result of a $38.2 million increase in medication costs and a $7.6 million increase in compensation costs to support of the growth of SelectRx.
Adjusted EBITDA from our Life segment was $6.0 million for the three months ended September 30, 2024, a $0.7 million, or 14%, increase compared to Adjusted EBITDA of $5.2 million for the three months ended September 30, 2023. The increase in Adjusted EBITDA was due to a $1.5 million increase in revenue, offset by a $0.8 million increase in operating costs. The increase in operating costs was primarily due to a $0.9 million increase in compensation costs, partially offset by a $0.1 million decrease in fulfillment costs.
Liquidity and Capital Resources
Our liquidity needs primarily include working capital and debt service requirements. Additionally, we are required under the Senior Secured Credit Facility to maintain compliance with certain debt covenants, as discussed further in Note 6 to the condensed consolidated financial statements. Based on our financial projections, we believe we will remain in compliance with the debt covenants through the 12 months following the date of issuance of our condensed consolidated financial statements.
On October 15, 2024, the Company completed a $100.0 million securitization transaction to provide advanced financing against the expected collections for policies previously sold. The Company will use the proceeds from the securitization to pay down a portion of its outstanding term loans. The new securitized debt offers a lower cost of capital than the Company’s term loans. In connection with the securitization transaction, and subsequent to September 30, 2024, the Company entered into an Eleventh Amendment (the “Eleventh Amendment”) to its Credit Agreement to (1) extend the scheduled maturity date of the existing term loans, (2) modify financial covenant ratios required to be maintained by the Company for various reporting dates to allow the Company to stay in compliance with the required covenants, and (3) allow the Company to enter into the securitization transaction.
As of September 30, 2024 and June 30, 2024, the Company had total debt obligations of $680.4 million and $683.3 million, respectively, under the Senior Secured Credit Facility. Management expects that our existing cash, cash equivalents, funds available under the revolving credit facility, and cash provided from operations, will be sufficient to finance normal working capital needs, investments in properties, facilities and equipment, and debt service.
We do not expect to generate sufficient cash flows from operations to enable us to make the milestone payments contemplated in the Eleventh Amendment. If we are unable to secure additional financing from outside sources or otherwise amend the Senior Secured Credit Facility, we will need to obtain additional capital through other means, including future securitization transactions, selling one or more material assets, or substantially reducing the scope of certain of our operations. If we are unable to satisfy our repayment obligations under the Senior Secured Credit Facility or maintain compliance with the covenants therein, we may be in default, which would significantly affect our liquidity.
As of September 30, 2024 and June 30, 2024, our cash and cash equivalents totaled $10.4 million and $42.7 million, respectively. Additionally, the following table presents a summary of our cash flows for the periods presented below:
| Three Months Ended September 30, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Net cash used in operating activities | $ | (16,610) | $ | (23,671) | |||||||
| Net cash used in investing activities | (2,574) | (2,145) | |||||||||
Net cash used in financing activities | (13,062) | (8,854) | |||||||||
Operating Activities
Net 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; amortization of debt issuance costs and discount; accrued interest; non-cash lease expenses; 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.
Three Months Ended September 30, 2024—Net cash used in operating activities was $16.6 million, consisting of net loss of $44.5 million, adjustments for non-cash items of $26.3 million, and cash used in operating assets and liabilities of $1.6 million. Adjustments for non-cash items primarily consisted of $5.6 million of depreciation and amortization, $3.8 million of share-based compensation expense, $5.3 million of accrued interest payable in kind on the Term Loans, $1.1 million of amortization of debt issuance costs and debt discount, $0.9 million of non-cash lease expense, and $9.5 million in deferred income taxes. The cash increase resulting from changes in net operating assets and liabilities primarily consisted of an increase of $50.5 million in accounts receivable, related to an increase in revenue, an increase of $12.8 million in accounts payable and accrued expenses,
offset by a decrease of $38.5 million in commissions receivable, due to a 5% decrease in approved policies for the three months, a decrease of $18.5 million in other liabilities, primarily related to an $5.1 million decrease in our contract liability, and a $12.9 million decrease in accrued compensation and benefits, a decrease of $1.1 million in operating lease liabilities and a decrease of $3.5 million in other assets, primarily related to hedge activities.
Three Months Ended September 30, 2023—Net cash used in operating activities was $23.7 million, consisting of net loss of $31.1 million, adjustments for non-cash items of $2.1 million, and cash used in operating assets and liabilities of $5.2 million. Adjustments for non-cash items primarily consisted of $13.0 million in deferred income taxes, offset by $6.0 million of depreciation and amortization, $3.2 million of share-based compensation expense, $3.6 million of accrued interest payable in kind, $1.6 million of amortization of debt issuance costs and debt discount, and $0.8 million of non-cash lease expense. The cash increase resulting from changes in net operating assets and liabilities primarily consisted of a decrease of $38.7 million in accounts receivable, net and an increase of $5.3 million in accounts payable and accrued expenses, offset by an increase of $29.1 million in commissions receivable and a $6.0 million decrease in other liabilities.
Investing Activities
Our investing activities primarily consist of purchases of property, equipment, and software and capitalized salaries related to the development of internal-use software.
Three Months Ended September 30, 2024—Net cash used in investing activities of $2.6 million was due to $2.1 million in purchases of software and capitalized internal-use software development costs and $0.4 million of purchases of property and equipment, primarily made up of machinery and equipment and leasehold improvements.
Three Months Ended September 30, 2023—Net cash used in investing activities of $2.1 million was due to $1.8 million in purchases of software and capitalized internal-use software development costs and $0.6 million of purchases of property and equipment, primarily computer equipment.
Financing Activities
Our financing activities primarily consist of payments on term loans and proceeds and payments related to stock-based compensation.
Three Months Ended September 30, 2024—Net cash used in financing activities of $13.1 million was primarily due to $8.5 million of principal payments on the Term Loans and $3.9 million of tax payments for stock-based compensation.
Three Months Ended September 30, 2023—Net cash used in financing activities of $8.9 million was primarily due to $8.5 million of principal payments on the Term Loans.
Contractual Obligations
Other than the discussions in Note 7 and Note 9 to the condensed consolidated financial statements, as of September 30, 2024, there have been no material changes to our contractual obligations as previously described in our Annual Report.
Off-Balance Sheet Arrangements
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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Our Disclosure Controls and Procedures
As of September 30, 2024, 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) was 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 have concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.
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.
Changes in Internal Control over Financial Reporting
There have been no changes 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 first quarter of fiscal 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 7, Commitments and Contingencies – Legal Contingencies and Obligations,” which is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors set forth in our Annual Report. Before investing in our securities, we recommend that investors carefully consider the risks described in our Annual Report, including those under the heading “Risk Factors.” Realization of any of these risks and any additional risks and uncertainties not currently known to us or that we have deemed to be immaterial could have a material adverse effect on our business, financial condition, or results of operations.
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
There was an administrative error in the Eleventh Amendment to Credit Agreement included within the Company’s Current Report filed on October 16, 2024. A copy of the final Eleventh Amendment to Credit Agreement is included hereto as Exhibit 10.1.
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 Number | Exhibit Description | |||||||
32.1† | ||||||||
32.2† | ||||||||
| 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.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||
# Indicates management contract or compensatory plan.
* Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
† 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SELECTQUOTE, INC. | |||||
| November 4, 2024 | By: /s/ Tim Danker | ||||
| Name: Tim Danker | |||||
| Title: Chief Executive Officer | |||||
| By: /s/ Ryan Clement | |||||
| Name: Ryan Clement | |||||
| Title: Chief Financial Officer | |||||