Notes
to Condensed Consolidated Financial Statements
(unaudited)
1.
Organization, Basis of Presentation and Summary of Significant Accounting Policies
In
this quarterly report, unless the context suggests otherwise, references to the “Company,” “we,” “us”
and “our” refer (1) prior to the February 13, 2013 closing of an initial public offering (“IPO”) of the
Class A common stock of Health Insurance Innovations, Inc. and related transactions, to Health Plan Intermediaries, LLC (“HPI”)
and its consolidated subsidiaries and (2) after the IPO and related transactions, to Health Insurance Innovations, Inc. and its
consolidated subsidiaries. The term “HII” refers to Health Insurance Innovations, Inc. on a stand-alone basis,
and the term “HPIH” refers to Health Plan Intermediaries Holdings, LLC, a subsidiary of HII and a consolidated subsidiary
of the Company, on a stand-alone basis. The terms “HealthPocket” or “HP” refer to HealthPocket, Inc.,
our wholly owned subsidiary which was acquired by HPIH on July 14, 2014.
Business
Description
We
are a developer, distributor and cloud-based administrator of affordable individual and family health insurance plans (“IFP”)
and supplemental products, which include short-term medical (“STM”) insurance plans and guaranteed-issue and underwritten
hospital indemnity plans. We design and structure these IFPs and supplemental products on behalf of insurance carriers and discount
benefit providers. The health insurance products we develop are underwritten by insurance carriers and we assume no underwriting,
insurance, or reimbursement risk. We market these products to individuals both through our internal distribution network and
an external distribution network consisting of non-owned third party licensed agent call centers.
Principles
of Consolidation and Basis of Presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of
the financial information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial
statements include the accounts of Health Insurance Innovations, Inc., its wholly-owned subsidiaries, one of which is a Variable
Interest Entity (“VIE”), of which the Company is the primary beneficiary. See Note 2 for further information
on the VIE. All significant intercompany balances and transactions have been eliminated in preparing the consolidated financial
statements. The results of operations for business combinations are included from their respective dates of acquisition.
Noncontrolling
interests are included in the consolidated balance sheets as a component of stockholders’ equity that is not attributable
to the equity of the Company. We report separately the amounts of consolidated net loss or income attributable to us and noncontrolling
interests.
The
information included in this quarterly report, including the interim condensed consolidated financial statements and the accompanying
notes, should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2016. The condensed consolidated results for the three months ended
March 31, 2017 are not necessarily indicative of the results to be expected for any interim subsequent period or for the year
ending December 31, 2017.
As
an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”),
we benefit from certain temporary exemptions from various reporting requirements, including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations
regarding executive compensation in our periodic reports and proxy statements. We have also elected under the JOBS Act to delay
the adoption of new and revised accounting pronouncements applicable to public companies until such pronouncements are made applicable
to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with
public company effective dates. These exemptions will apply for a period of five years following the completion of our IPO which
closed on February 13, 2013. However, if we record $1.07 billion in total annual gross revenue before that time or if the
market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would
cease to be an emerging growth company as of the following December 31.
Summary
of Significant Accounting Policies
The
following is an update to our significant accounting policies described in Note 1, Organization, Basis of Presentation, and Summary
of Significant Accounting Policies, in our audited consolidated financial statements for the year ended December 31, 2016 included
in our Annual Report on Form 10-K.
Use
of Estimates
The
preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires management to make estimates, judgments, and assumptions that affect
the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements. These estimates
also affect the reported amounts of revenue and expenses during the reporting periods. Actual results could materially differ
from those estimates.
Recent
Accounting Pronouncements
In
the following summary of recent accounting pronouncements, all references to effective dates of Financial Accounting Standards
Board (“FASB”) guidance relate to nonpublic entities. As noted above, we have elected to delay the adoption of new
and revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private
companies under provisions of the JOBS Act.
Recently
adopted accounting pronouncements
In
March 2016, the FASB issued an amendment to its accounting guidance for stock compensation as part of the FASB’s simplification
initiative. The amendments affect all entities that issue share-based payment awards to their employees. The areas for simplification
involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification
apply only to nonpublic entities. For public business entities, the amendments in this update are effective for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are
effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December
15, 2018. Early adoption is permitted for any entity in any interim or annual period.
The
Company has elected to early adopt this update during the three months ended March 31, 2017. As described in Note 19 in our Annual
Report on Form 10-K for the year ended December 31, 2016, the Company’s former Chief Executive Officer exercised 1.0 million
Stock Appreciation Rights in February 2017. Early adoption of this update was favorable in light of the material exercise and
as a result of this adoption, during the three months ended March 31, 2017, excess tax benefits of $3.3 million related
to vested and exercised share-based compensation awards were recorded as a decrease in income tax expense and a $0.38 increase
in our basic earnings per share in the condensed consolidated statement of income.
Recently
issued accounting pronouncements
In
January 2017, the FASB issued a new accounting standard update on simplifying the accounting for goodwill impairment. The new
guidance eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the goodwill impairment test)
to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting
unit’s carrying amount over its fair value. This guidance will be effective for interim or annual goodwill impairment tests
in fiscal years beginning after December 15, 2019 and will be applied prospectively. Early adoption is permitted for any impairment
tests performed after January 1, 2017. We are still evaluating the effect that this guidance will have on our condensed consolidated
financial statements and related disclosures.
In
November 2016, the FASB issued an update which requires companies to include amounts generally described as restricted cash and
restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. The amendments in this update are effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective
for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.
Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period,
any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We have not yet
completed the analysis of how adopting this update will affect our financial statements, but do not expect a material impact on
our statement of cash flows.
In
August 2016, the FASB issued an update to the presentation of certain cash receipts and cash payments as presented and classified
in the statement of cash flows. The update provides amendments to the codification for eight specific cash flow issues such as
the classification of debt prepayment or debt extinguishment costs to the classification of the proceeds from the settlement of
insurance claims. The amendments in this update are effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is
permitted, including adoption in an interim period. We will adopt this guidance in reporting periods beginning after December
15, 2018. We are currently evaluating the impact of this guidance on our condensed consolidated financial statements.
In
February 2016, the FASB issued an amendment to its accounting guidance for leases to increase transparency and comparability by
requiring organizations to recognize lease assets and lease liabilities on the balance sheet and increasing disclosures about
key leasing arrangements. The amendment updates the critical determinant from capital versus operating to whether a contract is
or contains a lease because lessees are required to recognize lease assets and lease liabilities for all leases – financing
and operating – other than short term. The amendments in this update are effective for public business entities for fiscal
years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We will adopt
this guidance in reporting periods beginning after December 15, 2018. The Company does not believe that the impact of adopting
this pronouncement will be material to our condensed consolidated financial statements.
In
May 2014, the FASB issued an amendment to its accounting guidance related to revenue recognition. The amendment clarifies the
principles for recognizing revenue. The guidance is based on the principle that revenue is recognized to depict the transfer of
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in the judgments and assets
recognized from costs incurred to obtain or fulfill a contract. For a public entity, the amendments in this update and the related
deferral guidance are effective for annual reporting periods beginning after December 15, 2017, including interim periods within
that reporting period. For all other entities, the amendments in this update are effective for annual reporting periods beginning
after December 15, 2018, and interim periods within annual periods beginning after December 15, 2018. Early adoption is not permitted.
We will adopt this guidance in reporting periods beginning after December 15, 2018. The new standard is required to be applied
retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it
recognized at the date of initial application. We have not yet selected a transition method nor have we determined the impact
of the new standard on our condensed consolidated financial statements. We have not determined the effect of the update on our
internal control over financial reporting or other changes in business practices and processes but will do so in the design and
implementation phase which is to begin during the current calendar year.
2.
Variable Interest Entities
As
of March 31, 2017, we are the primary beneficiary of one entity, HPIH, that constitutes a VIE pursuant to FASB guidance. HPIH
is a VIE as the voting rights of the investors are not proportional to their obligations to absorb the expected losses of HPIH.
As of March 31, 2017, we hold 100% of the voting power in HPIH, but 75.5% of the total membership and economic interest,
and the other members of HPIH hold no voting rights in HPIH. Further, substantially all of the activities of HPIH are conducted
on behalf of a membership with disproportionately few voting rights. We have concluded that we are the primary beneficiary of
HPIH, and, therefore, should consolidate HPIH since we have the power to
direct the activities of HPIH that most significantly impact its economic performance. Our equity interest in HPIH obligates us
to absorb losses of HPIH and gives us the right to receive benefits from HPIH related to the day-to-day operations of the entity,
both of which could potentially be significant to HPIH. As such, our maximum exposure as a result of our involvement in this VIE
is the net income or loss allocated to us based on our interest.
3.
Goodwill and Intangible Assets
Goodwill
Our
goodwill balance as of March 31, 2017 and December 31, 2016 of $41.1 million arose from previous acquisitions as described in
our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no changes in the carrying amounts of goodwill.
Other
intangible assets
Our
other intangible assets arose primarily from acquisitions described in our Annual Report on Form 10-K for the year ended December
31, 2016 and consist of a brand, the carrier network, distributor relationships, customer relationships, noncompete agreements
and capitalized software. Finite-lived intangible assets are amortized over their useful lives from two to fifteen years.
Major
classes of intangible assets as of March 31, 2017 consisted of the following ($ in thousands):
|
|
Weighted-average
Amortization (years)
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangible
Assets, net
|
|
Brand
|
|
|
14.1
|
|
|
$
|
1,377
|
|
|
$
|
(332
|
)
|
|
$
|
1,045
|
|
Carrier network
|
|
|
5.0
|
|
|
|
40
|
|
|
|
(40
|
)
|
|
|
—
|
|
Distributor relationships
|
|
|
6.8
|
|
|
|
4,059
|
|
|
|
(2,980
|
)
|
|
|
1,079
|
|
Noncompete agreements
|
|
|
4.7
|
|
|
|
987
|
|
|
|
(926
|
)
|
|
|
61
|
|
Customer relationships
|
|
|
5.8
|
|
|
|
1,484
|
|
|
|
(1,133
|
)
|
|
|
351
|
|
Capitalized software
|
|
|
6.7
|
|
|
|
8,571
|
|
|
|
(3,711
|
)
|
|
|
4,860
|
|
Total
intangible assets
|
|
|
|
|
|
$
|
16,518
|
|
|
$
|
(9,122
|
)
|
|
$
|
7,396
|
|
Major
classes of intangible assets as of December 31, 2016 consisted of the following ($ in thousands):
|
|
Weighted-average
Amortization (years)
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Intangible
Assets, net
|
|
Brand
|
|
|
14.1
|
|
|
$
|
1,377
|
|
|
$
|
(311
|
)
|
|
$
|
1,066
|
|
Carrier network
|
|
|
5.0
|
|
|
|
40
|
|
|
|
(40
|
)
|
|
|
—
|
|
Distributor relationships
|
|
|
6.8
|
|
|
|
4,059
|
|
|
|
(2,831
|
)
|
|
|
1,228
|
|
Noncompete agreements
|
|
|
4.7
|
|
|
|
987
|
|
|
|
(881
|
)
|
|
|
106
|
|
Customer relationships
|
|
|
5.8
|
|
|
|
1,484
|
|
|
|
(1,125
|
)
|
|
|
359
|
|
Capitalized software
|
|
|
6.7
|
|
|
|
8,571
|
|
|
|
(3,423
|
)
|
|
|
5,148
|
|
Total
intangible assets
|
|
|
|
|
|
$
|
16,518
|
|
|
$
|
(8,611
|
)
|
|
$
|
7,907
|
|
Amortization
expense for the three months ended March 31, 2017 and 2016 was $511,000 and $558,000, respectively.
Estimated
annual pretax amortization of intangible assets for the remainder of 2017 and in each of the next five years and thereafter are
as follows ($ in thousands):
Remainder
of 2017
|
|
$
|
1,454
|
|
2018
|
|
|
1,725
|
|
2019
|
|
|
1,338
|
|
2020
|
|
|
1,338
|
|
2021
|
|
|
685
|
|
2022
|
|
|
114
|
|
Thereafter
|
|
|
742
|
|
Total
|
|
$
|
7,396
|
|
4.
Accounts Payable and Other Liabilities
Accounts
payable and accrued expenses consisted of the following as of ($ in thousands):
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Carriers and vendors payable
|
|
$
|
13,274
|
|
|
$
|
11,385
|
|
Commissions payable
|
|
|
4,864
|
|
|
|
5,710
|
|
Accrued wages
|
|
|
2,849
|
|
|
|
4,206
|
|
Accrued refunds
|
|
|
2,657
|
|
|
|
3,238
|
|
Accounts payable
|
|
|
1,749
|
|
|
|
928
|
|
Accrued professional fees
|
|
|
1,318
|
|
|
|
910
|
|
Accrued credit card/ACH fees
|
|
|
417
|
|
|
|
430
|
|
Accrued restructuring
|
|
|
3
|
|
|
|
3
|
|
Other accrued
expenses
|
|
|
1,827
|
|
|
|
2,870
|
|
Total
accounts payable and accrued expenses
|
|
$
|
28,958
|
|
|
$
|
29,680
|
|
5.
Stockholders’ Equity
On
February 13, 2013, we completed our IPO by issuing 4,666,667 shares of our Class A common stock, par value $0.001 per share, at
a price to the public of $14.00 per share of Class A common stock. In addition, we issued 8,666,667 shares of our Class B common
stock, of which 8,580,000 shares of Class B common stock were obtained by HPI, and 86,667 shares of Class B common stock were
obtained by Health Plan Intermediaries Sub, LLC (“HPIS”), of which HPI is the managing member. In addition, we granted
the underwriters of the IPO the right to purchase additional shares of Class A common stock to cover over-allotments (the “over-allotment
option”).
Our
authorized capital stock consists of 100,000,000 shares of Class A common stock, par value $0.001 per share, 20,000,000 shares
of Class B common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share.
Class
A Common Stock and Class B Common Stock
Each
share of Class A common stock and Class B common stock entitles its holders to one vote per share on all matters to be voted upon
by the stockholders, and holders of each class will vote together as a single class on all such matters. Holders of shares of
our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders
for their vote or approval, except as otherwise required by applicable law. As of March 31, 2017, the Class A common stockholders
had 75.5% of the voting power in HII and the Class B common stockholders had 24.5% of the voting power in HII. Holders of shares
of our Class A common stock have 100% of the economic interest in HII. Holders of Class B common stock do not have an economic
interest in HII.
The
determination to pay dividends, if any, to our Class A common stockholders will be made by our Board of Directors. We do not,
however, expect to declare or pay any cash or other dividends in the foreseeable future on our Class A common stock, as we intend
to reinvest any cash flow generated by operations in our business. We may enter into credit agreements or other borrowing arrangements
in the future that prohibit or restrict our ability to declare or pay dividends on our Class A common stock. In the event of liquidation,
dissolution, or winding up of HII, the holders of Class A common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The holders of our
Class A common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking
fund provisions applicable to the Class A common stock. The rights, preferences and privileges of holders of our common stock
will be subject to those of the holders of any shares of our preferred stock we may issue in the future.
Class
B common stockholders will not be entitled to any dividend payments. In the event of any dissolution, liquidation, or winding
up of our affairs, whether voluntary or involuntary, after payment of our debts and other liabilities and making provision for
any holders of our preferred stock that have a liquidation preference, our Class B common stockholders will not be entitled to
receive any of our assets. In the event of our merger or consolidation with or into another company in connection with which shares
of Class A common stock and Class B common stock (together with the related membership interests) are converted into, or become
exchangeable for, shares of stock, other securities or property (including cash), each Class B common stockholder will be entitled
to receive the same number of shares of stock as is received by Class A common stockholders for each share of Class A common stock,
and will not be entitled, for each share of Class B common stock, to receive other securities or property (including cash). No
holders of Class B common stock will have preemptive rights to purchase additional shares of Class B common stock.
Exchange
Agreement
On
February 13, 2013, we entered into an exchange agreement (the “Exchange Agreement”) with the holders of the Series
B Membership Interests of HPIH (“Series B Membership Interests”). All of the Series B Membership Interests are
held by Health Plan Intermediaries, LLC (“HPI”) and Health Plan Intermediaries Sub, LLC (“HPIS”), which
are two entities owned by Michael Kosloske, the founder and a director of our company. Pursuant to and subject to the terms
of the Exchange Agreement and the amended and restated limited liability company agreement of HPIH, holders of Series B Membership
Interests, at any time and from time to time, may exchange one or more Series B Membership Interests, together with an equal number
of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to equitable
adjustments for stock splits, stock dividends and reclassifications. See Note 9 from our December 31, 2016 audited consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 for further information on
the Exchange Agreement.
On
February 1, 2014, a registration statement on Form S-3 became effective under which we registered 8,566,667 shares of our Class
A common stock for resale from time to time by HPI and HPIS, of which all such shares are issuable upon the exchange of
an equivalent number of Series B Membership Interests (together with an equal number of shares of our Class B common stock).
On
March 13, 2017, HPI and HPIS (the “Selling Stockholders”) completed a secondary underwritten public offering of 3,000,000
shares of our Class A common stock under the above-described Form S-3 registration statement. In connection with the offering,
on
March 8, 2017, we entered into an underwriting agreement
with Canaccord Genuity Inc., Cantor Fitzgerald & Co., Northland Securities, Inc., and Lake Street Capital Markets, LLC, collectively
as the underwriters, and the Selling Stockholders. Immediately prior to the completion of the offering, we
issued 3,000,000 shares of Class A common stock to the Selling Stockholders. In exchange for the issuance of the shares, we
immediately acquired 3,000,000 Series B Membership Interests, together with an equal number of shares of our Class
B common stock from the Selling Stockholders. These Series B Membership Interests were immediately recapitalized into Series A
Membership Interests in HPIH. The Selling Stockholders agreed to immediately after the exchange sell to the underwriter for resale
all 3,000,000 shares of Class A common stock at a public offering price of $14.00 per share ($13.16 per share, net of underwriting
discounts), for net proceeds of $39.5 million. No shares were sold by the Company in this offering. The acquisition of the Series
B Membership Interests resulted in a decrease in noncontrolling interests with an offsetting increase in stockholders’ equity
as of March 31, 2017 to reflect the decrease in the noncontrolling interest’s investment in HPIH. See Note 9
for further discussion on the tax receivable agreement we entered into with holders of Series B Membership Interests.
Preferred
Stock
Our
board of directors has the authority to issue shares of preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders.
The
issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of HII without further
action by the stockholders and may adversely affect the voting and other rights of the holders of Class A common stock. At present,
we have no plans to issue any preferred stock.
Treasury
Stock
Treasury
stock is recorded at cost. As of March 31, 2017 and December 31, 2016, we held 131,171 and 119,544 shares of treasury stock, respectively,
recorded at a cost of $1.3 million and $1.1 million, respectively.
Tax
Obligation Settlements and Treasury Stock Transactions
Treasury
stock is recorded pursuant to the surrender of shares by certain employees to satisfy statutory tax withholding obligations on
vested restricted stock awards. In addition, certain forfeited stock-based awards are transferred to and recorded as treasury
stock, and certain restricted stock awards have been granted from shares in Treasury, and certain forfeited awards.
During
the three months ended March 31, 2017, 11,627 shares were transferred to Treasury as a result of surrendered shares of vested
restricted stock awards. No shares were transferred to Treasury as the result of forfeitures of restricted stock awards. During
the three months ended March 31, 2016, 4,132 shares were transferred to Treasury as a result of surrendered shares of vested restricted
stock awards and 13,657 options were exercised and converted to Class A common stock out of treasury. No shares were transferred
to Treasury as the result of forfeitures of restricted stock awards.
6.
Stock-based Compensation
We
maintain one stock-based incentive plan, the Health Insurance Innovations, Inc. Long Term Incentive Plan (the “LTIP”),
which became effective February 7, 2013, under which stock appreciation rights (“SARs”), restricted stock,
restricted stock units and other types of equity and cash incentive awards may be granted to employees, non-employee directors
and service providers. The LTIP expires after ten years, unless prior to that date the maximum number of shares available for
issuance under the plan has been issued or our Board of Directors terminates this plan. At its inception, 1,250,000 shares of
Class A common stock were reserved for issuance under the LTIP. Since inception, the Company’s shareholders have approved
a cumulative increase of 2,000,000 shares of Class A common stock and as of December 31, 2016, there were 3,250,000 shares of
Class A common stock reserved for issuance under the LTIP.
Expense
for stock-based compensation is recognized based upon estimated grant date fair value and is amortized over the requisite service
period of the awards using the accelerated method. We offer awards which vest based on service conditions, performance conditions
or market conditions. For grants of SARs and stock options, we apply the Black-Scholes option-pricing model, a Monte Carlo Simulation,
or a lattice model, depending on the vesting conditions, in determining the fair value of share-based payments to employees. These
models incorporate various assumptions, including expected volatility and expected term. Through November 2015, expected stock
price volatilities were estimated using implied volatilities of comparable publicly-traded companies, given our limited trading
history. Beginning December 2015, volatility is calculated using the Company’s trading history. The expected term of the
awards represents the estimated period of time until exercise, giving consideration to the contractual terms, vesting schedules
and expectations of future employee behavior. The Company uses its best estimate and the simplified method for “plain
vanilla” awards under GAAP for calculating the expected term, where applicable. The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant with an equivalent remaining term. Compensation expense is recognized
only for those awards expected to vest, with forfeitures estimated based on our historical experience and future expectations.
None
of the stock-based compensation was capitalized during the three months ended March 31, 2017 and 2016, respectively.
The
Black-Scholes option-pricing model was used with the following weighted average assumptions:
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Risk-free rate
|
|
|
—
|
|
|
|
1.4
|
%
|
Expected life
|
|
|
—
|
|
|
|
4.6
years
|
|
Expected volatility
|
|
|
—
|
|
|
|
56.7
|
%
|
Expected dividend
|
|
|
—
|
|
|
|
none
|
|
No
new awards were granted during the three months ended March 31, 2017 and therefore there are no corresponding Black-Scholes option-pricing
model assumptions for the period.
The
following table summarizes restricted shares, SARs, and stock options granted during the three months ended March 31, 2017 and
2016 (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted shares
|
|
|
—
|
|
|
|
—
|
|
SARs
|
|
|
—
|
|
|
|
15
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
There
were no forfeitures during the three months ended March 31, 2017 and 2016.
The
following table summarizes stock-based compensation expense for the three months ended March 31, 2017 and 2016 ($ in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted shares
|
|
$
|
380
|
|
|
$
|
165
|
|
SARs
|
|
|
433
|
|
|
|
280
|
|
Stock options
|
|
|
8
|
|
|
|
41
|
|
|
|
$
|
821
|
|
|
$
|
486
|
|
The
following table summarizes unrecognized stock-based compensation and the remaining weighted average period over which such stock-based
compensation is expected to be recognized as of March 31, 2017 ($ in thousands):
|
|
Unrecognized
Expense
|
|
|
Weighted
Average Remaining years
|
|
Restricted shares
|
|
$
|
1,758
|
|
|
|
2.0
|
|
SARs
|
|
|
1,117
|
|
|
|
1.9
|
|
Stock options
|
|
|
7
|
|
|
|
0.5
|
|
|
|
$
|
2,882
|
|
|
|
|
|
The
amounts in the table above do not include the cost of any additional awards that may be granted in future periods nor any changes
in our forfeiture rate.
During
the three months ended March 31, 2017, there were 1.1 million SARs exercised resulting in an increase of 784,000 issued Class
A common stock. No SARs were exercised during the three months ended March 31, 2016. During the three months ended March 31, 2017
and 2016, there were no outstanding awards forfeited.
There
were 8,000 and 13,657 options exercised during the three months ended March 31, 2017 and 2016, respectively.
For
the three months ended March 31, 2017 and 2016, the settlement of stock based incentive plans resulted in a cash outflow of $185,000
and $25,000, respectively, with respect to shares redeemed to cover the recipient’s tax obligations.
We
recognized an income tax benefit of $3.3 million and $15,000 from stock-based activity for the three months ended March 31, 2017
and 2016, respectively. During the three months ended March 31, 2017, the Company elected to early adopt ASU 2016- 09 and
as a result of this adoption, excess tax benefits of $3.3 million related to vested and exercised share-based compensation awards
were recorded as a decrease in income tax expense and a $0.38 increase in our basic earnings per share in the condensed consolidated
statement of income. The Company has elected to continue its policy of estimating forfeitures in accordance with the update.
7.
Net Income per Share
The
computations of basic and diluted net income (loss) per share attributable to HII for the three months ended March 31, 2017 and
2016 were as follows ($ in thousands, except share and per share data):
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic net income attributable
to Health Insurance Innovations, Inc.
|
|
$
|
5,834
|
|
|
$
|
905
|
|
Weighted average shares—basic
|
|
|
8,892,239
|
|
|
|
7,563,555
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Restricted shares
|
|
|
251,406
|
|
|
|
79,271
|
|
SARs
|
|
|
872,467
|
|
|
|
11,066
|
|
Stock
options
|
|
|
35,257
|
|
|
|
45,974
|
|
Weighted average shares—diluted
|
|
|
10,051,369
|
|
|
|
7,699,866
|
|
Basic net income per share attributable
to Health Insurance Innovations, Inc.
|
|
$
|
0.66
|
|
|
$
|
0.12
|
|
Diluted net income per share attributable
to Health Insurance Innovations, Inc.
|
|
$
|
0.58
|
|
|
$
|
0.12
|
|
Potential
common shares are included in the diluted per share calculation when dilutive. Potential common shares consist of Class A common
stock issuable through unvested restricted stock grants and stock appreciation rights and are calculated using the treasury stock
method.
The
following securities were not included in the calculation of diluted net income per share because such inclusion would be anti-dilutive
(in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Restricted shares
|
|
|
—
|
|
|
|
—
|
|
SARs
|
|
|
—
|
|
|
|
27
|
|
Stock options
|
|
|
—
|
|
|
|
—
|
|
Additionally,
potential common stock totaling 3,841,667 shares at March 31, 2017 and 6,841,667 shares at March 31, 2016 issuable under an exchange
agreement were not included in diluted shares because such inclusion would be antidilutive. See Note 5 for further details
on the exchange agreement.
8.
Income Taxes
HPIH
is taxed as a partnership for income tax purposes; as a result, it is not subject to entity-level federal or state income taxation
but its members are liable for taxes with respect to their allocable shares of each company’s respective net taxable income.
We are subject to U.S. corporate federal, state and local income taxes on our allocable share of net taxable income that is reflected
in our consolidated financial statements.
The
effective tax rate for the three months ended March 31, 2017 was (20.8%). The effective tax rate for the three months ended
March 31, 2016 was 14.4%. For the three months ended March 31, 2017 and 2016, the benefit and provision for income taxes,
respectively, were $1.5 million and $384,000, respectively. Deferred taxes on our investment in HPIH are measured on the
difference between the carrying amount of our investment in HPIH and the corresponding tax basis of this investment. We do not
measure deferred taxes on differences within HPIH, as those differences inherently comprise our deferred taxes on our external
investment in HPIH.
Due
to the ownership structure of HP, which is a taxable entity, it cannot join in a consolidated tax filing with HII. Consequently,
its federal and state tax jurisdictions are separate from those of HII, which prevents deferred tax assets and liabilities of
HII and HP from offsetting one another. The effective tax rate for HII, for the three months ended March 31, 2017, was mainly
impacted by the tax benefit realized by the early adoption of ASU 2016-09. HP’s 2017 book loss generates a deferred tax
benefit which is fully offset by a valuation allowance. As a result, due to the offsetting effect of HP’s pretax book loss
and HII’s pretax book income when the two are combined, the deferred tax benefit from HP along with the benefit realized
by HII’s early adoption of the accounting update results in a total combined effective tax rate of (20.8%). On a
standalone basis, the effective tax rate for the three months ended March 31, 2017 for HII was (17.9%), while the effective
tax rate for the three months ended March 31, 2017 for HP was 3.8%. On a standalone basis, the effective tax rate for the
year ended December 31, 2016 for HII was (39.2%), while the effective tax rate for the year ended December 31, 2016 for HP was
12.5%.
We
account for uncertainty in income taxes using a two-step process. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained
upon audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Such amounts
are subjective, as a determination must be made on the probability of various possible outcomes. We reevaluate uncertain tax positions
on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes
in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition and measurement could
result in recognition of a tax benefit or an additional tax provision.
For
the three months ended March 31, 2017 and 2016, respectively, we did not have a balance of gross unrecognized tax benefits, and
as such, no amount would favorably affect the effective income tax rate in any future periods. We believe that there will not
be a significant increase or decrease to the uncertain tax positions within 12 months of the reporting date. The Company accounts
for interest and penalties associated with uncertain tax positions as a component of tax expense, and none were included in the
Company’s financial statements as there are not uncertain tax positions outstanding as of March 31, 2017 and 2016, respectively.
The Company’s 2013 through 2016 tax years remain subject to examination by tax authorities.
9.
Commitments and Contingencies
BimSym
Agreements
On
August 1, 2012, the Company entered into a software assignment agreement with BimSym eBusiness Solutions, Inc. (“BimSym”)
for our exclusive ownership of all rights, title and interest in the technology platform (“A.R.I.E.S. System”) developed
by BimSym and utilized by us. As a result of the agreement, we purchased the A.R.I.E.S. System, our proprietary sales and member
administration platforms, for $45,000 and this purchase was capitalized and recorded as an intangible asset. In connection with
this agreement, we simultaneously entered into a master services agreement for the technology, under which we are required to
make monthly payments of $26,000 for five years. After the five-year term, this agreement automatically renews for one-year terms
unless we give 60 days’ notice.
Additionally,
we also entered into an exclusivity agreement with BimSym whereby neither BimSym nor any of its affiliates will create, market
or sell a software, system or service with the same or similar functionality as that of A.R.I.E.S. System under which we are required
to make monthly payments of $16,000 for five years. The present value of these payments was capitalized and recorded as an intangible
asset with a corresponding liability on the accompanying condensed consolidated balance sheets.
Tax
Receivable Agreement
On
February 13, 2013, we entered into a Tax Receivable Agreement (“TRA”) with HPI and HPIH as the holders
of the HPIH Series B Membership Interests. The TRA requires us to pay to such holders 85% of the cash savings, if any, in U.S.
federal, state and local income tax we realize (or are deemed to realize in the case of an early termination payment, a change
in control or a material breach by us of our obligations under the TRA) as a result of any possible future increases in tax basis
and of certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the
TRA itself. This is HII’s obligation and not an obligation of HPIH. HII will benefit from the remaining 15% of any realized
cash savings. For purposes of the TRA, cash savings in income tax is computed by comparing our actual income tax liability with
our hypothetical liability had we not been able to utilize the tax benefits subject to the TRA itself. The TRA became effective
upon completion of the IPO and will remain in effect until all such tax benefits have been used or expired, unless HII exercises
its right to terminate the TRA for an amount based on the agreed payments remaining to be made under the agreement or HII breaches
any of its material obligations under the TRA in which case all obligations will generally be accelerated and due as if HII had
exercised its right to terminate the agreement. Any potential future payments will be calculated using the market value of our
Class A common stock at the time of the relevant exchange and prevailing tax rates in future years and will be dependent
on us generating sufficient future taxable income to realize the benefit. Payments are generally due under the TRA within a specified
period of time following the filing of our tax return for the taxable year with respect to which payment of the obligation arises.
Exchanges
of Series B Membership Interests, together with an equal number of shares of our Class B common stock, for shares of our Class A
common stock, are expected to increase our tax basis in our share of HPIH’s tangible and intangible assets. These increases
in tax basis are expected to increase our depreciation and amortization deductions and create other tax benefits and therefore
may reduce the amount of tax that we would otherwise be required to pay in the future. As of March 31, 2017, Series B Membership
Interests, together with an equal number of shares of Class B common stock have been exchanged for a total of 4,825,000 shares
of Class A common stock subsequent to the IPO. See Note 5 for further information on these issuances of Class A common
stock. As a result of the exchanges noted above, we have recorded a liability of $28.6 million pursuant to the TRA as of
March 31, 2017. We have determined that this amount is probable of being paid, because a portion of the deductions and other tax
benefits noted above has been utilized based on our estimated taxable income for 2017 and future periods. This liability represents
the share of tax benefits payable to the entities beneficially owned by Mr. Kosloske, if we generate sufficient taxable income
in the future. As of December 31, 2016, we also reversed the valuation allowance on our deferred tax assets related to the TRA.
The exchange transactions created a tax benefit to be shared by the Company and the entities beneficially owned by Mr. Kosloske.
As of March 31, 2017, we have made $672,000 of payments under the TRA.
Distributor
Advanced Commissions, net
As
a course of business, we enter into agreements with our distributors to loan future commission payments based on actual sales,
referred to as advanced commissions on the condensed consolidated balance sheets. Certain of these agreements may include a loan
agreement and a UCC-1 financing statement for the purposes of securing the future commission payments we make. Generally,
these loans will be repaid to us by future commissions earned by the distributor based on actual sales, as described in the respective
agreements. As of March 31, 2017, the Company has recorded an allowance for bad debt of $352,000.
Legal
Proceedings
The
Company is subject to legal proceedings, claims, and liabilities that arise in the ordinary course of business. The Company accrues
losses associated with legal claims when such losses are probable and reasonably estimable. If the Company determines that a loss
is probable and cannot estimate a specific amount for that loss, but can estimate a range of loss, the best estimate within the
range is accrued. If no amount within the range is a better estimate than any other, the minimum amount of the range is accrued.
Estimates are adjusted as additional information becomes available or circumstances change. Legal defense costs associated with
loss contingencies are expensed in the period incurred.
State
Regulatory Examinations
Indiana
Multistate Market Conduct Examination
The
Company received notification in April 2016 from the Indiana Department of Insurance that a multistate examination had been commenced
providing for the review of HCC Life Insurance Company’s (“HCC”) short-term medical plans, Affordable Care Act
compliance, marketing, and rate and form filing for all products. In May 2016, the Company received notice that the Market Actions
Working Group of the National Association of Insurance Commissioners determined that the examination would become a multistate
examination. As the Company was a distributor of HCC products at that time, the notification indicated that the multistate examination
will include a review of the activities of the Company and a review of whether the Company’s practices are in compliance
with Indiana insurance law and the similar laws of other states participating in the examination. The Indiana Department of Insurance
is serving as the managing participant of the multistate examination, and the examination includes, among other things, a review
of whether HCC (and the Company) has engaged in any unfair or deceptive acts or non-compliant insurance business practices. At
present, forty-two states have joined the multistate examination. On June 1, 2016, the Company responded to an initial document
production request in this matter. The Company received notice on March 16, 2017 that Indiana may expand the scope and time period
of the examination to include a review of the Company’s marketing, sales, and administration of insurance products for all
parties with whom HII conducted business. This notice was provided through an additional “warrant” which is similar
to an investigatory subpoena. Additional discussions with the lead investigators took place on March 29, 2017, in which the Company
sought modifications to the scope of any potential expansion, and offered to provide additional information on a voluntary basis,
but a decision has not yet been reached on the Company’s requested modifications. In addition to the multistate examination
led by Indiana, we are aware that several other states, including Florida, Ohio, and South Dakota are reviewing the sales practices
and potential unlicensed sale of insurance by third-party distributor call centers utilized by the Company. The Company is aware
of and managing related, additional claims and inquiries that it does not believe are material at this time. Except as otherwise
described below, it is too early to determine whether any of these regulatory examinations will have a material impact on the
Company. The Company is proactively communicating and cooperating with all applicable regulatory agencies, and has provided a
detailed action plan to regulators that summarizes the Company’s newly developed and enhanced compliance and control mechanisms.
Montana
Regulatory Action
The
Company also received notification from the Office of the Montana State Auditor, Commissioner of Securities and Insurance (“CSI”)
that an administrative action had been initiated against it. The Company was among more than two dozen separate parties named
by the CSI in a Notice of Proposed Agency Action on May 12, 2016, that alleges potential violations of the Montana Insurance Code.
The Notice, directed to the Company as well as a large pool of third-party respondents ranging from very large companies to individual
insurance agents, indicated that the CSI was concerned with the possibility of unfair trade practices, potentially unlicensed
insurance practices, or agents that were not properly appointed to the insurance carriers for whom products were being offered.
Seventeen of the named parties, including the Company, requested a hearing before the CSI to contest the state’s allegations
and, in addition to reviewing its own data, the Company has requested certain materials, data, and information from the CSI in
order to do so. Pending the resolution of the matter, the CSI summarily suspended the Company’s license to conduct business
in Montana. The state formally granted the Company’s request to be heard on the issues, and a neutral Hearing Officer, experienced
in the insurance industry, was appointed to hear the matter. The Company has been cooperative with the CSI, and both parties have
exchanged information attendant to the hearing process.
On
March 2, 2017, Montana indicated it was exploring the possibility of consolidating its own investigation with the Indiana Multistate
Market Conduct Examination and conversations with the lead investigators on March 29, 2017 indicate such will occur. The Company
expects that the Montana investigation will be consolidated into the above-described multi-state inquiry, and the Company is awaiting
confirmation from the involved parties.
While
it is too early to assess whether the CSI’s independent investigation and its consolidation with the multistate will have
a material impact on the Company, based on the nature of the allegations and evidence provided by the CSI during the third and
fourth quarters of 2016 and settlement discussions with the CSI in early 2017, the Company believes that a loss arising from the
future assessment of a civil penalty is probable but will likely be tied to the Indiana Multistate Market Conduct Examination
and any result from that, which the Company is unable to estimate or predict at this time.
Massachusetts
Regulatory Action
The
Company also received notification of a civil investigative demand from the Massachusetts Attorney General’s Office (“MAG”)
on June 16, 2016. As part of the MAG’s regulatory oversight of the Massachusetts health care system and its corresponding
authority to request documents from market participants, the MAG has requested certain information and documents from the Company.
The information requested will be used to review the Company’s sales and marketing practices, and ensure the Company is
in compliance with Massachusetts laws and regulations. Additionally, the Company’s materials and sales and marketing practices
will be evaluated in order to ensure that they are neither deceptive nor do they constitute unfair trade practices.
The
Company has provided all requested documents and materials and continues to cooperate with the MAG in order to bring the matter
to an agreeable conclusion. While the MAG has indicated it is amenable to exploring all available options, and it is still too
early to assess whether the MAG’s investigation will result in a material impact on the Company, the Company believes that
based on the nature of the allegations raised by the MAG during the fourth quarter, a loss arising from the future assessment
of a civil penalty against the Company is probable. Notwithstanding, due to the relatively early stage of the investigative process,
the recent settlement of another party for the same set of allegations, and the fact that the Company has neither requested nor
received evidentiary material from the MAG, the Company is currently unable to estimate the amount of any potential civil penalty
or determine a range of potential loss. It is possible there may be no financial loss, a nominal or minimal loss, or some other
mutually satisfactory resolution reached with the MAG.
Texas
Regulatory Action
In September 2016, the
Texas Department of Insurance (“TDI”) notified the Company that it has instituted an enforcement action to investigate
alleged violations of advertising rules and third-party administrator license requirements in connection with the sale of the
Company’s products. In connection with the investigation, the TDI requested certain information, records, and explanations
and the Company delivered a response and the requested information and records in November 2016. Following such date, the TDI
has not taken any action, and the TDI has only communicated that it is continuing to review the matter. The Company’s position
is that there have been no violations of the advertising or third-party administrator statutes in Texas, although there is no
assurance that the TDI will agree with position. This action is at an early stage of development and accordingly the Company
has not determined any potential loss to be probable. Additionally, due to the early stage of the matter any potential loss is
not reasonably estimable. Accordingly, no loss or range of loss has been recorded or disclosed.
We
are proactively communicating and cooperating with all regulatory agencies involved in the above-described examinations and actions
and we have recently developed and enhanced our compliance and control mechanisms. However, it is too early to determine whether
any of these regulatory matters will have a material impact on our business. Any adverse finding could result in significant penalties
or other liabilities and/or a requirement to modify our marketing or business practices and the practices of our third-party distributors,
which could harm our business, results of operations or financial condition. Moreover, an adverse regulatory action in one jurisdiction
could result in penalties and adversely affect our license status or reputation in other jurisdictions due to the requirement
that adverse regulatory actions in one jurisdiction be reported to other jurisdictions.
Miscellaneous
The
Company has also received a number of private-party claims relating to alleged violations by its distributors of the federal Telephone
Consumer Protection Act, alleging that their marketing activities were potentially unlawful. The Company is presently reviewing
these matters and reviewing distributor compliance, and enhancing existing compliance. While these types of claims have previously
settled or resolved without any material effect on the Company, there is a possibility in the future that one or more could
have a material effect. The Company requires that its distributors reimburse or indemnify it for any such settlements.
The
Company has previously received inquiries but no claims, litigation, or findings of violation relating to alleged data loss and/or
privacy breaches relating to affiliated companies. Each allegation is investigated upon receipt and handled promptly to resolution.
10.
Fair Value Measurements
We
measure and report financial assets and liabilities at fair value on a recurring basis. Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (referred to as an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable
inputs. The fair value of our financial assets and liabilities is determined by using three levels of input, which are defined
as follows:
|
Level
1:
|
Quoted
prices in active markets for identical assets or liabilities
|
|
|
|
|
Level
2:
|
Quoted
prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in
markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
|
|
|
|
|
Level
3:
|
Unobservable
inputs for the asset or liability
|
The
categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant
to the fair value measurement.
We
utilize the market approach to measure the fair value of our financial assets. As subjectivity exists with respect to many of
the valuation techniques, the fair value estimates we have disclosed may not equal prices that we may ultimately realize if the
assets are sold or the liabilities are settled with third parties. Below is a description of our valuation methods.
Noncompete
obligation.
Our noncompete obligation, an exclusivity agreement with the developer of the A.R.I.E.S System as
described in Note 9 is primarily valued using nonbinding market prices as stated in the agreement that are corroborated
by observable market data. The inputs and fair value are reviewed for reasonableness and may be further validated by comparison
to publicly available information or compared to multiple independent valuation sources. The noncompete obligation is classified
within Level 2 of the fair value hierarchy.
The
carrying amounts of financial assets and liabilities reported in the accompanying condensed consolidated balance sheets for cash
and cash equivalents, restricted cash, credit card transactions receivable, accounts receivable, advanced commissions, carriers
and vendors payable, commissions payable, line of credit, and accounts payable and accrued expenses as of March 31, 2017 and December
31, 2016, respectively, approximate fair value because of the short-term duration of these instruments.
As
of March 31, 2017, our liabilities measured at fair value were as follows ($ in thousands):
|
|
Carrying
Value
|
|
|
Fair
Value Measurement as of March 31, 2017
|
|
|
|
as
of
March
31, 2017
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncompete
obligation
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
63
|
|
|
$
|
—
|
|
As
of December 31, 2016, our liabilities measured at fair value were as follows ($ in thousands):
|
|
Carrying
Value
|
|
|
Fair
Value Measurement as of December 31, 2016
|
|
|
|
as
of
December
31, 2016
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncompete
obligation
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
|
$
|
110
|
|
|
$
|
—
|
|
|
$
|
110
|
|
|
$
|
—
|
|
11.
Related Party Transactions
Health
Plan Intermediaries, LLC
HPI
and its subsidiary HPIS, which are beneficially owned by Mr. Kosloske, are related parties by virtue of their Series B Membership
Interests in HPIH, of which we are managing member. During the three months ended March 31, 2017 and 2016, HPIH paid cash and
received cash refunds of $38,000 and $7,000, respectively, for these entities related to estimated federal and state income taxes,
pursuant to the operating agreement entered into by HPIH and HPI.
Distributions
by HPIH to its members
Pursuant
to the operating agreement of HPIH, we determine when distributions will be made to the members of HPIH and the amount of any
such distributions, except that HPIH is required by the operating agreement to make certain pro rata distributions to each member
of HPIH quarterly on the basis of the assumed tax liabilities of the members. As of March 31, 2017, we have accrued in due to
member on the condensed consolidated balance sheets, $2.7 million for estimated tax liabilities due to our members.
Tax
Receivable Agreement
As
discussed in Note 9, on February 13, 2013, we entered into a tax receivable agreement with the holders of the HPIH Series
B Membership Interests, which holders are beneficially owned by Mr. Kosloske.
As
of March 31, 2017, we are obligated to pay $28.6 million pursuant to the TRA, of which $1.1 million is included in current
liabilities and $27.5 million is included in long-term liabilities on the accompanying condensed consolidated balance sheets.
As of March 31, 2017, we have made payments under the TRA of $672,000.
Reinsurance
Insurance
carriers with which we do business often reinsure a portion of their risk. From time to time, entities owned or affiliated with
Michael Kosloske, serve as reinsurers for insurance carriers that offer products sold by HPIH.