Business Acquisitions | 9 Months Ended |
Sep. 30, 2014 |
Business Combinations [Abstract] | ' |
Business Acquisitions | ' |
2. Business Acquisitions |
Acquisition of HealthPocket, Inc. |
On July 14, 2014, we entered into an agreement to acquire (the “Merger Agreement”) HealthPocket, Inc. (which is referred to herein as “HP”) from Mr. Bruce Telkamp (“Telkamp”), Dr. Sheldon Wang (“Wang”) and minority equity holders of HP. The closing of the acquisition occurred on July 14, 2014 simultaneous with the signing of the Merger Agreement. |
Pursuant to the Merger Agreement, at the closing, we paid consideration consisting of approximately $21.9 million in cash and 900,900 shares of Class A common stock, $0.001 par value per share, with such shares of the Class A common stock having an agreed upon aggregate value of $10.0 million, or $11.10 per share. A portion of the merger consideration consisting of $3.2 million in cash was deposited with an escrow agent to fund payment obligations with respect to post-closing working capital adjustments, post-closing indemnification obligations of HP’s former equity holders, and fees and expenses of the representative of HP’s former equity holders. |
All vested options and warrants to acquire shares of HP’s capital stock were terminated in connection with the acquisition, and the holders thereof will receive in cash a portion of the aggregate consideration upon the terms and subject to the conditions set forth in the Merger Agreement. All unvested options to acquire shares of HP’s capital stock were converted into options to acquire shares of our Class A Common Stock (“Replacement Options”) upon the terms and subject to the conditions set forth in the Merger Agreement. The total number of Replacement Options was 84,909. Pursuant to the Merger Agreement, this amount offset the total number of shares included in the consolidation. If any Replacement Options are terminated or expire, the value of those options will be classified as an adjustment to the purchase price for the acquisition. The Replacement Options are included as a component of stock-based compensation on the accompanying condensed consolidated statements of operations. See Note 7 for future information on the Replacement Options. As of September 30, 2014, the net amount of shares of Class A common stock issued as a result of the acquisition was 815,991. |
Under the terms of the Merger Agreements, the former equity holders of HP may elect to receive cash or shares of our Class A common stock. Telkamp and Wang have agreed to accept cash and common stock, including 50% each of any of the shares that were issued as part of the aggregate consideration that are not elected to be received as consideration by other former HP equity holders. |
Effective July 14, 2014, HII's Board of Directors appointed Telkamp as our Chief Operating Officer and we entered into an employment agreement Mr. Telkamp where he also agreed to continue to serve as HealthPocket’s Chief Executive Officer. Telkamp’s employment agreement provides for, among other things, a noncompetition covenant beginning on July 14, 2014 and ending on the last day of any salary continuation period (as defined in Telkamp’s employment agreement). In addition, the Merger Agreement provides for, among other things, a noncompetition covenant applicable to Telkamp beginning on July 14, 2014 and ending on July 14, 2017. Telkamp was also appointed as a member of HII’s Board of Directors. In addition, effective July 14, 2014, HII’s Board of Directors appointed Wang as our Chief Technology Officer and we entered into an employment agreement with Wang where he also agreed to continue to serve as HealthPocket’s President. Wang’s employment agreement provides for, among other things, a noncompetition covenant beginning on July 14, 2014 and ending on the last day of any salary continuation period (as defined in Wang’s employment agreement). In addition, the Merger Agreement provides for, among other things, a noncompetition covenant applicable to Wang beginning on July 14, 2014 and ending on July 14, 2017. |
During the three and nine months ended September 30, 2014, we recognized $433,000 and $520,000, respectively, in transaction costs related to HP. Transaction costs were expensed as incurred and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. We expect to incur additional acquisition related costs in the fourth quarter of 2014. |
This transaction is expected to provide us with additional benefits such as increased and ongoing sales referrals that we will own, broad consumer and industry data to facilitate our entry into new markets and revenue streams, advanced health information technology to position us to better assist our stakeholders, including customers, insurance brokers and insurance carriers, and other technological and operational synergies. |
The following table summarizes the fair value of the consideration for the acquisition as of July 14, 2014 ($ in thousands): |
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Cash paid at closing (1) | $ | 21,906 | | | | | | | | | | | | | |
Class A common stock, at fair value (2) | | 7,126 | | | | | | | | | | | | | |
Total consideration | $ | 29,032 | | | | | | | | | | | | | |
-1 | Cash paid at closing includes $17.0 million in cash, $3.2 million in cash held in escrow, as noted above, $1.2 million for the payoff of outstanding bank debt held by HP, $54,000 for the payoff of HP loans payable to Telkamp and Wang, and $482,000 in estimated acquisition-related expenses incurred by HP. | | | | | | | | | | | | | | |
-2 | The fair value of the Class A common stock derived from the market price of the stock, adjusted to include a discount for a lack of marketability, due to trading restrictions pursuant to the Merger Agreement and other factors. | | | | | | | | | | | | | | |
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The following table summarizes the preliminary allocation of the total purchase price for the acquisition as of July 14, 2014 ($ in thousands): |
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Cash | $ | 1,295 | | | | | | | | | | | | | |
Accounts receivable and other assets (1) | | 103 | | | | | | | | | | | | | |
Property and equipment (1) | | 7 | | | | | | | | | | | | | |
Accounts payable, accrued expenses and other liabilities (1) | | (486 | ) | | | | | | | | | | | | |
Intangible asset – technology | | 8,100 | | | | | | | | | | | | | |
Intangible asset – brand | | 1,280 | | | | | | | | | | | | | |
Intangible asset – customer relationships | | 430 | | | | | | | | | | | | | |
Intangible asset – noncompete agreements | | 27 | | | | | | | | | | | | | |
Goodwill (2) | | 18,276 | | | | | | | | | | | | | |
| $ | 29,032 | | | | | | | | | | | | | |
-1 | The carrying value of accounts receivable, accounts payable, accrued expenses and property and equipment approximated fair value; as such, no adjustments to the accounts were recorded in association with the acquisition. | | | | | | | | | | | | | | |
-2 | As of September 30, 2014, we expect none of the goodwill acquired in this transaction to be deductible. | | | | | | | | | | | | | | |
The goodwill allocated to the purchase price was calculated as the fair value of the consideration less the assets acquired and liabilities assumed. This value is primarily related to the expected results of future operations of HP and the operational and technological synergies we expect to realize as a result of the acquisition. |
As a result of acquiring HP, our consolidated results of operations include the results of HP since the acquisition date. HP’s revenues and pre-tax net loss included in our results of operations since the acquisition were $370,000 and $1.4 million, respectively, for the three and nine months ended September 30, 2014. Net loss before taxes include $459,000 of amortization expense related to the identified intangible assets recorded as a result of the acquisition. |
The following table ($ in thousands) presents unaudited pro forma information for the Company assuming the acquisition of HP had occurred as of January 1, 2013. This pro forma information does not purport to represent what our actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods. |
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| ($ in thousands, except per share data) | |
| Three months ended September 30, | | | Nine months ended September 30, | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | |
Revenues | $ | 23,409 | | | $ | 14,749 | | | $ | 62,936 | | | $ | 40,818 | |
Net loss before income taxes | | (788 | ) | | | (1,706 | ) | | | (2,175 | ) | | | (11,637 | ) |
Net loss | | (554 | ) | | | (1,815 | ) | | | (420 | ) | | | (12,382 | ) |
Net loss attributable to Health Insurance Innovations, Inc. | | (582 | ) | | | (1,055 | ) | | | (728 | ) | | | (5,584 | ) |
Loss per share – basic | | (0.09 | ) | | | (0.22 | ) | | | (0.13 | ) | | | (1.17 | ) |
Loss per share – diluted | | (0.09 | ) | | | (0.22 | ) | | | (0.13 | ) | | | (1.17 | ) |
Acquisition of American Service Insurance Agency, LLC |
On August 8, 2014, we entered into an agreement (the “Purchase Agreement”) to acquire all of the issued and outstanding membership interests of American Service Insurance Agency, LLC, a Texas insurance brokerage (“ASIA”), from Mr. Landon Jordan (Jordan) for an initial cash payment of $1.8 million, comprised of a prior deposit of $325,000 and a closing payment of $1.5 million, and $2.2 million in contingent consideration, as described below. The closing of the acquisition occurred on August 8, 2014 simultaneous with the signing of the Purchase Agreement. |
Pursuant to the Purchase Agreement, Jordan may receive total contingent consideration of $2.2 million, payable in cash. This amount is payable in two cash payments of $1.2 million and $1.0 million, respectively, if ASIA attains certain amounts of adjusted EBITDA, as defined by the Purchase Agreement, during each of the periods from September 1, 2014 through August 31, 2015, and September 1, 2015 through August 31, 2016. As of September 30, 2014, the fair value of the contingent consideration was $1.3 million which is included in contingent acquisition consideration on the accompanying condensed consolidated balance sheets During the three months ended September 30, 2014, we recorded $50,000 in adjustments to the fair value of the contingent consideration, primarily due to the discounting of the future payments. The estimated range of potential total contingent consideration is zero to approximately $2.2 million. |
Effective August 8, 2014, we also entered into an employment agreement with Jordan which provides for, among other things, a noncompetition covenant beginning on August 8, 2014 and ending on the later of August 8, 2017 and one year following the date on which Jordan’s employment with us is terminated. |
We recognized $13,000 and $48,000 during each of the three and nine months ended September 30, 2014 in transaction costs related to ASIA. Transaction costs were expensed as incurred and are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. We expect to incur additional acquisition related costs in the fourth quarter of 2014. |
The following table summarizes the fair value of the consideration for the acquisition as of August 8, 2014 ($ in thousands): |
|
Cash paid at closing | $ | 1,825 | | | | | | | | | | | | | |
Contingent consideration, at fair value | | 1,220 | | | | | | | | | | | | | |
Total consideration | $ | 3,045 | | | | | | | | | | | | | |
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The following table summarizes the preliminary allocation of the total purchase price for the acquisition as of August 8, 2014 ($ in thousands): |
|
Cash | $ | 105 | | | | | | | | | | | | | |
Accounts receivable and other assets (1) | | 272 | | | | | | | | | | | | | |
Accounts payable, accrued expenses and other liabilities (1) | | (164 | ) | | | | | | | | | | | | |
Intangible asset – customer relationships – distributors | | 406 | | | | | | | | | | | | | |
Intangible asset – customer relationships – direct | | 257 | | | | | | | | | | | | | |
Intangible asset – brand | | 20 | | | | | | | | | | | | | |
Intangible asset – noncompete agreements | | 17 | | | | | | | | | | | | | |
Goodwill (2) | | 2,132 | | | | | | | | | | | | | |
| $ | 3,045 | | | | | | | | | | | | | |
-1 | The carrying value of accounts receivable, accounts payable, accrued expenses and property and equipment approximated fair value; as such, no adjustments to the accounts were recorded in association with the acquisition. | | | | | | | | | | | | | | |
-2 | As of September 30, 2014, the amount of goodwill acquired that we expect to be deductible for income tax purposes is $2.1 million. | | | | | | | | | | | | | | |
The goodwill allocated to the purchase price was calculated as the fair value of the consideration less the assets acquired and liabilities assumed. This value is primarily related to expected results of future operations of ASIA and the operational and technological synergies we expect to realize as a result of the acquisition. |
As a result of acquiring ASIA, our consolidated results of operations include the results of ASIA since the acquisition date. ASIA’s revenues and pre-tax net loss included in our results of operations since the acquisition were $292,000 and $300,000, respectively, for the three and nine months ended September 30, 2014. Net loss before taxes include $29,000 of amortization expense related to the identified intangible assets recorded as a result of the acquisition. |
The following table ($ in thousands) presents unaudited pro forma information for the Company assuming the acquisition of ASIA had occurred as of January 1, 2013. This pro forma information does not purport to represent what our actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods. |
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| ($ in thousands, except per share data) | |
| Three months ended September 30, | | | Nine months ended September 30, | |
| 2014 | | | 2013 | | | 2014 | | | 2013 | |
Revenues | $ | 23,588 | | | $ | 15,230 | | | $ | 63,328 | | | $ | 42,034 | |
Net loss before income taxes | | (1,258 | ) | | | (168 | ) | | | (244 | ) | | | (6,988 | ) |
Net (loss) income | | (884 | ) | | | (179 | ) | | | (47 | ) | | | (7,435 | ) |
Net (loss) income attributable to Health Insurance Innovations, Inc. | | (624 | ) | | | (372 | ) | | | (355 | ) | | | (3,520 | ) |
(Loss) income per share – basic | | (0.10 | ) | | | (0.08 | ) | | | (0.06 | ) | | | (0.74 | ) |
(Loss) income per share – diluted | | (0.10 | ) | | | (0.08 | ) | | | (0.06 | ) | | | (0.74 | ) |
Acquisition of Sunrise Health Plans, Inc. and Affiliates |
On July 17, 2013, we consummated a Stock Purchase Agreement with Joseph Safina, Howard Knaster and Jorge Saavedra (collectively, the “Sellers”), pursuant to which we acquired from the Sellers all of the outstanding equity of Sunrise Health Plans, Inc., a licensed insurance broker, Sunrise Group Marketing, Inc., a call center and sales lead management company, and Secured Software Solutions, Inc., an intellectual property holding company (collectively “Secured”), each of which was converted to a limited liability company shortly after closing, for a cash payment of $10.0 million plus $6.6 million of contingent consideration, which included contingent stock awards and a note payable. The Company also entered into employment agreements with the Sellers. The funding of the $10.0 million cash portion of the purchase price was provided primarily from the net proceeds from the IPO. |
In November 2013, HPIH and the Sellers reached an agreement to modify the contingent consideration, including the thresholds to earn such contingent consideration, and to terminate the contingent stock awards and note payable. As a result of this agreement, the contingent consideration is payable in cash only. The contingent consideration included a one-time payment of $1.0 million, which was paid in November 2013. A fixed component in the aggregate of $250,000 will be paid quarterly if certain levels of policies in force, as defined by the amendment, are achieved, up to a maximum of $3.0 million. A variable component of no more than $200,000 per quarter will be paid if certain levels of growth in policies in force are achieved, up to a maximum of $2.4 million. In addition, one of the Sellers who severed his employment with Sunrise Health Plans, Inc. entered into a consulting arrangement with the Company. Contingent consideration also includes a potential payment of $150,000 to compensate the Sellers for personal income tax liability triggered by the acquisition. As of September 30, 2014, we had made total payments of $2.8 million under the contingent consideration agreement, and the maximum remaining payments under the agreement total $3.8 million. The estimated range of potential total contingent consideration is approximately $2.8 million to $6.6 million. |
The fair value of contingent consideration was $3.4 million as of September 30, 2014 and is included in contingent acquisition consideration on the accompanying condensed consolidated balance sheets. During the three and nine months ended September 30, 2014, we recorded $81,000 and $890,000, respectively, in adjustments to fair value of the contingent consideration, which is included in other expense on the accompanying condensed consolidated statements of operations. The increase in the fair value of the contingent consideration during the three months ended September 30, 2014 was primarily due to the accretion of the discount of the future payments. The increase for the nine months ended September 30, 2014 was primarily due to an increase in the estimated probability of the Sellers’ continuing to achieve the policies in force thresholds to earn the contingent consideration that will result in maximum payout under the agreement. |
The following table summarizes the fair value of the consideration for the acquisition as of July 17, 2013 ($ in thousands). The fair values are derived using discount rates related to the probability of the Sellers’ meeting the thresholds for payment and other risk factors including credit risk. |
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Cash paid at closing | $ | 10,000 | | | | | | | | | | | | | |
Contingent consideration | | 4,872 | | | | | | | | | | | | | |
Total consideration | $ | 14,872 | | | | | | | | | | | | | |
The following table summarizes the allocation of the total purchase prices for the acquisition as of July 17, 2013 ($ in thousands): |
|
Cash | $ | 91 | | | | | | | | | | | | | |
Accounts receivable and other assets (1) | | 332 | | | | | | | | | | | | | |
Property and equipment (1) | | 128 | | | | | | | | | | | | | |
Accounts payable and accrued expenses (1) | | (326 | ) | | | | | | | | | | | | |
Intangible asset – brand | | 76 | | | | | | | | | | | | | |
Intangible asset – noncompete agreements | | 99 | | | | | | | | | | | | | |
Intangible asset – customer relationships-distributors | | 1,050 | | | | | | | | | | | | | |
Intangible asset – customer relationships-direct | | 788 | | | | | | | | | | | | | |
Intangible asset – capitalized software | | 526 | | | | | | | | | | | | | |
Goodwill (2) | | 12,108 | | | | | | | | | | | | | |
| $ | 14,872 | | | | | | | | | | | | | |
-1 | The carrying value of accounts receivable, property and equipment and accounts payable and accrued expenses acquired approximated fair value; as such, no adjustments to these accounts were recorded in association with the acquisition. | | | | | | | | | | | | | | |
-2 | As of September 30, 2014, the amount of goodwill acquired that we expect to be deductible for income tax purposes is $8.9 million. | | | | | | | | | | | | | | |
The goodwill allocated to the purchase price was calculated as the fair value of the consideration less the assets acquired and liabilities assumed. This value is primarily related to expected results of future operations of Secured and the operational and technological synergies we expect to realize as a result of the acquisition. |
The following table ($ in thousands) presents unaudited pro forma information for the Company assuming the acquisition of Secured had occurred as of January 1, 2013. This pro forma information does not purport to represent what our actual results would have been if the acquisition had occurred as of the date indicated or what such results would be for any future periods. |
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| Three months ended September 30, 2013 | | | Nine months ended September 30, 2013 | | | | | | | | | |
Revenues | $ | 15,162 | | | $ | 43,383 | | | | | | | | | |
Net income (loss) before income taxes | | (209 | ) | | | (5,491 | ) | | | | | | | | |
Net income (loss) | | (226 | ) | | | (5,885 | ) | | | | | | | | |
Net income (loss) attributable to Health Insurance Innovations, Inc. | | (93 | ) | | | (1,219 | ) | | | | | | | | |
Income (loss) per share – basic | | (0.02 | ) | | | (0.26 | ) | | | | | | | | |
Income (loss) per share – diluted | | (0.02 | ) | | | (0.26 | ) | | | | | | | | |
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Acquisition of Insurance Center for Excellence, LLC |
On June 1, 2012, HPI and TSG Agency, LLC (“TSG”) acquired ICE. ICE is a licensed call center and a call center training facility for our distributors. In connection with the transaction, HPI received an 80% controlling interest in ICE and TSG received a 20% noncontrolling interest in ICE. On June 30, 2013, we purchased TSG’s 20% interest in ICE for $90,000 and, as a result, ICE is our wholly-owned subsidiary. |