##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-QSB
  þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from ______ to ______
 Commission File Number: 333-123081
 HEALTH BENEFITS DIRECT CORPORATION
  Delaware
    
    98-0438502(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)
 Radnor, Pennsylvania 19087
 (610) 971-6199
 N/A
 þ o
 o þ
  o þ




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##### 



PagePART I  FINANCIAL INFORMATIONItem 1  Consolidated Financial StatementsConsolidated Balance Sheet As of June 30, 2006 (Unaudited)
    
    
    3Consolidated Statements of Operations (Unaudited) For the Three and Six Months Ended June 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows (Unaudited) For the Three and Six Months Ended June 30, 2006 and 2005
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2  Managements Discussion and Analysis or Plan of Operation
    
    
    27Item 3  Controls and Procedures
    
    
    40PART II  OTHER INFORMATIONItem 6  Exhibits
    
    
    41Signatures
    
    
    42Certification of the Chief Executive OfficerCertification of the Chief Financial OfficerCertification of the Chief Executive OfficerCertification of the Chief Financial Officer
  Page 2




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HEALTH BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEET
 June 30, 2006(Unaudited)ASSETSCURRENT ASSETS:Cash
    
    $
    4,967,229Accounts receivable, less allowance for doubtful accounts of $16,982
    
    
    268,027Deferred compensation advances
    
    
    708,487Prepaid expenses
    
    
    266,900Total current assets
    
    
    6,210,643Restricted cash
    
    
    1,150,000Property and equipment, net of accumulated depreciation of $256,742
    
    
    1,750,353Intangibles, net of accumulated amortization of $697,147
    
    
    4,738,885Other assets
    
    
    106,510Total assets
    
    $
    13,956,391LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    676,336Accrued expenses
    
    
    1,116,061Due to related parties
    
    
    151,238Unearned commission advances
    
    
    1,631,305Total current liabilities
    
    
    3,574,940SHAREHOLDERS EQUITY:Preferred stock ($.001 Par value; 10,000,000 shares authorized;
no shares issued and outstanding)
    
    
    Common stock ($.001 Par value; 90,000,000 shares authorized;
27,988,083 shares issued and outstanding
    
    
    27,988Additional paid-in capital
    
    
    23,774,956Accumulated deficit
    
    
    (10,575,279
    )Deferred compensation
    
    
    (2,846,214
    )Total shareholders equity
    
    
    10,381,451Total liabilities and shareholders equity
    
    $
    13,956,391
  Page 3




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HEALTH BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenues, net
    
    $
    2,591,672
    
    
    $
    562,497
    
    
    $
    3,859,979
    
    
    $
    1,027,566Operating expenses:Salaries, commission and related taxes
    
    
    3,676,740
    
    
    
    545,173
    
    
    
    5,496,691
    
    
    
    1,082,110Lead expense
    
    
    847,694
    
    
    
    196,857
    
    
    
    1,433,771
    
    
    
    301,239Depreciation and amortization
    
    
    770,042
    
    
    
    19,917
    
    
    
    839,313
    
    
    
    38,068Professional fees
    
    
    396,716
    
    
    
    9,728
    
    
    
    711,676
    
    
    
    18,188Management salaries  related parties
    
    
    
    
    
    
    157,500
    
    
    
    
    
    
    
    315,000Other general and administrative
    
    
    1,248,126
    
    
    
    203,757
    
    
    
    1,905,655
    
    
    
    411,1396,939,318
    
    
    
    1,132,932
    
    
    
    10,387,106
    
    
    
    2,165,744Loss from operations
    
    
    (4,347,646
    )
    
    
    (570,435
    )
    
    
    (6,527,127
    )
    
    
    (1,138,178
    )Other income (expense):Registration rights penalty reversal
    
    
    
    
    
    
    
    
    
    
    60,537
    
    
    
    Interest income
    
    
    91,304
    
    
    
    
    
    
    
    203,582
    
    
    
    Interest expense
    
    
    (8,144
    )
    
    
    (6,332
    )
    
    
    (13,837
    )
    
    
    (9,453
    )Total other income (expense)
    
    
    83,160
    
    
    
    (6,332
    )
    
    
    250,282
    
    
    
    (9,453
    )Net loss
    
    $
    (4,264,486
    )
    
    $
    (576,767
    )
    
    $
    (6,276,845
    )
    
    $
    (1,147,631
    )Net loss per common share:Net loss per common share  basic and
diluted
    
    $
    (0.15
    )
    
    $
    (0.07
    )
    
    $
    (0.23
    )
    
    $
    (0.15
    )Weighted average common shares outstanding 
basic and diluted
    
    
    27,801,123
    
    
    
    7,800,000
    
    
    
    26,857,374
    
    
    
    7,800,000
  Page 4




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HEALTH BENEFITS DIRECT CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Six Months EndedJune 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)Cash Flows From Operating Activities:Net loss
    
    $
    (6,276,845
    )
    
    $
    (1,147,631
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    839,313
    
    
    
    38,068Stock-based compensation and consulting
    
    
    894,952
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    (73,766
    )
    
    
    14,836Deferred compensation advances
    
    
    (534,791
    )
    
    
    Prepaid expenses and other current assets
    
    
    (266,900
    )
    
    
    (70,735
    )Other assets
    
    
    (83,851
    )
    
    
    Accounts payable
    
    
    295,024
    
    
    
    151,642Accrued expenses
    
    
    705,537
    
    
    
    (28,656
    )Due to related parties
    
    
    (56,516
    )
    
    
    382,811Unearned commission advances
    
    
    744,366
    
    
    
    277,569Net cash used in operating activities
    
    
    (3,813,477
    )
    
    
    (382,096
    )Cash Flows From Investing Activities:Purchase of property and equipment
    
    
    (958,340
    )
    
    
    (27,484
    )Purchase of intangible assets and capitalization of software development
    
    
    (1,308,924
    )
    
    
    (43,137
    )Net cash used in investing activities
    
    
    (2,267,264
    )
    
    
    (70,621
    )Cash Flows From Financing Activities:Gross proceeds from sales of common stock
    
    
    6,450,000
    
    
    
    Restricted cash in connection with letters of credit
    
    
    (1,150,000
    )
    
    
    Placement and other fees paid in connection with offering
    
    
    (285,826
    )
    
    
    Proceeds from note payable
    
    
    
    
    
    
    199,000Payment of note payable
    
    
    (399,630
    )
    
    
    Proceeds from related party advances
    
    
    
    
    
    
    240,200Net cash provided by financing activities
    
    
    4,614,544
    
    
    
    439,200Net decrease in cash
    
    
    (1,466,197
    )
    
    
    (13,517
    )Cash  beginning of year
    
    
    6,433,426
    
    
    
    13,517Cash  end of period
    
    $
    4,967,229
    
    
    $
    Supplemental Disclosures of Cash Flow InformationCash payments for interest
    
    $
    13,837
    
    
    $
    9,453Cash payments for income taxes
    
    $
    
    
    
    $
    
  Page 5




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of presentation
    Organization
    Page 6




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
   Use of estimates
  Restricted cash
  Accounts receivable
   Page 7




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 Property and equipment
  Intangible assets
  Impairment of long-lived assets
  Loss per common share
  Options
    
    
    5,435,000Warrants
    
    
    8,600,00014,035,000
 Page 8




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 Revenue recognition
       Page 9




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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
 Deferred compensation advances
  Lead expense
  Concentrations of credit risk
   Stock-based compensation
 Share Based Payment
 Accounting for Stock-Based Compensation
 Recent accounting pronouncements
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ISG ACQUISITION
    Cash payment to seller
    
    $
    1,107,324Fair value of common stock issued to seller
    
    
    3,310,806Discounted value of guaranteed future fixed cash payments to seller
    
    
    225,212Fair value of stock option issued to seller
    
    
    425,381Estimated direct transaction fees and expenses
    
    
    57,930Estimated purchase price
    
    $
    5,126,653
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ISG ACQUISITION (continued)
  Cash
    
    $
    186,194Accounts receivable
    
    
    196,489Deferred compensation advances
    
    
    255,868Prepaid expenses and other assets
    
    
    1,533Property and equipment, net
    
    
    600Intangible assets
    
    
    4,964,330Accrued expenses
    
    
    (191,718
    )Unearned commission advances
    
    
    (286,643
    )$
    5,126,653
   For the Six MonthsEnded June 30,2006
    
    2005Revenues, net
    
    $
    4,294,692
    
    
    $
    1,600,616Net loss
    
    
    (6,368,365
    )
    
    
    (1,919,019
    )Net loss per common share  basic and diluted
    (
    $
    0.23
    )
    (
    $
    0.22
    )
  Page 12




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HEALTHPLAN CHOICE ASSET PURCHASE
    www.1800healthplan.com www.1800healthplan.net www.1-800-healthplan.com www.1-800-healthplan.net
  REALTIME LICENSE AGREEMENT
   Page 13




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REALTIME LICENSE AGREEMENT (continued)
  PROPERTY AND EQUIPMENT
  Useful Life (Years)Computer equipment and software
    
    
    3
    
    
    $
    980,689Office equipment
    
    
    5
    
    
    
    811,669Office furniture and fixtures
    
    
    7
    
    
    
    68,807Leasehold improvements
    
    
    10
    
    
    
    145,9292,007,094Less accumulated depreciation
    
    
    
    
    
    
    (256,741
    )$
    1,750,353
  INTANGIBLE ASSETS
  Useful Life(Years)Weighted averageISG intangible assets acquired
    
    4.5
    
    $
    4,964,337HealthPlan Choice intangible assets acquired
    
    0.5
    
    
    240,643Software development costs
    
    3
    
    
    189,737Web properties
    
    3
    
    
    41,3155,436,032Less: accumulated amortization
    
    
    
    
    (697,147
    )$
    4,738,885
  Page 14




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INTANGIBLE ASSETS (continued)
  Six months ending December 31, 2006
    
    $
    864,0222007
    
    
    1,355,3992008
    
    
    989,8512009
    
    
    764,6052010
    
    
    621,1182011
    
    
    143,890$
    4,738,885
 RELATED PARTY TRANSACTIONS
   
    
    The Company from time to time uses a credit card in the name of Mr. Frohman, an officer
of the Company, for purchases and operating purposes. At June 30, 2006, the Company owed
Mr. Frohman $75,195 for expenses incurred on his credit card.
    
    The Company from time to time uses a credit card in the name of Mr. Eissa, an officer of
the Company, for purchases and operating purposes. At June 30, 2006, the Company owed Mr.
Eissa $2,037 for expenses incurred on his credit card.
    
    The Company uses a credit card in the name of Mr. Clemens, an officer of the Company,
for purchases and operating purposes. At June 30, 2006, the Company owed Mr. Clemens
$16,991 for expenses incurred on his credit card.
    
    During 2005, Marlin Capital Partners I, LLC (Marlin) paid expenses totaling $50,136 on
behalf of the Company. Daniel Brauser, an officer of the Company is an affiliate and
control person of Marlin. At June 30, 2006, the Company owed Marlin $21,515.
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RELATED PARTY TRANSACTIONS (continued)
 
    
    In March 2006, the Company entered into Marketing Services Agreement with SendTec, Inc.
(SendTec). Paul Soltoff, a director of the Company, is the Chief Executive Officer of
SendTec. SendTec will provide certain marketing and advertising services and will receive
a flat fee of $7,500 per month plus commissions on services rendered. This agreement can
be terminated by either party upon thirty-days notice. For six months ended June 30, 2006
the Company paid SendTec $135,000, which has been included in other general and
administrative expense of $121,000, prepaid expenses of $49,500 and due to related parties
of $35,500 in the accompanying financial statements.
 SHAREHOLDERS EQUITY
 Common Stock
     Stock Options
  Page 16




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SHAREHOLDERS EQUITY (continued)
     Page 17




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SHAREHOLDERS EQUITY (continued)
     Administration
 Eligibility
 Types of Awards.
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SHAREHOLDERS EQUITY (continued)
 Shares Subject to the Plan.
  Change of Control.
  Amendment and Termination of the Plan
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SHAREHOLDERS EQUITY (continued)
  Number
    
    WeightedOf Shares
    
    Average
    
    WeightedUnderlying
    
    Exercise
    
    AverageOptions
    
    Price
    
    Fair ValueOutstanding at December 31, 2005
    
    
    3,935,000
    
    
    $
    1.89
    
    
    $
    0.14Six months ended June 30, 2006Granted
    
    
    1,627,500
    
    
    
    2.92
    
    
    
    2.35Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    127,500
    
    
    
    2.74
    
    
    
    1.01Outstanding at June 30, 2006
    
    
    5,435,000
    
    
    $
    2.18
    
    
    $
    0.78Outstanding and exercisable at June 30, 2006
    
    
    890,000
    
    
    $
    2.29
    
    
    $
    1.17
  Stock Options Granted During the PeriodSix Months Ended
    
    For the Year EndedJune 30, 2006
    
    December 31, 2005Expected volatility
    
    
    110
    %
    
    
    25
    %Risk-free interest rate
    
    
    4.61
    %
    
    
    3.75
    %Expected life in years
    
    
    5.0
    
    
    
    4.5Assumed dividend yield
    
    
    0
    %
    
    
    0
    %
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SHAREHOLDERS EQUITY (continued)
  Options Outstanding
    
    Options ExercisableNumber of Shares
    
    Weighted
    
    Weighted
    
    Number
    
    WeightedExercise
    
    Underlying
    
    Average
    
    Average
    
    Exercisable at
    
    AveragePrice
    
    Options at June
    
    Remaining
    
    Exercise
    
    June 30, 2006
    
    Exercise$
    1.00
    
    
    
    1,850,000
    
    
    
    4.4
    
    
    $
    1.00
    
    
    
    300,000
    
    
    $
    1.002.50
    
    
    
    2,257,500
    
    
    
    2.3
    
    
    
    2.50
    
    
    
    350,000
    
    
    
    2.502.70
    
    
    
    425,000
    
    
    
    2.7
    
    
    
    2.70
    
    
    
    
    
    
    
    2.95
    
    
    
    45,000
    
    
    
    4.9
    
    
    
    2.95
    
    
    
    
    
    
    
    3.50
    
    
    
    150,000
    
    
    
    4.8
    
    
    
    3.50
    
    
    
    
    
    
    
    $
    3.60
    
    
    
    707,500
    
    
    
    4.8
    
    
    $
    3.60
    
    
    
    240,000
    
    
    $
    3.605,435,000
    
    
    
    
    
    
    
    
    
    
    
    890,000
 Common Stock warrants
   WeightedAverageExerciseShares
    
    
    PriceOutstanding at December 31, 2005
    
    
    5,052,500
    
    
    $
    1.50Granted
    
    
    3,547,500
    
    
    
    1.50Exercised
    
    
    
    
    
    
    Outstanding at June 30, 2006
    
    
    8,600,000
    
    
    $
    1.50Warrants exercisable at end of period
    
    
    8,600,000
    
    
    $
    1.50
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SHAREHOLDERS EQUITY (continued)
  Warrants Outstanding
    
    
    Warrants ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Remaining
    
    
    Average
    
    
    Number
    
    
    AverageOutstanding at
    
    
    Contractual
    
    
    Exercise
    
    
    Exercisable at
    
    
    ExerciseJune 30, 2006
    
    
    Life (Years)
    
    
    Price
    
    
    June 30, 2006
    
    
    Price8,600,000
    
    
    2.45
    
    
    
    1.50
    
    
    
    8,600,000
    
    
    
    1.508,600,000
    
    
    
    
    
    
    $
    1.50
    
    
    
    8,600,000
    
    
    $
    1.50
 RESTRICTED CASH, COMMITMENTS AND CONTINGENCIES
 Employment Agreements
    Restricted Cash and Operating Leases
  Page 22




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RESTRICTED CASH, COMMITMENTS AND CONTINGENCIES (continued)
    Page 23




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RESTRICTED CASH, COMMITMENTS AND CONTINGENCIES (continued)
  Six Months ended December 31,2006
    
    $
    555,4252007
    
    
    1,280,4302008
    
    
    1,333,3912009
    
    
    1,376,4212010
    
    
    1,412,242thereafter
    
    
    6,337,653Total
    
    $
    12,295,562
 BOARD OF DIRECTORS
   SUBSEQUENT EVENTS
 Registration Statement Effectiveness
  Corporate Office Lease
 th
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SUBSEQUENT EVENTS (continued)
  Internet Domain Name Purchase and Assignment Agreement
 www.healthbenefitsdirect.com www.healthbenefitsdirect.com www.healthbenefitsdirect.com www.healthbenefitsdirect.com
   Consulting Agreement with Real IT Group
  Page 25




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SUBSEQUENT EVENTS (continued)
   Exercise Of Warrants
  Page 26




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FORWARD LOOKING STATEMENTS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
      Page 27




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Cash payment and payable to seller
    
    $
    1,107,324Fair value of common stock issued to seller
    
    
    3,310,806Discounted value of guaranteed future fixed cash payments to seller
    
    
    225,212Fair value of stock option issued to seller
    
    
    425,381Estimated direct transaction fees and expenses
    
    
    57,930Estimated purchase price
    
    $
    5,126,653
  Cash
    
    $
    186,194Accounts receivable
    
    
    196,489Deferred compensation advances
    
    
    255,868Prepaid expenses and other assets
    
    
    1,533Property and equipment, net
    
    
    600Intangible assets
    
    
    4,964,330Accrued expenses
    
    
    (191,718
    )Unearned commission advances
    
    
    (286,643
    )$
    5,126,653
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www.1800healthplan.com www.1800healthplan.net www.1-800-healthplan.com www.1-800-healthplan.net
        Page 30




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
    
    For the three months ended June 30, 2006, we recorded salaries, commission and related
taxes of $3,676,740 as compared to $545,173 for the 2005 period. Salaries, commission and
related taxes consisted of the following:
 For the Three MonthsEnded June 30,2006
    
    
    2005Salaries and wages
    
    $
    1,978,452
    
    
    $
    431,137Share based employee and
director compensation
    
    
    743,954
    
    
    
    Commissions to employees
    
    
    430,803
    
    
    
    77,531Commissions to non-employees
    
    
    144,251
    
    
    
    Employee benefits
    
    
    110,856
    
    
    
    Payroll taxes and other
    
    
    268,424
    
    
    
    36,505Total
    
    $
    3,676,740
    
    
    $
    545,173
 
    
    Salaries and wages were $1,978,452 as compared to $431,137 for the 2005 period, an
increase of $1,547,318 or 358%. These increases were the result of the hiring of
additional personnel employed by the Company from approximately 66 at June 30, 2005 to
approximately 204 at June 30, 2006.
    
    Share based employee and director compensation expense was $743,954 as compared to $0
for the 2005 period. Share based employee and director compensation consists of stock
option grants, which are valued at fair-value at the date of the grant and expensed over
the stock options vesting period or expiration date, whichever occurs first. Effective
January 1, 2006, we adopted the provisions of SFAS No. 123(R), Share-Based Payment,
under the modified prospective method. There were no stock options outstanding in the
2005 period. Expense in the second quarter of 2006 included $49,492 associated with the
accelerated vesting of a stock option to a former director and $128,890 associated with
expensing the unamortized fair value of stock options granted to employees whose
employment terminated.
    
    Commissions to employees were $430,803 as compared to $77,531 for the 2005 period,
which was the result of increased sales that resulted in higher sales commission expense.
    
    Commissions to non employees were $144,251 as compared to $0 for the 2005 period.
Effective April 3, 2006 as a result of the ISG acquisition the Company now incurs
commission expense to non employees, who are independent licensed insurance agents. ISGs
revenue is the result of the sale of health insurance products sold through independent
insurance agents. Unlike the Companys employee licensed insurance agents, the Companys
only expense pertaining to independent insurance agents are commissions.
    
    Employee benefits expense was $110,856 as compared to $0 for the 2005 period. The
Company began implementing an employee benefits package during 2006.
    
    Payroll taxes and other expense was $268,424 as compared to $36,505 for the 2005
period. This is primarily employer payroll taxes and the increase was the result of the
hiring of additional personnel employed by the Company.
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
    
    Lead expense was $845,626 as compared to $196,857 in the 2005 period, an increase of
$648,769 or 330%. As we increase the number of licensed agents we employ, we expect our
lead expense to increase in the future in order to facilitate the flow of quality leads to
our sale agents.[verify]
    
    For the three months ended June 30, 2006, we recorded depreciation and amortization
expense of $770,042 as compared to $19,917 for the 2005 period. Depreciation and
amortization expense consisted of the following:
 For the Three MonthsEnded June 30,2006
    
    
    2005Amortization of intangibles
acquired as a result of the ISG
acquisition
    
    $
    480,136
    
    
    $
    Amortization of intangibles
acquired as a result of the
HealthPlan Choice Asset Purchase
    
    
    167,533
    
    
    
    Amortization of software and
website development
    
    
    18,351
    
    
    
    Depreciation expense
    
    
    104,022
    
    
    
    19,917Total
    
    $
    770,042
    
    
    $
    19,917
 
    
    For the three months ended June 30, 2006, we recorded amortization expense of $480,136
for the intangible assets acquired from ISG. The ISG acquisition was effective April 3,
2006. Accordingly there was no amortization in the 2005 period. The intangible assets
acquired from ISG represent the value of purchased commission override revenue with an
assigned value of $1,411,594 amortized over five years in proportion to expected future
value, value of acquired carrier contracts and agent relationships with an assigned value
of $2,752,142 amortized straight line over the expected useful life of 5 years and value
of employment and non-compete agreement acquired with an assigned value of $800,593
amortized straight line over a weighted average useful life of 3.1 years.
    
    For the three months ended June 30, 2006, we recorded amortization expense of $167,533
for the intangible assets acquired as a result of the HealthPlan Choice asset purchase.
The HealthPlan Choice asset purchase was effective April 10, 2006. Accordingly there was
no amortization in the 2005 period. The intangible assets acquired represent the value of
acquired employees of $157,344, which was fully amortized in the second quarter of 2006,
the value of the bargain sublease amortized straight line over the balance of the
Sublease, which expires on December 31, 2006 and the value of the 1-800-healthplan
telephone number, www.1800healthplan.com,
www.1800healthplan.net, www.1-800-healthplan.com
and www.1-800-healthplan.net domain names amortized straight line over 36 months.
    
    For the three months ended June 30, 2006, we recorded amortization expense of $18,351
compared to $0 in the 2005 period for the software and website development.
    
    For the three months ended June 30, 2006, we recorded depreciation expense of $104,022
as compared to $19,917 for the 2005 period. In the fourth quarter of 2005 and in the
first quarter of 2006, we acquired telephone and switching equipment and computer
equipment, which we began depreciating in the fourth quarter of 2005. In the second
quarter of 2006 we acquired fixed assets in connection with ISG and HealthPlan Choice,
which we began depreciating in the second quarter of 2006.
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
    
    For the three months ended June 30, 2006, we incurred professional fees of $396,716 as
compared to $9,728 for the 2005 period. During the three months ended June 30, 2006, we
incurred legal fees of $226,320 associated primarily with SEC filings as well as other
corporate legal matters. Additionally, we incurred accounting fees of $42,550 related to
the preparation and audit of our financial statements and the review of our SEC filings,
recruiting fees to attract qualified employees of $74,113, investor relations fees of
$18,625 and other professional fees of $35,108.
    
    For the three months ended June 30, 2005, we incurred accrued salaries to our
management for services rendered of $157,500 as compared to $0 for the 2006 period. In
October and November of 2005, we entered into employment agreements with these executives
and paid compensation to them in 2006, which is included in salaries, commissions and
related taxes.
    
    For the three months ended June 30, 2006, we incurred other general and administrative
expenses of $1,248,126 as compared to $203,757 for the 2005 period, an increase of
$1,044,369 or 513%. Other general and administrative expenses consisted of the following:
 For the Three MonthsEnded June 30,2006
    
    
    2005Licensing and permit fees
    
    $
    127,636
    
    
    $
    26,177Rent and utilities
    
    
    385,350
    
    
    
    41,750Travel and entertainment
    
    
    128,680
    
    
    
    22,482Telephone
    
    
    150,226
    
    
    
    40,946Cost of integrating HealthPlan Choice Atlanta office as a satellite sales office
    
    
    102,615
    
    
    
    Other
    
    
    353,619
    
    
    
    72,402Total
    
    $
    1,248,126
    
    
    
    203,757
 
    
    During the three months ended June 30, 2006, we had increases in licensing and permit
fees of $101,459 related to the increase in our licensed employee insurance agents. We
incur licensing and appointment costs associated with the licensing of our employee
insurance agents.
    
    During the three months ended June 30, 2006, we had increases in rent of $343,600
attributable to the cost of new and larger facilities. In mid 2005 we began occupying our
New York and California offices. In March 2006, we relocated our Florida office into a
larger facility and entered into a lease for a larger New York sales office. We
anticipate relocating our New York sales office in the third quarter of 2006. In April
2006 we began occupying our Atlanta office as a result of the HealthPlan Choice asset
purchase agreement.
    
    During the three months ended June 30, 2006, we had an increase in travel and
entertainment expense of $106,198 compared to the 2005 period primarily related with
increased marketing activities with insurance carriers and travel between our various
office locations.
    
    During the three months ended June 30, 2006, we had an increase in telephone and
communications expense of $109,280 as compared to the 2005 period due to the increase in
the number of sales agents and other administrative employees.
    
    During the three months ended June 30, 2006, we incurred $102,615 pertaining to the
cost of integrating HealthPlan Choices office as our Atlanta satellite sales office.
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
    
    Other general and administrative expenses consisted of advertising, casual labor,
insurance, office expenses, maintenance and computer expenses. The increase for the three
months ended June 30, 2006 as compared to the 2005 period is attributable to an increase
in operational activities.
           
    
    For the six months ended June 30, 2006, we recorded salaries, commission and related
taxes of $5,496,691 as compared to $1,082,110 for the 2005 period. Salaries, commission
and related taxes consisted of the following:
 For the Six MonthsEnded June 30,2006
    
    
    2005Salaries and wages
    
    $
    3,196,939
    
    
    $
    832,271Share based employee and director
compensation
    
    
    844,952
    
    
    
    Commissions to employees
    
    
    664,241
    
    
    
    104,450Commissions to non-employees
    
    
    144,251
    
    
    
    Employee benefits
    
    
    110,856
    
    
    
    Payroll taxes and other
    
    
    535,452
    
    
    
    145,389Total
    
    $
    5,496,691
    
    
    $
    1,082,110
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
    
    Salaries and wages were $3,196,939 as compared to $832,271 for the 2005 period, an
increase of $2,364,668 or 284%. These increases were the result of the hiring of
additional personnel employed by the Company. The Company had approximately 66 employees
at June 30, 2005 and approximately 204 employees at June 30, 2006.
    
    Share based employee and director compensation expense was $844,951 as compared to $0
for the 2005 period. Share based employee and director compensation consists of stock
option grants, which are valued at fair-value at the date of the grant and expensed over
the stock options vesting period or expiration date, whichever occurs first. There were
no stock options outstanding in the 2005 period. Expense in the six months ended June 30,
2006 period included $49,492 associated with the accelerated vesting of a stock option to
a former director and $128,890 associated with expensing the unamortized fair value of
stock options granted to employees whose employment has terminated.
    
    Commissions to employees were $664,241 as compared to $104,450 for the 2005 period.
These increases were the result of an increase in sales that resulted in higher sales
commission expense.
    
    Commissions to non employees were $144,251 as compared to $0 for the 2005 period.
Effective April 3, 2006 as a result of the ISG acquisition the Company now incurs
commission expense to non employees, who are independent licensed insurance agents. ISGs
revenue is the result of the sale of health insurance products sold through independent
insurance agents. Unlike the Companys employee licensed insurance agents, the Companys
only expense pertaining to independent insurance agents are commissions.
    
    Payroll taxes and other expense was $535,452 as compared to $145,389 for the 2005
period. This is primarily employer payroll taxes and the increase was the result of the
hiring of additional personnel employed by the Company.
    
    Lead expense was $1,431,703 as compared to $301,239 in the 2005 period, an increase of
$1,130,464 or 375%. As we increase the number of licensed agents we employ, we expect our
lead expense to increase in the future in order to facilitate the flow of quality leads to
our sale agents.
    
    For the six months ended June 30, 2006, we recorded depreciation and amortization
expense of $839,313 as compared to $38,068 for the 2005 period. Depreciation and
amortization expense consisted of the following:
 For the Six MonthsEnded June 30,2006
    
    
    2005Amortization of intangibles acquired as
a result of the ISG acquisition
    
    $
    480,136
    
    
    $
    Amortization of intangibles acquired as
a result of the HealthPlan Choice Asset
Purchase
    
    
    167,532
    
    
    
    Amortization of software and website
development
    
    
    33,479
    
    
    
    Depreciation expense
    
    
    158,166
    
    
    
    38,068Total
    
    $
    839,313
    
    
    $
    38,068
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
    
    For the six months ended June 30, 2006, we recorded amortization expense of $480,136
for the intangible assets acquired from ISG. The ISG acquisition was effective April 3,
2006. Accordingly there is no amortization in the 2005 period. The intangible assets
acquired from ISG represent the value of purchased commission override revenue with an
assigned value of $1,411,594 amortized over five years in proportion to expected future
value, value of acquired carrier contracts and agent relationships with an assigned value
of $2,752,142 amortized straight line over the expected useful life of 5 years and value
of employment and non-compete agreement acquired with an assigned value of $800,593
amortized straight line over a weighted average useful life of 3.1 years.
    
    For the six months ended June 30, 2006, we recorded amortization expense of $167,532
for the intangible assets acquired as a result of the HealthPlan Choice asset purchase.
Accordingly there is no amortization in the 2005 period. The intangible assets acquired
represent the value of acquired employees of $157,344, which was fully amortized in the
second quarter of 2006, the value of the bargain sublease amortized straight line over the
balance of the Sublease, which expires on December 31, 2006 and the value of the
1-800-healthplan telephone number, www.1800healthplan.com,
www.1800healthplan.net,
www.1-800-healthplan.com and www.1-800-healthplan.net domain names amortized straight line
over 36 months.
    
    For the six months ended June 30, 2006, we recorded depreciation expense of $158,166 as
compared to $38,068 for the 2005 period. In the fourth quarter of 2005 and in the first
quarter of 2006, we acquired telephone and switching equipment and computer equipment,
which we began depreciating in the fourth quarter of 2005. In the second quarter of 2006
we acquired fixed assets in connection with ISG and HealthPlan Choice, which we began
depreciating in the second quarter of 2006.
    
    For the six months ended June 30, 2006, we incurred professional fees of $711,676 as
compared to $18,188 for the 2005 period, an increase of $693,488. During the six months
ended June 30, 2006, we incurred legal fees of $398,464 associated with our SEC filings,
our compensation plans and restructuring of our board of directors, as well as other
corporate legal matters. Additionally, we incurred accounting fees of $79,421 related to
the preparation and audit of our financial statements and the review of our SEC filings,
recruiting fees to attract qualified employees of $109,250, investor relations fees of
$54,130 and other professional fees of $70,411.
    
    For the six months ended June 30, 2005, we incurred accrued salaries to our management
for services rendered of $315,000 as compared to $0 for the 2006 period. In October and
November of 2005, we entered into employment agreements with these executives and paid
compensation to them in 2006, which is included in salaries, commissions and related
taxes.
    
    For the six months ended June 30, 2006, we incurred other general and administrative
expenses of $1,905,655 as compared to $411,139 for the 2005 period, an increase of
$1,494,516 or 364%. Other general and administrative expenses consisted of the following:
 For the Six MonthsEnded June 30,2006
    
    
    2005Licensing and permit fees
    
    $
    256,784
    
    
    $
    49,241Rent and utilities
    
    
    553,278
    
    
    
    77,824Travel and entertainment
    
    
    205,243
    
    
    
    33,107Telephone
    
    
    233,917
    
    
    
    95,472Cost of integrating HealthPlan
Choice Atlanta office as a satellite
sales office
    
    
    102,615
    
    
    
    Other
    
    
    553,818
    
    
    
    155,495Total
    
    $
    1,905,655
    
    
    $
    411,139
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
    
    During the six months ended June 30, 2006, we had increases in licensing and permit
fees of $204,543 related to the increase in our sales agents. We incur licensing and
appointment costs associated with the licensing of our employee insurance agents.
    
    During the six months ended June 30, 2006, we had increases in rent and utilities of
$475,454 attributable to the cost of new and larger facilities. In mid 2005 we began
occupying our New York and California offices. In March 2006, we relocated our Florida
office into a larger facility and entered into a lease for a larger New York sales office.
We anticipate relocating our New York sales office in the third quarter of 2006. In
April 2006 we began occupying our Atlanta office as a result of the HealthPlan Choice
asset purchase agreement.
    
    During the six months ended June 30, 2006, we had an increase in travel and
entertainment expense of $172,136 compared to the 2005 period primarily related with
increased marketing activities with insurance carriers and travel between our various
office locations.
    
    During the six months ended June 30, 2006, we had an increase in telephone and
communications expense of $138,445 as compared to the 2005 period due to the increase in
the number of sales agents and other administrative employees.
    
    During the six months ended June 30, 2006, we incurred $102,615 pertaining to the cost
of integrating HealthPlan Choices office as our Atlanta satellite sales office.
    
    Other general and administrative expenses consisted of advertising, casual labor,
insurance, office expenses, utilities, maintenance, computer expenses, and office
expenses. The increase for the six months ended June 30, 2006 as compared to the 2005
period is attributable to an increase in operational activities. Additionally, during the
2006 period, we incurred approximately $49,700 related to maintenance on our telephone
system.
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
    
    Increases in accounts receivable of $76,766 related to increased revenues;
    
    Increases in deferred compensation advances of $534,791. We have advanced commissions
relating to the advanced commissions the Company has received from insurance carriers. The
deferred compensation advances are charged to expense in proportion to the Companys
recognition of unearned commissions as revenue;
    
    Increases in prepaid expenses and other current assets of
$266,900 related to advances
made by us for advertising, the establishment of a health insurance program for our
employees, and other prepaid items;
    
    Increases in accounts payable of $295,024 relating to professional fees and increased business activity.
    
    Increases in accrued expenses of $705,537 relating to primarily to increased salaries, wages and commissions;
    
    Increases in unearned commission advances of $744,366 relating to increased revenues
from certain of the Companys insurance carriers that advance the Company future
commission revenue. The Companys revenue consists primarily of insurance premium
commissions, which are recognized pro-rata over the terms of the insurance policies. The
unearned portion of insurance premium commissions has been included in the consolidated
balance sheet as a liability for unearned commission advances.
   
    
    During the first quarter of 2006 we received net proceeds from the sale of common stock
of $6,164,174.
    
    During the second quarter of 2006 we disbursed $1,150,000 from cash and deposited this
amount into a certificate of deposit, which is reported as restricted cash. The
certificate of deposit is on deposit with the same bank that issued 2 letters of credit for
the benefit of the Companys landlords of our new Florida and New York offices.
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##### Table of Contents




    
    During the second quarter of 2006 we repaid our $399,630 outstanding balance of a line
of credit with Regions Bank dated August 2004. The interest rate for this line of credit
was prime plus 8.5%. This line of credit was personally guaranteed by the Companys CEO
Scott Frohman, the Companys President and COO Charles Eissa and Michael Brauser. The
Company has no further obligations regarding this line of credit and this line of credit is
not available for future borrowing.
  
    
    On April 3, 2006, we issued 1,000,000 shares of our common stock to Ivan M. Spinner, the
sole stockholder of ISG in exchange for all of the outstanding stock of ISG. The fair
value of the shares issued was estimated to be $3,310,806. Also on April 3, 2006 we issued
to Mr. Spinner an employee stock option grant to purchase 150,000 shares of our common
stock at the closing market price on the date of the grant. The fair value of this option
grant was estimated to be $425,381 on the date of grant using the Black-Scholes
option-pricing model. We also paid Mr. Spinner $920,000 and entered into a 2 year
employment agreement in connection with the purchase of ISG.
    
    On April 10, 2006, we issued 80,000 shares of our common stock to Mr. Horace Richard
Priester III in connection with the HealthPlan Choice Asset Purchase Agreement. The fair
value of the shares issued was estimated to be $270,240. We also paid Mr. Priester
$100,000 in connection with the asset purchase agreement.
    
    On May 31, 2006, we issued 216,612 shares of our common stock to Realtime Solutions
Group, L.L.C. in connection with a Software and Services Agreement. Realtime granted the
Company a worldwide, transferable, non-exclusive, perpetual and irrevocable license to use,
display, copy, modify, enhance, create derivate works within, and access Realtime Solutions
Groups Straight Through Processing software and all associated documentation, source code
and object code, for use in the marketing, promotion and sale of health benefits or
insurance products. The fair value of the shares issued was estimated to be $648,536. We
accounted for the issuance of our common stock as the purchase of computer software, which
is included in property and equipment.
  Six Months ended December 31,2006
    
    $
    555,4252007
    
    
    1,280,4302008
    
    
    1,333,3912009
    
    
    1,376,4212010
    
    
    1,412,242thereafter
    
    
    6,337,653Total
    
    $
    12,295,562
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ITEM 3. CONTROLS AND PROCEDURES
     Page 40




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PART II  OTHER INFORMATION
 
 Item 6. Exhibits
 Exhibit No
    
    Description10.1
    
    Merger Agreement, dated April 3, 2006, among Health Benefits Direct Corporation,
ISG Merger Acquisition Corp., Insurance Specialist Group Inc. and Ivan M. Spinner
(incorporated by reference to the Registrants Current Report on Form 8-K filed with the
SEC on April 6, 2006).10.2
    
    Employment Agreement, dated April 3, 2006, between HBDC II, Inc. and Ivan M.
Spinner (incorporated by reference to the Registrants Current Report on Form 8-K filed
with the SEC on April 6, 2006).10.3
    
    Health Benefits Direct Corporation 2006 Omnibus Equity Compensation Plan
(incorporated by reference to the Registrants Current Report on Form 8-K filed with the
SEC on May 2, 2006).10.4
    
    Health Benefits Direct Corporation 2006 Omnibus Equity Compensation Plan Form of
Nonqualified Stock Option Grant (incorporated by reference to the Registrants Current
Report on Form 8-K filed with the SEC on May 2, 2006).10.5
    
    Sublease, dated March 7, 2006, between Health Benefits Direct Corporation and
World Travel Partners I, LLC (incorporated by reference to the Registrants Current
Report on Form 8-K filed with the SEC on May 19, 2006).10.6
    
    First Amendment to Sublease, dated April 18, 2006, between Health Benefits Direct
Corporation ad World Travel Partners I, LLC (incorporated by reference to the
Registrants Current Report on Form 8-K filed with the SEC on May 19, 2006).10.7
    
    Letter Agreement, dated April 18, 2006, among World Travel Partners I, LLC,
Health Benefits Direct Corporation, and 1120 Avenue of the Americas, LLC (incorporated
by reference to the Registrants Current Report on Form 8-K filed with the SEC on May
19, 2006).10.8
    
    Software and Services Agreement, dated May 31, 2006, among Health Benefits Direct
Corporation, Insurint Corporation, and Realtime Solutions Group, L.L.C. (incorporated by
reference to the Registrants Current Report on Form 8-K filed with the SEC on June 2,
2006).31.1
    
    Certificate of the Chief Executive Officer of Health Benefits Direct Corporation
required by rule 13a-14(a) under the Exchange Act.31.2
    
    Certificate of the Chief Financial Officer of Health Benefits Direct Corporation
required by rule 13a-14(a) under the Exchange Act.32.1
    
    Certificate of the Chief Executive Officer of Health Benefits Direct Corporation
required by rule 13a-14(b) under the Exchange Act.32.2
    
    Certificate of the Chief Financial Officer of Health Benefits Direct Corporation
required by rule 13a-14(b) under the Exchange Act.
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##### Table of Contents



HEALTH BENEFITS DIRECT CORPORATIONDated: August 14, 2006
    
    By:
    
    /s/ SCOTT FROHMANScott FrohmanChief Executive Officer(Principal Executive Officer)Dated: August 14, 2006
    
    By:
    
    /s/ ANTHONY R. VERDIAnthony R. VerdiChief Financial Officer(Principal Financial and Accounting Officer)
 Page 42