The following table sets forth the location, approximate square footage and primary use of each of the
Location Approximate Square Footage Leased Approximate Square Footage Subleased Approximate Square Footage Occupied Primary Use
The following selected consolidated financial data are qualified in their entirety by, and should be read in conjunction with the consolidated financial statements and related notes thereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in
You should read the following discussion and analysis of our financial condition and result of operations together with our consolidated financial statements and footnotes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in Part I, Item 1A above.
We are a leading technology-enabled, direct-to-consumer (“DTC”) distribution platform that provides consumers with a transparent and convenient venue to shop for complex senior health, life, and auto & home insurance policies from a curated panel of the nation’s leading insurance carriers. As an insurance distributor, we do not insure the consumer, but rather identify consumers looking to acquire insurance products and place these consumers with insurance carrier partners that provide these products and, in return, earn commissions from our insurance carrier partners for the policies we sell on their behalf. Because we are not the issuer of the insurance policy to the consumer, we bear no underwriting risks. Our proprietary technology allows us to take a broad funnel approach to marketing by analyzing and identifying high quality consumer leads sourced from a wide variety of online and offline marketing channels. Our primary sources of leads include search engine marketing, radio, television, and third-party marketing partners. We monitor our acquisition costs to dynamically allocate our marketing spend to the most attractive channel, benefiting from over thirty years of data accumulated through our proprietary, purpose-built technologies. Our advanced workflow processing system scores each acquired lead in real-time, matching it with an agent whom we determine is best suited to meet the consumer’s need. Our platform then captures and utilizes our experience to further build upon the millions of data points that feed our marketing algorithms, which further enhances our ability to deploy subsequent marketing dollars efficiently and target more high-quality consumer leads. We have built our business model to maximize commissions collected over the life of an approved policy less the cost of acquiring the business, a metric we refer to as policyholder lifetime value and which is a key component to our overall profitability.
SelectQuote Auto & Home (“Auto & Home”) was founded in 2011 as an unbiased comparison shopping platform for auto, home, and specialty insurance lines. We offer insurance products, including homeowners, auto, dwelling fire, and other ancillary insurance products underwritten by approximately 30 leading, nationally-recognized insurance carrier partners. Homeowners and 12-month auto products accounted for 78% and 75% of new premium within the Auto & Home segment for the years ended June 30, 2020 and 2019, respectively, with six-month auto, dwelling, and other products accounting for the majority of the remainder.
We estimate that the total addressable market for the insurance products we distribute is greater than $180 billion. Further, while these markets are already substantial, they are also growing, in part due to a number of highly attractive demographic trends. Our Senior segment serves consumers predominantly in the over 65 age category. The over 65 age category grew at a 3.4% CAGR from 2010 to 2016, and grew from 12.9% of the total population to 15.2% of the total population according to the United States Census Bureau. The over 65 age category is expected to grow at a 3.2% CAGR from 2016 to 2025, by which point it will account for 18.9% of the population, according to the United States Census Bureau. On average, 10,000 “Baby Boomers” are expected to turn 65 every day or nearly 4 million per year, for the next 10 years. As a result, Medicare enrollment is growing steadily, with the number of Medicare enrollees expected to grow from 59.9 million in 2018 (up from 45.5 million in 2008 and 52.5 million in 2013), to approximately 68.4 million in 2023 then rising to 76.7 million by 2028, according to CSG Actuarial. Of this, Medicare Advantage plans are representing an increasing share of the Medicare market. At the end of 2017, there were approximately 20 million Medicare Advantage enrollees, representing approximately 35% penetration of the Medicare market. By 2025, the number of Medicare Advantage enrollees is expected to swell to approximately 38 million, representing a 50% penetration rate of the Medicare market. Medicare Advantage is expected to reach 60% to 70% penetration between 2030 and 2040, according to LEK Consulting, highlighting the pace with which this already large segment of the Medicare market is growing. The degree to which we will realize a corresponding increase in revenue will be determined by our ability to continue to successfully place new Medicare policies for this enlarged potential consumer base.
The amount of revenue we expect to recognize per policy is based on multiple factors, including our commission rates with our insurance carrier partners and the expected retention rates of different types of policies. The higher our retention rates, the more revenue we expect to generate pursuant to our carrier agreements, which generally entitle us to receive annual renewal commissions for so long as the policyholder renews their policy. Additionally, we earn certain volume-based bonuses from some carriers on first-year policies sold, which we refer to as production bonuses and marketing development funds, based on attaining various predetermined target sales levels or other agreed upon objectives, as presented in the consolidated statements of comprehensive income as production bonus and other revenue. These commissions that we expect to generate over the life of an approved policy less the cost of acquiring the business is a key component to our overall profitability. Our goal is to maximize policyholder lifetime value by increasing retention rates, which starts by providing consumers with a transparent, valuable and best-in-class consumer experience and making sure they are buying a policy that meets their specific needs.
On May 26, 2020, the Company completed its IPO whereby 18,000,000 shares of common stock were sold to the public at $20.00 per share (in addition to shares sold by selling stockholders). Net proceeds to the Company from the offering, after deducting underwriting discounts and commissions and offering expenses were $333.1 million.
Submitted policies are counted when an individual completes an application with our licensed agent and provides authorization to them to submit it to the insurance carrier partner. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information.
The following table shows the number of submitted policies for the years ended June 30:
Approved policies represents the number of submitted policies that were approved by our insurance carrier partners for the identified product during the indicated period. Not all approved policies will go in force.
The following table shows the number of approved policies for the years ended June 30:
In general, the relationship between submitted policies and approved policies has been steady over time. Therefore, factors impacting the number of submitted policies also impact the number of approved policies.
2020 compared to 2019-Total approved policies increased by 88% for the year ended June 30, 2020, compared to the year ended June 30, 2019. The increase was driven primarily by a 109% increase in MA approved policies, 94% increase in dental, vision and hearing approved policies and a 9% increase in Medicare Supplement approved policies. Fluctuations in approved policies are in direct correlation to submitted policies; therefore, the increases in the number of core and flex productive agents and the increased agent productivity noted above, also resulted in the increase in approved policies compared to the year ended June 30, 2019.
2019 compared to 2018-Total approved policies increased by 58% for the year ended June 30, 2019, compared to the year ended June 30, 2018. The increase was driven primarily by a 114% increase in MA approved policies and a 41% increase in dental, vision and hearing approved policies. These increases were partially offset by a 14% decrease in Medicare Supplement approved policies. Fluctuations in approved policies are in direct correlation to submitted policies; therefore, the increases in the number of core and flex productive agents and the dynamics of AEP and OEP noted above, also resulted in the increase in approved policies compared to the year ended June 30, 2018.
Lifetime value of commissions per approved policy represents commissions estimated to be collected over the estimated life of an approved policy based on multiple factors, including but not limited to, contracted commission rates, carrier mix and expected policy persistency with applied constraints. The lifetime value of commissions per approved policy is equal to the sum of the commission revenue due upon the initial sale of a policy, and when applicable, an estimate of future renewal commissions. The estimate of the future renewal commissions is determined using contracted renewal commission rates constrained by a persistency-adjusted 10-year renewal period based on a combination of our historical experience and available insurance carrier historical experience to estimate renewal revenue only to the extent probable that a material reversal in revenue would not be expected to occur. These factors may result in varying values from period to period. The lifetime value of commissions per approved policy represents commissions only from policies sold during the period. That figure excludes renewals during the period from policies originally sold in a prior period with insurance carrier partners
The following table shows the lifetime value of commissions per approved policy for the years ended June 30:
2020 compared to 2019-The lifetime value of commissions (“LTV”) per Medicare Advantage approved policy increased 1% for the year ended June 30, 2020, compared to the year ended June 30, 2019. Medicare4Supplement LTV per approved policy increased 5% for the year ended June 30, 2020, compared to the year ended June 30, 2019. Medicare Advantage's LTV was higher as a result of higher commission rates somewhat offset by lower MA persistency rates. The increase in Medicare Supplement's LTV was primarily due to a carrier mix shift of policies to carriers that pay us higher commissions.
2019 compared to 2018-The lifetime value of commissions per Medicare Advantage approved policy increased 4% for the year ended June 30, 2019 compared to the year ended June 30, 2018. The increase was primarily due to an increase in our retention rates for MA policies. Medicare Supplement lifetime value of commissions per approved policy increased 11% for the year ended June 30, 2019 compared to the year ended June 30, 2018. The increase was primarily due to a carrier mix shift of policies to carriers that pay us higher commissions.
Per unit economics represents total Medicare Advantage and Medicare Supplement commissions, other product commissions, other revenues, and costs associated with the Senior segment, each shown as per number of approved Medicare Advantage and Medicare Supplement approved policies over a given time period. Management assesses the business on a per unit basis to help ensure that the revenue opportunity associated with a successful policy sale is attractive relative to the marketing acquisition cost. All per policy metrics are based on approved policies which is a measure that triggers revenue recognition.
The Medicare Advantage and Medicare Supplement commission per MA/MS policy represents the lifetime value of commissions for policies sold in the period. Other commission per MA/MS policy represents the lifetime value of commissions for other products sold in the period, including dental, vision and hearing, prescription drug plan, and other products, which management views as additional commission revenue on our agents’ core function of MA/MS policy sales. Other per MA/MS policy represents the production bonuses, renewals from policies originally sold in a prior period with insurance carrier partners whose contracts preclude us from recognizing variable consideration for estimated renewal commissions and updated estimates of prior period variable consideration based on actual policy renewals in the current period. Total operating expenses per MA/MS policy represent all of the operating expenses within the Senior segment. The Revenue to customer acquisition cost (“CAC”) multiple represents total revenue per MA/MS policy as a multiple of total marketing acquisition cost, which represents the direct costs of acquiring leads which is included in marketing and advertising expense within the total operating expenses per MA/MS policy.
The following table shows core premiums and ancillary premiums for the years ended June 30:
2019 compared to 2018-Total premiums increased 12% for the year ended June 30, 2019 compared to the year ended June 30, 2018, due to hiring more agents for the Auto & Home segment which resulted in an increase in the number of policies sold.
To supplement our financial statements presented in accordance with GAAP and to provide investors with additional information regarding our GAAP financial results, we have presented in this Annual Report on Form 10-K Adjusted EBITDA and Adjusted EBITDA Margin, which are non-GAAP financial measures. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly titled measures presented by other companies.
and share-based compensation expenses. The most directly comparable GAAP measure is net income. We monitor and have presented in this Annual Report on Form 10-K Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our operating performance, to establish budgets, and to develop operational goals for managing our business. In particular, we believe that excluding the impact of these expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance.
We believe that this non-GAAP financial measure helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude in the calculations of this non-GAAP financial measure. Accordingly, we believe that this financial measure provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects.
The following table reconciles Adjusted EBITDA and net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the year ended June 30, 2020 (in thousands):
The following table reconciles Adjusted EBITDA and net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the year ended June 30, 2019 (in thousands):
General and administrative expenses include compensation and benefits costs for staff working in our executive, finance, accounting, recruiting, human resources, administrative, business intelligence and data science departments. These expenses also include fees paid for outside professional services, including audit, tax and legal fees and allocations for facilities, telecommunications and software maintenance costs.
2020 compared to 2019-Commission revenue increased $180.6 million, or 61%, which included increases in Senior, Life, and Auto & Home commission revenues of $157.4 million, $18.6 million and $4.8 million, respectively. For Senior, the revenue growth was driven by the significant increase in our agent count that led to a 106% increase in Medicare Advantage commission revenue. Life’s $18.6 million revenue growth was driven by $19.5 million growth in ancillary revenue which was a result of the investment we've made in agents to grow sales of these policies offset by a slight reduction in core term life revenue. The revenue growth for Auto & Home was driven by a $3.4 million increase in the sale of home insurance policies. The $13.4 million increase in production bonus and other revenue was primarily driven by the $6.6 million increase in marketing development funds received for Senior and $4.6 million of revenue earned by InsideResponse since the May 1, 2020, acquisition date.
2020 compared to 2019-Cost of revenue increased $63.0 million in 2020 compared to 2019, primarily due to a $51.0 million increase in compensation expense driven by the growth in the number of agents, mostly within the Senior segment. The increase in headcount also drove increases in the allocations of $6.2 million for facilities, telecommunications, and software maintenance costs, and $2.6 million for licensing costs.
The following table presents our marketing and advertising expenses for the years ended June 30, and the dollar and percentage changes from the prior year:
increased $8.5 million in our Life segment driven by an increase in leads specifically for our final expense policies. Compensation costs related to our marketing personnel increased $1.9 million as we increased the number of people supporting our marketing organization to produce more leads.
The following table presents our general and administrative expenses for the years ended June 30, and the dollar and percentage changes from the prior year:
2020 compared to 2019-General and administrative expenses increased $17.1 million, or 94%, for 2020, primarily due to the Distribution to our stock option holders of $9.2 million. We also incurred $4.2 million in higher compensation costs due to growth in the number of general & administrative employees required to support the continued growth of our business and $3.2 million in higher professional fees driven by higher audit costs and outside recruiting fees. This was offset by a decrease in restructuring costs of $2.2 million as the majority of our restructuring activities took place in 2017 and 2018.
2019 compared to 2018-General and administrative expenses increased $3.0 million, or 20%, for the year ended June 30, 2019, primarily due to $2.4 million in higher compensation costs due to growth in the number of general & administrative employees required to support the continued growth of our business and also an increase in professional fees.
2020 compared to 2019-Technical development expenses increased $4.0 million, or 48% in 2020, primarily due to a $1.9 million increase in compensation costs related to our technology personnel as we increased the number of people in our desktop support and development efforts to support the increase in total headcount and the growth in the company. In addition, professional fees increased $1.9 million as we increased our use of external application developers to work on our growing technology platforms.
2019 compared to 2018-Technical development expenses decreased $1.6 million, or 17%, in 2019, primarily due to an increase in the capitalization of internally developed software expenses. A total of $3.8 million was capitalized for the year ended June 30, 2019, versus the year ended June 30, 2018, in which such amounts were not material.
2019 compared to 2018-For the year ended June 30, 2019, we recorded a provision for income taxes of $22.0 million, representing an effective tax rate of 23.3%, which was higher than the statutory federal rate primarily due to the net effect of state income taxes incurred. For the year ended June 30, 2018, we recorded a provision for income taxes of $6.6 million, representing an effective tax rate of 15.9%, which was lower than the statutory federal rate primarily due to the re-measurement of deferred income tax liabilities related to the corporate tax rate reduction in the Tax Cuts and Jobs Act.
The following tables present information about the reportable segments for the periods presented (in thousands):
(2) These expenses consist primarily of one-time consulting expenses associated with adopting ASC 606, nonrecurring compensation to certain Board members and non-restructuring severance expenses.
Revenue from our Life segment was $110.5 million for the year ended June 30, 2019, a $12.3 million, or 12%, increase compared to revenue of $98.2 million for the year ended June 30, 2018. The increase was primarily due to a $11.4 million increase in commission revenue and $0.8 million increase in production bonus and other revenue. The increase in commission revenue was driven by a 116% increase in ancillary premium sold which was the result of our focus on selling more guaranteed issue and fixed indemnity policies. Commission revenue also increased as a result of writing 5% more core term life premium. Production bonus and other revenue was driven by the increase in core term life premium sold.
Revenue from our Auto & Home segment was $35.1 million for the year ended June 30, 2019, a $1.7 million, or 5%, increase compared to revenue of $33.3 million for the year ended June 30, 2018. The increase was primarily due to a $1.1 million increase in commission revenue and $0.6 million increase in production bonus and other revenue. The increase in commission revenue was driven by a 12% increase in premium sold, offset by a shift in mix to insurance carrier partners whose contracts preclude us from recognizing variable consideration for estimated renewal commissions and therefore we only recognize the first year commission revenue when a policy is initially sold and then recognize renewal commission revenue when the policy renews in future years. Production bonus and other revenue was driven by the increase in premium sold.
Adjusted EBITDA from our Life segment was $27.8 million for the year ended June 30, 2020, a $2.0 million, or 8%, increase compared to Adjusted EBITDA of $25.8 million for the year ended June 30, 2019. The increase in Adjusted EBITDA was primarily due to a $19.5 million increase in revenue partially offset by a $17.5 million increase in operating costs and expenses primarily attributable to an increase in variable marketing expenses and variable sales commission expenses to agents driven by an increase in the amount of premium sold for ancillary policies. Revenue and Adjusted EBITDA were also negatively impacted by our temporarily shifting some of our Life agents into the Senior segment to maximize the opportunity of the AEP and OEP seasonal increase in demand for Senior products.
2019 compared to 2018-Adjusted EBITDA from our Senior segment was $90.2 million for the year ended June 30, 2019, $53.5 million, or 146%, increase compared to Adjusted EBITDA of $36.7 million for the year ended June 30, 2018. The increase in Adjusted EBITDA was primarily due to an $89.8 million increase in revenue partially offset by a $36.4 million increase in operating costs and expenses primarily attributable to an increase in variable marketing expenses and personnel costs associated with higher headcount that was driven by a significant increase in policies submitted and an increase in the number of licensed agents.
Adjusted EBITDA from our Life segment was $25.8 million for the year ended June 30, 2019, a $2.8 million, or 12%, increase compared to Adjusted EBITDA of $23.0 million for the year ended June 30, 2018. The increase in Adjusted EBITDA was primarily due to a $12.3 million increase in revenue partially offset by a $9.4 million increase in operating costs and expenses primarily attributable to an increase in variable marketing expenses and variable sales commission expenses to agents driven by an increase in the amount of premium sold for core and ancillary policies, partially offset by a reduction in fulfillment expenses associated with the restructuring activities we took during the years ended June 30, 2019 and 2018.
Adjusted EBITDA from our Auto & Home segment was $7.8 million for the year ended June 30, 2019, a $1.4 million, or 15%, decrease compared to Adjusted EBITDA of $9.2 million for the year ended June 30, 2018. The reduction in Adjusted EBITDA was primarily due to a $1.7 million increase in revenue offset by a $3.1 million increase in operating costs and expenses primarily attributable to an increase in personnel costs associated with higher headcount that was driven by an increase in premium sold and an increase in the number of licensed agents. Adjusted EBITDA was also negatively impacted by a shift in the mix to insurance carrier partners whose contracts preclude us from recognizing variable consideration for estimated renewal commissions and therefore we only recognize the first year commission revenue when a policy is initially sold and then recognize renewal commission revenue when the policy renews in future years.
A significant portion of our marketing and advertising expenses is driven by the number of leads required to generate the insurance applications we submit to our insurance carrier partners. Our marketing and advertising costs are expensed and generally paid as incurred and since commission revenue is recognized upon approval of a policy but commission payments are paid to us over time there are working capital requirements to fund the upfront cost of acquiring new policies. During AEP, we experience an increase in the number of submitted Senior insurance applications and marketing and advertising expenses compared to periods outside of AEP. The timing of AEP affects the positive or negative impacts of our cash flows during each quarter.
Year Ended June 30, 2020-Cash used in operating activities was $61.8 million, consisting of net income of $81.1 million and adjustments for non-cash items of $45.7 million, offset by cash used in operating assets and liabilities of $188.6 million. Adjustments for non-cash items primarily consisted of $25.0 million of deferred income taxes as the Company defers revenue related to certain commissions receivable into following years until it is collected, $9.5 million of stock compensation expense primarily for the distribution to stock option holders, and $8.0 million of depreciation and amortization related to the additional fixed assets purchases and internally developed software in service. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of $15.6 million and $197.4 million in accounts receivable and commissions receivable, respectively, partially offset by decreases of $15.7 million in accounts payable and accrued expenses and $9.2 million in accrued compensation and benefits, all driven by the increased marketing and personnel costs required to produce our increased revenue.
Year Ended June 30, 2020-Net cash used in investing activities of $51.4 million was primarily due $35.8 million of cash paid net of the cash acquired for the acquisition of InsideResponse as well as $9.4 million of purchases of property and equipment and $6.1 million in purchases of software and capitalized internal-use software spent to develop new programs and systems to efficiently accommodate our increased volumes.
Year Ended June 30, 2018-Net cash used in investing activities of $6.0 million was due to $5.4 million of purchases of property and equipment and $0.6 million in purchases of software and capitalized internal-use software spent to develop new programs and systems to efficiently accommodate our increased volumes.
Our financing activities primarily consist of net proceeds from the revolving line of credit, non-recourse debt, and common stock options exercised along with dividend payments to stockholders.
Year Ended June 30, 2020-Net cash provided by financing activities of $481.4 million was primarily due to $416.5 million in net proceeds from the Term Loan, $340.2 million in proceeds from our initial public offering, net of underwriters’ discounts and commissions, and $135.0 million in proceeds from the issuance of preferred stock, partially offset by $275.0 million for the Distribution, $100.0 million payment on our Term Loan with proceeds from the IPO, and $31.4 million in payments on non-recourse debt, primarily to pay off the Receivables Financing Agreement.
Year Ended June 30, 2019-Net cash provided by financing activities of $8.1 million was primarily due to $16.2 million gross proceeds from non-recourse debt and $4.3 million of common stock options exercised, partially offset by $8.7 million in net payments for our revolving line of credit which is used to fund working capital mostly due to our seasonality around AEP.
On November 6, 2017, the Company entered into a two-year Loan and Security Agreement (the “Credit Agreement”) with UMB Bank N.A. (“UMB”). Subsequently, on November 5, 2019, the Credit Agreement was terminated when the Company entered into a new credit agreement with UMB as a lender and revolving agent and Morgan Stanley Capital Administrators, Inc. (“Morgan Stanley”) as a lender and the administrative agent for a syndicate of lenders party to the agreement (the “Senior Secured Credit Facility”). See Note 9 to the consolidated financial statements for further details. There was $325.0 million outstanding under the Term Loan and no amounts outstanding under the Revolving Credit Facility as of June 30, 2020.
On December 14, 2018, we entered into a senior secured delayed draw credit facility (as amended, the “Receivables Financing Agreement”). Pursuant to the Receivables Financing Agreement, we had access to a senior secured delayed draw credit facility consisting of up to $30.0 million aggregate principal amount of commitments (the “Commitment”), with no more than quarterly draws in an aggregate original principal amount not to exceed the Commitment, with the commissions receivable from the Auto & Home insurance policies sold by SelectQuote Auto & Home as collateral. As the underlying policyholders renewed their policies, the renewal commissions received from our insurance carrier partners were transferred to the lender as repayment of the draw, with any accrued interest being paid first. Each loan accrued interest at 11.5% that was computed on a daily basis on the unpaid principal and interest amounts. If the amount of renewal commissions received was not enough to pay off the loan balances, there was no recourse to the Company. If we continued to receive renewal commissions on the underlying policies after the time at which the loan balances were paid off, the right to those renewal commissions reverted back to the Company.
On April 17, 2020 and May 6, 2020, we issued and sold an aggregate of 100,000 shares and 35,000 shares, respectively, of our Series E preferred stock to certain “accredited investors” (as defined in Regulation D promulgated under the Securities Act), at a purchase price of $1,000 per share, for aggregate proceeds of $135.0 million and net proceeds to the Company of $129.4 million, after deducting commissions and expenses. We applied a portion of the net proceeds from the private placement of Series E preferred stock to complete our acquisition of InsideResponse and are using the remaining proceeds for general corporate purposes. Upon the closing of the IPO,
Our principal commitments consist of obligations under our outstanding operating leases for office facilities, capital lease obligations related to copy machines, and our Senior Secured Credit Facility. In addition, we have outstanding service and licensing agreements with various vendors for connectability, maintenance, and other services; however, we believe that overall they are not material to the below presentation. We believe that we will be able to fund these obligations through our existing cash and cash equivalents and cash generated from operations. The amount of the obligations presented in the table summarizes our commitments to settle contractual obligations in cash as of June 30, 2020:
(2) This assumes current interest rates as of June 30, 2020.
We do not have any off-balance sheet arrangements during any of the periods covered by this report.
For a discussion of new accounting pronouncements recently adopted and not yet adopted, see the notes to our consolidated financial statements.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities in our financial statements. We regularly assess these estimates; however, actual amounts could differ from those estimates. The impact of changes in estimates is recorded in the period in which they become known.
An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions that are most critical to understanding and evaluating our reported financial results are: revenue recognition, commissions receivables, accounting for income taxes, and share-based compensation.
Commissions receivable represent the variable consideration for policies that have not renewed yet and therefore are subject to the same assumptions, judgements and estimates used when recognizing revenue as noted above.
We account for income taxes using an asset and liability approach. Deferred income tax assets and liabilities result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.
We recognize share-based compensation expense in the consolidated statements of comprehensive income based on the fair value of our stock-based awards over their respective vesting periods, depending on the plan. The estimated grant date fair value of our stock options is determined using the Black-Scholes-Merton pricing model. The weighted-average expected term for stock options granted is calculated using historical option exercise
behavior. The dividend yield is determined by dividing the expected per share dividend during the coming year by the grant date stock price, however, we do not expect to pay any dividends in the foreseeable future. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of our stock options. Expected volatility is determined using historical stock prices for a combination of publicly traded peer group companies and our stock price. The estimated attainment of performance-based awards and related expense is based on the expectations of target achievement. The assumptions used in calculating the fair value of stock-based payment awards and expected attainment of performance-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. We will continue to use judgment in evaluating the expected term and volatility related to our own stock-based awards on a prospective basis, and incorporating these factors into the model. Changes in key assumptions could significantly impact the valuation of such instruments.
(2) Dividends paid per share, including common shares and series A-D, were $0.12 for the years ended June 30, 2019 and 2018 and $15.66 per share during the year ended June 30, 2020. See note 11 for details.
Basis of Presentation-The accompanying consolidated financial statements include the accounts of SelectQuote, Inc., and its wholly owned subsidiaries: SelectQuote Insurance Services, SelectQuote Auto & Home Insurance Services, LLC (“SQAH”), ChoiceMark Insurance Services, Inc., Tiburon Insurance Services, InsideResponse, LLC, and GenMark, LLC. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and include all adjustments necessary for the fair presentation of our financial position as of June 30, 2020. Certain reclassifications have been made to prior periods to conform with current year. Results from operations related to entities acquired during the periods covered by the consolidated financial statements are reflected from the effective date of acquisition. Results of operations were not materially impacted by the COVID-19 pandemic, but the Company is continuously assessing the evolving situation related to the pandemic.
Use of Estimates-The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingent assets and liabilities. The Company regularly assesses these estimates; however, actual amounts could differ from those estimates. The most significant items involving management’s estimates include estimates of revenue recognition, commissions receivable, valuation of intangible assets and goodwill, and the provision for income taxes. The impact of changes in estimates is recorded in the period in which they become known.
Seasonality-Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year during the Medicare annual enrollment period (“AEP”) in October through December and are allowed to switch plans from an existing plan during the open enrollment period (“OEP”) in January through March each year. As a result, the Company’s Senior segment’s commission revenue is highest in the second quarter and to a lesser extent, the third quarter during OEP.
Initial Public Offering-On May 26, 2020, the Company completed its initial public offering (the "IPO") whereby 18,000,000 shares of common stock were sold to the public at $20.00 per share (in addition to shares sold by selling stockholders). Net proceeds to the Company from the offering, after deducting underwriting discounts and commissions and offering expenses were $333.1 million.
Equity Issuance Costs-Equity issuance costs primarily consist of legal fees, underwriting fees, and other costs incurred as a result of the IPO and the issuance of Series E preferred stock. Upon completion of the IPO in May of 2020, $26.9 million of costs were charged to shareholders’ equity against the gross proceeds raised. For the issuance of Series E preferred stock in April and May of 2020, $5.6 million of costs were charged to shareholders’ equity against the gross proceeds raised. The Company did not incur any equity issuance costs as of June 30, 2019.
Property and Equipment-Net-Property and equipment are stated at cost less accumulated depreciation. Capital lease amortization expenses are included in depreciation expense in our consolidated statements of comprehensive income. Depreciation is computed using the straight-line method based on the date the asset is placed in service using the following estimated useful lives:
Software-Net-The Company capitalizes costs of materials, consultants, and compensation and benefits costs of employees who devote time to the development of internal-use software during the application development stage. Judgment is required in determining the point at which various projects enter the phases at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized, which is generally 3 years.
Revenue Recognition-The Company recognizes revenue when a customer obtains control of promised goods or services and recognizes an amount that reflects the consideration that an entity expects to receive in exchange for those goods or services. The Company applies the following five-step model in order to determine this amount: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price,
including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
Significant Judgments-The accounting estimates and judgments related to the recognition of revenue require the Company to make assumptions about numerous factors such as the determination of performance obligations and determination of the transaction price. In determining the amounts of revenue to recognize, the Company uses the following methods, inputs, and assumptions:
•Determination of Performance Obligations-The Company reviews each contract with customers to determine what promises the Company must deliver and which of these promises are capable of being distinct and are distinct in the context of the contract. The delivery of new policyholders to the insurance carriers is the only material promise specified within the contracts. After a policy is sold, the Company has no material additional or recurring obligations to the policyholder or the insurance carrier. The Company’s contracts do not include downstream policyholder activities such as claims support or payment collection services. While the primary promise is the sale of policies, some contracts include the promise to provide administrative services to policyholders on behalf of the insurance carrier such as responding to policyholder inquiries regarding coverage or providing proof of insurance. The Company has concluded that while these administrative services may be distinct, they are immaterial in the context of the contract.
▪Determination of the Transaction Price-The transaction price is identified as the first year commission due upon the initial sale of a policy as well as an estimate of renewal commissions or production bonuses when applicable. The estimates of renewal commissions and production bonuses are considered variable consideration and require significant judgment including determining the number of periods in which a renewal will occur and the value of those renewal commissions to be received if renewed.
For production bonuses, the Company utilizes the expected value approach that incorporates a combination of historical payment data by segment and insurance carrier as well as current forecast data that is used to estimate the amount of production bonus expected to be received from the insurance carriers. For marketing development funds, the Company records revenue over the period in which the funds are earned.
Timing of Recognition-The Company recognizes revenue when it has completed its performance obligation, which is at different milestones for each segment based on the contractual enforceable rights, the Company’s historical experience, and established customer business practices:
•For Auto & Home, revenue is recognized when the policy sold becomes effective.
Accounts Receivable-Accounts receivable represents either first year or renewal commissions expected to be received on policies that have already been sold or renewed and for production bonus revenue that has been earned but not received from the insurance carrier. Typically, the Company receives commission payments as the insurance carriers receive payments from the underlying policyholders. As these can be on various payment terms such as monthly or quarterly, a receivable is recorded to account for the commission payments yet to be received from the insurance carriers.
Commissions Receivable-Commissions receivable are contract assets that represent estimated variable consideration for performance obligations that have been satisfied but payment is not due as the underlying policy has not renewed yet. The current portion of commissions receivable are future renewal commissions expected to be received within one year, while the non-current portion of commissions receivable are expected to be received beyond one year. Contract assets are reclassified as accounts receivable when the rights to the renewal commissions become unconditional, which is primarily upon renewal of the underlying policy, typically on an annual basis.
Cost of Revenue-Cost of revenue represents the direct costs associated with fulfilling the Company’s obligations to the insurance carriers for the sale of insurance policies. Such costs primarily consist of compensation and related benefit costs for sales agents, fulfillment specialists, and others directly engaged in serving policy holders. The Company does not have any incremental costs of obtaining its contracts with its customers, the insurance carriers.
Marketing and Advertising Expenses-Direct costs related to marketing and advertising the Company’s services are expensed in the period incurred. Advertising expense was $162.8 million, $99.9 million, and $74.6 million for the years ended June 30, 2020, 2019, and 2018, respectively.
Recent Accounting Pronouncements Not Yet Adopted-In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which has been clarified and amended by various subsequent updates. The core principle of this standard is that a lessee should recognize the assets and liabilities that arise from leases, by recognizing in the consolidated balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. Under the guidance of Topic 842, leases are classified as finance or operating leases, and both types of leases will be recognized on the consolidated balance sheet. The accounting applied by a lessor is largely unchanged from that applied under previous guidance. The new guidance requires certain expanded qualitative disclosures and specific quantitative disclosures in order to provide users of financial statements enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities.
Although the effective date of this ASU has been deferred for emerging growth companies until annual periods beginning after December 15, 2021, the Company has elected to early adopt the new guidance and related amendments on July 1, 2020, and has elected various practical expedients permitted under the transition guidance. The new guidance and related amendments will be applied on a modified retrospective basis using the optional transition method with an application date of July 1, 2020. The Company has made an accounting policy election to keep leases with terms of twelve months or less that do not include purchase options that the Company is reasonably certain to exercise off of the consolidated balance sheet, which will result in recognizing those lease payments on a straight-line basis over the lease term.
As a result of adopting this standard, the Company estimates it will record lease liabilities of approximately $41.3 million and right-of-use assets of approximately $29.7 million, which includes reclassifications of existing assets and liabilities primarily related to deferred rent. The adoption of this new standard is not expected to have a material impact on the Company’s consolidated statement of comprehensive income or the consolidated statement of cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which amends the guidance for accounting for assets that are potentially subject to credit risk. The amendments affect contract assets, loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. As an emerging growth company, this standard may be adopted by the Company effective in fiscal years beginning after December 15, 2022, and interim periods within those fiscal years; however, early adoption is permitted. The Company is currently evaluating the impact to its consolidated financial statements and related disclosures but does not expect this ASU to have a material impact on its consolidated financial statements.
In March of 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective upon issuance and generally can be applied through December 31, 2022. The implementation of Topic 848 did not have a material impact to our consolidated financial statements and related disclosures.
At the date of acquisition, the fair value of net tangible assets acquired approximated their carrying value. The trade name acquired was determined using the relief from royalty method, which measures the value by estimating the cost savings associated with owning the asset rather than licensing it. For the proprietary software acquired, the replacement cost method under the cost approach was used, estimating the cost to rebuild the software. The non-compete agreements were valued using the income approach, and the customer relationships were valued using the multiple period excess earnings method. As such, all aforementioned intangible assets were valued using Level 3 inputs. Further, the Company believes that the fair value of the earn-out liability falls within Level 3 of the fair value hierarchy as a result of the unobservable inputs used for the measurement.
The valuation of the acquired net assets remains preliminary while management completes its valuation, particularly the valuation of acquired intangible assets. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date (in thousands):
The Company will amortize the intangible assets acquired on a straight line basis over their estimated remaining lives, ranging from 2 to 7 years.
From the date of acquisition, May 1, 2020 through June 30, 2020, InsideResponse generated revenue of $4.6 million included in production bonus and other on the consolidated statement of comprehensive income.
Work in progress as of June 30, 2020 and June 30, 2019, primarily represents costs incurred for software not yet put into service and are not yet being depreciated. For the years ended June 30, 2020, 2019, and 2018, the Company capitalized internal-use software and website development costs of $5.8 million, $4.1 million, and $0.4 million, respectively, and recorded amortization expense of $2.2 million, $0.9 million, and $0.6 million, respectively.
Other current assets-Other current assets consisted of the following as of June 30:
(1) Prepaid expenses primarily consists of amounts prepaid for future services, rent, and other contractual arrangements for which we have yet to receive benefit.
(1) Other noncurrent liabilities primarily consists of deferred payroll tax liabilities under the CARES Act and revenue sharing obligations expected to settle beyond one year from the balance sheet date.
Intangible assets-The Company's intangible assets include those acquired as part of the acquisition of the controlling interest in Auto & Home in August 2012 as well as from the May 2020 acquisition of InsideResponse. As described in Note 1 to the consolidated financial statements, the Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. During the years ended June 30, 2020 and 2019, there have been no such indicators.
Goodwill-In August of 2012, the Company acquired the remaining interest in Auto & Home, and recorded goodwill as the excess of the total consideration transferred plus the acquisition-date fair value of the previously held equity interest over the fair values of the identifiable net assets acquired. Further, in May 2020, the Company recorded as goodwill the excess of the purchase price over the estimated fair values of identifiable assets and liabilities acquired from InsideResponse. There were no goodwill impairment charges recorded during the years ended June 30, 2020, 2019, or 2018.
Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date and becomes identified with that reporting unit in its entirety. As such the reporting unit as a whole supports the recovery of its goodwill. For the aforementioned acquisitions, the reporting units are Auto & Home and Senior, respectively.
The carrying amounts, accumulated amortization, net carrying value, and weighted average remaining life of our definite-lived amortizable intangible assets as well as our goodwill are presented in the tables below as of June 30 (dollars in thousands, useful life in years):
As of June 30, 2020, expected amortization expense in future periods were as follows (in thousands):
In addition, our Board of Directors and shareholders have adopted the 2020 Employee Stock Purchase Plan (the “ESPP”), which was effective as of May 21, 2020. The purpose of the ESPP is to provide the Company's eligible employees with an opportunity to purchase shares of its common stock through accumulated payroll deductions at 95% of the fair market value on the exercise date, but no less than the lesser of 85% of the fair market value of a share of common stock on the date the offering period commences or 85% of the fair market value of the common stock on the exercise date. As of June 30, 2020, the Company had not issued any shares through the ESPP, and there are 1.4 million shares reserved for future issuance under the plan.
In addition, the Company has determined that the majority of the inputs used to value its interest rate swap fall within Level 2 of the fair value hierarchy as they primarily include other than quoted prices that are observable.
Further this valuation uses standard calculations and models that use readily observable market data as their basis. As a result, the Company classifies its interest rate swap in Level 2 of the fair value hierarchy.
The following table presents the unrealized losses deferred to accumulated other comprehensive loss resulting from the Company’s derivative instruments designated as cash flow hedging instruments as of June 30:
The Company reclassified less than $0.1 million from accumulated other comprehensive income into interest expense for the year ended June 30, 2020. The income tax effects as a result of the reclassification to interest expense were not significant. As of June 30, 2020, the Company estimates that $0.6 million will be reclassified into interest expense during the next twelve months.
The Senior Secured Credit Facility provides for (1) a secured revolving loan facility with UMB in an aggregate principal amount of up to $75.0 million (the “Revolving Credit Facility”) and (2) a senior secured term loan facility in an aggregate principal amount of $425.0 million with a syndicate of lenders led by Morgan Stanley as the administrator for the lending group (the “Term Loan”). The outstanding balance under the prior Credit Agreement with UMB was rolled into the Revolving Credit Facility and will continue to be used for general working capital purposes as needed. The proceeds of the Term Loan were used (i) to finance a distribution to all holders of the Company’s common and preferred stock as well as holders of stock options in an aggregate amount of $275.0 million (the “Distribution”), (ii) to fund cash to the balance sheet in an aggregate amount of $68.0 million, equal to
The Revolving Credit Facility accrues interest on amounts drawn at a rate per annum equal to either (a) LIBOR plus 4.0% or (b) a base rate plus 3.0%, at the Company’s option. The Term Loan bears interest on the outstanding principal amount thereof at a rate per annum equal to either (a) LIBOR plus 6.0% or (b) a base rate plus 5.0%, at the Company’s option. The Company’s risk management strategy includes entering into interest rate swap agreements from time to time to protect against unfavorable interest rate changes relating to forecasted debt transactions. We entered into a USD floored interest rate swap agreement on May 12, 2020, with an effective date of May 29, 2020, having a notional amount of $325.0 million and designated as a cash flow hedge of interest payments on the debt issuance. See Note 8 to the consolidated financial statements for more information.
The Term Loan is repayable beginning from March 31, 2022, in equal quarterly installments in an aggregate annual amount equal to 1% of the original principal amount of the Term Loan, with the balance payable on the maturity date of November 5, 2024. Upon the completion of the IPO, the Company paid down $100.0 million of the Term Loan.
In addition to paying interest on outstanding principal amounts under the Senior Secured Credit Facilities, the Company is required to pay UMB an unused commitment fee of 0.15%, in respect of the unutilized commitments under the Revolving Credit Facility. The Revolving Credit Facility also has a maturity date of November 5, 2024.
Non-Recourse Debt-Non-recourse debt consisted of the following as of June 30:
The loans drawn on the Receivables Financing Agreement were recorded on the consolidated balance sheets at amortized cost. The fair value of the loans was measured as a level 3 liability and was based on the incremental borrowing rate for similar debt. However, as the underlying renewal commissions securing the loans are of high credit quality and turn over quickly, the Company has determined that the carrying value approximates fair value.
Amortization of debt financing costs amounted to $2.3 million, $0.1 million, and $0.1 million during year ended June 30, 2020, 2019, and 2018, respectively, which was included in interest expense in the Company’s consolidated statements of comprehensive income.
Amortization expense related to the debt issuance costs as of June 30, 2020, for each of the next five fiscal years and thereafter is estimated to be as follows (in thousands):
Lease Obligations-The Company leases office facilities in the United States in San Francisco, California; San Diego, California; Centennial, Colorado; Jacksonville, Florida; Overland Park, Kansas; Wilmington, North Carolina; and Des Moines, Iowa under noncancelable operating leases that expire at various dates through July 2029.
As of June 30, 2020, future annual minimum lease obligations under noncancelable operating leases are as follows (in thousands):
The Company has entered into noncancelable agreements to sublease portions of its office facilities to unrelated third parties. Sublease rental income is recorded as a reduction of rent expense in the accompanying consolidated statements of comprehensive income. Sublease rental income totaled $0.3 million, $0.4 million, and $0.2 million for the years ended June 30, 2020, 2019, and 2018, respectively. Future minimum lease payments for operating leases have not been reduced by the future minimum sublease income in the schedule above.
The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Rent expense for operating leases, net of sublease income, lease incentives, and rent recorded as restructuring expenses was $7.0 million, $4.4 million, and $3.7 million for the years ended June 30, 2020, 2019, and 2018, respectively, recorded in general and administrative operating costs and expenses in the consolidated statements of comprehensive income.
Legal Contingencies and Obligations-From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition, operating results, or cash flows.
Preferred Stock-The Company’s preferred stock as of June 30, 2019, was all classified as temporary equity. As per guidance under ASC 480-10-S99-3A(4), ASR 268 requires equity instruments with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity, in temporary equity. Thus, as the terms of the preferred stock agreements dictated as such, Series A-D preferred stock as of June 30, 2019, was classified as temporary equity. Upon the closing of the Company's initial public offering (“IPO”), all outstanding shares of preferred stock converted on an 8:1 basis into common stock, and there was no preferred stock outstanding as of June 30, 2020. The conversion resulted in an impact to additional paid-in capital in the consolidated balance sheet of $0.2 million.
Initial Public Offering-On May 26, 2020, the Company completed its IPO whereby 18,000,000 shares of common stock were sold to the public at $20.00 per share (in addition to shares sold by selling stockholders). Net proceeds to the Company from the offering, after deducting underwriting discounts and commissions and offering expenses were $333.1 million.
Stock Split-On February 28, 2020, the Board of Directors of the Company resolved via unanimous written consent to: i) approve an eight-for-one forward stock split pursuant to which each outstanding share of the Company’s common stock would become eight shares of the Company’s common stock (the “Forward Stock Split”), ii) approve an amendment to the Company’s Fifth Amended and Restated Certificate of Incorporation, increasing the number of authorized shares of the Company’s common stock from 23.0 million shares to 700.0
Distribution-On November 15, 2019, the Company declared a distribution of $188.7 million on all outstanding common stock and stock options (regardless of vesting status) ($1.96 per share) and $86.3 million on all outstanding preferred stock ($15.66 per share) which was paid on November 20, 2019 (the “Distribution”). Of the Distribution, $265.8 million was paid to existing shareholders and $9.2 million was paid to stock option holders. The Distribution to shareholders is characterized as ordinary dividends up to accumulated earnings at the time of Distribution, with the excess over earnings of $58.4 million treated as a return of capital and recorded as a reduction to additional paid-in capital in the consolidated balance sheet as of June 30, 2020. The Distribution to stock option holders is characterized as an equity restructuring where a one-time large cash payment is made in lieu of modifying the option award as the Company’s stock options plans do not allow for dividends to be distributed to holders of stock options and do not provide any dividend protections. Although no other terms of the option awards were modified, this Distribution resulted in a modification to the outstanding awards and incremental share-based compensation expense was recorded in the consolidated statement of comprehensive income during the year ended June 30, 2020, for the increase in fair value over the original awards of $9.2 million.
The Company has awards outstanding from two share-based compensation plans - the 2003 Stock Incentive Plan (the "2003 Stock Plan") and the 2020 Omnibus Incentive Plan (the "2020 Stock Plan") (collectively, the “Stock Plans”). However, no further awards will be made under the 2003 Stock Plan. The Company's Board of Directors adopted, and shareholders approved, the 2020 Stock Plan in connection with the IPO, which provides for the grant of incentive stock options (“ISOs”), nonstatutory stock options (“NSOs”), stock appreciation rights, restricted stock awards, restricted stock unit awards ("RSUs") and other forms of equity compensation (collectively, “stock awards”). Additionally, the 2020 Stock Plan provides for the grant of performance-based cash awards ("PSUs"). ISOs may be granted only to employees. All other awards may be granted to employees, non-employee directors, and consultants of the Company and its subsidiaries and affiliates.
The number of shares of common stock available for issuance as of June 30, 2020, pursuant to future awards under the Company's 2020 Stock Plan is 9,089,000. The number of shares of the Company's common stock reserved under the 2020 Stock Plan is subject to an annual increase on the first day of each fiscal year beginning on July 1, 2021, equal to 3% of the outstanding shares of common stock as of the last day of the immediately preceding fiscal year. The maximum number of shares of common stock that may be issued upon the exercise of ISOs will be 4,000,000. The shares of common stock covered by any award (including any award granted pursuant to the 2003 Stock Plan) that is forfeited, terminated, expired, or lapsed without being exercised or settled for cash will again become available for issuance under the 2020 Stock Plan. With respect to any award, if the exercise price and/or tax withholding obligations are satisfied by delivering shares to the Company (by actual delivery or attestation), or if the exercise price and/or tax withholding obligations are satisfied by withholding shares otherwise issuable pursuant to the award, the share reserve shall nonetheless be reduced by the gross number of shares subject to the award.
Total share-based compensation included in general and administrative expense in our consolidated statements of comprehensive income was as follows:
The fair value of each option (for purposes of calculation of share-based compensation) was estimated on the date of grant using the Black-Scholes-Merton option pricing formula that uses assumptions determined at the date of grant. Use of this option pricing model requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them ("expected term"), the estimated volatility of the Company's common stock price over the expected term ("volatility"), the number of options that will ultimately not complete their vesting requirements ("forfeitures"), the risk-free interest rate that reflects the interest rate at grant date on zero-coupon United States governmental bonds that have a remaining life similar to the expected term ("risk-free interest rate"), and the dividend yield assumption which is based on the Company's dividend payment history and management's expectations of future dividend payments ("dividend yield"). Changes in the subjective assumptions can materially affect the estimate of the fair value of share-based compensation and, consequently, the related amount recognized in the consolidated statements of comprehensive income.
Restricted Stock-During the year ended June 30, 2020, the Company granted 150,000 shares of restricted stock to employees, all of which were issued in the form of RSUs. The following table summarizes restricted stock unit activity under the 2020 Stock Plan for the year ended June 30, 2020:
As of June 30, 2020, there was $2.9 million of unrecognized compensation cost related to unvested restricted stock units granted, which is expected to be recognized over a weighted-average period of 2.88 years.
Contract Balances-After a policy is sold, the Company has no material additional or recurring obligations to the policyholder or the insurance carrier. As such, there are no contract liabilities recorded in the consolidated balance sheets. As there is no activity in the contract asset balances other than the movement over time between long-term and short-term commissions receivable and accounts receivable as the policy is renewed, a separate roll forward other than what is shown on the consolidated balance sheets is not relevant. Cumulative revenue catch-up adjustments related to changes in the estimates of transaction prices were not material for the years ended June 30, 2020, 2019, and 2018.
The difference from the Company’s statutory tax rates to the effective tax rates shown below for the years ended June 30, 2020 and 2019 were primarily due to Kansas High Performance Incentive Program (“HPIP”) tax credits partially offset by non-deductible expenses. The difference from the Company’s statutory tax rates to the effective tax rates for the year ended June 30, 2018 was primarily due to the reduction in corporate tax rate under the Act.
The following reconciles the statutory federal income tax rate to the effective income tax rate for the periods presented:
In accordance with the provisions of ASU No. 2016-09, Improvements on Employee Share-Based Payment Accounting (Topic 718) ("ASU 2016-09"), the Company now classifies the excess income tax benefits from share-based compensation arrangements as a discrete item within income tax expense rather than recognizing such excess income tax benefits in additional paid-in capital. The Company recognized an income tax benefit of $0.5 million and
$0.2 million in the consolidated statements of comprehensive income related to excess tax benefits resulting from the exercise of non-qualified stock options for the years ended June 30, 2020 and 2019, respectively. The cumulative effect of the adoption of ASU 2016-09 of $0.4 million was made during the year ended June 30, 2019, to recognize the excess income tax benefits from prior year share-based compensation arrangements in deferred income taxes and retained earnings in the consolidated balance sheet.
As of June 30, 2020, the Company has NOL carryforwards for federal and state income tax purposes of $109.6 million and $95.3 million, respectively. Other than the federal NOL generated for the tax year ended June 30, 2020, which has an indefinite carryforward period, the federal carryforwards will expire in 2034 through 2038. The state carryforwards will expire in 2024 through 2039.
The Company is subject to income taxes in the US federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to interpretation of the related tax laws and regulations and require the application of significant judgment. The federal tax returns from tax years 2016 through 2018 and state tax returns from tax years 2015 through 2018 remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. NOLs generated on a tax return basis by the Company for tax years 2015 to 2018 will remain open to examination by the major domestic taxing jurisdictions until the statute of limitations expires for the year in which the loss carry overs are utilized.
The Company calculates net income per share as defined by ASC Topic 260, “Earnings per Share”. Basic net income per share (“Basic EPS”) is computed by dividing net income attributable to common shareholders by the weighted-average common stock outstanding during the respective period. Net income attributable to common shareholders is computed by deducting both the dividends declared in the period on preferred stock and the dividends accumulated for the period on cumulative preferred stock from net income. Diluted net income per share (“Diluted EPS”) is computed by dividing net income attributable to common and common equivalent shareholders by the total of the weighted-average common stock outstanding and common equivalent shares outstanding during
The following table sets forth the computation of net (loss) income per share for the years ended June 30:
The Company reports segment information based on how its CODM regularly reviews its operating results, allocates resources, and makes decisions regarding business operations. The performance measures of the segments include total revenue and Adjusted EBITDA because management believes that such information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industries.
(2) These expenses consist primarily of one-time consulting expenses associated with adopting ASC 606, nonrecurring
The following table presents information about the reportable segments for the year ended June 30, 2018:
The Company purchases leads from InsideResponse which was previously owned in part by individuals related to one of the Company’s shareholders or are members of management. On May 1, 2020, the Company acquired 100% of the outstanding membership units of InsideResponse for an aggregate purchase price of up to $65.0 million (subject to customary adjustments) as set forth in the Merger Agreement. Refer to Note 2 to the consolidated financial statements for further details. Prior to the acquisition, the Company incurred $16.1 million, $10.1 million, $10.0 million, in lead costs with this firm for the years ended June 30, 2020, 2019, and 2018, respectively, which were recorded in marketing and advertising expense in the consolidated statements of comprehensive income. The Company did not have any outstanding payables as of June 30, 2020, and owed $0.2 million as of June 30, 2019, that was recorded in accounts payable in the consolidated balance sheets. As of June 30, 2020 and June 30, 2019, the shareholder, related affiliates, and the related members of management owned 10.89% and 21.36% of the Company, respectively.
Selected summarized quarterly financial information for 2020 and 2019 is as follows (in thousands,