We have established the 1997 Stock Option Plan and the 2004 Non-Qualified Stock Option Plan, or the plans, to provide additional incentives to our employees, officers, and directors. Under the plans, an aggregate of 800,000 shares of Life Quotes common stock may be granted to participants in the plans. The Company accounts for stock options in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718, “Computation of Stock Compensation.” (ASC 718) Generally, the approach in ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.
The Company’s assets recorded at fair value are categorized based upon a fair value hierarchy which ranks the quality and reliability of the information used to determine fair value. The fair value of the Company’s investments is determined using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities (Level 1). We classify our fixed maturity investments as available-for-sale and, accordingly, such investments are carried at fair value. The cost of fixed maturity investments is adjusted for amortization of premiums and discounts and for declines in value that are other than temporary. Temporary changes in the fair values of investments are reflected directly in stockholders’ equity as accumulated other comprehensive income or loss net of income taxes with no effect on net income or loss. Realized gains or losses are calculated using the specific identification method.
While goodwill is not amortized, it is subject to periodic reviews for impairment (at least annually, or more frequently if impairment indicators arise). Such impairment reviews are performed at the entity level, as we have one reporting unit. Under those circumstances, if the fair value were less than the carrying amount of the entity, further analysis would be required to determine whether or not an impairment would need to be charged against current period earnings. No impairment was recorded as a result of our December 31, 2009 impairment review, as the calculated fair value of the reporting unit exceeded the carrying value by approximately 7%. The determination of fair value and the impairment are based on a combination of a market valuation based on a comparison with similar public companies (guideline company method), a discounted cash flow analysis, which includes making various judgmental assumptions, including assumptions about future cash flows, growth rates and discount rates, and a transaction method, which looks at recent acquisitions of similar companies. The use of different estimates or assumptions could produce different results. If the Company is unable to achieve the anticipated projected operating results utilized in the discounted cash flow analysis, there may be future goodwill impairment charges. The Company’s carrying value as of December 31, 2009 exceeds the market capitalization of the Company by approximately $8 million. The Company does not consider its market capitalization to necessarily be the best indicator of the fair value of the Company given the following considerations: (1) approximately 70% of the Company’s common stock is held by 3 insiders which significantly limits the public float and trading activity of the Company’s common stock, resulting in extremely low trading volume, (2) the quoted market price of the Company’s common stock does not factor in any market based control premiums and (3) there has been significant volatility in the equity markets over the past twelve months. Given these factors, the Company believes the methods utilized by the Company to assess the fair value of the Company for the goodwill impairment analysis are more appropriate than utilizing the Company’s market capitalization as the primary indicator of fair value for purposes of goodwill impairment testing.
Revenues decreased $1 million or 6.5%, to $14.7 million in 2009 from $15.7 million in 2008. The components of revenue are as follows:
Life insurance commissions increased $314,000, or 2.5%, even though policies sold increased by about 13% from 15,495 to 17,551. Our average commission revenue per policy declined by 10%, from $836 to $753. Commission from health insurance decreased 20% in 2009, as we discontinued brokerage sales for health insurance during the first quarter of 2005, and are now outsourcing this business to third parties. As a result, there were no new health insurance policies sold during 2009 or 2008. All of the commissions result from previously-sold policies that continue in force. Fees from the sale of internet insurance leads decreased 47% to $1.4 million in 2009, compared to $2.7 million in 2008. This decrease results primarily from a decrease in the number of internet leads being sold, which resulted primarily from a decrease in advertising. We expect this revenue source to fall significantly in 2010 as a result of the sale of our Insure.com website.
General and Administrative. General and administrative expenses increased by less than 1%, or $22,000, in 2009 to a total of $3.5 million. Most of the increase resulted from higher insurance costs and legal fees.
Depreciation and amortization. Depreciation and amortization increased by 4%, or $33,000, in 2009 when compared to 2008. Amortization costs related to the life insurance renewals acquired in 2004 declines each year in anticipation of policy lapses that will result in steadily declining revenue from these renewal contracts. This decrease was offset by higher depreciation charges on new computer equipment and capitalized software development costs.
We currently expect that our cash, cash equivalents, certificates of deposit and fixed maturity investments of approximately $24 million at December 31, 2009 will be sufficient to meet our anticipated cash requirements for at least the next 12 months. The timing and amounts of our working capital expenditures are difficult to predict, and if they vary materially, we may require additional financing. If we require additional equity financing, it may be dilutive to our stockholders and the equity securities issued in a subsequent offering may have rights or privileges senior to our common stock. If debt financing is available, it may require additional restrictive covenants with respect to dividends, raising capital and other financial and operational matters, which could impact or restrict our operations. If we cannot obtain adequate financing on acceptable terms, we may be required to reduce the scope of our marketing or operations, which could harm our business, results of operations and our financial condition.
Cash used for financing activities in 2009 and 2008 totaled $ 21,000 and $1.8 million, respectively, and consisted of the repurchase of shares of our common stock.
In the normal course of business, we enter into financing transactions, lease agreements, or other commitments. These commitments may obligate us to certain cash flows during future periods. The following table summarizes such obligations as of December 31, 2009:
In September 2006, the FASB issued Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 was effective for financial statements issued for fiscal years beginning after November 15, 2007. In February of 2008, the FASB delayed the effective date of ASC 820 for non-financial assets and liabilities which are not measured at fair value on a recurring basis (at least annually) until fiscal years beginning after November 15, 2008. In October 2008, FASB provided guidance in determining the fair value of a financial asset when the market for that financial asset is not active. The adoption of ASC 820 did not have a material effect on the financial statements.
In May 2009, the FASB issued ASC 855, Subsequent Events (ASC 855), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The Company adopted ASC 855 beginning April 1, 2009. The adoption of ASC 855 did not have a material impact on the consolidated financial position, results of operations or cash flows. The Company has evaluated subsequent events through March 5, 2010, the date the consolidated financial statements were issued. See discussion in the Basis of Presentation section of Note 2.