We also lease 7,414 square feet of office space in Radnor, Pennsylvania. We lease this office space under a lease agreement with Radnor Properties-SDC, L.P. The term of the lease commenced on November 1, 2006, and will expire on March 31, 2017. The monthly base rent increases every 12 months, starting at approximately $13,466 and ending at approximately $21,531. Under the terms of the lease agreement, rent is waived for the first five months of the lease term with respect to 5,238 square feet and for the first 12 months for the remaining 2,176 square feet.
The term of this lease commenced on August 1, 2007, and will expire on December 31, 2012. The monthly rent increases every 12 months, starting at approximately $8,500 and ending at approximately $23,900.
During the first quarter of 2009, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in our Telesales call center. We continue to sell health and life insurance and related products to individuals and families through our non-employee ISG agents. Our Telesales business segment eliminated 43 positions, including all of its licensed employee sales agents along with other Telesales service and support personnel, and eliminated another 20 positions in Telesales through attrition.
Management anticipates a significant decline in future Telesales revenues as a result of the cessation of direct marketing and sales in Telesales and the eHealth transaction. Revenue from the five insurance carriers covered by the eHealth transaction accounted for 66% of our total revenue for 2008 and 85% of our Telesales segment. Management believes the reduction in future revenues will be mitigated by significant reductions in future expenses.
The following is a discussion of our critical accounting policies and methods. Critical accounting policies are defined as those that are both important to the portrayal of our financial condition and results of operations and are reflective of significant judgments and uncertainties made by management that may result in materially different results under different assumptions and conditions. Note 2 to the consolidated financial statements for the year ended December 31, 2008 includes further information on the significant accounting policies and methods used in the preparation of our consolidated financial statements.
Our Telesales segment generates revenues primarily from the receipt of commissions paid to us by insurance companies based upon the insurance policies sold to consumers through our service. These revenues are in the form of first year, bonus and renewal commissions that vary by company and product. We recognize commission revenue from the sale of primarily health insurance, after we receive notice that the insurance company has received payment of the related premium. First year commission revenues per policy can fluctuate due to changing premiums, commission rates, and types or amount of insurance sold. We receive bonuses based upon individual criteria set by insurance companies. We recognize bonus revenues when we receive notification from the insurance company of the bonus due to us. Bonus revenues are typically higher in the fourth quarter of our fiscal year due to the bonus system used by many health insurance companies, which pay greater amounts based upon the achievement of certain levels of annual production. Revenues for renewal commissions are recognized after we receive notice that the insurance company has received payment for a renewal premium. Renewal commission rates are significantly less than first year commission rates and may not be offered by every insurance company. We also generate revenue from the sale of leads to third parties. Such revenues are recognized when we receive notification from those sources of the revenue due to us. Our revenue recognition accounting policy has been applied to all periods presented in this report. The timing between when we submit a consumer’s application for insurance to the insurance company and when we generate revenues has varied over time. The type of insurance product, the insurance company’s premium billing and collection process, and the insurance company’s backlog are the primary factors that impact the length of time between submitted applications and revenue recognition. Any changes in the amount of time between submitted application and revenue recognition, which will be influenced by many factors not under our control, will create fluctuations in our operating results and could affect our business, operating results and financial condition.
Our Atiam business segment offers InsPro on a licensed and an application service provider, or ASP, basis. An InsPro software license entitles the purchaser to a perpetual license to a copy of the InsPro software installed at a single client location, which may be used to drive a production and model office instance of the application. The ASP hosting service enables a client to lease the InsPro software, paying only for that capacity required to support their business. ASP clients access an instance of InsPro installed on Atiam owned servers located at Atiam’s offices or at a third party’s site.
The unearned portion of Atiam business segment revenue has been included in the consolidated balance sheet as a liability for deferred revenue.
Under the criteria set forth in SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” capitalization of software development costs begins upon the establishment of technological feasibility of the software. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross product revenues, estimated economic life, and changes in software and hardware technology. Capitalized software development costs are amortized utilizing the straight-line method over the estimated economic life of the software not to exceed three years. We regularly review the carrying value of software development assets and a loss is recognized when the unamortized costs are deemed unrecoverable based on the estimated cash flows to be generated from the applicable software.
We acquired Atiam on October 1, 2007. The results of Atiam’s operations prior to our October 1, 2007 acquisition have been excluded from our financial statements. The results of our Atiam business segment have been included in the Company’s statement of operations as of October 1, 2007. Thus Atiam segment’s results from operations for years ended December 31, 2008 and 2007 are not comparable. The Company accounted for the acquisition of Atiam using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations”. Our calculation for the consideration paid for Atiam in connection with the Bilenia Agreement and the Atiam Merger Agreement in the aggregate was $3,080,744 and consisted of the following:
Intangible assets acquired from Atiam were assigned the following values: value of client contracts and relationships other than license with an assigned value of $1,089,223 amortized straight line over five years; value of purchased software for sale and licensing value with an assigned value of $644,449 amortized straight line over five years; and employment and non-compete agreements acquired with an assigned value of $364,000 amortized straight line over three years. Intangible assets acquired from Atiam had the following unamortized values as of December 31, 2008: value of client contracts and relationships other than license of $816,916; value of purchased software for sale and licensing value of $483,337; and employment and non-compete agreements acquired of $212,319.
Subsequent to December 31, 2008, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in our Telesales call center. We continue to sell health and life insurance and related products to individuals and families through our non-employee ISG agents. Our Telesales business segment eliminated 43 positions, which included all Telesales’ licensed employee sales agents along with other Telesales service and support personnel, and eliminated another 20 positions in Telesales through attrition. Management believes these reductions will result in the reduced expenses in excess of reduced revenue.
In 2008, we earned periodic bonuses from carriers of $100,392 as compared to $843,311 in 2007. The Telesales segment receives bonuses from certain carriers, which are based primarily on the Telesales segment’s sales performance and criteria established by carriers and generally do not extend beyond the current calendar year. Accordingly, we cannot determine what criteria, if any, may be offered by its carriers pertaining to bonuses beyond the current calendar year. As a result of the cessation of direct marketing and sales in 2009, management does not anticipate receiving material periodic bonuses from carriers in the future.
In 2008, we earned revenue of $1,404,244 relating to ISG as compared to $1,821,958 in 2007. ISG revenue declined as a result of reduced new sales, the lapse of inforce business and reduced commission overrides earned on the Telesales segment on new and inforce business. As a result of the transaction with eHealth in February 2009, management anticipates a significant decline in ISG commission revenue as a result of the elimination of commission overrides for all Telesales business.
Salaries, commissions and related taxes declined in 2008 compared to 2007 as a result of employee workforce reductions.
Loss on impairment of property and equipment pertains to the closure of our Telesales New York sales office. During the first quarter of 2008 Telesales closed its sales office located in New York. As of March 31, 2008, we determined that all furniture and lease-hold improvements located at the New York sales office were impaired as a result of the office closure. During the first quarter of 2008, we recorded $88,922 expense to write-down the value of these assets to their net realizable value.
During the first quarter of 2008, we determined that the portion of license fee paid by Telesales for a commission system together with capitalized costs incurred to implement the commission system was impaired as a result of the absence of definitive plans to implement this system for internal use in Telesales. We recorded a $295,633 expense in the first quarter of 2008 to write-off the value of this asset.
As a result of Ivan Spinner’s termination of employment, we have determined that the value of an employment and non-compete agreement acquired pertaining to Mr. Spinner was impaired as of December 31, 2008 and recorded an impairment charge of $85,078 in loss on impairment of intangible assets.
We acquired Atiam on October 1, 2007. The results of Atiam’s operations prior to our October 1, 2007 acquisition have been excluded from our financial statements. The results of our Atiam business segment have been included in the Company’s statement of operations as of October 1, 2007. Thus Atiam segment’s results from operations for years ended December 31, 2008 and 2007 are not comparable. Atiam’s operating expenses consisted of the following:
As a result of these factors described above, we reported a net loss of $8,976,084 or $0.23 loss per share in 2008 as compared to a net loss of $14,136,599 or $0.43 loss per share in 2007.
In 2008, we earned revenues of $18,549,515 as compared to $19,568,722 in 2007, for a decrease of $1,019,207or 5%. Telesales segment revenues declined due to lower periodic bonus revenue from carriers, which was caused by lower marketing and selling activity. Revenues include the following:
In 2008, we earned commission revenue from carriers, excluding periodic bonuses and ISG revenues, of $16,078,942 as compared to $16,043,563 in 2007.
We had 31 licensed insurance agent employees at December 31, 2008 as compared to 118 at December 31, 2007. In March 2008, we closed our New York sales office, which accounted for approximately 20% of our sales activity for 2007. We also reduced sales and sales support staff in our Florida office. As a result of the closure, we terminated 34 licensed sales agents and eliminated eight open licensed sales positions, which were vacated subsequent to December 31, 2007. In October 2008, we further reduced our Telesales sales and sales support staff in our Florida office and terminated 51 employees, including 22 agents. Management believes these reductions will result in the reduced expenses in excess of reduced revenue.
In 2008, we earned periodic bonuses from carriers of $100,392 as compared to $843,311 in 2007. The Telesales segment receives bonuses from certain carriers, which are based primarily on the Telesales segment’s sales performance and other criteria established by carriers and generally do not extend beyond the current calendar year. Accordingly, we cannot determine what criteria, if any, may be offered by its carriers pertaining to bonuses beyond the current calendar year. As a result of the cessation of direct marketing and sales in the first quarter of 2009, management does not anticipate receiving material periodic bonuses from carriers in the future.
Salaries and wages were $8,192,550 in 2008 as compared to $10,462,015 in 2007, for a decrease of $2,269,465 or 22%.
Share-based employee and director compensation expense was $1,516,686 in 2008 as compared to $1,751,556 in 2007.
Share-based employee and director compensation consists of stock option and restricted stock grants, which are valued at fair-value on the date of the grant and expensed over the stock option’s vesting period or the duration of employment, whichever is shorter.
Commissions to employees were $1,928,889 in 2008 as compared to $2,634,257 in 2007. This decrease was the result of a decrease in sales that resulted in lower sales commission expense.
Commissions to non-employees were $371,441 in 2008 as compared to $398,900 in 2007. We pay commissions to non-employee ISG agents.
Lead, advertising and other marketing was $4,375,466 in 2008 as compared to $8,478,643 in 2007, a decrease of $4,103,177 or 48%, due primarily to a decrease in the number of leads purchased in 2008 compared to 2007. Subsequent to December 31, 2008, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in its Telesales call center, which will result in the elimination of lead cost in the future.
In 2008, we incurred amortization expense of $1,045,119 as compared to $1,287,397 for the intangible assets acquired from ISG. 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, the value of acquired carrier contracts and agent relationships with an assigned value of $2,752,143 amortized over five years in proportion to expected future value and the value of employment and non-compete agreement acquired with an assigned value of $800,593 amortized on a straight line basis over a weighted average useful life of 3.2 years.
As a result of Ivan Spinner’s termination of employment, we have determined the value of an employment and non-compete agreement acquired pertaining to Mr. Spinner impaired as of December 31, 2008 and recorded an impairment charge of $85,078 in loss of impairment of intangible asset.
In 2008, we incurred telephone and communications expense of $709,415 as compared to $809,839 in 2007. The decrease was primarily attributable the closure of Telesales’ New York sales office reduced sales and sales support staff in our Florida office.
In 2008, we incurred professional fees of $1,672,450 as compared to $1,915,223 in 2007 for a decrease of $242,774 or 13%. The decrease was primarily attributable to lower recruiting and technology outsourcing fees.
During the first quarter of 2008, Telesales closed its sales office located in New York. As of March 31, 2008, we determined that all furniture and lease-hold improvements located at the New York sales office were impaired as a result of the office closure. During the first quarter of 2008, we recorded an $88,922 expense to write-down the value of these assets to their net realizable value in loss on impairment of property and equipment.
We incur licensing and appointment costs associated with the licensing of our employee insurance agents. The reduction in licensing cost is primarily the result of the reduction in licensed employees.
Subsequent to December 31, 2008, we ceased the direct marketing and sale of health and life insurance and related products to individuals and families in our Telesales call center. We continue to sell health and life insurance and related products to individuals and families through our non-employee ISG agents. Our Telesales business segment eliminated all of its licensed employee sales agents. We do not incur licensing and appointment fees for our non-employee ISG agents.
As result of these factors described above, we reported a loss from operations of $8,231,905 in 2008 as compared to a loss from operations of $14,650,531 in 2007 in our Telesales business segment.
For 2008, we earned revenues of $5,578,512, which consisted of the following:
Consulting and implementation services revenues are from seven InsPro clients. Implementation services provided to these clients included assisting clients in setting up their insurance products in InsPro, providing modifications to InsPro’s functionality to support the client’s business, interfacing InsPro with the client’s other systems, automation of client correspondence to their customers and data conversion from the client’s existing systems to InsPro.
In 2008, we earned ASP revenue from five InsPro clients. ASP hosting service enables a client to lease the InsPro software, paying only for the capacity required to support its business. ASP clients access InsPro installed on Atiam owned servers located at Atiam’s offices or at a third party’s site.
Our Atiam business segment’s total operating expenses in 2008 were $6,310,318 and consisted of the following:
The Atiam business segment had 31 employees at December 31, 2008.
In 2008, we incurred amortization expense of $468,081 for the intangible assets acquired from Atiam. The Atiam acquisition was effective October 1, 2007. Intangible assets acquired from Atiam were assigned the following values:
value of client contracts and relationships (other than licenses) with an assigned value of $1,089,223, amortized straight line over five years
value of purchased software for sale and licensing value with an assigned value of $644,449, amortized on a straight line basis over five years
employment and non-compete agreements acquired with an assigned value of $364,000, amortized on a straight line basis over three years.
We incur travel and entertainment expenses in connection with marketing, sales and implementation of InsPro at client locations.
We incur computer processing fees associated with ASP hosting services. Atiam has a hosting services contract with a third party, which can be terminated with notice and payment of a termination fee. This third party provides Atiam with hosting services for our client’s ASP production and test environments.
At December 31, 2008, we had a cash balance of $1,842,419 and working capital deficit of $(3,540,008).
On March 31, 2008, we entered into securities purchase agreements with certain institutional investors and completed a private placement of an aggregate of 6,250,000 shares of our common stock and warrants to purchase 6,250,000 shares of our common stock. Pursuant to the agreements we sold investment units at a per unit purchase price of $0.80. Each unit sold in the private placement consisted of one share of common stock and a warrant to purchase one share of common stock at an initial exercise price of $0.80 per share, subject to adjustment as provided therein. The gross proceeds from the private placement were $5,000,000 and we incurred $70,238 of legal and other expenses in connection with the private placement. We have and are using the net proceeds of the private placement for working capital purposes.
At December 31, 2008, we had a restricted cash balance of $1,150,000, which represents money market account balances pertaining to two letters of credit for the benefit of the landlords of our Florida and New York offices. The money market accounts are on deposit with the issuer of the letters of credit. We receive interest on the money market accounts.
We have agreements with certain of our insurance carriers whereby our insurance carriers advance our first year premium commissions before the commissions are earned. The unearned portion of premium commissions has been included in the consolidated balance sheet as a liability for unearned commission advances. These advance agreements represent a material source of cash to fund our operations. Unearned commission advances are recognized as commission revenue after we receive notice that the insurance company has received payment of the related premium. In the event that the insurance company does not receive payment of the related premium pertaining to a commission advance, the insurance company generally deducts the unearned commission advance from its commission payments to us.
We have an advance agreement with Humana that allows the insurance carrier to terminate future advances and convert the outstanding advance balance into a promissory note, which, if not repaid within 30 days, would incur interest expense. As of December 31, 2008, our outstanding advance balance with Humana was $353,808. Subsequent to December 31, 2008 in connection with the eHealth transaction eHealth assumed $370,794 of the Company’s outstanding advance balance with Humana as of the date of the eHealth transaction. Effective January 31, 2009 Humana notified the Company that it will no longer advance first year premium commissions and charged back to the Company the remaining unearned commission advance as of January 31, 2009.
Decreases in accounts receivable of $753,398 in 2008, which is the result of decreased commission payments from certain of our insurance carriers that advance us future commission revenue.
In addition to cash used in operating activities, we incurred $4,623,332 of non cash expenses and impairments in 2008, which were included in our net loss, including:
Depreciation and amortization expense of $2,568,145 and $2,286,767 in 2008 and 2007, respectively.
$380,711 loss on impairment of intangible assets, which included $295,633 of expense in 2008 to write-off the value of license fee and capitalized costs incurred to implement a commission system; and $85,078 as a result of Ivan Spinner’s termination of employment and impairment of acquired ISG employee contracts.
Net cash provided by financing activities in 2008 was $5,169,624 as compared to $10,863,708 in 2007.
In the first quarter of 2007, we completed a private placement with certain institutional and individual accredited investors and issued 5,000,000 shares of our common stock and warrants to purchase 2,500,000 shares of our common stock. Gross proceeds were $11,250,000 and placement and other fees paid in connection with the private placement were $895,240.
During the year ended December 31, 2008 we used $8,354,232 of cash to fund operations and $760,558 of cash to fund investing activities. As of December 31, 2008, we have funded our operating activities from the proceeds of the sale of our common stock; however, based on our most recent financial projections, we believe that our current level of liquid assets and our expected cash flows from operations may not be sufficient to finance our operations and financial commitments in the future. As a result, we have begun to reduce and expect to further reduce our cost structure. For example, during the first quarter of 2008, we closed our former New York sales office and reduced staffing at our Florida office in order to reduce expenses and our negative cash flow. During the third quarter of 2008, we sub-leased our former New York office and began receiving sub-lease rental revenue, which will offset the lease occupancy costs of the New York office. Subsequent to September 30, 2008, we further reduced our staffing and subleased a portion of its Florida office to further reduce our expenses and negative cash flow; however we anticipate that we will continue to use cash to fund operations for the foreseeable future. Management believes that our cash on hand together with the net proceeds of the January 2009 private placement and the recent sale of the Telesales agency business to eHealth will be sufficient to meet our cash requirements through at least the next 12 months.
On May 31, 2006, we entered into a Software and Services Agreement (the “License Agreement”) with Realtime Solutions Group, L.L.C. (“Realtime”), under which Realtime granted us 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 (“STP”) and all associated documentation, source code and object code, for use in the marketing, promotion and sale of health benefits or insurance products.
Consolidated Balance Sheets at December 31, 2008 and December 31, 2007
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2008 and December 31, 2007
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
We have audited the accompanying consolidated balance sheets of Health Benefits Direct Corporation and Subsidiaries as of December 31, 2008 and December 31, 2007, the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years ended December 31, 2008 and December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Benefits Direct Corporation and Subsidiaries as of December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for the years ended December 31, 2008 and December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
The acquisition of HBDC by the Company was accounted for as a reverse merger because, on a post-merger basis, the former HBDC shareholders held a majority of the outstanding common stock of the Company on a voting and fully diluted basis. As a result, HBDC was deemed to be the acquirer for accounting purposes. Accordingly, the consolidated financial statements presented for the period ended December 31, 2005, are those of HBDC for all periods prior to the acquisition, and the financial statements of the consolidated companies from the acquisition date forward. The historical shareholders’ deficit of HBDC prior to the acquisition has been retroactively restated (a recapitalization) for the equivalent number of shares received in the acquisition after giving effect to any differences in the par value of the Company and HBDC’s common stock, with an offset to additional paid-in capital. The restated consolidated retained earnings of the accounting acquirer, HBDC, are carried forward after the acquisition.
The Company operates though two business segments, which are the Telesales Business Segment (“Telesales”) and the Atiam Business Segment (“Atiam”).
The Company considers all liquid debt instruments with original matuirities of 3 months or less to be cash equivalents.
The Company has a policy of establishing an allowance for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. At December 31, 2008, the Company has established, based on a review of its outstanding balances, an allowance for doubtful accounts in the amount of $2,173.
Accounts receivable from the Company’s largest Atiam client as measured by receivable balance accounted for 30% and 13% of the Company’s total accounts receivable balance at December 31, 2008 and 2007, respectively. Accounts receivable from the Company’s largest insurance carrier accounted for 20% and 53% of the Company’s total accounts receivable balance at December 31, 2008 and 2007, respectively.
The Company’s Telesales segment capitalized certain costs valued in connection with developing or obtaining internal use software in accordance with American Institute of Certified Public Accountants Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”. These costs, which consist of direct technology labor costs, are capitalized and amortized using the straight-line method over expected useful lives. Costs that the Company has incurred in connection with developing the Company’s websites and purchasing domain names are capitalized and amortized using the straight-line method over an expected useful life.
The Company’s Atiam segment capitalized certain costs valued in connection with developing or obtaining software for external use in accordance with Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. These costs, which consist of direct technology labor costs, are capitalized subsequent to the establishment of technological feasibility and until the product is available for general release. Both prior and subsequent costs relating to the establishment of technological feasibility are expensed as incurred. Development costs associated with product enhancements that extend the original product’s life or significantly improve the original product’s marketability are also capitalized once technological feasibility has been established. Software development costs are amortized on a straight-line basis over the estimated useful lives of the products not to exceed two years, beginning with the initial release to customers. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining useful life of the capitalized software development costs should be revised or the remaining balance of such assets may not be recoverable. The Company evaluates the recoverability of capitalized software based on the net realizable value of its software products, as defined by the estimated future revenue from the products less the estimated future costs of completing and disposing of the products, compared to the unamortized capitalized costs of the products. As of December 31, 2008, management believes no revisions to the remaining useful life or additional write-downs of capitalized software development costs are required because the net realizable value of its software products exceeds the unamortized capitalized costs. Management’s estimates about future revenue and costs associated with its software products are subject to risks and uncertainties related to, among other things, market and industry conditions, technological changes, and regulatory factors. A change in estimates could result in an impairment charge related to capitalized software costs.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company periodically reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
During the first quarter of 2008, the Company closed its sales office located in New York. As of March 31, 2008, the Company determined that all furniture and lease-hold improvements located at the New York sales office were impaired as a result of the office closure. The Company recorded $88,922 expense to write-down the value of these assets to their net realizable value. During the third quarter of 2008 the Company sold all furniture and equipment located at the New York office and realized a loss of $92,374.
The Company accounts for income taxes under the liability method in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The length of time between when we submit a consumer’s application for insurance to an insurance company and when we recognize revenue varies. The type of insurance product, the insurance company’s premium billing and collection process, and the insurance company’s underwriting backlog are the primary factors that impact the length of time between submitted applications and revenue recognition. Any changes in the amount of time between submitted application and revenue recognition, which are influenced by many factors not under our control, create fluctuations in our operating results and could affect our business, operating results and financial condition.
The Company receives bonuses based upon individual criteria set by insurance companies, which vary over time and generally do not extend beyond the current calendar year. We recognize bonus revenues when we receive notification from the insurance company of the bonus due to us.
The Company also generates revenue from the sale of leads to third parties. Such revenues are recognized when the Company delivers the leads and bills the purchaser of the leads.
The Company’s Atiam business segment offers InsPro on a licensed and an application service provider (“ASP”) basis. An InsPro software license entitles the purchaser a perpetual license to a copy of the InsPro software installed at a single client location. Alternatively, ASP hosting service enables a client to lease the InsPro software, paying only for that capacity required to support their business. ASP clients access InsPro installed on Atiam owned servers located at Atiam’s offices or at a third party’s site.
Software maintenance fees apply to both licensed and ASP clients. Maintenance fees cover periodic updates to the application and the InsPro help desk.
Lead expenses, which are costs incurred in Telesales, are paid referrals from third-party lead aggregators of individuals who have expressed an interest in purchasing insurance products. Advertising expense pertains to direct response advertising. Other marketing consists of professional marketing services. Lead, advertising and other marketing are expensed as incurred. See Note 14 - Subsequent Events.
The Company maintains its cash and restricted cash in bank deposit accounts, which exceed the federally insured limits of $250,000 per account as of December 31, 2008. At December 31, 2008, the Company had approximately $1,209,000 in United States bank deposits, which exceeded federally insured limits. Effective October 3, 2008 through December 31, 2009, federally insured limits have been increased from $100,000 to $250,000 per account. The Company has not experienced any losses in such accounts through December 31, 2008.
At December 31, 2008, the Company does not believe that it is probable that the Company will incur a penalty in connection with the registration rights agreement, which we entered into on March 31, 2008 in connection with the 2008 private placement. Accordingly, no liability was recorded as of December 31, 2008.
Recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree;
Determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
The objective of FAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require:
When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment.
Entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners.
In March 2008, the FASB issued FASB No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which amends and expands the disclosure requirements of FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities,” with the intent to provide users of financial statements with an enhanced understanding of; how and why an entity sues derivative instruments, how the derivative instruments and the related hedged items are accounted for and how the related hedged items affect an entity’s financial position, performance and cash flows. This statement is effective for financial statements for fiscal years and interim periods beginning after November 15, 2008. Management believes this statement has no impact on the consolidated financial statements of the Company.
In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States. Any effect of applying the provisions of SFAS 162 shall be reported as a change in accounting principle in accordance with SFAS 154, Accounting Changes and Error Corrections. SFAS 162 is effective 60 days following approval by the Securities and Exchange Commission of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Management does not anticipate that the adoption of SFAS 162 will have a material impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP 03-6-1”), which addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in earnings allocation in computing earnings per share under the two-class method. The statement is effective for financial statements issued for fiscal years beginning after December 15, 2008 and retrospective application is required for all periods presented. Management believes FSP 03-6-1 has no impact on the consolidated financial statements of the Company.
On September 12, 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161 (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 (1) amends Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), to require disclosures by sellers of credit derivatives, including credit derivatives embedded in a hybrid instrument; (2) amends FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to require an additional disclosure about the current status of the payment/performance risk of a guarantee and (3) clarifies the FASB’s intent about the effective date of SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133 (“SFAS 161”). FSP FAS 133-1 and FIN 45-4 is effective for reporting periods ending after November 15, 2008. Management believes FSP FAS 133-1 and FIN 45-4 have no impact on the consolidated financial statements of the Company.
On January 12, 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (“FSP EITF 99-20-1”). This FSP amends EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets, by eliminating the requirement that a holder’s best estimate of cash flows be based upon those that a market participant would use. Instead, FSP EITF 99-20-1 eliminates the use of market participant assumptions and requires the use of management’s judgment in the determination of whether it is probable there has been an adverse change in estimated cash flow. This FSP was effective for reporting periods ending after December 15, 2008. Management believes FSP EITF 99-20-1 has no material impact on the consolidated financial statements of the Company.
On April 3, 2006, the Company entered into a merger agreement (the “ISG Merger Agreement”) with ISG Merger Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub”), ISG, and Ivan M. Spinner pursuant to which, among other things, Merger Sub merged with and into ISG (the “ISG Merger”). As consideration for the ISG Merger, the Company made a cash payment of $920,000 and issued 1,000,000 shares of its common stock to Mr. Spinner, the sole stockholder of ISG, in exchange for all of the outstanding stock of ISG. The ISG merger was completed on April 4, 2006.
The following table summarizes the estimated fair values of ISG’s assets acquired and liabilities assumed at the date of acquisition.
On September 21, 2007, the Company entered into an Agreement and Plan of Merger (the “Atiam Merger Agreement”) by and among the Company, HBDC, System Consulting Associates, Inc., a Pennsylvania corporation (“SCA”), and the shareholders of SCA party thereto (the “Shareholders”). SCA owned approximately 60% of Atiam Technologies, L.P. The Company and SCA closed on the Merger on October 1, 2007.
Through October 1, 2007, SCA operated through Atiam Technologies, L.P. Subsequent to October 1, 2007, SCA was merged into HBDC Sub, which was subsequently renamed Atiam Technologies LLC and operates as the Company’s Atiam business. The results of our Atiam business segment have been included in the Company’s statement of operations as of October 1, 2007. The Company’s Atiam business segment is a provider of comprehensive, web-based insurance administration software applications that support individual insurance products.
We estimated the fair values of Atiam’s assets acquired and liabilities assumed at the date of acquisition as follows:
Intangible assets acquired from Atiam were assigned the following values: value of client contracts and relationships other than license with an assigned value of $1,089,223 amortized straight line over five years; value of purchased software for sale and licensing value with an assigned value of $644,449 amortized straight line over five years; and employment and non-compete agreements acquired with an assigned value of $364,000 amortized straight line over three years. Intangible assets acquired from Atiam had the following unamortized values as of December 31, 2008: value of client contracts and relationships other than licensing of $816,916; value of purchased software for sale and licensing value of $483,337; and employment and non-compete agreements acquired of $212,319.
The following table summarizes the required disclosures of the pro forma combined entity, as if the acquisition of Atiam occurred at January 1, 2007.
The Company has agreements with certain of its insurance carriers whereby the Company’s insurance carriers advance the Company first year premium commissions before the commissions are earned. The unearned portion of premium commissions has been included in the consolidated balance sheet as a liability for unearned commission advances. These advance agreements represent a material source of cash to fund the Company’s operations. Unearned commission advances are recognized as commission revenue after we receive notice that the insurance company has received payment of the related premium. In the event that the insurance company does not receive payment of the related premium pertaining to a commission advance the insurance company generally deducts the unearned commission advance from its commission payments to the Company.
On March 30, 2007, Co-Investment Trust II, L.P., designee of Cross Atlantic Capital Partners, Inc.; participated in a private placement along with other accredited and institutional investors wherein it purchased 5.0 million investment units for a purchase price of $5,000,000. Mr. Tecce, who is one of our directors effective August 2, 2007, is a managing director and counsel to Cross Atlantic Capital Partners, Inc. Mr. Caldwell, who is also one of our directors effective April 1, 2008, is a shareholder, director and officer of Co-Invest II Capital Partners, Inc., which is the general partner of Co-Invest Management II, L.P., which is the general partner of The Co-Investment Fund II, L.P and is the Chairman and Chief Executive Officer of Cross Atlantic Capital Partners, Inc.
As of December 31, 2007, the Company recorded $28,500 due to related parties, which consisted of the following:
Keystone Equities Group, L.P provided the Company investment advisory services in 2007 at a cost of $53,572. John Harrison, a director of the Company, is associated with Keystone Equities Group, L.P. The Company paid Keystone Equities Group, L.P $28,572 in 2007, recorded a related party liability of $25,000 as of December 31, 2007, which was subsequently paid in 2008.
In connection with the 2007 Private Placement, the Company paid the placement agents an aggregate placement fee equal of $787,500 plus the reimbursement of certain expenses in the amount of $42,500. The Company also issued to the placement agents warrants (the “Placement Agent Warrants”) to purchase in the aggregate 350,000 shares of the Company’s Common Stock with an exercise price of $2.80 and exercisable from September 30, 2007 through March 30, 2010. The Company also incurred legal and other expenses in the amount of $65,240 in connection with the 2007 Private Placement.
The Purchase Agreements also provide a customary participation right, subject to exceptions and limitations, which provides for a designated investor to be able to participate in future financings for capital raising purposes occurring within two years of March 30, 2007 at a level based on such investor’s ownership percentage of the Company on a fully-diluted basis prior to such financing.
On October 1, 2007 the Company issued 739,913 shares of its Common Stock in connection with the Company’s acquisition of Atiam. See Note 3 -Acquisition of Atiam.
On December 15, 2007 the Company issued 75,000 unrestricted shares of its Common Stock to certain directors of the Company in accordance with the Company’s Non Employee Director Compensation Plan, which were valued at $161,250 based on the $2.15 closing price of our Common Stock on the OTCBB on December 14, 2007.
On February 15, 2007, the Company and Daniel Brauser, the Company’s former Senior Vice President, entered into Amendment No. 1 (the “Amendment”) to Mr. Brauser’s option, dated November 10, 2005 (the “Brauser Option”). The Brauser Amendment was approved by the Company’s board of directors on February 15, 2007. Under the terms of the Brauser Option, Mr. Brauser has the right to purchase, at an exercise price of $2.50 per share, 500,000 fully-paid and non-assessable shares (the “Option Shares”) of the Company’s Common Stock.
Under the terms of the Brauser Option, the vesting schedule of the Option Shares was as follows: (a) 25% of the Option Shares on or after the first anniversary of the Brauser Option’s grant date; (b) 10,416 Option Shares on or after the last day of each month thereafter; and (c) 10,440 Option Shares on or after November 30, 2009. As of February 15, 2007, the Brauser Option was vested with respect to 145,832 Option Shares and remained unvested with respect to the remaining 354,168 Option Shares. The Amendment accelerates the vesting schedule of the Option Shares as follows: 25% of the Option Shares subject to the Brauser Option on the first anniversary of the Brauser Option’s date of grant; an additional 10,416 Option Shares on December 31, 2006; an additional 10,416 Option Shares on January 31, 2007; an additional 19,966 Option Shares on February 15, 2007; and an additional 30,382 Option Shares on the last day of each month thereafter beginning on February 28, 2007 through December 31, 2007.
During 2007, the Company issued options to purchase 190,550 shares of Common Stock to various employees at prices ranging from $2.13 to $3.00. These options vest one third on the first anniversary and an additional one third on each anniversary thereafter.
During 2007, 239,918 options were forfeited as a result of the termination of the employment of various employees in accordance with the terms of the stock options.
On March 31, 2008, the board of directors of the Company adopted the Company’s 2008 Equity Compensation Plan (the “2008 Plan”), which plan was not subject to shareholder approval. An aggregate of 1,000,000 shares of the Company’s common stock was reserved for issuance under the 2008 Plan in addition to any authorized and unissued shares of common stock available for issuance under the Company’s 2006 Omnibus Equity Compensation Plan. The purpose of the 2008 Plan is to provide a comprehensive compensation program to attract and retain qualified individuals to serve as directors. The Company is authorized to award cash fees and issue non-qualified stock options under the 2008 Plan. The 2008 Plan is administered by the Company’s board of directors or the compensation committee established by the board.
Effective October 2, 2008, our shareholders approved an amendment and restatement of the 2008 Plan to (i) permit the grant of incentive stock options, (ii) provide our compensation committee with the flexibility to make grants that qualify as “qualified performance-based compensation” within the meaning of section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), (iii) reflect the merger of the Health Benefits Direct Corporation 2006 Omnibus Equity Compensation Plan (the “2006 Plan”) with and into the 2008 Plan, (iv) amend the adjustment provision to make clarifying changes and (v) specify the maximum number of shares authorized for issuance under the 2008 Plan.
A summary of the Company’s outstanding stock options as of and for the years ended December 31, 2008 and 2007 are as follows:
The weighted average fair value of option grants are estimated as of the date of grant using the Black-Scholes option-pricing model based on the following assumptions for options granted during the years ended December 31, 2008 and 2007:
As of December 31, 2008, there were 7,000,000 shares of our common stock authorized to be issued under the 2008 Plan, of which 1,969,790 shares of our common stock remain available for future stock option grants.
The value of equity compensation expense not yet expensed pertaining to unvested equity compensation was $412,478 as of December 31, 2008, which will be recognized over a weighted average 0.6 years in the future.
During 2007, certain holders of the Company’s outstanding warrants exercised their warrants to purchase an aggregate of 300,000 shares of the Company’s common stock at an exercise price of $1.50 per share for an aggregate exercise price of $450,000.
Outstanding warrants at December 31, 2008 have a weighted average remaining contractual life of 2.9 years.
In connection with the 2007 Private Placement, the Company issued to the placement agents the Placement Agent Warrants. Under the terms of the Registration Rights Agreement, the holders of the Placement Agent Warrants have certain “piggyback” registration rights for the shares of Common Stock underlying the Placement Agent Warrants (the “Placement Agent Warrant Shares”).
In connection with the Bilenia Agreement, the Company and CCCC entered into the Bilenia Registration Rights Agreement. In connection with the Atiam Merger Agreement, the Company and Shareholders also entered into a Registration Rights Agreement (the “Shareholder Registration Rights Agreement”). See Note 3 - Atiam Acquisition.
The Company’s Atiam Business Segment has entered into several capital lease obligations to purchase equipment used for operations. The Company has the option to purchase the equipment at the end of the lease agreement for one dollar. The underlying assets and related depreciation were included in the appropriate fixed asset category, and related depreciation account.
Property and equipment includes the following amounts for leases that have been capitalized as of December 31, 2008 and 2007:
Mr. Verdi’s amended and restated employment agreement, as amended on March 31, 2008, provides for an initial term of one year with automatic successive one-year renewals unless we or Mr. Verdi gives the other party 60 days’ written notice prior to the end of the then current term. Mr. Verdi’s base salary is $225,000 per year.
If we terminate Mr. Verdi’s employment for cause or Mr. Verdi terminates his employment agreement without good reason, Mr. Verdi will be entitled to receive (i) all accrued and unpaid salary and vacation pay through the date of termination and (ii) continued participation for one month in our benefit plans. Otherwise if we terminate Mr. Verdi’s employment or Mr. Verdi terminates his employment agreement for good reason including his permanent disability he will be entitled to receive 18 months’ base salary at the then current rate, payable in accordance with our usual practices, continued participation for 18 months in our benefit plans and payment, within a commercially reasonable time and on a prorated basis, of any bonus or other payments earned in connection with our bonus plan existing at the time of termination. In addition, if Mr. Verdi’s employment is terminated in accordance with the foregoing sentence within two months prior to, or 24 months following, a change in control (as described in the employment agreement), Mr. Verdi will be entitled to receive 18 months’ base salary at the then current rate upon the date of termination, regardless of our usual practices, and all stock options held by Mr. Verdi at the date of termination will immediately become 100% vested and all restrictions on such options will lapse.
If Mr. Verdi dies during the term of his employment agreement, the employment agreement will automatically terminate and Mr. Verdi’s estate or beneficiaries will be entitled to receive (i) three months’ base salary at the then current rate, payable in a lump sum and (ii) continued participation for one year in our benefit plans.
In the event of Mr. Eissa’ s termination without cause or for good reason, he or his estate would receive his then current base annual salary, plus unpaid accrued employee benefits, which is primarily accrued vacation, plus the continuation of his employee benefits for a period of one year, less all applicable taxes. In the event of his voluntary termination, death or disability, he or his estate would receive unpaid accrued employee benefits, plus the continuation of his employee benefits for a period of 1 month, less all applicable taxes.
Effective during the first quarter of 2007, the letters of credit pertaining to the lease for our Florida office and our New York office were collateralized in the form of a money market account, which as of December 31, 2008 and December 31, 2007 had a balance of $1,150,000. This money market account is on deposit with the issuer of the letters of credit and is classified as restricted cash on the Company’s balance sheet. The terms of the money market account allow the Company to receive interest on the principal but prohibits the Company from withdrawing the principal for the life of the letters of credit.
The Company leases certain real and personal property under non-cancelable operating leases. Rent expense was $2,482,008 and $1,710,010 for the years ended December 31, 2008 and 2007, respectively.
On August 28, 2008, a former employee of the Company (the “Plaintiff”) filed a national class action complaint in the Seventeenth Judicial Circuit of Florida, Broward County, case no. 062008 CA 042798 XXX CE, alleging that the Company breached a contract with employees by failing to provide certain commissions and/or bonuses. The complaint also contains claims for an accounting and for declaratory relief relating to the alleged compensation agreement. Plaintiff purports to bring these claims on behalf of a class of current and former insurance sales agents. Plaintiff seeks payment from the Company of all commissions allegedly owed to him and the putative class, triple damages, attorneys’ fees, costs, and interest. The Company filed a motion to dismiss the complaint, which is set for hearing on November 13, 2008. The Company filed a motion to dismiss the complaint, which has not yet been heard by the court. The Company believes that these claims are without merit and intends to vigorously defend the litigation.
On May 31, 2006, the Company entered into a Software and Services Agreement (the “License Agreement”) with Realtime Solutions Group, L.L.C. (“Realtime”), under which 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 (“STP”) and all associated documentation, source code and object code, for use in the marketing, promotion and sale of health benefits or insurance products.
As consideration for the grant of the rights and licenses under the License Agreement, the Company paid to Realtime a $10,000 nonrefundable cash deposit and upon delivery of the STP software and other materials the Company will pay a license fee in the form of 216,612 unregistered shares of our common stock. Concurrent with entering into the License Agreement, HBDC and Realtime entered into a Registration Rights Agreement that provides for piggyback registration rights for the to be issued shares.
The Company derives the results of the business segments directly from its internal management reporting system. The accounting policies the Company uses to derive business segment results are substantially the same as those the consolidated company uses. Business segment results are presented net of inter-segment amounts. Management measures the performance of each business segment based on several metrics, including earnings from operations. Management uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments.
Selected operating results and total asset information for each business segment was as follows:
The Company has net operating losses carry-forwards for federal income tax purposes of approximately $25,000,000 at December 31, 2008, the unused portion of which, if any, expires in years 2025 through 2028. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” “SFAS 109”. SFAS 109 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry forwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carry forwards after a change in control (generally greater than a 50% change in ownership).
Deferred tax assets and liabilities are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. The components of the net deferred tax assets for the years ended December 31, 2008 and 2007 were as follows:
The Company fully reserved the net deferred tax asset due to the substantial uncertainty of the realization of any tax assets in future periods. The valuation allowance was increased by $2,629,157 from the prior year.
On January 14, 2009, the Company entered into and, on January 15, 2009 completed, a private placement (the “2009 Private Placement”) with Co-Investment Fund II, L.P., a Delaware limited partnership (“Co-Investment” or the “Investor”), for an aggregate of 1,000,000 shares (each, a “Preferred Share”) of its Series A Convertible Preferred Stock, par value $0.001 per share (“Preferred Stock”), and warrants (“2009 Warrants”) to purchase 1,000,000 shares of its Preferred Stock (each, a “Preferred Warrant Share”), pursuant to the terms of the Securities Purchase Agreement (the “2009 Purchase Agreement”). The gross proceeds from the closing were $4 million and the Company intends to use the net proceeds of the Private Placement for working capital purposes.
The 2009 Warrants provide that the holder thereof shall have the right (A) at any time after the Stockholder Approval Deadline, but prior to the earlier of (i) ten business days’ after the Company has properly provided written notice to all such holders of a Call Event (as defined below), (ii) the date on which the Company’s stockholders approve the Charter Amendment (the “Stockholder Approval Date”) and (iii) January 14, 2014, to acquire 1,000,000 shares of Preferred Stock upon the payment of $4.00 per Preferred Warrant Share and (B) at any time after the Stockholder Approval Date, but prior to the earlier of (i) ten business days’ after the Company has properly provided written notice to all such holders of a Call Event (as defined below) and (ii) January 14, 2014, to acquire up to a total of 20,000,000 shares of Common Stock of the Company (each a “Warrant Share”) upon the payment of $0.20 per Warrant Share (the “Exercise Price”). The Company also has the right, at any point after the Stockholder Approval Date and after which the volume weighted average trading price per share of the Preferred Stock for a minimum of 20 consecutive trading days is equal to at least eight times the Exercise Price per share, provided that certain other conditions have been satisfied, to call the outstanding 2009 Warrants (a “Call Event”), in which case such 2009 Warrants will expire if not exercised within ten business days thereafter. The 2009 Warrants also include full ratchet anti-dilution adjustment provisions for issuances of securities below $0.20 per share of Common Stock during the first two years following the date of issuance of the 2009 Warrants, subject to customary exceptions.
Upon shareholder approval of the Charter Amendment at the Special Meeting and the filing of the Certificate of Amendment, all outstanding shares of Series A Preferred Stock will become immediately convertible, at the election of each holder of Preferred Shares, into twenty shares of the Company’s common stock and the 2009 Warrants issued in the 2009 Private Placement will automatically become exercisable for twenty shares of Common Stock.
The 2009 Purchase Agreement also provides for a customary participation right for Co-Investment, subject to certain exceptions and limitations, which grants Co-Investment the right to participate in any future capital raising financings of the Company occurring prior to January 14, 2011. Co-Investment may participate in such financings at a level based on Co-Investment’s ownership percentage of the Company on a fully-diluted basis prior to such financing.
On January 14, 2009, the Company filed the Certificate of Designation with the Secretary of State of the State of Delaware. The Certificate of Designation was approved by the Company’s Board of Directors on January 12, 2009 and became effective upon filing. The Certificate of Designation provides for the terms of the Preferred Stock issued pursuant to the 2009 Purchase Agreement.
Cessation of Direct Marketing and Sales in the Telesales Call Center, Transactions with eHealth and Reduction in Staffing
On February 20, 2009 (the “Closing Date”), the Company entered into and completed the sale of the Company’s Telesales call center produced agency business (the “Agency Business”) to eHealth, an unaffiliated third party, pursuant to the terms of a Client Transition Agreement (the “Agreement”).
Pursuant to the Agreement the Company transferred to eHealth broker of record status and the right to receive commissions on certain of the in-force individual and family major medial health insurance policies and ancillary dental, life and vision insurance policies issued by Aetna, Inc., Golden Rule, Humana, PacifiCare, Inc., Assurant and United Healthcare Insurance Co. (collectively, the “Specified Carriers”) on which the Company was designated as broker of record as of the Closing Date (collectively, the “Transferred Policies” and each, a “Transferred Policy”). Certain policies and products were excluded from the transaction, including the Company’s agency business generated through its ISG agents, all short term medical products and all business produced through carriers other than the Specified Carriers. In addition, the Agreement also provides for the transfer to eHealth of certain lead information relating to health insurance prospects (the “Lead Database”). The estimated aggregate initial amount of consideration paid by eHealth pursuant to the Agreement is approximately $1,280,000. In addition, on the Closing Date, eHealth agreed to assume from the Company certain liabilities relating to historical commission advances on the Transferred Policies made by the Specified Carriers in an aggregate amount of approximately $1,385,000. In addition, eHealth has agreed to pay to HBDC II a portion of each commission payment received by eHealth and reported by the Specified Carrier relating to a Transferred Policy for the duration of the policy, provided that eHealth remains broker of record on such Transferred Policy.
As a result of above, management anticipates a significant decline in future Telesales revenues as a result of the cessation of direct marketing and sales in Telesales and the eHealth transaction. Revenue from the five insurance carriers subject to the eHealth transactions accounted for 66% and 75% of the Company’s total revenue for the years ended December 31, 2008 and 2007. Management believes the reduction in future revenues will be mitigated if not more than offset by significant reductions in future expenses. During the year ended December 31, 2008, the Company incurred approximately $12,697,000 of expense in Telesales’ call center, which will be eliminated as a result of the cessation of direct marketing and sales activities, including approximately $7,668,000 of salaries, commissions and related taxes, approximately $4,013,000 of lead, advertising and other marketing, approximately $848,000 rent and other occupancy costs and approximately $168,000 of other general and administrative expense.
Effective March 25, 2009, our shareholders approved an amendment to our certificate of incorporation, as amended, to increase the number of authorized Common Shares from 90,000,000 shares to 200,000,000.
On February 5, 2009, the Compensation Committee (the “Committee”) of the Company’s board of directors authorized and issued stock option grants and bonuses to each of Anthony R. Verdi, the Company’s Chief Financial Officer, Chief Operating Officer and acting principal executive officer, and Robert Oakes, a director of the Company and President of the Company’s Atiam Technologies LLC subsidiary.
The Committee approved a $100,000 cash bonus payable to Mr. Verdi in four equal monthly installments beginning in April 2009 and a $50,000 cash bonus payable to Mr. Oakes in February 2009. The Committee also authorized and issued to Mr. Verdi a stock option grant to purchase a total of 650,000 shares of the Company’s common stock, which vests as follows: 130,000 shares of Common Stock on each of May 31, 2009, September 30, 2009, May 31, 2010 and September 30, 2010; 65,000 shares of Common Stock on May 31, 2011; and 32,500 shares of Common Stock on each of September 30, 2011 and May 31, 2012.
The Committee authorized and issued to Mr. Oakes a stock option grant to purchase a total of 1,000,000 shares of the Company’s common stock, which vests as follows: 200,000 shares of Common Stock on each of May 31, 2009, September 30, 2009, May 31, 2010 and September 30, 2010; 100,000 shares of Common Stock on May 31, 2011; and 50,000 shares of Common Stock on each of September 30, 2011 and May 31, 2012.
As of March 31, 2009 the Company and Mr. Eissa entered into a consulting agreement that outlines certain advisory services to be provided by Mr. Eissa to the Company.