SelectQuote, Inc.: Form 10-Q for the period ended Mar 31, 2023

You should read the following discussion and analysis of our financial condition and result of operations together with our condensed consolidated financial statements and footnotes included elsewhere in this Quarterly Report on Form 10-Q. 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. Please refer to a discussion of the Company’s forward-looking statements and associated risks in “Cautionary Note Regarding Forward-Looking Statements” in our 2022 Annual Report. 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 discussed in the section titled “Risk Factors” in our 2022 Annual Report and in Part II, Item 1A hereof.

Correction of Previously Issued Condensed Consolidated Financial Statements

Subsequent to the issuance of the Company’s financial statements as of and for the year ended June 30, 2021, the Company determined that the provision for first year commission revenue for certain final expense policies offered by certain of its insurance carrier partners should have been accrued based on a higher lapse rate. This misstatement was initially thought to be isolated to an error in the lapse rate for one of its insurance carrier partners, as disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021. However, during the three months ended June 30, 2022, it was determined that the lapse rate for other insurance carrier partners were also incorrect, resulting in an additional misstatement being identified. See Note 1 to the condensed consolidated financial statements for additional information related to the correction, including descriptions of the misstatements and the impacts to our condensed consolidated financial statements. In addition, we have corrected certain previously reported financial information for the three and nine months ended March 31, 2022, in this Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Company Overview

Our Business. We are a leading technology-enabled, direct-to-consumer (“DTC”) distribution platform for insurance products and healthcare services. Our insurance distribution business, which has operated continuously for over 35 years, provides consumers with a transparent and convenient venue to shop for complex senior health, life, and automobile and 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. In return, we earn commissions from our insurance carrier partners for the policies we sell on their behalf. 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 including search engines, radio, television, and third-party marketing partners. We monitor our acquisition costs to dynamically allocate our marketing spend to the most attractive channels, 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 a sales 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, further enhancing 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.

Our unique platform has enabled us to expand our distribution business in recent years to include additional products beyond insurance policies. In interacting with thousands of consumers over the years, we identified a large opportunity to leverage our existing database and distribution model to improve access to healthcare services for our consumers. In addition to improving consumers’ health outcomes, this service creates deeper relationships with our insurance carrier partners by increasing policy persistency and, in turn, reducing their overall costs. Additionally, we offer pharmacy services through our closed-door, long-term care pharmacy, which offers essential prescription medications, OTC medications, customized medication packaging, medication therapy management, and other consultative services.

We evaluate our business using the following four segments:

Senior was launched in 2010 and provides unbiased comparison shopping for Medicare Advantage (“MA”) and Medicare Supplement (“MS”) insurance plans as well as prescription drug and dental, vision, and hearing (“DVH”) plans, and critical illness products. We represent approximately 21 leading, nationally-recognized insurance carrier partners, including UnitedHealthcare (“UHC”), Humana, and Wellcare. MA and MS plans accounted for 90% and 83% of our approved Senior policies for the three months ended March 31, 2023 and 2022, respectively, and 90% and 83% for the nine months ended March 31, 2023 and 2022, respectively, with other ancillary type policies accounting for the remainder.

Healthcare Services, launched in 2021, includes SelectRx and Population Health, and was previously included under the Senior segment (refer to Note 13 to the condensed consolidated financial statements for further information on the change in segments). Through SelectRx, we provide simple solutions for prescription drug management and support with a personalized approach to streamline the process of managing multiple medications for seniors with chronic conditions. SelectRx has developed a pill pack solution that is customized to the unique needs of each patient, focusing on individual multi-dosages by day and time. SelectRx uses a high-touch, technology-driven approach to provide superior customer service and achieve improved medication adherence. Population Health contracts with insurance carriers to perform health risk assessments (“HRA”) on potential new members to determine how Population Health’s value-based care (“VBC”) partners can help members improve health outcomes. Consumers receive one-on-one assistance from our customer success agents who help patients understand the benefits available under their health plans and connect them with additional healthcare related resources. We believe that offering these services through SelectRx and Population Health to our existing MA consumers helps drive customer satisfaction and increase policy persistency, which, in turn, reduces costs for our insurance carrier partners.

Life is one of the country’s largest and most established DTC insurance distributors for term life insurance, having sold over 2.1 million policies nationwide since our founding in 1985. Our platform provides unbiased comparison shopping for life insurance products such as term life, final expense, and other ancillary products like critical illness, accidental death, and juvenile insurance. We represent approximately 22 leading, nationally-recognized insurance carrier partners, with many of these relationships exceeding 15 years. Term life policies accounted for 48% and 34% of new premium within Life for the three months ended March 31, 2023 and 2022, respectively, with final expense policies accounting for 52% and 66% for the three months ended March 31, 2023 and 2022, respectively. For the nine months ended March 31, 2023 and 2022, term life policies accounted for 45% and 35% of new premium within Life, respectively, with final expense policies accounting for 55% and 65%, respectively.

Auto & Home was launched in 2011 as an unbiased comparison shopping platform for auto, home, and specialty insurance lines. Our platform provides unbiased comparison shopping for insurance products such as homeowners, auto, dwelling fire, and other ancillary insurance products underwritten by approximately 25 leading, nationally-recognized insurance carrier partners. Homeowners and 12-month auto products accounted for 73% and 74% of new premium within Auto & Home for the three months ended March 31, 2023 and 2022, respectively, and 74% and 76% for the nine months ended March 31, 2023 and 2022, respectively, with six-month auto, dwelling fire, and other products accounting for a majority of the remainder.

The three and nine months ended March 31 referenced throughout the commentary below refers to the third quarter and fiscal year-to-date performance of our fiscal years ending on June 30, 2023 and 2022.

Key Business and Operating Metrics by Segment

In addition to traditional financial metrics, we rely upon certain business and operating metrics to estimate and recognize revenue, evaluate our business performance, and facilitate our operations. In Senior, our primary product, Medicare Advantage, pays us flat commission rates based on the number of policies we sell on behalf of our insurance carrier partners. Therefore, we have determined that units and unit metrics are the most appropriate measures to evaluate the performance of Senior. For Healthcare Services, our primary source of revenue is pharmacy revenue from SelectRx, so the total number of SelectRx members is the most appropriate measure used to evaluate the performance of Healthcare Services. In Life and Auto & Home, we are typically paid a commission that is a percent of the premium that we generate for our insurance carrier partners. Therefore, we have determined that premium-based metrics are the most relevant measures to evaluate the performance of these segments. Below are the most relevant business and operating metrics for each segment:

Senior

Submitted Policies

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.

The following table shows the number of submitted policies for the periods presented:

Total submitted policies for all products decreased 24% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, in line with our updated operating strategy to reduce the Senior distribution business and focus resources on Healthcare Services. The number of average productive agents decreased 28% during the three months ended March 31, 2023, compared to the three months ended March 31,

2022; however, due to a higher mix of tenured agents and an increased focus on agent training and development, productivity per agent increased 6% and overall close rates increased 12%.

Total submitted policies for all products decreased 26% for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022, in line with our updated operating strategy to reduce the Senior distribution business and focus resources on Healthcare Services. The number of average productive agents decreased 47% during the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022; however, due to a higher mix of tenured agents and an increased focus on agent training and development, productivity per agent increased 34% and overall close rates increased 28%.

Approved Policies

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 periods presented:

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.

Total approved policies for all products decreased 22% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, in line with our updated operating strategy to reduce the Senior distribution business and focus resources on Healthcare Services. Total approved policies decreased by 21% for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. Fluctuations in approved policies are normally in direct correlation to submitted policies; however, due to our increased focus on agent training and development and a higher mix of tenured agents, we experienced a 3% and a 7% improvement in the submitted-to-approved conversion rates for the three and nine months ended March 31, 2023, compared to the three and nine months ended March 31, 2022.

Lifetime Value of Commissions per Approved Policy

The lifetime value of commissions (the “LTV”) 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 LTV 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 LTV per approved policy represents commissions only from policies sold during the period; it does not include any updated estimates of prior period variable consideration based on actual policy renewals in the current period.

The following table shows the LTV per approved policy for the periods presented:

The LTV per MA approved policy increased 3% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to carrier mix.

The LTV per MA approved policy decreased 5% for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. The MA LTV was negatively impacted by carrier mix and lower persistency rates, which includes an increase in constraint and higher provision for renewal year lapse rates, somewhat offset by higher commission rates.

Healthcare Services

The total number of SelectRx members represents the amount of active customers to which an order has been shipped, as this is the primary key driver of revenue for Healthcare Services.

The following table shows the total number of SelectRx members as of the periods presented:

The total number of SelectRx members increased by 165% as of March 31, 2023, compared to March 31, 2022, due to the strategic growth of Healthcare Services.

Combined Senior and Healthcare Services - Consumer Per Unit Economics

The opportunity to leverage our existing database and distribution model to improve access to healthcare services for our consumers has created a need for us to review our key metrics related to our per unit economics. As we think about the revenue and expenses for Healthcare Services, we note that they are derived from the marketing acquisition costs associated with the sale of an MA or MS policy, some of which costs are allocated directly to Healthcare Services, and therefore determined that our per unit economics measure should include components from both Senior and Healthcare Services. See details of revenue and expense items included in the calculation below.

Combined Senior and Healthcare Services consumer per unit economics represents total MA and MS commissions; other product commissions; other revenues, including revenues from Healthcare Services; and operating expenses associated with Senior and Healthcare Services, each shown per number of approved MA and MS 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. Because not all acquired leads result in a successful policy sale, all per-policy metrics are based on approved policies, which is the measure that triggers revenue recognition.

The MA and MS commission per MA/MS policy represents the LTV for policies sold in the period. Other commission per MA/MS policy represents the LTV for other products sold in the period, including DVH prescription drug plan, and other products, which management views as additional commission revenue on our agents’ core function of MA/MS policy sales. Pharmacy revenue per MA/MS policy represents revenue from SelectRx and other revenue per MA/MS policy represents revenue from Population Health, production bonuses, marketing development funds, lead generation revenue, and adjustments from the Company’s reassessment of its cohorts’ transaction prices. Total operating expenses per MA/MS policy represents all of the operating expenses within Senior and Healthcare Services. 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. These costs are included in marketing and advertising expense within the total operating expenses per MA/MS policy.

The following table shows combined Senior and Healthcare Services consumer per unit economics for the periods presented. Based on the seasonality of Senior and the fluctuations between quarters, we believe that the most relevant view of per unit economics is on a rolling 12-month basis. All per MA/MS policy metrics below are based on the sum of approved MA/MS policies, as both products have similar commission profiles.

(1) These financial measures are not calculated in accordance with GAAP. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” for information regarding our use of these non-GAAP financial measures and a reconciliation of such measures to their nearest comparable financial measures calculated and presented in accordance with GAAP.

Total revenue per MA/MS policy increased 31% for the twelve months ended March 31, 2023, compared to the twelve months ended March 31, 2022, primarily due to the increase in pharmacy revenue. Total operating expenses per MA/MS policy were nearly flat for the twelve months ended March 31, 2023, compared to the twelve months ended March 31, 2022, driven by a decrease in our marketing and advertising costs, offset by an increase in cost of goods sold-pharmacy revenue for Healthcare Services due to the growth of the business.

Life

Life premium represents the total premium value for all policies that were approved by the relevant insurance carrier partner and for which the policy document was sent to the policyholder and payment information was received by the relevant insurance carrier partner during the indicated period. Because our commissions are earned based on a percentage of total premium, total premium volume for a given period is the key driver of revenue for Life.

The following table shows term and final expense premiums for the periods presented:

Total term premiums increased 17% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, due to a 4% increase in the average premium per policy sold and a 13% increase in the number of policies sold. Final expense premiums decreased 32% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The number of policies sold declined 39% driven by a lower average agent headcount, which was somewhat offset by a 10% increase in the average premium per policy sold.

Total term premiums increased 5% for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022, due to a 9% increase in the average premium per policy sold, somewhat offset by the 3% decrease in the number of policies sold which was driven by a lower average agent headcount. Final expense premiums decreased 30% for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. The number of policies sold declined 38% driven by a lower average agent headcount, which was somewhat offset by a 12% increase in the average premium per policy sold.

Auto & Home

Auto & Home premium represents the total premium value of all new policies that were approved by our insurance carrier partners during the indicated period. Because our commissions are earned based on a percentage of total premium, total premium volume for a given period is the key driver of revenue for Auto & Home.

The following table shows premiums for the periods presented:

Total premiums remained flat for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The number of policies sold and the average premium per policy sold both increased by 1%.

Total premiums remained flat for the nine months ended March 31, 2023, compared to the nine months ended March 31, 2022. The number of policies sold decreased 5%, which was offset by a 5.9% increase in the average premium per policy sold.

Non-GAAP Financial Measures

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 Quarterly Report on Form 10-Q 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.

Adjusted EBITDA. We define Adjusted EBITDA as income (loss) before interest expense, income tax expense (benefit), depreciation and amortization, and certain add-backs for transaction costs and non-cash or non-recurring expenses, including restructuring, share-based compensation expenses, and any impairment charges. The most directly comparable GAAP measure is net income (loss). We monitor and have presented in this Quarterly Report on Form 10-Q 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.

Adjusted EBITDA is not prepared in accordance with GAAP and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of this non-GAAP financial measure rather than net income (loss), which is the most directly comparable financial measure calculated and presented in accordance with GAAP. These limitations include the fact that Adjusted EBITDA excludes interest expense, depreciation and amortization expense, share-based compensation expense, income tax expense (benefit), and other non-recurring expenses that are one-time in nature. In addition, other companies may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

The following tables reconcile Adjusted EBITDA and net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, for the periods presented:

Three Months Ended March 31, 2023:

(in thousands)

(1) These expenses consist of costs related to the Senior Secured Credit Facility and non-restructuring severance expenses.

Three Months Ended March 31, 2022:

(in thousands)

(1) These expenses primarily consist of costs related to the change in administrative agent with respect to the Senior Secured Credit Facility and severance expenses.

Nine Months Ended March 31, 2023:

(in thousands)

(1) These expenses primarily consist of costs related to the Fourth Amendment to the Senior Secured Credit Facility and non-restructuring severance expenses.

Nine Months Ended March 31, 2022:

(in thousands)

(1) These expenses primarily consist of costs incurred for the Second Amendment, costs related to the acquisitions of Express Med Pharmaceuticals and Simple Meds, costs related to the change in administrative agent with respect to the Senior Secured Credit Facility, and severance expenses.

Key Components of our Results of Operations

The following table sets forth our operating results and related percentage of total revenues for the periods presented:

(in thousands)

Revenue

We earn revenue in the form of commission payments from our insurance carrier customers, for the initial year the policy is in effect (“first year”) and, where applicable, for each subsequent year the policy renews (“renewal year”), as presented in our condensed consolidated statements of comprehensive income as commission revenue. We also receive certain volume-based bonuses from some carriers on first year policies sold based on attaining various predetermined target sales levels or other agreed upon objectives. These bonuses are referred to as “production bonuses” or “marketing development funds” and are included in other revenue in the condensed consolidated statements of comprehensive income. Pharmacy revenue includes revenue from the sale of prescription and OTC medications from SelectRx. Other revenue includes production bonuses and marketing development funds noted above, revenue from Population Health for performing HRAs and making transfers or appointments with VBC partners, and external lead generation revenue from InsideResponse.

Our commission contracts with our insurance carrier partners contain a single performance obligation satisfied at the point in time to which we allocate the total 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 future renewal commissions and production bonus revenue when applicable. After a policy is sold, we have no material additional or recurring obligations to the policyholder or the insurance carrier partner. Therefore, we do not incur any additional expense related to our receipt of future renewal commissions or production bonus revenue. All of the costs associated with the sale of an individual policy are incurred prior to or at the time of the initial sale of an individual policy. Revenue is recognized at different milestones for Senior, Life, and Auto & Home and is based on the contractual enforceable rights, our historical experience, and established customer business practices. Lead generation revenue is recognized when the generated lead is accepted by our customers, which is the point of sale, and we have no performance obligation after the delivery. Revenues generated from SelectRx are recognized upon shipment. At the time of shipment, we have performed substantially all of our performance obligations and do not experience a significant level of returns or re-shipments. There are no future revenue streams associated as patients have the option to cancel their service at any time with no further payments due. Revenue from Population Health is recognized when the HRA has been performed or the agreed-upon task has been completed for a VBC partner, the transaction price is known based on volume and contractual prices, and we have no further performance obligation.

The following table presents our revenue for the periods presented and the percentage changes from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**Commission revenue decreased $24.5 million, or 11%, for the three months ended March 31, 2023, and included decreases in Senior and Life commission revenue of $25.9 million and $3.1 million, respectively, and an increase in Auto & Home commission revenue of $1.4 million. The decrease in Senior revenue was driven by a 22% decrease in approved policies offset by a 10% increase in LTV’s and higher commission rates. Life’s revenue decrease was primarily driven by a $5.0 million decrease in final expense revenue, offset by a $1.9 million increase in term revenue. The $48.5 million increase in pharmacy revenue was due to the increase in members from March 31, 2022, and the expansion of the SelectRx business. The $1.1 million increase in other revenue was primarily driven by a $4.0 million increase in production bonus revenue, partially offset by a $2.7 million decrease in external lead generation revenue and a decrease in Population Health revenue of $0.8 million.

**Nine Months Ended March 31, 2023 and 2022–**Commission revenue increased $41.1 million, or 8%, for the nine months ended March 31, 2023, and included increases in Senior and Auto & Home commission revenue of $39.5 million and $2.8 million, respectively, offset by a decrease in Life commission revenue of $6.6 million. For Senior, excluding the $145.0 million cohort adjustment recorded during the nine months ended March 31, 2022, commission revenue decreased $105.5 million during the nine months ended March 31, 2023, which was driven by a 21% decrease in approved policies and a 1% reduction in LTV’s, partially offset by higher commission rates. Life’s revenue decline was primarily driven by a $7.8 million decrease in final expense revenue. The $127.9 million increase in pharmacy revenue was due to the increase in members from March 31, 2022, and the expansion of the SelectRx business. The $12.6 million decrease in other revenue was primarily driven by an $11.5 million decrease in external lead generation revenue and a $2.9 million decrease in production bonus revenue, offset by an increase in Population Health revenue of $1.8 million.

Operating Costs and Expenses

Cost of Revenue

Cost of revenue represents the direct costs associated with fulfilling our obligations to our customers in the Senior, Life, Auto & Home, and Population Health divisions, primarily compensation, benefits, and licensing for sales agents, customer success agents, fulfillment specialists, and others directly engaged in serving customers. It also includes allocations for facilities, telecommunications, and software maintenance costs, which are all based on headcount. Facilities costs include rent and utilities expenses and other costs to maintain our office locations. Telecommunications and software maintenance costs includes costs related to the internal phone systems and various software applications that our agents use to make sales. These costs directly correlate to the number of agents we have as we are primarily charged based on per person usage for the phone systems and software applications.

The following table presents our cost of revenue for the periods presented and the percentage change from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**Cost of revenue decreased $17.3 million, or 18%, for the three months ended March 31, 2023, primarily due to a $13.3 million decrease in compensation costs, a $1.3 million decrease in licensing costs, and $2.4 million decrease in allocations for facilities, telecommunications, and software maintenance costs, all of which is due to the reduction in our agent headcount.

**Nine Months Ended March 31, 2023 and 2022–**Cost of revenue decreased $83.6 million, or 26%, for the nine months ended March 31, 2023, primarily due to a $61.4 million decrease in compensation costs, an $11.9 million decrease in licensing costs, and a $10.3 million decrease in allocations for facilities, telecommunications, and software maintenance costs, all of which is due to the reduction in our agent headcount.

Cost of Goods Sold-Pharmacy Revenue

Cost of goods sold-pharmacy revenue represents the direct costs associated with fulfilling pharmacy patient orders for SelectRx. Such costs primarily consist of medication costs and compensation and related benefit costs for licensed pharmacists, pharmacy technicians, and other employees directly associated with fulfilling orders such as packaging and shipping clerks. It also includes shipping, supplies, other order fulfillment costs including part of the one-time customer onboarding costs, and certain facilities overhead costs such as rent, maintenance, and depreciation related to the pharmacy production process.

The following table presents our cost of goods sold-pharmacy revenue for the periods presented and the percentage change from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**Cost of goods sold-pharmacy revenue increased $43.0 million, or 223%, for the three months ended March 31, 2023, due to a $37.2 million increase in medication costs, a $1.8 million increase in shipping and fulfillment costs, and a $2.6 million increase in compensation costs as the number of SelectRx members increased 165% over the prior year.

**Nine Months Ended March 31, 2023 and 2022–**Cost of goods sold-pharmacy revenue increased $120.4 million, or 351%, for the nine months ended March 31, 2023, due to a $96.6 million increase in medication costs, a $5.5 million increase in shipping and fulfillment costs, and a $14.4 million increase in compensation costs as the number of SelectRx members increased 165% over the prior year.

Marketing and Advertising

Marketing and advertising expenses consist primarily of the direct costs associated with marketing and advertising of our services, such as television and radio commercials and online advertising. These direct costs generally represent the vast majority of our marketing and advertising expenses. Other costs consist of compensation and other expenses related to marketing, business development, partner management, public relations, carrier relations personnel who support our offerings, and allocations for facilities, telecommunications, and software maintenance costs. Our marketing and advertising costs increase during AEP and OEP to generate more leads during these high-volume periods.

The following table presents our marketing and advertising expenses for the periods presented and the percentage change from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**Marketing and advertising expenses decreased $34.9 million, or 28%, for the three months ended March 31, 2023, due to a $34.1 million decrease in lead costs due to the decrease in volume associated with the Company’s updated operating strategy, as well as a $0.8 million decrease in compensation costs. However, we’ve seen an increase in marketing efficiency as our CAC per approved policy has decreased due to improved agent close rates as a result of increased focus on agent training and development.

**Nine Months Ended March 31, 2023 and 2022–**Marketing and advertising expenses decreased $171.3 million, or 42%, for the nine months ended March 31, 2023, due to a $162.4 million decrease in lead costs due to the decrease in volume associated with the Company’s updated operating strategy, as well as a $8.4 million decrease in compensation and benefits. However, we’ve seen an increase in marketing efficiency as our CAC per approved policy has decreased due to improved agent close rates as a result of increased focus on agent training and development.

Selling, General, and Administrative

Selling, general, and administrative expenses include compensation and benefits costs for staff working in our executive, finance, accounting, recruiting, human resources, administrative, business intelligence, data science, and part of the SelectRx customer onboarding 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.

The following table presents our selling, general, and administrative expenses for the periods presented and the percentage change from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**Selling, general, and administrative expenses increased $2.8 million, or 11%, for the three months ended March 31, 2023, primarily due to a $2.7 million increase in compensation costs, mostly related to the expansion of SelectRx.

**Nine Months Ended March 31, 2023 and 2022–**Selling, general, and administrative expenses increased $16.2 million, or 23%, for the nine months ended March 31, 2023, primarily due to $14.6 million increase in compensation costs, mostly related to the expansion of SelectRx.

Technical Development

Technical development expenses consist primarily of compensation and benefits costs for internal and external personnel associated with developing, maintaining, and enhancing our applications, infrastructure and other IT-related functions as well as allocations for facilities, telecommunications and software maintenance costs.

The following table presents our technical development expenses for the periods presented and the percentage change from the prior year:

(dollars in thousands)

**Three and Nine Months Ended March 31, 2023 and 2022–**Technical development expenses remained flat for the three and nine months ended March 31, 2023.

Interest Expense, Net

The following table presents our interest expense, net for the periods presented and the percentage changes from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**Interest expense increased $8.9 million, or 73%, for the three months ended March 31, 2023, primarily as a result of interest incurred on the Term Loans due to additional principal outstanding and changes under the Fourth Amendment, as well as the amortization of additional deferred financing costs associated with the amendments to the Senior Secured Credit Facility, all of which was partially offset by interest income received from the interest rate swap and on our money market account.

**Nine Months Ended March 31, 2023 and 2022–**Interest expense increased $27.6 million, or 88%, for the nine months ended March 31, 2023, primarily as a result of interest incurred on the Term Loans due to additional principal outstanding and changes under the Fourth Amendment, as well as the amortization and write-off of additional deferred financing costs associated with the amendments to the Senior Secured Credit Facility, all of which was partially offset by interest income received from the interest rate swap and on our money market account.

Income Taxes

The following table presents our provision for income taxes for the periods presented and the percentage change from the prior year:

(dollars in thousands)

**Three Months Ended March 31, 2023 and 2022–**For the three months ended March 31, 2023 and 2022, we recognized income tax expense (benefit) of $3.2 million and $(2.8) million, respectively, representing effective tax rates of 25.4% and 28.8%, respectively. The differences from our federal statutory tax rate to the effective tax rate for the three months ended March 31, 2023, were primarily related to state income taxes, RSU vestings, and the recording of a valuation allowance for state tax attributes that the Company does not expect to utilize prior to expiration. The differences from our federal statutory tax rate to the effective tax rate for the three months ended March 31, 2022, were primarily related to state income taxes.

**Nine Months Ended March 31, 2023 and 2022–**For the nine months ended March 31, 2023 and 2022, we recognized income tax benefits of $1.1 million and $66.0 million, respectively, representing effective tax rates of 8.9% and 25.5%, respectively. The differences from our federal statutory tax rate to the effective tax rate for the nine months ended March 31, 2023, were primarily related to state income taxes, RSU vestings, and the recording of a valuation allowance for state tax attributes that the Company does not expect to utilize prior to expiration. The differences from our federal statutory tax rate to the effective tax rate for the nine months ended March 31, 2022, were primarily related to state income taxes.

Segment Information

Prior to the first quarter of fiscal 2023, we reported financial results under three reportable segments: i) Senior, ii) Life, and iii) Auto & Home. Effective July 1, 2022, we realigned our reportable segments as a result of the change in strategic direction established for fiscal year 2023. This realignment separated the Healthcare Services business, which includes SelectRx and Population Health, out of the Senior reportable segment and into its own operating and reportable segment. Our chief operating decision maker (“CODM”) reviews discrete financial information for Healthcare Services, separate from Senior, to make operational and financial decisions and allocate resources, consistent with this realignment. As a result, the Company now reflects four reportable segments: i) Senior, ii) Healthcare Services, iii) Life, and iv) Auto & Home, and all prior periods have been restated to reflect the new presentation. In addition, we account for non-operating activity, share-based compensation expense, certain intersegment eliminations, and the costs of providing corporate and other administrative services in our administrative division, Corporate & Eliminations. These services are not directly identifiable with our reportable segments and are shown in the tables below to reconcile the reportable segments to the condensed consolidated financial statements. We have not aggregated any operating segments together to represent a reportable segment.

Costs of revenue, cost of goods sold-pharmacy revenue, marketing and advertising, selling, general, and administrative, and technical development operating expenses that are directly attributable to a segment are reported within the applicable segment. Indirect costs of revenue, marketing and advertising, selling, general, and administrative, and technical development operating expenses are allocated to each segment based on varying metrics such as headcount. Adjusted EBITDA is calculated as total revenue for the applicable segment less direct and allocated costs of revenue, cost of goods sold, marketing and advertising, technical development, and selling, general, and administrative operating costs and expenses, excluding depreciation and amortization expense; gain or loss on disposal of property, equipment, and software; share-based compensation expense; and non-recurring expenses such as severance payments and transaction costs. Our CODM does not separately evaluate assets by segment; therefore, assets by segment are not presented.

The following tables present information about the reportable segments for the periods presented:

Three Months Ended March 31, 2023:

(in thousands)

(1) Revenue in the Corp & Elims division represents intercompany revenue eliminated between segments, including for lead generation referrals from InsideResponse (within Senior) and referrals between the other segments.

(2) Operating expenses in the Corp & Elims division primarily include $12.6 million in salaries and benefits for certain general, administrative, and IT related departments and $4.6 million in professional services fees.

(3) These expenses consist of costs related to the Senior Secured Credit Facility and non-restructuring severance expenses.

Three Months Ended March 31, 2022:

(in thousands)

(1) Revenue in the Corp & Elims division represents intercompany revenue eliminated between segments primarily for referrals from Senior to the other segments.

(2) Operating expenses in the Corp & Elims division primarily include $12.0 million in salaries and benefits for certain general, administrative, and IT related departments and $4.1 million in professional services fees.

(3) These expenses primarily consist of costs related to the change in administrative agent with respect to the Senior Secured Credit Facility and severance expenses.

Nine Months Ended March 31, 2023:

(in thousands)

(1) Revenue in the Corp & Elims division represents intercompany revenue eliminated between segments, including for lead generation referrals from InsideResponse (within Senior) and referrals between the other segments.

(2) Operating expenses in the Corp & Elims division primarily include $36.8 million in salaries and benefits for certain general, administrative, and IT related departments and $13.8 million in professional services fees.

(3) These expenses primarily consist of costs related to the Fourth Amendment to the Senior Secured Credit Facility and non-restructuring severance expenses.

Nine Months Ended March 31, 2022:

(in thousands)

(1) Revenue in the Corp & Elims division represents intercompany revenue eliminated between segments primarily for lead generation referrals from InsideResponse (within Senior) to the other segments.

(2) Operating expenses in the Corp & Elims division primarily include $33.6 million in salaries and benefits for certain general, administrative, and IT related departments and $13.1 million in professional services fees.

(3) These expenses primarily consist of costs incurred for the Second Amendment, costs related to the acquisitions of Express Med Pharmaceuticals and Simple Meds, costs related to the change in administrative agent with respect to the Senior Secured Credit Facility, and severance expenses.

The following table depicts the disaggregation of revenue by segment and product for the periods presented:

(dollars in thousands)

51

Revenue by Segment

**Three Months Ended March 31, 2023 and 2022–**Revenue from Senior was $185.2 million for the three months ended March 31, 2023, a $25.8 million, or 12%, decrease compared to revenue of $211.0 million for the three months ended March 31, 2022. The decrease was due to an $25.9 million, or 14%, decrease in commission revenue and a $3.4 million decrease in lead generation revenue earned, partially offset by a $2.9 million increase in marketing development funds received.

Revenue from Healthcare Services was $70.7 million for the three months ended March 31, 2023, a $47.6 million, or 206%, increase compared to revenue of $23.1 million for the three months ended March 31, 2022, primarily due to a $48.5 million increase in SelectRx pharmacy revenue.

Revenue from Life was $37.0 million for the three months ended March 31, 2023, a $1.7 million, or 4%, decrease compared to revenue of $38.6 million for the three months ended March 31, 2022, in line with our updated operating strategy to stabilize our distribution business.

Revenue from Auto & Home was $8.2 million for the three months ended March 31, 2023, a $1.1 million, or 15%, increase compared to revenue of $7.2 million for the three months ended March 31, 2022, in line with our updated operating strategy to stabilize our distribution business.

**Nine Months Ended March 31, 2023 and 2022–**Revenue from Senior was $486.5 million for the nine months ended March 31, 2023, a $27.3 million, or 6%, increase compared to revenue of $459.3 million for the nine months ended March 31, 2022. The increase was due to a $39.5 million, or 10%, increase in commission revenue, partially offset by a $12.6 million decrease in lead generation revenue.

Revenue from Healthcare Services was $169.3 million for the nine months ended March 31, 2023, a $129.1 million, or 321%, increase compared to revenue of $40.2 million for the nine months ended March 31, 2022, primarily due to a $127.9 million increase in SelectRx pharmacy revenue.

Revenue from Life was $107.8 million for the nine months ended March 31, 2023, a $8.9 million, or 8%, decrease compared to revenue of $116.6 million for the nine months ended March 31, 2022, in line with our updated operating strategy to stabilize our distribution business.

Revenue from Auto & Home was $23.1 million for the nine months ended March 31, 2023, a $2.4 million, or 11%, increase compared to revenue of $20.8 million for the nine months ended March 31, 2022, in line with our updated operating strategy to stabilize our distribution business.

Adjusted EBITDA by Segment

**Three Months Ended March 31, 2023 and 2022–**Adjusted EBITDA from Senior was $59.2 million for the three months ended March 31, 2023, a $19.2 million increase compared to Adjusted EBITDA of $40.0 million for the three months ended March 31, 2022. The increase was due to a $25.8 million decrease in revenue and a $45.0 million decrease in operating costs and expenses, primarily due to a $30.0 million reduction in marketing and advertising costs, a $11.4 million reduction in compensation costs, and a $1.1 million reduction in licensing fees, all of which support our updated operating strategy.

Adjusted EBITDA from Healthcare Services was $(3.4) million for the three months ended March 31, 2023, a $4.4 million increase compared to Adjusted EBITDA of $(7.8) million for the three months ended March 31, 2022. The increase was due to a $43.2 million increase in operating costs and expenses primarily as a result of the $37.2 million increase in medication costs and a $3.8 million increase in compensation costs in support of the growth of Healthcare Services. The increase in operating costs and expenses was offset by the $47.6 million increase in revenue as discussed above.

Adjusted EBITDA from Life was $5.3 million for the three months ended March 31, 2023, a $8.0 million increase compared to Adjusted EBITDA of $(2.7) million for the three months ended March 31, 2022. The increase was due to a $9.8 million decrease in operating costs and expenses primarily due to a $7.8 million reduction in marketing and advertising costs, which supports our updated operating strategy. The decrease in operating costs and expenses was offset by the $1.7 million decrease in revenue as discussed above.

Adjusted EBITDA from Auto & Home was $2.6 million for the three months ended March 31, 2023, a $1.4 million, or 125%, increase compared to Adjusted EBITDA of $1.2 million for the three months ended March 31, 2022. The increase was due to a $1.1 million increase in revenue and a $0.4 million decrease in operating costs and expenses primarily due to a $0.3 million decrease in marketing and advertising costs, which supports our updated operating strategy.

**Nine Months Ended March 31, 2023 and 2022–**Adjusted EBITDA from Senior was $138.9 million for the nine months ended March 31, 2023, a $268.2 million increase compared to Adjusted EBITDA of $(129.3) million for the nine months ended March 31, 2022. The increase was due to a $27.3 million increase in revenue and a $241.0 million decrease in operating costs and expenses primarily due to a $148.6 million reduction in marketing and advertising costs, a $68.8 million reduction in compensation costs, and a $10.2 million reduction in licensing fees, all of which support our updated operating strategy.

Adjusted EBITDA from Healthcare Services was $(24.5) million for the nine months ended March 31, 2023, a $4.3 million decrease compared to Adjusted EBITDA of $(20.1) million for the nine months ended March 31, 2022. The decrease was due to a $133.4 million increase in operating costs and expenses primarily as a result of the $96.6 million increase in medication costs, $27.9 million increase in compensation costs, and $5.3 million increase in fulfillment costs in support of the growth of Healthcare Services. The increase in operating costs and expenses was offset by the $129.1 million increase in revenue as discussed above.

Adjusted EBITDA from Life was $16.4 million for the nine months ended March 31, 2023, a $17.1 million increase compared to Adjusted EBITDA of $(0.7) million for the nine months ended March 31, 2022. The increase was due to a $25.9 million decrease in operating costs and expenses primarily due to a $21.3 million reduction in marketing and advertising costs and a $3.8 million reduction in compensation costs, all of which support our updated operating strategy. The decrease in operating costs and expenses was offset by the $8.9 million decrease in revenue as discussed above.

Adjusted EBITDA from Auto & Home was $7.3 million for the nine months ended March 31, 2023, a $3.4 million, or 85%, increase compared to Adjusted EBITDA of $4.0 million for the nine months ended March 31, 2022. The increase was due to a $2.4 million increase in revenue and a $1.0 million decrease in operating costs and expenses due to a $1.1 million reduction in marketing and advertising costs and a $0.2 million reduction in compensation costs, partially offset by an increase in fulfillment costs of $0.4 million, all of which support our updated operating strategy.

Liquidity and Capital Resources

Our liquidity needs primarily include working capital and debt service requirements. We believe that the cash available under the Senior Secured Credit Facility will be sufficient to meet our projected operating and debt service requirements for at least the next 12 months. To the extent that our current liquidity is insufficient to fund future activities, we may need to raise additional funds. If we raise additional funds by issuing equity securities, the ownership of our existing stockholders will be diluted. The incurrence of additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations.

Cash Flows

As of March 31, 2023, and June 30, 2022, our cash and cash equivalents totaled $92.0 million and $141.0 million, respectively. Additionally, the following table presents a summary of our cash flows for the periods presented below:

(in thousands)

Operating Activities

Net cash used in operating activities primarily consists of net income, adjusted for certain non-cash items including depreciation; amortization of intangible assets and internally developed software; deferred income taxes; share-based compensation expense; impairment charges; and the effect of changes in working capital and other activities.

Collection of commissions receivable depends upon the timing of our receipt of commission payments and associated commission statements from our insurance carrier partners. If we were to experience a delay in receiving a commission payment from an insurance carrier partner within a quarter, our operating cash flows for that quarter could be adversely impacted.

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.

***Nine Months Ended March 31, 2023—***Net cash used in operating activities was $12.8 million, consisting of net loss of $10.7 million, adjustments for non-cash items of $47.1 million, and cash used in operating assets and liabilities of $49.2 million. Adjustments for non-cash items primarily consisted of $21.1 million of depreciation and amortization, $8.5 million of share-based compensation expense, $8.5 million of accrued interest payable in kind on the Term Loans, $6.3 million of amortization of debt issuance costs and debt discount as a result of amendments to the Senior Secured Credit Facility, and $3.1 million of non-cash lease expense, offset by $1.4 million in deferred income taxes. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of an increase of $62.7 million in accounts receivable, net and a decrease of $8.9 million in other liabilities, partially offset by a decrease of $17.1 million in commissions receivable and an increase of $6.4 million in accounts payable and accrued expenses.

***Nine Months Ended March 31, 2022—***Cash used in operating activities was $284.4 million, consisting of net loss of $192.8 million, adjustments for non-cash items of $34.1 million, and cash used in operating assets and liabilities of $57.4 million. Adjustments for non-cash items primarily consisted of $66.4 million in deferred income taxes, offset by $18.0 million of depreciation and amortization related to additional fixed assets purchases to accommodate our growth in headcount, internally developed software in service, and SelectRx infrastructure, $6.3 million of share-based compensation expense, $4.2 million of amortization of debt issuance costs and debt discount as a result of amendments to the Senior Secured Credit Facility, and $3.1 million of non-cash lease expense. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of $59.8 million in accounts receivable and $8.3 million in other assets related to an increase in inventory for SelectRx and an increase in prepaid expenses, partially offset by a decrease of $7.6 million in commissions receivable and increases of $8.1 million in accounts payable and accrued expenses, all driven by the increased marketing and personnel costs for AEP and OEP.

Investing Activities

Our investing activities primarily consist of purchases of property, equipment, and software and capitalized salaries related to the development of internal-use software.

***Nine Months Ended March 31, 2023—***Net cash used in investing activities of $6.9 million was due to $1.1 million of purchases of property and equipment, primarily to support the growth of SelectRx infrastructure, and $5.8 million in purchases of software and capitalized internal-use software development costs.

***Nine Months Ended March 31, 2022—***Net cash used in investing activities of $40.0 million was due to $24.5 million of purchases of property and equipment primarily to support AEP and OEP and the growth of SelectRx infrastructure, $7.6 million in purchases of software and capitalized internal-use software, $6.9 million of net cash paid to acquire Simple Meds, and a $1.0 million non-controlling interest equity investment.

Financing Activities

Our financing activities primarily consist of payments of debt and related issuance costs and proceeds and payments related to share-based compensation.

***Nine Months Ended March 31, 2023—***Net cash used in financing activities of $29.3 million was primarily due to $10.1 million of debt issuance costs related to the Fourth Amendment to the Senior Secured Credit Facility, $17.8 million of principal payments on the Term Loans, and $2.3 million of holdback remitted as part of the Express Med acquisition, partially offset by $1.2 million in proceeds from common stock options exercised and the employee stock purchase plan.

***Nine Months Ended March 31, 2022—***Net cash provided by financing activities of $237.3 million was primarily due to $242.0 million in net proceeds from the DDTL Facility and $3.2 million in proceeds from common stock options exercised and the employee stock purchase plan, partially offset by a holdback settlement of $5.5 million for acquisition of a lead distribution company, principal payments of $1.8 million and $0.0 million on the Term Loans and DDTL Facility, respectively, and $0.3 million in debt issuance costs related to the Second Amendment and Third Amendment to the Senior Secured Credit Facility.

Senior Secured Credit Facility

We entered into the Senior Secured Credit Facility to provide access to cash, in a variety of methods, when necessary to fund the operations of the business. There were no amounts outstanding under the Revolving Credit Facility as of March 31, 2023. As of March 31, 2023, there was $703.9 million outstanding under the Term Loans. Refer to Note 7 to the condensed consolidated financial statements for further details.

Our risk management strategy includes entering into interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. The Company's Amended Interest Rate Swap is designated as a cash flow hedge of the interest payments on $325.0 million in principal of the Term Loans. Refer to Note 7 to the condensed consolidated financial statements for further details.

Contractual Obligations

Other than the discussions in Note 8 and Note 10 to the condensed consolidated financial statements, as of March 31, 2023, there have been no material changes to our contractual obligations as previously described in our Annual Report.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements during the period covered by this report.

Recent Accounting Pronouncements

For a discussion of new accounting pronouncements recently adopted and not yet adopted, see the notes to our condensed consolidated financial statements.

We are primarily exposed to the market risk associated with unfavorable movements in interest rates. The risk inherent in our market risk-sensitive instruments and positions is the potential loss or increased expense arising from adverse changes in those factors. There have been no material changes to our market risk policies or our market risk-sensitive instruments and positions as described in our Annual Report.

Evaluation of Our Disclosure Controls and Procedures

The Company completed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), carried out by our management, with the participation of our chief executive officer (principal executive officer), chief financial officer (principal financial officer), and chief accounting officer (principal accounting officer). Based upon our management's evaluation, our chief executive officer and our chief financial officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

As previously disclosed in our Annual Report, management identified a design deficiency in internal control over financial reporting that resulted in a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company obtains and uses relevant information from third party carriers related to final expense policyholder lapses and did not evaluate it on a timely basis to ensure the carrier and policy information utilized to determine the first year commission revenue provision was complete and accurate, which could have resulted in a material misstatement of the Company’s consolidated financial statements. The material weakness did contribute to an actual error related to Life first year commission revenue provision for certain final expense policies that was not material to the consolidated financial statements for the year ended June 30, 2021, and for the three months ended September 30, 2021, December 31, 2021, and March 31, 2022.

In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable level of assurance of achieving their desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Management’s Remediation of the Material Weakness

As a result of this material weakness, we designed, implemented, and operated new controls as part of our remediation measures which included:

• a control to review final expense aged receivables on a timely basis;
• a control to evaluate the completeness and accuracy of the final expense third party carrier information received, including verification of lapse status; and
• a control to evaluate the completeness and accuracy of the information used in the review of provision rates used to develop estimates of first year commission revenue provision.

As a result of the remediation activities and controls described above, as previously disclosed in the Company’s Quarterly Report on Form 10-Q as of December 31, 2022, we have remediated the material weakness. However, completion of remediation does not provide assurance that our remediated controls will continue to operate properly or that our financial statements will be free from error.

Changes in Internal Control over Financial Reporting

Except for the remediation of the material weakness and changes described above, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Other than as set forth below, there have been no material changes to the risk factors set forth in our Annual Report and subsequent periodic filings. Before investing in our securities, we recommend that investors carefully consider the risks described in our Annual Report, including those under the heading “Risk Factors.” Realization of any of these risks and any additional risks and uncertainties not currently known to us or that we have deemed to be immaterial could have a material adverse effect on our business, financial condition, or results of operations.

Our Senior segment is subject to a complex legal and regulatory framework, and non-compliance with or changes in laws and regulations governing the marketing and sale of Medicare plans and other healthcare-related products and services could harm our business, operating results, financial condition and prospects.

Our Senior segment is subject to a complex legal and regulatory framework, and the laws and regulations governing the marketing and sale of Medicare plans, particularly with respect to regulations and guidance issued by CMS related to Medicare Advantage and Medicare Part D prescription drug plans, change frequently. For example, in April 2023, CMS finalized rules that could increase compliance costs and otherwise impact our business results by, among other things, requiring new disclosures that could make certain forms of marketing less practicable and potentially requiring a 48-hour waiting period between initial contact with a beneficiary and enrolling that beneficiary. These and any other changes to the laws, regulations and guidelines relating to Medicare plans, their interpretation or the manner in which they are enforced could harm our business, operating results, financial condition and prospects.

In addition, changes to laws, regulations, CMS guidance or the enforcement or interpretation of CMS guidance applicable to our Senior segment could cause insurance carriers or state departments of insurance to object to or not to approve aspects of our marketing materials and processes. As a result, those authorities may determine that certain aspects of our Senior segment are not in compliance with the current legal and regulatory framework. Any such determinations could delay or halt the operation of our Senior segment, which would harm our business, operating results, financial condition and prospects, particularly if such delay or halt occurred during the Medicare annual or open enrollment periods.