SelectQuote, Inc.: Form 10-Q for the period ended Dec 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 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 Annual Report and in Part II, Item 1A hereof.

Company Overview

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 & 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 SelectRx, our accredited Patient-Centered Pharmacy Home pharmacy, which offers essential prescription medications, OTC medications, customized medication packaging, medication therapy management, providing long-term pharmacy care that enables patients to optimize medication adherence to drive positive health outcomes while enabling patients to remain at home.

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 25 leading, nationally-recognized insurance carrier partners, including UnitedHealthcare, (“UHC”), Humana, and Wellcare. MA and MS plans accounted for 92% and 91% of our approved Senior policies for the three months ended December 31, 2023 and 2022, respectively, and 91% and 90% for the six months ended December 31, 2023, and 2022, respectively, with other ancillary type policies accounting for the remainder.

Healthcare Services, launched in 2021, includes SelectRx and Population Health. 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 helps members understand the benefits available under their health plans, contracts with insurance carriers to complete HRA’s on members, partners with VBC providers for a variety of healthcare-related services, and introduces them to the pharmacy services we offer through SelectRx. We believe that offering these services through SelectRx and Population Health to our existing 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 2.2 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 20 leading, nationally-recognized insurance carrier partners, with many of these relationships exceeding 15 years. Term life policies accounted for 47% and 48% of new premium within Life for the three months ended December 31, 2023 and 2022, respectively, with final expense policies accounting for 53% and 52% for the three months ended December 31, 2023 and 2022, respectively. For the six months ended December 31, 2023 and 2022, term life policies accounted for 48% and 44% of new premium within Life, respectively, with final expense policies accounting for 52% and 56%, 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 77% and 73% of new premium within Auto & Home for the three months ended December 31, 2023 and 2022, respectively, and 77% and 74% for the six months ended December 31, 2023 and 2022, respectively, with six-month auto, dwelling fire, and other products accounting for a majority of the remainder.

The three and six months ended December 31 referenced throughout the commentary below refers to the second quarter and fiscal year-to-date performance of our fiscal years ending on June 30, 2024 and 2023.

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 increased 6% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022. This was driven by an 8% increase in the number of average productive agents and a 5% increase in productivity per agent. Close rates remained flat for the three months ended December 31, 2023, compared to the three months ended December 31, 2022.

Total submitted policies for all products increased 7% for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. This was driven by increases in overall close rates (10%), the number of average productive agents (7%), and productivity per agent (6%).

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 increased 6% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, which correlates to the increase in submitted policies.

Total approved policies for all products increased 8% for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. Fluctuations in approved policies are normally in direct correlation to submitted policies; however, due to enhanced agent training and development and a higher mix of tenured agents, we experienced a slight improvement in the submitted-to-approved conversion rates for the six months ended December 31, 2023, compared to the six months ended December 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 significant 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 7% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, primarily due to carrier mix.

The LTV per MA approved policy increased 4% for the six months ended December 31, 2023, compared to the six months ended December 31, 2022, primarily due to carrier mix.

Healthcare Services

Total Members

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

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

The total number of SelectRx members increased 59% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, due to our operating strategy to grow SelectRx.

Prescriptions Per Day

Prescriptions per day represents the total prescriptions shipped per business day, as this is a primary key driver of revenue for Healthcare Services.

The following table shows the prescriptions shipped per day for the periods presented:

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.

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 as a multiple of total marketing acquisition costs, 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 37% for the twelve months ended December 31, 2023, compared to the twelve months ended December 31, 2022, primarily due to the increase in pharmacy revenue. Total operating expenses per MA/MS policy increased 23% for the twelve months ended December 31, 2023, compared to the twelve months ended December 31, 2022, driven by a 100% increase in operating expenses related to SelectRx due to the growth of the business, offset by a 3% decrease in other operating expenses driven by a decrease in marketing and advertising costs for the second half of fiscal year 2023 compared to the second half of fiscal year 2022.

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:

32

Total term premiums increased 10% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, due to a 10% increase in the number of policies sold. Final expense premiums increased 13% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, due to a 3% increase in the average premium per policy sold and a 10% increase in the number of policies sold.

Total term premiums increased 15% for the six months ended December 31, 2023, compared to the six months ended December 31, 2022, due to a 3% increase in the average premium per policy sold and a 12% increase in the number of policies sold. Final expense premiums remained flat for the six months ended December 31, 2023, compared to the six months ended December 31, 2022. The number of policies sold declined 4% driven by a lower average productive agent headcount, which was somewhat offset by a 3% 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 increased 22% for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, due to a 19% increase in the average premium per policy sold and a 2% increase in the number of policies sold.

Total premiums increased 21% for the six months ended December 31, 2023, compared to the six months ended December 31, 2022, due to a 14% increase in the average premium per policy sold and a 6% increase in the number of policies 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 net income (loss) before interest expense, income tax expense (benefit), depreciation and amortization, and certain add-backs for 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). 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 income (loss) for the periods presented:

Three Months Ended December 31, 2023:

(in thousands)

(1) These expenses primarily consist of financing transaction costs.

Three Months Ended December 31, 2022:

(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.

Six Months Ended December 31, 2023:

(in thousands)

(1) These expenses primarily consist of financing transaction costs.

Six Months Ended December 31, 2022:

(in thousands)

(1) These expenses primarily consist of costs related to the Fourth Amendment to the Senior Secured Credit Facility.

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 (loss) as commission revenue. After an insurance 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. 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.

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 (loss). Pharmacy revenue includes revenue from the sale of prescription and OTC medications from SelectRx. Other revenue includes production bonuses and marketing development funds, revenue from Population Health (excluding SelectRx pharmacy revenue), and external lead generation revenue from InsideResponse.

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 control has been transferred to the customer. 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 December 31, 2023 and 2022–**Commission revenue increased $33.2 million, or 14%, for the three months ended December 31, 2023, and included increases in Senior, Life, and Auto & Home commission revenue of $26.8 million, $3.1 million, and $2.9 million respectively. For Senior, this was driven by a 6% increase in approved policies and an 8% increase in LTV’s. Life’s revenue increase was primarily driven by a $1.8 million increase in term revenue and a $1.3 million increase in final expense revenue. The $57.2 million increase in pharmacy revenue was due to the increase in members due to the expansion of the SelectRx business. The $4.1 million decrease in other revenue was driven by a $2.6 million decrease in production bonus revenue.

**Six Months Ended December 31, 2023 and 2022–**Commission revenue increased $44.6 million, or 13%, for the six months ended December 31, 2023, and included increases in Senior, Life, and Auto & Home commission revenue of $35.4 million, $3.6 million, and $5.0 million respectively. For Senior, this was driven by an 8% increase in approved policies and a 6% increase in LTV’s. Life’s revenue increase was primarily driven by a $5.5 million increase in term revenue, partially offset by a $2.0 million decrease in final expense revenue. The $110.9 million increase in pharmacy revenue was due to the increase in members due to the expansion of the SelectRx business. The $1.0 million increase in other revenue was driven by a $2.5 million increase in production bonus revenue.

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 December 31, 2023 and 2022–**Cost of revenue increased $5.9 million, or 7%, for the three months ended December 31, 2023, primarily due to a $5.8 million increase in compensation costs mostly from our Senior segment.

**Six Months Ended December 31, 2023 and 2022–**Cost of revenue increased $13.3 million, or 8%, for the six months ended December 31, 2023, primarily due to a $13.0 million increase in compensation costs mostly from our Senior segment.

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 December 31, 2023 and 2022–**Cost of goods sold-pharmacy revenue increased $44.1 million, or 88%, for the three months ended December 31, 2023, primarily due to a $40.2 million increase in medication costs as the number of SelectRx members increased 59% over the prior year.

**Six Months Ended December 31, 2023 and 2022–**Cost of goods sold-pharmacy revenue increased $85.7 million, or 93%, for the six months ended December 31, 2023, primarily due to an $80.8 million increase in medication costs as the number of SelectRx members increased 59% 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 December 31, 2023 and 2022–**Marketing and advertising expenses increased $27.2 million, or 30%, for the three months ended December 31, 2023, primarily due to a $24.1 million increase in lead costs. This increase can be attributed to the increase in MA submitted policies and an increase in customer acquisition costs on a per policy basis.

**Six Months Ended December 31, 2023 and 2022–**Marketing and advertising expenses increased $31.9 million, or 22%, for the six months ended December 31, 2023, primarily due to a $28.4 million increase in lead costs. This increase can be attributed to the increase in MA submitted policies and an increase in customer acquisition costs on a per policy basis.

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 December 31, 2023 and 2022–**Selling, general, and administrative expenses increased $5.0 million, or 18%, for the three months ended December 31, 2023, primarily due to increases in compensation costs of $3.8 million and corporate development costs of $1.9 million.

**Six Months Ended December 31, 2023 and 2022–**Selling, general, and administrative expenses increased $3.0 million, or 5%, for the six months ended December 31, 2023, primarily due to an increase in compensation costs of $3.1 million.

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 Months Ended December 31, 2023 and 2022–**Technical development expenses increased $1.8 million, or 29%, for the three months ended December 31, 2023, primarily due to a $2.0 million increase in compensation costs.

**Six Months Ended December 31, 2023 and 2022–**Technical development expenses increased $3.3 million, or 26%, for the six months ended December 31, 2023, primarily due to a $3.3 million increase in compensation costs.

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 December 31, 2023 and 2022–**Interest expense increased $3.4 million, or 16%, as a result of higher interest rates during the period. The increase was partially offset by interest income received from the interest rate swap and our money market account.

**Six Months Ended December 31, 2023 and 2022–**Interest expense increased $8.0 million, or 21%, as a result of higher interest rates during the period. The increase was partially offset by interest income received from the interest rate swap and 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 December 31, 2023 and 2022–**For the three months ended December 31, 2023 and 2022, we recognized income tax expense of $11.5 million and $9.4 million, respectively, representing effective tax rates of 37.2% and 29.5%, respectively. The differences from the federal statutory tax rate to the effective tax rates for the three months ended December 31, 2023, were primarily related to state income taxes and the recording of a valuation allowance for federal 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 December 31, 2022, 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.

**Six Months Ended December 31, 2023 and 2022–**For the six months ended December 31, 2023 and 2022, we recognized income tax benefit of $1.3 million and $4.2 million, respectively, representing effective tax rates of 10.1% and 17.4%, respectively. The differences from the federal statutory tax rate to the effective tax rate for the six months ended December 31, 2023, were primarily related to state income taxes and the recording of a valuation allowance for federal tax attributes that the Company does not expect to utilize prior to expiration. The differences from the federal statutory tax rate to the effective tax rate for the six months ended December 31, 2022, 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.

Segment Information

The Company’s operating and reportable segments have been determined in accordance with ASC 280, *Segment Reporting (“*ASC 280”) and include four reportable segments: i) Senior, ii) Healthcare Services, iii) Life, and iv) Auto & Home. The Company includes non-operating activity, share-based compensation expense, certain intersegment eliminations, and the costs of providing corporate and other administrative services in its administrative division in Corporate & Eliminations. These services and activities are not directly identifiable with the Company’s reportable segments and are shown in the tables below to reconcile the reportable segments to the condensed consolidated financial statements. The Company has not aggregated any operating segments into a reportable segment.

The Company reports segment information based on how its chief operating decision maker ("CODM") regularly reviews its operating results, allocates resources, and makes decisions regarding business operations. The performance measures of the segments include total revenue and Adjusted EBITDA because management believes that such information is the most relevant in evaluating the results of the respective segments relative to other entities that operate in the same industries.

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, with the exception of commissions receivable, and therefore assets by segment are not presented.

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

Three Months Ended December 31, 2023:

(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 $16.6 million in salaries and benefits for certain general, administrative, and IT related departments and $4.0 million in professional services fees.

(3) These expenses primarily consist of financing transaction costs.

Three Months Ended December 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 $12.2 million in salaries and benefits for certain general, administrative, and IT related departments and $4.6 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.

Six Months Ended December 31, 2023:

(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 $30.5 million in salaries and benefits for certain general, administrative, and IT related departments and $8.1 million in professional services fees.

(3) These expenses primarily consist of financing transaction costs.

Six Months Ended December 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 $24.3 million in salaries and benefits for certain general, administrative, and IT related departments and $9.2 million in professional services fees.

(3) These expenses primarily consist of costs related to the Fourth Amendment to the Senior Secured Credit Facility.

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

(dollars in thousands)

Revenue by Segment

**Three Months Ended December 31, 2023 and 2022–**Revenue from Senior was $247.5 million for the three months ended December 31, 2023, a $23.7 million, or 11%, increase compared to revenue of $223.8 million for the three months ended December 31, 2022. The increase was primarily due to a $26.8 million, or 14%, increase in commission revenue offset by a $2.6 million decrease in production bonus revenue.

Revenue from Healthcare Services was $111.7 million for the three months ended December 31, 2023, a $56.2 million, or 101%, increase compared to revenue of $55.5 million for the three months ended December 31, 2022, primarily due to a $57.2 million increase in SelectRx pharmacy revenue.

Revenue from Life was $37.4 million for the three months ended December 31, 2023, a $3.4 million, or 10%, increase compared to revenue of $34.0 million for the three months ended December 31, 2022, primarily due to a $3.1 million increase in commission revenue.

Revenue from Auto & Home was $10.5 million for the three months ended December 31, 2023, a $2.7 million, or 34%, increase compared to revenue of $7.8 million for the three months ended December 31, 2022, primarily due to a $2.9 million increase in commission revenue.

**Six Months Ended December 31, 2023 and 2022–**Revenue from Senior was $337.4 million for the six months ended December 31, 2023, a $36.1 million, or 12%, increase compared to revenue of $301.3 million for the six months ended December 31, 2022. The increase was due to a $35.4 million, or 14%, increase in commission revenue and a $2.2 million increase in production bonus revenue.

Revenue from Healthcare Services was $209.1 million for the six months ended December 31, 2023, a $110.5 million, or 112%, increase compared to revenue of $98.5 million for the six months ended December 31, 2022, primarily due to a $110.9 million increase in SelectRx pharmacy revenue.

Revenue from Life was $75.2 million for the six months ended December 31, 2023, a $4.3 million, or 6%, increase compared to revenue of $70.8 million for the six months ended December 31, 2022, due to $0.8 million increase in production bonus revenue and a $3.6 million increase in commission revenue.

Revenue from Auto & Home was $19.5 million for the six months ended December 31, 2023, a $4.6 million, or 31%, increase compared to revenue of $14.9 million for the six months ended December 31, 2022, primarily due to a $5.0 million increase in commission revenue.

Adjusted EBITDA by Segment

**Three Months Ended December 31, 2023 and 2022–**Adjusted EBITDA from Senior was $78.7 million for the three months ended December 31, 2023, a $4.9 million decrease compared to Adjusted EBITDA of $83.6 million for the three months ended December 31, 2022. The decrease in Adjusted EBITDA was due to a $28.6 million increase in operating costs and expenses primarily due to a $21.7 million increase in marketing and advertising costs and a $6.5 million increase in compensation costs offset by a $23.7 million increase in revenue as discussed above.

Adjusted EBITDA from Healthcare Services was $3.0 million for the three months ended December 31, 2023, a $12.3 million increase compared to Adjusted EBITDA of $(9.3) million for the three months ended December 31, 2022. The increase in Adjusted EBITDA was due to a $56.2 million increase in revenue as discussed above, offset a $43.9 million increase in operating costs and expenses primarily as a result of a $40.2 million increase in medication costs and a $1.7 million increase in compensation costs in support of the growth of SelectRx.

Adjusted EBITDA from Life was $4.6 million for the three months ended December 31, 2023, a $1.3 million decrease compared to Adjusted EBITDA of $5.8 million for the three months ended December 31, 2022. The decrease in Adjusted EBITDA was due to a $4.6 million increase in operating costs and expenses primarily due to a $2.2 million increase in compensation costs and a $2.1 million increase in marketing and advertising costs, offset by a $3.4 million increase in revenue as discussed above.

Adjusted EBITDA from Auto & Home was $4.7 million for the three months ended December 31, 2023, a $2.4 million, or 107%, increase compared to Adjusted EBITDA of $2.3 million for the three months ended December 31, 2022. The increase in Adjusted EBITDA was due to a $2.7 million increase in revenue as discussed above, offset by a $0.2 million increase in operating costs and expenses primarily due to a $0.3 million increase in compensation costs.

**Six Months Ended December 31, 2023 and 2022–**Adjusted EBITDA from Senior was $77.4 million for the six months ended December 31, 2023, a $2.4 million decrease compared to Adjusted EBITDA of $79.8 million for the six months ended December 31, 2022. The decrease in Adjusted EBITDA was due to a $38.5 million increase in operating costs and expenses primarily due to a $25.7 million increase in marketing and advertising costs and a $12.3 million increase in compensation costs offset by a $36.1 million increase in revenue as discussed above.

Adjusted EBITDA from Healthcare Services was $5.3 million for the six months ended December 31, 2023, a $26.4 million increase compared to Adjusted EBITDA of $(21.1) million for the six months ended December 31, 2022. The increase in Adjusted EBITDA was due to a $110.5 million increase in revenue as discussed above, offset a $84.1 million increase in operating costs and expenses primarily as a result of a $80.8 million increase in medication costs and a $3.2 million increase in fulfillment costs in support of the growth of SelectRx.

Adjusted EBITDA from Life was $9.8 million for the six months ended December 31, 2023, a $1.3 million decrease compared to Adjusted EBITDA of $11.1 million for the six months ended December 31, 2022. The decrease in Adjusted EBITDA was due to a $5.4 million increase in operating costs and expenses primarily due to a $3.1 million increase in compensation costs and a $1.8 million increase in marketing and advertising costs offset by a $4.3 million increase in revenue as discussed above.

Adjusted EBITDA from Auto & Home was $8.0 million for the six months ended December 31, 2023, a $3.3 million, or 70%, increase compared to Adjusted EBITDA of $4.7 million for the six months ended December 31, 2022. The increase in Adjusted EBITDA was due to a $4.6 million increase in revenue as discussed above, offset by a $1.3 million increase in operating costs and expenses due to a $1.1 million increase in compensation costs and a $0.2 million increase in marketing and advertising costs.

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. Additionally, we are required under the Senior Secured Credit Facility to maintain compliance with certain debt covenants, as discussed further in Note 7 to the condensed consolidated financial statements. Based on our financial projections, we believe we will remain in compliance with the debt covenants through the 12 months following the date of issuance of our condensed consolidated financial statements.

We do not expect to generate sufficient cash flows from operations to enable us to repay all outstanding amounts under the Senior Secured Credit Facility at the time of its maturity on February 15, 2025. If we are unable to secure additional financing from outside sources or otherwise refinance the Senior Secured Credit Facility, we may need to obtain additional capital through other means, including by selling one or more material assets or substantially reducing the scope of certain of our operations. If we are unable to satisfy our repayment obligations under the Senior Secured Credit Facility or maintain compliance with the covenants therein, we may be in default, which would significantly affect our liquidity.

As of December 31, 2023 and June 30, 2023, our cash and cash equivalents totaled $10.8 million and $83.2 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.

***Six Months Ended December 31, 2023—***Net cash used in operating activities was $49.2 million, consisting of a net loss of $11.7 million, adjustments for non-cash items of $31.6 million, and cash used in operating assets and liabilities of $69.2 million. Adjustments for non-cash items primarily consisted of $11.9 million of depreciation and amortization, $7.0 million of share-based compensation expense, $9.0 million of accrued interest payable in kind, $3.4 million of amortization of debt issuance costs and debt discount, and $1.5 million of non-cash lease expense, offset by $1.2 million in deferred income taxes. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of an increase of $113.9 million in commissions receivables, offset by an increase of $29.2 million in accounts payable and accrued expenses, a decrease of $12.0 million in accounts receivable, net and an $8.2 million increase in other liabilities.

***Six Months Ended December 31, 2022—***Net cash used in operating activities was $75.6 million, consisting of net loss of $20.0 million, adjustments for non-cash items of $27.0 million, and cash used in operating assets and liabilities of $82.6 million. Adjustments for non-cash items primarily consisted of $14.0 million of depreciation and amortization, $5.6 million of share-based compensation expense, $4.9 million of accrued interest payable in kind on the Term Loans, $3.9 million of amortization of debt issuance costs and debt discount as a result of amendments to the Senior Secured Credit Facility, and $2.1 million of non-cash lease expense, offset by $4.6 million in deferred income taxes. The cash decrease resulting from changes in net operating assets and liabilities primarily consisted of increases of $114.7 million in commissions receivable, partially offset by increases of $1.0 million in accounts payable and accrued expenses, decreases of $14.0 million in accounts receivable, net, and an $18.0 million increase in other liabilities.

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.

***Six Months Ended December 31, 2023—***Net cash used in investing activities of $5.7 million was due to $3.9 million in purchases of software and capitalized internal-use software development costs and $2.1 million of purchases of property and equipment, primarily computer equipment and leasehold improvements.

***Six Months Ended December 31, 2022—***Net cash used in investing activities of $4.5 million was due to $0.6 million of purchases of property and equipment, primarily to support the growth of SelectRx infrastructure, and $3.9 million in purchases of software and capitalized internal-use software development costs.

Financing Activities

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

***Six Months Ended December 31, 2023—***Net cash used in financing activities of $17.4 million was primarily due to $16.9 million of principal payments on the Term Loans.

***Six Months Ended December 31, 2022—***Net cash used in financing activities of $24.9 million was primarily due to $10.1 million of debt issuance costs related to the Fourth Amendment to the Senior Secured Credit Facility, $13.4 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 $1.1 million in proceeds from common stock options exercised and the employee stock purchase plan.

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 December 31, 2023. As of December 31, 2023, there was $699.6 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.

On February 7, 2024, the Company and certain of its existing lenders, Wilmington Trust, National Association, as Administrative and Collateral Agent, and certain other parties to the Senior Secured Credit Facility named therein, including the guarantors party thereto, entered into the Eighth Amendment to the Senior Secured Credit Facility (the “Eighth Amendment”). Pursuant to the Eighth Amendment (i) a new $692.0 million class of extended term loans was established, and the maturity date applicable thereto was extended to February 15, 2025, (ii) the aggregate revolving credit commitments were reduced to an aggregate amount of $73.6 million and an aggregate amount of $25.8 million of the non-extended revolving credit commitments were terminated, and (iii) certain lenders holding outstanding Term Loans elected not to extend the maturity date applicable to those loans, resulting in a class of non-extended term loans of $9.4 million having a maturity date of November 5, 2024, (iv) a minimum asset coverage ratio covenant as of December 31, 2024 was added, and (v) the minimum liquidity covenants were revised based on the reduced revolving credit commitments. Pursuant to the amendment, the Company paid fees of $0.7 million to its lenders.

Contractual Obligations

Other than the discussions in Note 8 and Note 10 to the condensed consolidated financial statements, as of December 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

As of December 31, 2023, 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) was carried out by our management, with the participation of our chief executive officer (principal executive officer) and our chief financial officer (principal financial and accounting officer). Based upon our management's evaluation, our chief executive officer and our chief financial officer have 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.

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.

Changes in Internal Control over Financial Reporting

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 first quarter of fiscal 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

There have been no material changes to the risk factors set forth in our Annual Report. 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.