SelectQuote(US:SLQT)2022-02-14 14:03PART I FINANCIAL INFORMATION Item 1. Financial Statements Presents SelectQuote, Inc.'s unaudited condensed consolidated financial statements for the periods ended December 31, 2021, including balance sheets, income, equity, cash flows, and notes on accounting policies and a prior period correction Condensed Consolidated Balance Sheets (In thousands) | (In thousands) | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | | Total Assets | $1,444,833 | $1,425,795 | | Total current assets | $555,556 | $485,358 | | Commissions receivable | $683,516 | $756,777 | | Goodwill | $73,732 | $68,019 | | Total Liabilities | $952,429 | $757,235 | | Total current liabilities | $135,407 | $108,817 | | Long-term debt, net | $700,350 | $459,043 | | Total Shareholders' Equity | $492,404 | $668,560 | Condensed Consolidated Statements of Comprehensive Income (Loss) (In thousands, except per share data) | (In thousands, except per share data) | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $194,981 | $357,565 | $352,508 | $480,339 | | Income (Loss) from Operations | ($172,906) | $123,445 | ($227,466) | $129,324 | | Net Income (Loss) | ($137,008) | $89,856 | ($184,161) | $89,591 | | Diluted EPS | ($0.84) | $0.54 | ($1.12) | $0.54 | Condensed Consolidated Statements of Cash Flows (In thousands) | (In thousands) | Six Months Ended Dec 31, 2021 | Six Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | ($305,741) | ($103,148) | | Net cash used in investing activities | ($31,062) | ($9,096) | | Net cash provided by (used in) financing activities | $243,706 | ($10,719) | | Net Decrease in Cash | ($93,097) | ($122,963) | - The company identified an error in its provision for first-year commission revenue for certain final expense policies due to using an incorrect lapse rate, resulting in misstatements of commission revenue and accounts receivable in prior periods2829 - Management concluded the error was not material to prior periods but is correcting the financial statements for comparative purposes to avoid a significant impact on the current period's results2829 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of financial condition and results for Q4 2021, detailing a significant revenue decline, segment performance, liquidity, and cash flow dynamics Key Business and Operating Metrics - In the Senior segment, total submitted policies increased 29% YoY for the quarter, driven by a 140% increase in average productive agents, offset by a 45% decrease in average agent productivity and lower submitted-to-approved conversion rates133 Medicare Advantage and Supplement Approved Policies | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Medicare Advantage Approved Policies | 265,538 | 208,714 | | Medicare Supplement Approved Policies | 2,097 | 10,451 | Life-Time Value (LTV) per Approved Policy | Metric | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | LTV per MA Approved Policy | $922 | $1,268 | | LTV per MS Approved Policy | $1,347 | $1,233 | - In the Life segment, final expense premiums grew 82% YoY for the quarter due to an increase in agents selling these policies, while term life premiums decreased by 18%148 - In Auto & Home, total premiums decreased 20% as part of a strategy to reduce growth in this segment151 Results of Operations - Total revenue for the three months ended December 31, 2021, decreased 45% YoY to $195.0 million167 - The primary driver was a 56% drop in commission revenue, largely due to a $145.0 million downward adjustment from a change in estimate of Senior MA cohort transaction prices because of higher-than-expected policy lapses167 Operating Expenses (in thousands) | Expense Category (in thousands) | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | % Change | | :--- | :--- | :--- | :--- | | Cost of Revenue | $148,108 | $84,121 | 76% | | Marketing and Advertising | $193,246 | $132,206 | 46% | | General and Administrative | $20,147 | $13,043 | 54% | - Operating costs increased significantly, with cost of revenue rising 76% due to higher agent compensation and new medication costs from SelectRx171 - Marketing and advertising expenses increased 46% due to higher lead generation costs for a larger agent base and lower marketing efficiency during the Annual Enrollment Period (AEP)174 Segment Performance Segment Adjusted EBITDA (in millions) | Segment Adjusted EBITDA (in millions) | Three Months Ended Dec 31, 2021 | Three Months Ended Dec 31, 2020 | | :--- | :--- | :--- | | Senior | $(148.6) | $134.6 | | Life | $1.9 | $5.7 | | Auto & Home | $1.4 | $2.2 | - The Senior segment's Adjusted EBITDA plummeted from $134.6 million to a loss of $(148.6) million YoY for the quarter208 - This was caused by a $157.5 million revenue decrease (including the large cohort adjustment) and a $125.6 million increase in operating costs from higher marketing spend and personnel costs for AEP208 - The Life segment's Adjusted EBITDA decreased by 68% to $1.9 million, driven by lower term life revenue and higher marketing and sales commission expenses for the growing final expense business209 Liquidity and Capital Resources - As of December 31, 2021, the company had cash and cash equivalents of $193.4 million, a decrease from $286.5 million at June 30, 2021216 - For the six months ended December 31, 2021, net cash used in operating activities was $305.7 million, a significant increase from $103.1 million in the prior-year period216221 - This was driven by a net loss and increased working capital needs to fund upfront marketing and personnel costs for AEP216221 - Financing activities provided $243.7 million in cash, primarily from drawing $242.0 million from the senior secured delayed draw term loan (DDTL) facility227229 - As of December 31, 2021, $471.9 million was outstanding under the Term Loans and $245.0 million under the DDTL Facility227229 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to unfavorable interest rate movements, with no material changes to policies or positions since the 2021 Annual Report - The company is primarily exposed to market risk from adverse changes in interest rates and reported no material changes to market risk policies or positions during the quarter235 Item 4. Controls and Procedures Disclosure controls and procedures were ineffective as of December 31, 2021, due to a material weakness in internal controls over financial reporting related to commission revenue provision, with remediation initiated - The CEO and CFO concluded that disclosure controls and procedures were not effective as of December 31, 2021236 - A material weakness was identified in internal controls over financial reporting, specifically that controls over the completeness and accuracy of carrier and policy data for determining the first-year commission provision for certain Life segment final expense policies were not designed effectively236 - Management has initiated a remediation plan that includes obtaining complete carrier information feeds, reviewing policies for risk mitigation, and enhancing procedures to assess data accuracy238 PART II OTHER INFORMATION Item 1. Legal Proceedings The company is subject to two putative securities class action lawsuits alleging securities fraud, which it believes are without merit and intends to vigorously defend - A putative securities class action lawsuit (Hartel v. SelectQuote, Inc.) was filed on August 17, 2021, alleging securities fraud for the period between February 8, 2021, and May 11, 202176 - A second putative securities class action lawsuit (West Palm Beach Police Pension Fund v. SelectQuote, Inc.) was filed on October 7, 2021, alleging violations related to the company's IPO and the period between May 20, 2020, and August 25, 202177 - The company believes the allegations in both complaints are without merit and has not accrued a liability, but notes the cases could be costly to defend79 Item 1A. Risk Factors No material changes to the company's risk factors have occurred since those disclosed in its amended Form 10-K/A for the fiscal year ended June 30, 2021 - There have been no material changes to the risk factors as disclosed in the Company's Form 10-K/A for the year ended June 30, 2021244 Item 5. Other Information Details an immaterial correction of prior period financial statements due to an error in the lapse rate for first-year commission revenue, to be corrected in future comparative filings - An error was discovered where the provision for first-year commission revenue for certain final expense policies should have been accrued based on a higher lapse rate248 Prior Period Commission Revenue Misstatement and Net Income Impact | Period | Commission Revenue Misstatement | Net Income Impact | | :--- | :--- | :--- | | Year Ended June 30, 2021 | $6.1 million | ($4.8 million) | | Year Ended June 30, 2020 | $2.0 million | ($1.5 million) | | Three Months Ended Sep 30, 2021 | $2.4 million | ($1.8 million) | - The company plans to correct the consolidated financial statements for prior periods that will be presented in future Form 10-K and 10-Q filings to reflect these adjustments248249 Item 6. Exhibits This section lists exhibits filed with the quarterly report, including amendments to the Credit Agreement, CEO and CFO certifications, and XBRL data files - Key exhibits filed include the Second Amendment (dated Nov 2, 2021) and Third Amendment (dated Dec 23, 2021) to the company's Credit Agreement269 - Certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits269