Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

☑     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018


OR

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to

001-33071
(Commission File Number)
_____________________________________________
EHEALTH, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________

Delaware
(State or other jurisdiction of
incorporation or organization)
 
56-2357876
(I.R.S Employer
Identification No)

440 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
 (Address of principal executive offices)

(650) 584-2700
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
____________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒ NO ☐
    




Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
 ☐
 
Accelerated filer
 
 
Non-accelerated filer
 ☐
 
Smaller reporting company
 
 
 
Emerging growth Company
 ☐
 
 
 
 
 
 

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 30, 2018 was 18,993,019 shares. 







Table of Contents


 
EHEALTH, INC. FORM 10-Q
TABLE OF CONTENTS

 
PART I FINANCIAL INFORMATION
PAGE
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
 





3

Table of Contents


PART I

FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS


EHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)

 
December 31, 2017
 
March 31, 2018
 
(Note 1)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,293

 
$
34,742

Accounts receivable
1,475

 
668

Commissions receivable - current
109,666

 
98,768

Prepaid expenses and other current assets
4,305

 
6,008

Total current assets
155,739

 
140,186

Commissions receivable - non-current
169,751

 
173,714

Property and equipment, net
4,705

 
4,616

Other assets
7,287

 
7,900

Intangible assets, net
7,540

 
13,889

Goodwill
14,096

 
40,233

Total assets
$
359,118

 
$
380,538

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,246

 
$
2,789

Accrued compensation and benefits
15,498

 
8,718

Accrued marketing expenses
4,693

 
2,802

Accrued restructuring charges

 
1,053

Earnout liability - current

 
14,580

Other current liabilities
2,008

 
1,785

Total current liabilities
25,445

 
31,727

Earnout liability - non-current

 
13,120

Deferred income taxes - non-current
45,089

 
43,353

Other non-current liabilities
1,920

 
2,235

Stockholders’ equity:
 
 
 
Common stock
30

 
30

Additional paid-in capital
281,706

 
289,925

Treasury stock, at cost
(199,998
)
 
(199,998
)
Retained earnings
204,725

 
199,880

Accumulated other comprehensive income
201

 
266

Total stockholders’ equity
286,664

 
290,103

Total liabilities and stockholders’ equity
$
359,118

 
$
380,538


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


EHEALTH, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts, unaudited)

 
Three Months Ended March 31,
 
2017
 
2018
 
(Note 1)
 
 
Revenue
 
 
 
Commission
$
38,837

 
$
40,707

Other
2,719

 
2,363

Total revenue
41,556

 
43,070

Operating costs and expenses:
 
 
 
Cost of revenue
181

 
152

Marketing and advertising
15,055

 
15,002

Customer care and enrollment
12,109

 
13,239

Technology and content
8,072

 
8,341

General and administrative
9,992

 
10,691

Restructuring charges

 
1,856

Acquisition costs

 
58

Amortization of intangible assets
260

 
451

Total operating costs and expenses
45,669

 
49,790

Loss from operations
(4,113
)
 
(6,720
)
Other income (expense), net
277

 
184

Loss before benefit for income taxes
(3,836
)
 
(6,536
)
Benefit from income taxes
(4,916
)
 
(1,691
)
Net income (loss)
$
1,080

 
$
(4,845
)
Net income (loss) per share:
 
 
 
Basic
$
0.06

 
$
(0.26
)
Diluted
$
0.06

 
$
(0.26
)
Weighted-average number of shares used in per share amounts:
 
 
 
Basic
18,370

 
18,873

Diluted
18,561

 
18,873

Comprehensive income (loss)
 

 
 

Net income (loss)
$
1,080

 
$
(4,845
)
Foreign currency translation adjustment, net of taxes
(12
)
 
65

Comprehensive income (loss)
$
1,068

 
$
(4,780
)
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


EHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(in thousands, unaudited)



 
Three Months Ended March 31,
 
2017
 
2018
 
(Note 1)
 
 
Operating activities
 

 
 
Net income (loss)
$
1,080

 
$
(4,845
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Deferred income taxes
(3,343
)
 
(1,736
)
Depreciation and amortization
762

 
619

Amortization of internally developed software
291

 
477

Amortization of intangible assets
260

 
451

Stock-based compensation expense
2,133

 
2,801

Other non-cash items
(59
)
 
389

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
787

 
807

Commissions receivable
18,960

 
22,409

Prepaid expenses and other assets
107

 
(1,793
)
Accounts payable
(3,417
)
 
(567
)
Accrued compensation and benefits
(3,023
)
 
(6,912
)
Accrued marketing expenses
(4,082
)
 
(1,891
)
Accrued restructuring charges

 
1,053

Other liabilities
(2,028
)
 
(525
)
Net cash provided by operating activities
8,428

 
10,737

Investing activities
 
 
 
Capitalized internal-use software and website development costs
(802
)
 
(989
)
Purchases of property and equipment and other assets
(862
)
 
(217
)
Acquisition of business, net of cash acquired

 
(14,929
)
Net cash used in investing activities
(1,664
)
 
(16,135
)
Financing activities
 
 
 
Proceeds from exercise of common stock options

 
109

Cash used to net-share settle equity awards
(300
)
 
(286
)
Principal payments in connection with capital leases
(32
)
 
(26
)
Net cash used in financing activities
(332
)
 
(203
)
Effect of exchange rate changes on cash and cash equivalents
15

 
50

Net increase (decrease) in cash and cash equivalents
6,447

 
(5,551
)
Cash and cash equivalents at beginning of period
61,781

 
40,293

Cash and cash equivalents at end of period
$
68,228

 
$
34,742

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

6


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 1 - Summary of Business and Significant Accounting Policies

Description of Business — eHealth, Inc. (the “Company,” “eHealth,” “we” or “us”) is a leading private health insurance exchange for individuals, families and small businesses in the United States. Through our website addresses (www.eHealth.com,  www.eHealthInsurance.com,  www.eHealthMedicare.com, www.Medicare.com, www.PlanPrescriber.com and www.GoMedigap.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase Medicare-related, individual and family, small business and ancillary health insurance plans. We actively market the availability of Medicare-related insurance plans and offer Medicare plan comparison tools and educational materials for Medicare-related insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. We are licensed to market and sell health insurance in all 50 states and the District of Columbia. 

Basis of Presentation — The accompanying condensed consolidated balance sheets as of December 31, 2017 and March 31, 2018, the condensed consolidated statements of comprehensive income (loss) for the three months ended March 31, 2017 and 2018 and the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2018, respectively, are unaudited. Effective January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606), as discussed in detail below under Adoption of New Accounting Standards. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with Topic 606. Except for the impact of the adoption of Topic 606, the condensed consolidated balance sheet data as of December 31, 2017 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission on March 19, 2018. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K.  

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance to such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2017 and include all adjustments necessary for the fair presentation of our financial position as of December 31, 2017 and March 31, 2018, our results of operations for the three months ended March 31, 2017 and 2018 and our cash flows for the three months ended March 31, 2017 and 2018. The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2018 and therefore should not be relied upon as an indicator of future results.

Principles of Consolidation — The condensed consolidated financial statements include the accounts of eHealth, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Seasonality — A greater number of our Medicare-related health insurance plans are sold in our fourth quarter during the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year. As a result, our Medicare plan-related commission revenue is highest in our fourth quarter.

 The majority of our individual and family health insurance plans are sold in the fourth quarter during the annual open enrollment period as defined under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. Individuals and families generally are not able to purchase individual and family health insurance outside of these open enrollment periods, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance or moving to another state.

Recent Accounting Pronouncements Not Yet Adopted

Leases (Topic 842) — In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as a

7


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

finance or operating lease.The guidance also eliminates existing real estate-specific provisions for all entities. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We expect to adopt this new accounting standard in the first quarter of 2019 and are in the process of evaluating the impact of the adoption of ASU 2016-02 on our condensed consolidated financial statements.

Adoption of New Accounting Standards

Compensation — Stock Compensation (Topic 718) — In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. We adopted ASU 2017-09 in the first quarter of 2018. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

Statement of Cash Flows (Topic 230) — In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under ASU 2016-18, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. We adopted ASU 2016-18 in the first quarter of 2018. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are presented on the statement of cash flows. We adopted ASU 2016-15 in the first quarter of 2018. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

Goodwill Impairment (Topic 350) — In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. ASU 2017-04 eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. ASU 2017-04 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for annual goodwill impairment tests performed after January 1, 2017. The standard must be applied prospectively. We adopted ASU 2017-04 in the first quarter of 2018. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.

Revenue Recognition (Topic 606) — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. ASU 2016-10 provides guidance in identifying performance obligations and determining the appropriate accounting for licensing arrangements.
The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). ASU 2014-09 may be adopted retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We adopted ASC 2014-09 effective January 1, 2018, using the full retrospective method to restate each prior reporting period presented. The adoption of this standard had a material impact on our condensed consolidated balance sheets and condensed consolidated statements of comprehensive income (loss), but had no impact on total net cash provided by (used in) operating, investing, or financing activities within the condensed consolidated statements of cash flows.


8


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Change in Significant Accounting Policies

Except for the accounting policies for revenue recognition, commissions receivable and deferred revenue that were updated as a result of adopting Topic 606, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 19, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.

Revenue Recognition Policy

We are compensated by the receipt of commission payments from health insurance carriers whose health insurance policies are purchased through our ecommerce platforms or our customer care centers. We may also receive commission bonuses based on our attaining predetermined target sales levels for Medicare, individual and family, small business and ancillary health insurance products, or other objectives, as determined by the health insurance carrier, which we recognize as commission revenue when we achieve the predetermined target sales levels or other objectives. In addition, we also generate revenue from non-commission revenue sources, which include online sponsorship and advertising, technology licensing and lead referrals.

The core principle of Topic 606 is to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Accordingly, we recognize revenue for our services in accordance with the following five steps outlined in Topic 606:

Identification of the contract, or contracts, with a customer.  A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

Identification of the performance obligations in the contract. Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.

Determination of the transaction price. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.

Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP") basis.

Recognition of revenue when, or as, we satisfy a performance obligation. We satisfy performance obligations either over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised good or service to the customer.

Commission Revenue - Our commission revenue is primarily comprised of commissions paid to us by health insurance carriers related to insurance plans that have been purchased by a member through our health insurance exchange service. We define a member as an individual currently covered by an insurance plan, which include Medicare-related, individual and family, small business and ancillary plans. We are compensated by the health insurance carrier, which we define as our customer.

We typically enter into contractual agency relationships with health insurance carriers that are non-exclusive and terminable on short notice by either party for any reason. In addition, health insurance carriers often have the ability to terminate or amend our agreements unilaterally on short notice, including provisions in our agreements relating to the commission rates paid to us by the health insurance carriers. The amendment or termination of an agreement we have with a

9


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

health insurance carrier may adversely impact the commissions we are paid on health insurance plans purchased from the carrier by means of our health insurance exchange services.

For both Medicare Advantage and Medicare Part D prescription drug plans, we receive a fixed, annual commission payment from insurance carriers once the plan is approved by the carrier and either a fixed, monthly or annual commission payment beginning with and subsequent to the second plan year. Additionally, commission rates may be higher in the first twelve months of the plan if the plan is the first Medicare Advantage or Medicare Part D prescription drug plan issued to the member. In the first plan year of a Medicare Advantage and Medicare Part D prescription drug plan, after the health insurance carrier approves the application but during the effective year of the plan, we are paid a fixed commission that is prorated for the number of months remaining in the calendar year. Additionally, if the plan is the first Medicare Advantage or Medicare Part D plan issued to the member, we may receive a higher commission rate that covers a full twelve-month period, regardless of the month the plan was effective. We earn commission revenue for Medicare Advantage and Medicare Part D prescription drug plans for which we are the broker of record, typically until either the policy is cancelled or we otherwise do not remain the agent on the policy. 

For individual and family, Medicare Supplement, small business and ancillary plans, our commissions generally represent a flat amount per member per month or a percentage of the premium amount collected by the carrier during the period that a member maintains coverage under a plan. Premium-based commissions are reported to us after the premiums are collected by the carrier, generally on a monthly basis. We generally continue to receive the commission payment from the relevant insurance carrier until the health insurance plan is cancelled or we otherwise do not remain the agent on the policy.

We utilize a practical expedient to estimate commission revenue for each insurance product by applying the use of a portfolio approach to group approved members by the effective month of the relevant policy (referred to as a “cohort”). This allows us to estimate the commissions we expect to collect for each approved member cohort by evaluating various factors, including but not limited to, contracted commission rates, carrier mix and expected member churn.

For Medicare-related, individual and family and ancillary health insurance plans, our services are complete once a submitted application is approved by the relevant health insurance carrier. Accordingly, we recognize commission revenue based upon the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application, net of a constraint. We refer to these estimated and constrained lifetime values as the "constrained LTV" for the plan. We provide annual services in selling and renewing small business health insurance plans; therefore, we recognize small business health insurance plan commission revenue at the time the plan is approved by the carrier, and when it renews each year thereafter, equal to the estimated commissions we expect to collect from the plan over the following 12-months. Our estimate of commission revenue for each product line is based on a number of assumptions, which include, but are not limited to, estimating conversion of an approved member to a paying member, forecasting member churn and forecasting the commission amounts likely to be received per member. These assumptions are based on historical trends and incorporate management’s judgment in interpreting those trends and in applying constraints discussed below. To the extent we make changes to the assumptions, we will recognize any material impact of the changes to commission revenue in the reporting period in which the change is made, including revisions of estimated lifetime commissions either below or in excess of previously estimated constrained LTV recognized as revenue.

For Medicare-related, individual and family and ancillary health insurance plans, we apply constraints to determine the amount of commission revenue to recognize per approved member. The constraints are applied to help ensure that the total estimated lifetime commissions expected to be collected for an approved member’s plan are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with future commissions receivable from the plan is subsequently resolved. We evaluate the appropriateness of these constraints on at least an annual basis, including assessing factors affecting our estimate of the estimated lifetime value of commissions per approved member based on current trends impacting our business and assessing whether any adjustment to those constraints should be made. We update the assumptions when we observe a sufficient level of evidence that would suggest that the long term expectation of the assumption has changed.


10


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

For the three months ended March 31, 2017 and 2018, the constraints applied to the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application in order to derive the constrained LTV of commissions per approved member are as follows:

 
Three Months Ended
March 31,
 
2017
 
2018
Medicare
 
 
 
Medicare Advantage
7
%
 
7
%
Medicare Supplement
5
%
 
5
%
Medicare Part D
5
%
 
5
%
 
 
 
 
Individual and Family
 
 
 
Non-Qualified Health Plans
15
%
 
15
%
Qualified Health Plans
20
%
 
20
%
 
 
 
 
Ancillaries
10
%
 
10
%
 
 
 
 
Small Business

 


Other Revenue - Our sponsorship and advertising program allows carriers to purchase advertising space in specific markets in a sponsorship area on our website. In return, we are typically paid a monthly fee, which is recognized over the period that advertising is displayed. Such revenue often includes a performance fee component based on metrics such as submitted health insurance applications and is recognized when the performance obligations are fulfilled and control has been transferred. We also offer Medicare advertising services, which include website development, hosting and maintenance. In these instances, we are typically paid a fixed, up-front fee, which we recognize as revenue over the service period as the performance obligations are satisfied.

Our commercial technology licensing business allows carriers the use of our ecommerce platform to offer their own health insurance policies on their websites and allows agents to utilize our technology to power their online quoting, content and application submission processes. Typically, we are paid a one-time implementation fee, which we recognize upon transfer of control at a point in time, commencing once the technology is available for use by the third party. Variable consideration in the form of performance fees based on metrics such as submitted health insurance applications are recognized upon achieving the metrics. The metrics used to calculate performance fees for both sponsorship and advertising and technology licensing are based on performance criteria that are either measured based on data tracked by us, or data tracked by the third party.

Deferred revenue includes deferred technology licensing implementation fees and amounts billed or collected from sponsorship or technology licensing customers in advance of our performing our service for such customers. It also includes the amount by which both unbilled and billed services provided under our technology licensing arrangements exceed the straight-line revenue recognized to date.

Some of our contracts with customers contain multiple performance obligations. We allocate revenue to all performance obligations within an arrangement with multiple deliverables at the inception of the arrangement using the relative selling price method. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.

11


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Disaggregation of Revenue
    
The table below depicts the disaggregation of revenue by product for the three months ended March 31, 2017 and 2018 and is consistent with how we evaluate our financial performance:

 
Three Months Ended
 
March 31, 2017
 
March 31, 2018
Commission Revenue:
 
 
 
Medicare
 
 
 
Medicare Advantage
$
19,205

 
$
21,935

Medicare Supplement
3,914

 
5,592

Medicare Part D
1,378

 
1,159

Total Medicare
24,497

 
28,686

Individual and Family (1)
 
 
 
Non-Qualified Health Plans
3,773

 
1,441

Qualified Health Plans
3,132

 
2,162

Total Individual and Family
6,905

 
3,603

Ancillaries
 
 
 
Short-term
1,846

 
1,250

Dental
1,847

 
1,599

Vision
570

 
340

Other
765

 
2,391

Total Ancillaries
5,028

 
5,580

Small Business
1,924

 
2,359

Commission Bonus
483

 
479

Total Commission Revenue
38,837

 
40,707

Other Revenue
2,719

 
2,363

Total Revenue
$
41,556

 
$
43,070

(1)
We define our Individual and Family Plan offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans. Individual and family health insurance plans include both Qualified and Non-Qualified plans. Qualified health plans are individual and family health insurance plans that meet the requirements of the Affordable Care Act and are offered through the government-run health insurance exchange in the relevant jurisdiction. Non-Qualified health plans are individual and family health insurance plans that meet the requirements of the Affordable Care Act and are not offered through the exchange in the relevant jurisdiction. Individuals that purchase Non-Qualified health plans cannot receive a subsidy in connection with the purchase of Non-Qualified plans.

Book-of-Business Transfers
We entered into several agreements with a broker partner, whereby the partner transferred certain of its existing Medicare plan members to us as the broker of record on the underlying policies. The first of these book-of-business transfers occurred in November 2010 and the most recent in June 2012. Total consideration paid by us for these books-of-business amounted to $13.9 million. Consideration paid for these books-of-business is included within commissions receivable in the accompanying condensed consolidated balance sheets. The consideration we paid to the broker partner was based on the discounted commissions expected to be received over the remaining life of each transferred Medicare plan member. As we receive commission payments from health insurance carriers for these plan members, we reduce commissions receivable for the discounted commissions expected to be received, with the remaining margin earned recorded to other income (expense), net in the condensed consolidated statements of comprehensive income (loss). The margin earned and recorded to other income (expense), net for these books-of-business for the three months ended March 31, 2017 and 2018 totaled $0.5 million and $0.6 million, respectively.

12


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Incremental Costs to Obtain a Contract
We reviewed our sales compensation plans, which are directed at converting leads into approved members, and concluded that they are fulfillment costs and not costs to obtain a contract with a customer. Additionally, we reviewed compensation plans related to personnel responsible for identifying new health insurance carriers and entering into contracts with new health insurance carriers and concluded that no incremental costs are incurred to obtain such contracts.
Income Taxes
As described in more detail in Note 6 - Income Taxes, as a result of the adoption of Topic 606, we recorded a significant deferred tax liability on our recasted opening balance sheet related to the resulting accelerated revenue recognition under Topic 606. Additionally, as a result of the deferred tax liability, we re-evaluated the need for the valuation allowance recorded against our U.S. deferred tax assets. As a result of this evaluation, we determined that the deferred tax liability is a source of income that can be used to support realization of deferred tax assets on a more likely than not level and accordingly reversed our previously recorded valuation allowance as of January 1, 2015, the earliest period to which the retrospective the adoption of Topic 606 was applied.

Impact to Previously Reported Results
The adoption of ASU 2014-09 impacted our reported results as follows (in thousands, except per share amounts):

 
December 31, 2017
Balance Sheets
As
Reported
 
ASC 606 Adoption
Adjustment
 
As
Adjusted
Accounts receivable
$
9,894

 
$
(8,419
)
 
$
1,475

Commissions receivable - current
$

 
$
109,666

 
$
109,666

Prepaid expenses and other current assets
$
4,845

 
$
(540
)
 
$
4,305

Commissions receivable - non-current
$

 
$
169,751

 
$
169,751

Other assets
$
7,317

 
$
(30
)
 
$
7,287

Accrued marketing expenses
$
4,088

 
$
605

 
$
4,693

Other current liabilities
$
3,815

 
$
(1,807
)
 
$
2,008

Deferred income taxes - non-current
$

 
$
45,089

 
$
45,089

Non-current liabilities
$
900

 
$
1,020

 
$
1,920

Retained earnings (accumulated benefit)
$
(20,796
)
 
$
225,521

 
$
204,725


 
For the Three Months Ended March 31, 2017
Statements of Operations
As
Reported
 
ASC 606 Adoption Adjustment
 
As
Adjusted
Revenue
$
78,939

 
$
(37,383
)
 
$
41,556

Cost of revenue
$
1,629

 
$
(1,448
)
 
$
181

Other income (expense), net
$
26

 
$
251

 
$
277

Benefit from income taxes
$
(1,573
)
 
$
(3,343
)
 
$
(4,916
)
Net income
$
33,421

 
$
(32,341
)
 
$
1,080

Net income per diluted share
$
1.80

 
$
(1.74
)
 
$
0.06



13


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 
For the Three Months Ended March 31, 2017
Segment Information
As
Reported
 
ASC 606 Adoption Adjustment
 
As
Adjusted
Revenue
 
 
 
 
 
Medicare
$
57,974

 
$
(32,564
)
 
$
25,410

Individual, Family and Small Business
20,965

 
(4,819
)
 
16,146

Total revenue
$
78,939

 
$
(37,383
)
 
$
41,556

 
 
 
 
 
 
Segment profit (loss)
 
 
 
 
 
Medicare segment profit (loss)
$
30,695

 
$
(31,624
)
 
$
(929
)
Individual, Family and Small Business segment profit
11,079

 
(4,309
)
 
6,770

Total segment profit
$
41,774

 
$
(35,933
)
 
$
5,841




Note 2 - Acquisition

On January 22, 2018, we completed our acquisition of all outstanding membership interests of Wealth, Health and Life Advisors, LLC, more commonly known as GoMedigap, a technology-enabled provider of Medicare Supplement enrollment services. This acquisition is expected to enhance our growing presence in the Medicare Supplement market and put us in a stronger position with carriers and strategic partners. The acquisition consideration consisted of cash of $15.0 million, less $0.1 million cash acquired, and 294,637 shares of our common stock. In addition, the members are entitled to receive earnout payments ("Earnout Consideration") consisting of up to $20 million in cash and 589,275 shares of our common stock. The Earnout Consideration will become payable, subject to the terms and conditions of the purchase agreement relating to the acquisition, upon the final determination of the achievement of certain milestones in 2018 and 2019.


14


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The GoMedigap acquisition was accounted for using the acquisition method of accounting under ASC 805, Business Combinations. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The major classes of assets and liabilities to which we have preliminarily allocated the acquisition consideration were as follows (in thousands):

Acquisition Consideration
 
Cash paid
$
15,000

Fair value of equity awards issued to GoMedigap members (1)
5,595

Estimated fair value of earnout liability
27,700

 
$
48,295

Allocation
 
Cash and cash equivalents
$
71

Commission receivable - current
4,371

Prepaid expenses and other current assets
11

Commission receivable - non-current
11,103

Property and equipment, net
174

Accounts payable
(110
)
Accrued compensation and benefits
(132
)
Other current liabilities
(131
)
Net tangible assets acquired
15,357

Intangible assets
6,800

Goodwill
26,138

Total intangible assets acquired
32,938

Total net assets acquired
$
48,295

(1) The fair value of equity awards issued was determined based on the January 22, 2018 closing price of our common stock of $18.99.

The acquisition consideration allocation as of the date of the acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. Additional information that result in adjustments to the provisional current and non-current commissions receivable amounts recognized as of the acquisition date may result in a corresponding adjustment to goodwill in the period in which new information becomes available.

Goodwill and Intangible Assets—Goodwill represents the excess of the purchase price of the acquired business over the acquisition date fair value of the net assets acquired. Goodwill is primarily attributable to the assembled workforce, new product development capabilities and anticipated synergies and economies of scale expected from the operations of the combined company. The goodwill was assigned to our Medicare segment. Goodwill is tested for impairment on an annual basis in the fourth quarter of each year or whenever events or changes in circumstances indicate that the asset may be impaired. Factors that we consider in deciding when to perform an impairment test include significant negative industry or economic trends or significant changes or planned changes in our use of the intangible assets. Goodwill will be deductible for tax purposes over 15 years.

Earnout liability—The earnout liability represents the fair value of the Earnout Consideration payable and will be adjusted to fair value at each reporting date until settled. Changes in fair value will be recognized in operations while changes in the earnout liability due to the passage of time will be recognized as other expense. The earnout liability will be adjusted to the extent the specified enrollment targets are not achieved.

Fair Value Measurements—The assets acquired and liabilities assumed of GoMedigap have been recognized at fair value in accordance with ASC 820, Fair Value Measurement. ASC 820 defines fair value as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires three levels of hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each asset and liability is based on the assessment of the transparency and reliability of inputs used in the valuation of such items based on the lowest level of input that is significant to fair value measurement. The

15


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements).

Assets acquired and liabilities assumed measured and reported at fair value are classified in one of the following categories based on inputs:

Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2
Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability.
Level 3
Unobservable inputs for the asset or liability.

The fair value of prepaid expenses and other current assets, property and equipment, net, accounts payable, accrued compensation and benefits and other current liabilities approximated their carrying value at the date of acquisition. The fair value of commissions receivable was determined using a discount rate of interest, which is a Level 2 input. Intangible assets and the earnout liability were valued using Level 3 inputs.

The fair values of the acquired intangible assets were determined using the profit allocation method, which is based on determining the estimated royalties we are relieved from paying because we own the assets.

The fair value of the earnout liability was measured using probability-weighted analysis and is discounted using a rate that appropriately captures the risk associated with the obligation. Key assumptions included new enrollments and volatility for the years ending December 31, 2018 and 2019 and eHealth’s simulated stock price at the time of payment. earnout liability was part of the acquisition consideration and will be adjusted to fair value at each reporting date until settled. Changes in fair value will be recognized in operations while changes in the earnout liability due to the passage of time will be recognized as other expense.

Following are the details of the acquisition consideration allocated to the intangible assets acquired (in thousands):

Technology
$
2,000

Trade names, trademarks and website addresses
4,800

Total intangible assets
$
6,800


We will amortize the existing technology and trade name using a straight-line method over an estimated life of 3 and 10 years, respectively. The estimated useful lives are based on the time periods during which the intangibles are expected to result in incremental cash flows.

We incurred $0.1 million acquisition-related costs during the first quarter of 2018, which were expensed as incurred.


16


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 3 - Balance Sheet Accounts

Cash and Cash Equivalents—As of December 31, 2017 and March 31, 2018, our cash equivalents consisted of money market accounts that invested in U.S. government-sponsored enterprise bonds and discount notes, U.S. government treasury bills and notes and repurchase agreements collateralized by U.S. government obligations. As of December 31, 2017 and March 31, 2018, our cash equivalents carried no unrealized gains or losses and we did not realize any significant gains or losses on sales of cash equivalents during the three months ended March 31, 2017 and 2018.

As of December 31, 2017 and March 31, 2018, our cash and cash equivalent balances were invested as follows (in thousands):
 
December 31, 2017
 
March 31, 2018
Cash
$
5,098

 
$
9,463

Money market funds
35,195

 
25,279

Total cash and cash equivalents
$
40,293

 
$
34,742



Prepaid Expenses and Other Current Assets—Prepaid expenses and other current assets consisted of the following (in thousands):

 
December 31, 2017
 
March 31, 2018
Prepaid maintenance contracts
$
1,945

 
$
1,880

Prepaid insurance
490

 
1,133

Prepaid rent
311

 
404

Other current assets
1,559

 
2,591

Total prepaid expenses and other current assets
$
4,305

 
$
6,008



Intangible Assets- The carrying amounts, accumulated amortization, net carrying value and weighted average remaining life of our definite-lived amortizable intangible assets, as well as our indefinite-lived intangible trademarks, are presented in the tables below for (dollars in thousands, weighted-average remaining life in years):

 
December 31, 2017
 
March 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted-Average Remaining Life
Technology
$
1,700

 
$
(1,700
)
 
$

 
$
3,700

 
$
(1,811
)
 
$
1,889

 
2.8 years
Pharmacy and customer relationships
10,100

 
(7,884
)
 
2,216

 
10,100

 
(8,121
)
 
1,979

 
2.1 years
Trade names, trademarks and website addresses
907

 
(697
)
 
210

 
5,707

 
(800
)
 
4,907

 
9.5 years
Total intangible assets subject to amortization
$
12,707

 
$
(10,281
)
 
2,426

 
$
19,507

 
$
(10,732
)
 
8,775

 
 
Indefinite-lived trademarks and domain names
 
 
 
 
5,114

 
 
 
 
 
5,114

 
Indefinite
Total intangible assets
 
 
 
 
$
7,540

 
 
 
 
 
$
13,889

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





17


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

As of March 31, 2018, expected amortization expense in future periods is as follows (in thousands):

Years Ending December 31,
Technology
 
Pharmacy and Customer Relationships
 
Trade Names, Trademarks and Website Addresses
 
Total
2018
$
500

 
$
714

 
$
427

 
$
1,641

2019
667

 
950

 
570

 
2,187

2020
667

 
315

 
510

 
1,492

2021
55

 

 
480

 
535

2022

 

 
480

 
480

Thereafter

 

 
2,440

 
2,440

Total
$
1,889

 
$
1,979

 
$
4,907

 
$
8,775



Note 4 - Fair Value Measurements

We define fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques we use to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We classify the inputs used to measure fair value into the following hierarchy:

Level 1
 
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2
 
Unadjusted quoted prices in active markets for similar assets or liabilities; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability.
Level 3
 
Unobservable inputs for the asset or liability.

The following table is a summary of financial assets measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands).

 
December 31, 2017
 
March 31, 2018
 
Carrying Value
 
Level 1
 
Total
 
Carrying Value
 
Level 1
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
35,195

 
$
35,195

 
$
35,195

 
$
25,279

 
$
25,279

 
$

 
$
25,279

Total assets measured and recorded at fair value
$
35,195

 
$
35,195

 
$
35,195

 
$
25,279

 
$
25,279

 
$

 
$
25,279

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnout liability - current
$

 
$

 
$

 
$
14,580

 
$

 
$
14,580

 
$
14,580

Earnout liability - non-current

 

 

 
13,120

 

 
13,120

 
13,120

Total liabilities measured and recorded at fair value
$

 
$

 
$

 
$
27,700

 
$

 
$
27,700

 
$
27,700


Our cash equivalents were invested in money market funds and were classified as Level 1. We endeavor to utilize the best available information in measuring fair value. We used observable prices in active markets in determining the classification of our money market funds as Level 1.

The earnout liability represents the fair value of the Earnout Consideration payable to acquire GoMedigap and will be adjusted to fair value at each reporting date until settled. Changes in fair value will be recognized in operations while changes in the earnout liability due to the passage of time will be recognized as other expense.

18


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


We measure the earnout liability using internally developed assumptions, therefore it is classified as Level 3. The fair value of the earnout liability was measured using probability-weighted analysis and is discounted using a rate that appropriately captures the risk associated with the obligation. Key assumptions included new enrollments and volatility for the years ending December 31, 2018 and 2019 and our simulated stock price at the time of payment.


Note 5 - Stockholder's Equity

2014 Equity Incentive Plan —The following table summarizes activity under our 2014 Equity Incentive Plan (the “2014 Plan”) for the three months ended March 31, 2018 (in thousands):

 
Shares Available for Grant
Shares available for grant December 31, 2017
1,409

Restricted stock units granted 1
(308
)
Options granted2
(1
)
Restricted stock units cancelled 3
63

Options cancelled
12

Shares available for grant March 31, 2018
1,175

  
(1)
Includes grants of restricted stock units with service, performance-based or market-based vesting criteria.
(2)
Includes grants of stock options with service, performance-based or market-based vesting criteria.
(3)
Includes cancelled restricted stock units with service, performance-based or market-based vesting criteria.

The following table summarizes stock option activity (in thousands, except weighted-average exercise price and weighted-average remaining contractual life data): 

 
Number of Stock Options 1
 
Weighted Average Exercise Price
 
Weighted-Average Remaining Contractual Life (years)
 
Aggregate Intrinsic Value 2
Balance outstanding at December 31, 2017
983

 
$
17.38

 
4.6
 
$
2,522

Granted
1

 
$
12.04

 
 
 
 
Exercised
(9
)
 
$
12.37

 
 
 


Cancelled
(39
)
 
$
21.82

 
 
 
 
Balance outstanding at March 31, 2018
936

 
$
17.08

 
4.4
 
$
854

Vested and expected to vest at March 31, 2018
896

 
$
17.11

 
4.3
 
$
828

Exercisable at March 31, 2018
484

 
$
18.36

 
3.1
 
$
531

 
(1)
Includes certain stock options with service, performance-based or market-based vesting criteria.
(2)
The aggregate intrinsic value is calculated as the difference between the closing price of our common stock as of December 31, 2017 and March 31, 2018 and the exercise price multiply by number of in-the-money options. 
 

19


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table summarizes restricted stock unit activity (in thousands, except weighted-average grant date fair value and weighted-average remaining contractual life data): 

 
Number of Restricted Stock Units 1
 
Weighted-Average Grant Date Fair Value
 
Weighted-Average Remaining Service Period
 
Aggregate Intrinsic Value 2
Unvested as of December 31, 2017
1,745

 
$
14.24

 
2.3
 
$
30,313

Granted
308

 
$
12.33

 
 
 
 

Vested
(52
)
 
$
10.53

 
 
 
 

Cancelled
(63
)
 
$
14.13

 
 
 
 

Unvested as of March 31, 2018
1,938

 
$
14.04

 
2.1
 
$
27,733


(1)
Includes certain restricted stock units with service, performance-based or market-based vesting criteria.
(2)
The aggregate intrinsic value is calculated as the product of our closing stock price as of December 31, 2017 and March 31, 2018 and the number of restricted stock units outstanding as of December 31, 2017 and March 31, 2018, respectively.   

Stock Repurchase Programs —We had no stock repurchase activity during the three months ended March 31, 2018. In addition to 10,663,888 shares repurchased under our past repurchase programs as of March 31, 2018, we have in treasury 590,471 shares that were previously surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of December 31, 2017 and March 31, 2018, we had a total of 11,237,995 shares and 11,254,359 shares, respectively, held in treasury. 

For accounting purposes, common stock repurchased under our stock repurchase programs is recorded based upon the settlement date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method.

Stock-Based Compensation Expense —The following table summarizes stock-based compensation expense recorded during the three months ended March 31, 2018 and 2017 (in thousands): 

 
Three Months Ended
March 31,
 
2017
 
2018
Common stock options
$
187

 
$
498

Restricted stock units
1,946

 
2,303

Total stock-based compensation expense
$
2,133

 
$
2,801



The following table summarizes stock-based compensation expense by operating function for the three months ended March 31, 2017 and 2018 (in thousands): 

 
Three Months Ended
March 31,
 
2017
 
2018
Marketing and advertising
$
215

 
$
370

Customer care and enrollment
12

 
165

Technology and content
394

 
343

General and administrative
1,512

 
1,672

Restructuring

 
251

Total stock-based compensation expense
$
2,133

 
$
2,801



20


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

During the three months ended March 31, 2018, as part of our workforce reduction, we accelerated the vesting dates of certain stock options and restricted stock units granted to a former employee. We recorded a $0.3 million incremental stock-based compensation expense in connection with this modification.

Note 6 - Income Taxes

The following table summarizes our provision (benefit) for income taxes and our effective tax rates for the three months ended March 31, 2017 and 2018 (in thousands, except effective tax rate):

 
Three Months Ended March31,
 
2017
 
2018
Loss before benefit for income taxes
(3,836
)
 
(6,536
)
Benefit from income taxes
(4,916
)
 
(1,691
)
Effective tax rate
128.2
%
 
25.9
%


Our effective tax rate in the three months ended March 31, 2017 was higher than the statutory federal rate due primarily to the release of a liability for unrecognized tax benefits, research and development credits and stock-based compensation adjustments, partially offset by non-deductible lobbying expenses. Our effective rate in the three months ended March 31, 2018 was higher than the statutory federal rate due primarily to stock based compensation adjustments, non-deductible lobbying expenses, and foreign income inclusions partially offset by research and development credits.

As a result of our adoption of Topic 606 using the full retrospective method, in our recasted opening balance sheet, we recognized a significant deferred tax liability due to the resulting acceleration of revenue recognition while revenue for tax purposes will continue to be recognized as we collect the amounts receivable in future periods. This deferred tax liability is a source of income that can be used to support the realizability of our deferred tax assets. As a result of the significant increased deferred tax liability, we have also reversed the valuation allowance recorded against our U.S. deferred tax assets as of January 1, 2015, the earliest period to which the retrospective the adoption of Topic 606 was applied. We continue to record all our deferred tax assets as of March 31, 2018 as we believe it is more likely than not that the net deferred tax assets will be fully realized.

The Tax Cuts and Jobs Act ("Jobs Act") legislation was passed in December 2017, which has various implications on our income tax provision accrual. The main impact of the tax reform on our provision for income taxes is the decrease in our statutory federal income tax rate from 35% to 21% and the change in the deferred income tax rate used in determining the ending deferred tax balances. Our estimated annual effective tax rate has been adjusted for the impact of the Jobs Act including, among other things, certain limitation on deductions and taxes on Global Intangible Low-Taxed Income ("GILTI") earned by our China subsidiary. Given the complexity of the GILTI provisions, we are still evaluating their effects and as at March 31, 2018, we have included GILTI related to current-year operations only in our estimated annual effective tax rate and have not provided for additional GILTI on deferred items. The effects of other provisions of the tax reform legislation are not expected to have a material impact on our condensed consolidated financial statements. However, the final impact of the Jobs Act may differ from our estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued, and resulting actions we may take.

Note 7 - Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Diluted net income (loss) per share is computed giving effect to all potential dilutive common stock equivalent shares, including options and restricted stock units. The dilutive effect of outstanding awards is reflected in diluted net income (loss) per share by application of the treasury stock method.  


21


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):  

 
Three Months Ended
March 31,
 
2017
 
2018
Basic:
 

 
 

Numerator:
 

 
 

Net income (loss)
$
1,080

 
$
(4,845
)
Denominator:
 
 
 
Weighted-average number of common stock shares outstanding
18,370

 
18,873

Net income (loss) per share—basic:
$
0.06

 
$
(0.26
)
Diluted:
 

 
 

Numerator:
 

 
 

Net income (loss)
$
1,080

 
$
(4,845
)
Denominator:
 

 
 

Net weighted average number of common stock shares outstanding
18,370

 
18,873

Dilutive effect of potential common stock
191

 

Total common stock shares used in per share calculation
18,561

 
18,873

Net income (loss) per share—diluted:
$
0.06

 
$
(0.26
)

For each of the three months ended March 31, 2017 and 2018, we had securities outstanding that could potentially dilute earnings per share, but the shares from the assumed conversion or exercise of these securities were excluded in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive. The number of outstanding anti-dilutive shares that were excluded from the computation of diluted net income (loss) per share consisted of the following (in thousands): 

 
Three Months Ended
March 31,
 
2017
 
2018
Common stock options
$
34

 
$
1,006

Restricted stock units
836

 
1,426

Total
$
870

 
$
2,432



Note 8 - Commitments and Contingencies

Legal Proceedings

On January 26, 2017, a purported class action lawsuit was filed against us in the Superior Court of the State of California, County of Santa Clara.  The complaint alleges that we negligently failed to take necessary precautions required to protect from unauthorized disclosure of personally identifiable information contained on 2016 Form W-2s for current and former employees.  The complaint purports to allege causes of action against us for negligence, violation of Section 17200 et seq. of the California Business & Professions Code, declaratory relief and breach of implied contract.  The complaint seeks actual damages, punitive damages, statutory damages, costs, including experts’ fees and attorneys’ fees, pre-judgment and post-judgment interest as prescribed by law and equitable, injunctive and declaratory relief as appropriate.  In April 2017, an additional purported class action lawsuit was filed against us in the Superior Court of State of California, County of Santa Clara, relating to the same circumstances.   The second complaint purports to allege causes of action against us for negligence, violation of California Customer Records Act (California Civil Code Section 1798.80 et seq.), violation of the California

22


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Confidentiality of Medical Information Act (California Civil Code Section 56 et seq.), invasion of privacy by public disclosure of private facts, breach of confidentiality and violation of the California Unfair Competition Law (California Business & Professions Code Section 17200 et seq.).  The causes of action for violations of the California Customer Records Act and the California Confidentiality of Medical Information Act were dismissed without prejudice.  The second complaint seeks actual damages, statutory damages, restitution, disgorgement, equitable, injunctive and declaratory relief, costs, including experts’ fees and attorneys’ fees and costs of prosecuting the action, and pre-judgment and post-judgment interest as prescribed by law.  In July 2017, we entered into a binding settlement term sheet where we and the plaintiffs in each of the above-described cases agreed to enter into a settlement, pursuant to which we would receive a release of all claims that were or could have been alleged related to the unauthorized disclosure at issue in each of the cases.  In exchange for the release, we agreed to (i) pay, subject to an aggregate cap of $250,000, up to $2,500 to each impacted individual for reasonable, documented out-of-pocket losses or expenses related to the data security incident; (ii) offer to individuals who signed up for identity theft protection that we offered at the time of the incident a one-year extension of the identity theft protection; (iii) offer to individuals who did not sign up for identity theft protection that we offered at the time of the incident three-years of identity theft protection; and (iv) not oppose a request by class counsel for attorneys’ fees, costs and class representative enhancements of up to $245,000 in the aggregate.  In December 2017,we entered into a joint stipulation for settlement of class action consistent with the settlement term sheet.   The court entered an order preliminarily approving the settlement on April 23, 2018.  As a result, notice of the settlement will be sent to members of the class informing them of the settlement and the possible relief available to them thereunder.  The settlement is subject to final approval of the court after the notice has been sent to the class and after a hearing before the court. As of March 31, 2018, we maintained an accrual in our consolidated financial statements for estimated potential damages and other amounts we expect to be required to pay in connection with the matter. 

On April 6, 2018, a former California employee (“Plaintiff”) filed a complaint against us in the Superior Court of the State of California for the County of Sacramento (the “Complaint”).  Plaintiff’s Complaint is filed pursuant to the California Labor Code Private Attorneys General Act of 2004 (“PAGA”), purportedly on behalf of all current and former hourly-paid or non-exempt employees who work or have worked for us in California.  The Complaint alleges that we violated a number of wage and hour laws with respect to these non-exempt employees, including, among other things, the failure to comply with California law as to (i) the payment of overtime wages; (ii) the payment of minimum wages; (iii) providing uninterrupted meal and rest periods, (iv) the payment of wages earned during employment and owed upon the termination of employment; (v) providing complete and accurate wage statements, (vi) keeping of accurate payroll records; and (vii) the proper reimbursement  for necessary business-related expenses and costs.  The Complaint seeks allegedly unpaid wages, civil penalties and costs, expenses and attorneys’ fees.  Discovery has not yet commenced. We cannot estimate the likelihood of liability or the amount of potential damages, because the case is at a preliminary stage.

In the ordinary course of our business, we have received and may continue to receive inquiries from state regulators relating to various matters. We have become, and may in the future become, involved in litigation in the ordinary course of our business. If we are found to have violated laws or regulations in any jurisdiction, we could be subject to various fines and penalties, including revocation of our license to sell insurance in those states, and our business, operating results and financial condition would be harmed. Revocation of any of our licenses or penalties in one jurisdiction could cause our license to be revoked or for us to face penalties in other jurisdictions. In addition, without a health insurance license in a jurisdiction, carriers would not pay us commissions for the products we sold in that jurisdiction, and we would not be able to sell new health insurance products in that jurisdiction. We could also be harmed to the extent that related publicity damages our reputation as a trusted source of objective information relating to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome.

Operating Lease Obligations
 
We lease our operating facilities and certain of our equipment and furniture and fixtures under various operating leases, the latest of which expires in January 2026. Certain of these leases have free or escalating rent payment provisions. We recognize rent expense on our operating leases on a straight-line basis over the terms of the leases, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements. 

In March 2018, we entered into an agreement to lease approximately 27,000 square feet of office space in Austin, Texas. The term of this lease agreement is ninety months, commencing on an estimated date of July 15, 2018 and ending on approximately January 15, 2026. Future minimum lease payments under this lease will be approximately $4.5 million.  


23


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In connection with the Austin, Texas office lease agreement, we entered into a financial guarantee consisting of a standby letter of credit for $0.6 million, which may be reduced on the third and subsequent anniversaries of the commencement date, subject to our compliance with the applicable conditions to such reductions set forth in the lease.  

In connection with our Mountain View, California lease agreement in March 2012, we entered into a financial guarantee consisting of a standby letter of credit for $0.6 million, which may be reduced in increments of 25% of the original amount thereof on the first, second and third anniversaries of the commencement date, subject to our compliance with the applicable conditions to such reductions set forth in the lease. The remaining balance on the financial guarantee is $0.1 million as of March 31, 2018.

Service and Licensing Obligations

We have entered into service and licensing agreements with third party vendors to provide various services, including network access, equipment maintenance and software licensing. The terms of these services and licensing agreements are generally up to three years. As the benefits of these agreements are experienced uniformly over the applicable contractual periods, we record the related service and licensing expenses on a straight-line basis, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements.

 The following table presents a summary of our future minimum payments under non-cancellable operating lease agreements and contractual service and licensing obligations as of March 31, 2018 (in thousands): 

For the Years Ending December 31,
Operating Lease Obligations
 
Service and Licensing Obligations
 
Total Obligations
2018
$
2,909

 
$
1,165

 
$
4,074

2019
3,453

 
861

 
4,314

2020
3,679

 
330

 
4,009

2021
2,163

 

 
2,163

2022
2,227

 

 
2,227

Thereafter
2,829

 

 
2,829

Total
$
17,260

 
$
2,356

 
$
19,616



Note 9 - Operating Segments, Geographic Information and Significant Customers

Operating Segments

We report segment information based on how our chief executive officer, who is our chief operating decision maker ("CODM"), regularly reviews our operating results, allocates resources and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit (loss). Our business structure is comprised of two operating segments.

Medicare
Individual, Family and Small Business

The Medicare segment consists primarily of commissions earned from our sale of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans, and to a lesser extent, ancillary products sold to our Medicare-eligible customers, including but not limited to, dental and vision insurance, as well as our advertising program that allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us and our delivery and sale to third parties of Medicare-related health insurance leads generated by our ecommerce platforms and our marketing activities.

The Individual, Family and Small Business segment consists primarily of commissions earned from our sale of individual and family and small business health insurance plans and ancillary products sold to our non-Medicare-eligible

24


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

customers, including but not limited to, dental, vision, life, short term disability and long term disability insurance. To a lesser extent, the Individual, Family and Small Business segment consists of amounts earned from our online sponsorship program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website, our licensing to third parties the use of our health insurance ecommerce technology and our delivery and sale to third parties of individual and family health insurance leads generated by our ecommerce platforms and our marketing activities.

Marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses that are directly attributable to a segment are reported within the applicable segment. Indirect marketing and advertising, customer care and enrollment and technology and content operating expenses are allocated to each segment based on usage. Other indirect general and administrative operating expenses are managed in a corporate shared services environment and, since they are not the responsibility of segment operating management, are not allocated to the two operating segments and are presented as a reconciling item to our consolidated financial results.

Segment profit (loss) is calculated as total revenue for the applicable segment less direct and allocated marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses, excluding stock-based compensation, depreciation and amortization expense and amortization of intangible assets.


The following table presents summary results of our operating segments for the three months ended March 31, 2017 and 2018 (in thousands):

 
Three Months Ended
March 31,
 
2017
 
2018
Revenue
 
 
 
Medicare
$
25,410

 
$
30,763

Individual, Family and Small Business
16,146

 
12,307

Total revenue
$
41,556

 
$
43,070

 
 
 
 
Segment profit (loss)
 
 
 
Medicare segment profit (loss)
$
(929
)
 
$
3,180

Individual, Family and Small Business segment profit
6,770

 
3,488

Total segment profit
5,841

 
6,668

Corporate
(6,799
)
 
(7,854
)
Stock-based compensation expense
(2,133
)
 
(2,550
)
Depreciation and amortization
(762
)
 
(619
)
Restructuring charges

 
(1,856
)
Acquisition costs

 
(58
)
Amortization of intangible assets
(260
)
 
(451
)
Other income (expense), net
277

 
184

Loss before benefit for income taxes
$
(3,836
)
 
$
(6,536
)

There are no internal revenue transactions between our operating segments. Our CODM does not separately evaluate assets by segment, and therefore assets by segment are not presented.


25


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Geographic Information

Our long-lived assets consisted primarily of property and equipment, internally-developed software, goodwill and other indefinite-lived intangible assets and finite-lived intangible assets. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area as of December 31, 2017 and March 31, 2018 were as follows (in thousands):  
 
December 31, 2017
 
March 31, 2018
United States
$
202,597

 
$
239,595

China
550

 
525

Total
$
203,147

 
$
240,120

 
Significant Customers

Substantially all revenue for the three months ended March 31, 2017 and 2018 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the three months ended March 31, 2017 and 2018 are presented in the table below: 

 
Three Months Ended
March 31,
 
2017
 
2018
UnitedHealthcare 1
23
%
 
23
%
Humana
17
%
 
15
%

(1)
UnitedHealthcare also includes other carriers owned by UnitedHealthcare. 


As of March 31, 2018, our total outstanding commissions receivable balance was $272.5 million. Our contracts with the above carriers expose us to credit risk that a financial loss could be incurred if the counterparty does not fulfill its financial obligation. While we are exposed to credit losses due to the non-performance of our counterparties, we consider the risk of this remote. We estimate our maximum credit risk in determining the commissions receivable amount recorded on the balance sheet.

Note 10 –Restructuring Charges
In February 2018, our Board of Directors approved a plan to close our sales call center in Massachusetts and to terminate the employment of other employees in certain other locations. As part of this plan, we eliminated approximately 110 full-time positions, representing approximately 10% of our workforce, primarily within customer care and enrollment, and to a lesser extent, in our marketing and advertising and general and administrative groups.
We estimated total pre-tax restructuring charges of approximately $2.2 million, which includes approximately $1.6 million for employee termination benefits, approximately $0.3 million in contract termination and other restructuring charges and $0.3 million in non-cash accelerated stock based compensation. Substantially all of the restructuring charges are expected to result in cash expenditures. We recognized $1.9 million in employee termination benefit and related costs and non-cash accelerated stock based compensation in the first quarter of 2018, and we expect to recognize the remaining restructuring charges in the second quarter of 2018, when the activities comprising the plan are expected to be substantially completed.

26


EHEALTH, INC. 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The following table summarizes the total cash and non-cash restructuring charges recognized during the three months ended March 31, 2018 (in thousands): 

Employee termination costs
$
1,605

Non-cash employee termination costs - stock-based compensation
251

Total restructuring charges
$
1,856


The following table summarizes the accrued restructuring charges activity during the three months ended March 31, 2018 (in thousands):

 
Three Months Ended March 31, 2018
 
Beginning balance
 
Charges
 
Payments
 
Ending balance
Employee termination costs
$

 
$
1,605

 
$
(552
)
 
$
1,053

Accrued restructuring charges - current
$

 
$
1,605

 
$
(552
)
 
$
1,053



Note 11 - Subsequent Event

On April 25, 2018, we entered into a lease agreement to lease approximately 32,492 square feet of office space located in Santa Clara, California. We entered into this lease agreement as a result of the upcoming expiration of one of our leases in Mountain View, California on August 31, 2018. The term of the lease is approximately one hundred twenty-three months, commencing on an estimated date of September 1, 2018 and ending on an estimated date of November 30, 2028. Future minimum lease payments under this lease are expected to total $17.4 million.

In connection with the Santa Clara, California lease agreement, we entered into a financial guarantee consisting of a standby letter of credit for $1.5 million, which may be reduced in increments of 20% of the original amount thereof on the second, third, fourth and fifth anniversaries of the commencement date, and may be reduced by an additional 8% of the original amount on the sixth anniversary of the commencement date, subject to our compliance with the applicable conditions to such reductions set forth in the lease.




27



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements regarding our expectations relating to submitted and approved applications, membership and and lifetime value of commissions; our expectations relating to revenue, sources of revenue, cost of revenue, the collectability of our accounts receivable, operating expenses and profitability; our expectations regarding our strategy and investments including our acquisition of GoMedigap, and impact to our operating results; growth opportunities in our business; our expectations regarding the impact of healthcare reform on our business; our ability to enroll and plans relating to the enrollment of individuals and families into qualified health plans through government health insurance exchanges without users leaving our website; our expectations regarding commission rates, payment rates, conversion rates, membership retention rates and membership acquisition costs; our expectations regarding the supply and demand of individual and family health insurance; our expectations relating to the seasonality of our business; our expectations relating to marketing and advertising expense and our business development and cross-selling efforts; the timing of our receipt of commission payments; our critical accounting policies and related estimates; the expected financial impact of our adoption of new revenue recognition standards; our belief that cash generated from operations and our current cash and cash equivalents will be sufficient to fund operations for the next twelve months; future capital requirements; expected competition from government-run health insurance exchanges and other sources; the timing and source of our Medicare-related revenue; political, legislative, regulatory and legal challenges; the merits or potential impact of any lawsuits filed against us; as well as other statements regarding our future operations, financial condition, prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those risks associated with the impact of healthcare reform; our ability to retain existing members and enroll a large number of new members during the annual healthcare reform open enrollment period and Medicare annual enrollment period; the impact of annual enrollment period for the purchase of individual and family health insurance and its timing on our recognition of revenue; our ability to sell qualified health insurance plans to subsidy-eligible individuals and to enroll subsidy eligible individuals through government-run health insurance exchanges without users leaving our website; the success of our health insurance benefit packages; our ability to comply with CMS guidance and impact on conversion rates as a result of the federal exchange changes to enrollment; competition, including competition from government-run health insurance exchanges; seasonality of our business and the fluctuation of our operating results; our ability to retain existing members and limit member turnover; changes in consumer behaviors and their selection of individual and family health insurance products, including the selection of products for which we receive lower commissions; product offerings among carriers and the resulting impact on our commission revenue; carriers exiting the market of selling individual and family health insurance and the resulting impact on our supply and commission revenue; our ability to execute on our growth strategy in the Medicare and small business health insurance markets; the impact of increased health insurance costs on demand; our ability to timely receive and accurately predict the amount of commission payments from health insurance carriers; medical loss ratio requirements; delays in our receipt of items required to recognize Medicare revenue; changes in member conversion rates; our ability to accurately estimate membership; our relationships with health insurance carriers; customer concentration and consolidation of the health insurance industry; our success in marketing and selling health insurance plans and our unit cost of acquisition; our ability to hire, train and retain licensed health insurance agents and other employees; the need for health insurance carrier and regulatory approvals in connection with the marketing of Medicare-related insurance products; costs of acquiring new members; scalability of the Medicare business; lack of membership growth and retention rates; consumers satisfaction of our service; our ability to attract and to convert online visitors into paying members; changes in products offered on our ecommerce platform; changes in commission rates; maintaining and enhancing our brand identity; our ability to derive desired benefits from investments in our business, including membership growth initiatives; dependence on acceptance of the Internet as a marketplace for the purchase and sale of health insurance; reliance on marketing partners; the impact of our direct-to-consumer email, telephone and television marketing efforts; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; our ability to successfully make and integrate acquisitions; dependence on our operations in China; changes in laws and regulations, including in connection with healthcare reform and/or with respect to the marketing and sale of Medicare plans; compliance with insurance and other laws and regulations; exposure to security risks and our ability to safeguard sensitive data; and the performance, reliability and availability of our ecommerce platform and underlying network infrastructure. Other risks include the risks discussed under the heading “Risk Factors” in Part II, Item 1A. of this report and those discussed in our other Securities and Exchange Commission filings. The following discussion should be read in conjunction with our Annual Report on Form 10-K as filed with the Securities and Exchange Commission in March 2018, and the audited consolidated financial statements and related notes contained therein. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

28



Overview 

We are a leading private health insurance exchange for individuals, families and small businesses. Through our website addresses (www.eHealth.com,  www.eHealthInsurance.com,  www.eHealthMedicare.com, www.Medicare.com, www.PlanPrescriber.com and www.GoMedigap.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase Medicare-related, individual and family, small business and ancillary health insurance plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. As a result, we simplify and streamline the complex and traditionally paper-intensive health insurance sales and purchasing process.

On January 22, 2018, we completed our acquisition of Wealth, Health and Life Advisors, LLC, more commonly known as GoMedigap, a technology-enabled provider of Medicare Supplement enrollment services. GoMedigap has built a leading consumer acquisition and engagement platform focused on meeting the Medicare Supplement insurance needs of its individual customers with a technology-enabled, consumer-centric approach that aligns with our mission and operations. This strategic acquisition significantly enhances our growing presence in the Medicare Supplement market, puts us in a stronger position with carriers and strategic partners and allows us to accelerate our projected Medicare plan enrollment growth in 2018 and beyond. For more information on our acquisition of GoMedigap, see Note 2 - Acquisition in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

We have invested heavily in technology and content related to our ecommerce platforms. We have also invested significant time and resources in obtaining licenses to sell health insurance in all 50 states and the District of Columbia, developing member acquisition programs, obtaining necessary regulatory approvals of our websites and establishing relationships and appointments with leading health insurance carriers, enabling us to offer thousands of health insurance plans online. Our ecommerce platforms can be accessed directly through our websites as well as through our network of marketing partners.

We operate as two distinct reporting segments:

Medicare
Individual, Family and Small Business.

For more information regarding our segments, see Note 9 - Operating Segments, Geographic Information and Significant Customers in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Adoption of Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standard is a comprehensive new revenue recognition model requiring an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Effective January 1, 2018, we adopted ASU No. 2014-09 using the full retrospective method, which required us to revise our historical financial information to be consistent with the new standard. The adoption had a material impact on our consolidated financial statements. The most significant impact of the standard was on our commission revenue, whereby we are now required to estimate the lifetime value of commissions we expect to collect from Medicare-related, individual and family and ancillary health insurance plans at the time the carrier approves the plans, and for small business health insurance plans, the estimated commissions we expect to collect from the plan over the following 12-months. For additional information on the change in our revenue recognition policy and the related impact to our previously reported results, see Note 1 - Summary of Business and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.


29


Health Care Reform

In March 2010, the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act were signed into law. These health care reform laws contain provisions that changed and will continue to change the health insurance industry in substantial ways. We have described various aspects of health care reform in Part I, Item 1, Business - Health Care Reform, in our Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the Securities and Exchange Commission on March 19, 2018, and Part II, Item 1A, Risk Factors, in this Quarterly Report on Form 10-Q. The implementation of health care reform has significantly reduced our individual and family health insurance membership and commission revenue and could continue to have a material adverse effect on our business and results of operations.

The Trump administration and Republican leadership have repeatedly communicated their intention to alter or repeal the Affordable Care Act, but their efforts to do so have so far been unsuccessful. As a part of the tax reform law that came into effect in December 2017, the tax penalty for violating the individual mandate to maintain qualifying health insurance was reduced to zero effective in 2019, essentially repealing it. The essential repeal of the individual mandate could have a further adverse impact on the individual and family health insurance market. In addition to the repeal of the mandate, the Trump administration issued an executive order in October 2017 that directed the executive branch of the government to consider proposing regulations and revising guidance to expand access to association health plans, expand the availability of short term health insurance and increase the usability of health reimbursement arrangements. As a result of the executive order, new regulations have been proposed that would facilitate association-based health insurance plans and promote the sale of more short term health insurance. The expansion of the use of short term health insurance may cause individuals and families to purchase short term health insurance instead of individual and family health insurance. If adopted, the proposed regulations relating to association health plans would allow small businesses to join industry or geographically-based associations and collectively purchase large group health insurance plans. Large group health insurance is not subject to many of the provisions of the Affordable Care Act, including the requirement that health insurance plans cover all of the essential health benefits defined under the Affordable Care Act. The goal of the proposed regulation is to reduce the cost of insurance for individuals who receive their health insurance under associations. The proposed regulations relating to association-based health insurance and short term health insurance could present new business opportunities for us, but also may reduce the size of the individual, family and small business health insurance markets that we address.

Summary of Selected Metrics

In addition to traditional financial metrics, we rely upon certain metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate strategic planning. Our commission revenue is influenced by a number of factors including:

the number of individuals on applications for Medicare-related, individual and family, small business and ancillary health insurance plans we submit to and are approved by the relevant health insurance carriers, and

the constrained lifetime value of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell as well as the estimated annual value of approved members for small business plans we sell.

30



Submitted Applications and Approved Members


The following table shows submitted applications and approved members by product for the three months ended March 31, 2017 and 2018:

 
Submitted Applications
 
Approved Members
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
 
 
2017
 
2018
 
Percent Change
 
2017
 
2018
 
Percent Change
Medicare (1)
 
 
 
 
 
 
 
 
 
 
 
Medicare Advantage
21,799

 
24,796

 
14
 %
 
21,465

 
24,620

 
15
 %
Medicare Supplement
4,540

 
6,388

 
41
 %
 
4,199

 
5,416

 
29
 %
Medicare Part D
4,938

 
3,845

 
(22
)%
 
5,132

 
4,302

 
(16
)%
Total Medicare
31,277

 
35,029

 
12
 %
 
30,796

 
34,338

 
12
 %
Individual and Family (2)
 
 
 
 
 
 
 
 
 
 
 
Non-Qualified Health Plans
14,264

 
3,886

 
(73
)%
 
24,799

 
9,213

 
(63
)%
Qualified Health Plans
7,747

 
2,684

 
(65
)%
 
16,604

 
14,686

 
(12
)%
Total Individual and Family
22,011

 
6,570

 
(70
)%
 
41,403

 
23,899

 
(42
)%
Ancillaries (3)
 
 
 
 
 
 
 
 
 
 
 
Short-term
24,285

 
19,495

 
(20
)%
 
21,251

 
20,996

 
(1
)%
Dental
23,378

 
12,993

 
(44
)%
 
24,734

 
19,524

 
(21
)%
Vision
9,857

 
5,584

 
(43
)%
 
10,753

 
6,595

 
(39
)%
Other
4,699

 
13,341

 
184
 %
 
5,028

 
9,026

 
80
 %
Total Ancillaries
62,219

 
51,413

 
(17
)%
 
61,766

 
56,141

 
(9
)%
Small Business (4)
1,162

 
1,720

 
48
 %
 
3,484

 
5,294

 
52
 %
Total
116,669

 
94,732

 
(19
)%
 
137,449

 
119,672

 
(13
)%

31


(1)
Medicare-related health insurance applications submitted on our website or through our customer care center during the period, including Medicare Advantage, Medicare Part D prescription drug and Medicare Supplement plans.
(2)
Major medical Individual and Family plan ("IFP") health insurance applications submitted on our website during the period. An applicant may submit more than one application. We define our IFP offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans.
(3)
Ancillary Plans consists primarily of short-term, dental and vision insurance plans submitted on our website during the period.
(4)
Applications for small business health insurance applications are counted as submitted when the applicant completes the application, the employees complete their applications, the applicant submits the application to us and we submit the application to the carrier.

Submitted Applications

Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application.

Medicare submitted applications grew 12% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to 41% growth in Medicare Supplement as a result of our acquisition of GoMedigap in January 2018. Individual and family plan submitted applications declined 70% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to the continuing turmoil in the individual and family plan market. The decline in the individual and family plan submitted applications also limited our ability to cross-sell ancillary plans, resulting in a decline of 17% in submitted applications for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Small business submitted applications grew 48% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to improved focus on key partnerships, technology enhancements and increased conversions.

Approved Members

Approved Members represents the number of individuals on submitted applications that were approved by the relevant insurance carrier for the identified product during the current period. The applications may be submitted in either the current period or prior periods. Approved members may not pay for their plan and become paying members.
Medicare total approved members grew 12% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. We experienced a shift in the mix of our Medicare enrollments in the first quarter to higher value Medicare Advantage and Medicare Supplement members. Approved Medicare Supplement plan members grew 29%, approved Medicare Advantage members grew 15% and approved members on Medicare Part D plans declined 16% compared to the first quarter of 2017. The growth in Medicare Supplement plan approved members was accelerated by our acquisition of GoMedigap, which closed in January of this year, while the decline in approved Medicare Part D members resulted from the reduced spending in our paid search channel. Individual and family plan approved members declined 42% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to the continuing turmoil in the individual and family plan market and a shift in the timing of the open enrollment period compared to prior years. Ancillary approved members declined 9% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to a decline in our cross-selling of dental and vision plans as a result of the decline in individual and family plan approved members, partially offset by growth in fixed indemnity and dental, vision and hearing plans, which we recently introduced. Small business approved members grew 52% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to improved focus on key partnerships, technology enhancements and increased conversions.

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Constrained Lifetime Value of Commissions Per Approved Member

The following table shows our estimated constrained lifetime value, or LTV, of commissions per approved member by product for the three months ended March 31, 2017 and 2018:
 
Three Months Ended March 31,
 
 
 
2017
 
2018
 
Percentage Change
Medicare
 
 
 
 
 
Medicare Advantage (1)
$
892

 
$
880

 
(1
)%
Medicare Supplement (1)
$
932

 
$
1,029

 
10
 %
Medicare Part D (1)
$
268

 
$
270

 
1
 %
 
 
 
 
 
 
Individual and Family
 
 
 
 
 
Non-Qualified Health Plans (1)
$
139

 
$
140

 
1
 %
Qualified Health Plans (1)
$
134

 
$
134

 
 %
 
 
 
 
 
 
Ancillaries
 
 
 
 
 
Short-term (1)
 
$
87

 
$
60

 
(31
)%
Dental (1)
$
71

 
$
74

 
4
 %
Vision (1)
$
53

 
$
51

 
(4
)%
 
 
 
 
 
 
Small Business (2)
$
168

 
$
178

 
6
 %
(1)
Constrained lifetime value of commissions per approved member represents commissions estimated to be collected over the estimated life of an approved member’s policy after applying constraints in accordance with our revenue recognition policy.The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, expected policy churn and applied constraints. These factors may result in varying values from period to period. For additional information on constraints see Note 1 - Summary of Business and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.


(2)
For small business the amount represents the estimated commissions we expect to collect from the plan over the following 12-months. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, expected policy churn and applied constraints. These factors may result in varying values from period to period.
The constrained LTV of commissions per approved member remained generally flat in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 across the Medicare and Individual, Family and Small Business segments. The constrained LTV of commissions per Medicare Supplement approved member increased 10% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily as a result of the more favorable lifetime value of commissions per approved member for Medicare Supplement plans sold since our acquisition of GoMedigap in January 2018. The constrained LTV of commissions per short-term approved member decreased 31% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily as a result of a regulation that reduced the maximum length of a short-term policy from one year to 90-days.


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Estimated Membership

Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the month of estimation.

The following table shows estimated membership by product for the three months ended March 31, 2017 and 2018:
 
As of March 31,
 
 
 
2017
 
2018
 
Percent Change
Medicare (1)
 
 
 
 
 
Medicare Advantage
174,561

 
218,685

 
25
 %
Medicare Supplement
24,654

 
58,507

 
137
 %
Medicare Part D
85,650

 
104,595

 
22
 %
Total Medicare
284,865

 
381,787

 
34
 %
Individual and Family (2)
265,201

 
182,655

 
(31
)%
Ancillaries (3)
 
 
 
 
 
Short-term
20,821

 
15,467

 
(26
)%
Dental
181,422

 
162,570

 
(10
)%
Vision
86,294

 
79,872

 
(7
)%
Other
23,361

 
35,423

 
52
 %
Total Ancillaries
311,898

 
293,332

 
(6
)%
Small Business (4)
30,743

 
35,545

 
16
 %
Total Estimated Membership
892,707

 
893,319

 
 %
(1)
For Medicare-related health insurance plans, we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to two months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. Estimated number of members active on Medicare-related health insurance as of the date indicated based on the number of members for whom we have received or applied a commission payment during the month of estimation.
(2)
To estimate the number of members on Individual and Family health insurance plans, we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for a month that is up to six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the period being estimated; and (ii) the number of approved members over that period (after reducing that number by the percentage of members who do not accept their approved policy from the same month of the previous year for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. For IFP health insurance plans, a member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members.
(3)
For ancillary health insurance plans (such as short-term, dental and vision insurance), we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers.
(4)
For small business health insurance plans, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported.


34



Health insurance carrier’s bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their policies do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date.
After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Health care reform and its impacts as well as other factors could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.
Medicare membership grew 34% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to 137% growth in Medicare Supplement membership as a result of our acquisition of GoMedigap in January 2018, as well as strong growth in our Medicare Advantage and Medicare Part D membership. Individual and family plan approved members declined 31% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to the continuing turmoil in the individual and family plan market. Ancillary membership declined 6% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 as a result of the decline in individual and family plan membership, partially offset by growth in fixed indemnity and dental, vision and hearing plans, which we recently introduced. Small business approved members grew 16% in the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to improved focus on key partnerships, technology enhancements and increased conversions.
Member Acquisition

Marketing initiatives are an important component of our strategy to increase revenue. Our marketing initiatives are focused on three primary member acquisition channels: direct, marketing partners and online advertising and are primarily designed to encourage consumers to complete an application for health insurance. In addition, we incur customer care and enrollment expenses in assisting applicants during the enrollment process.

35


The following table shows the variable marketing cost per approved member and the customer care and enrollment expense per approved member metrics for the three months ended March 31, 2017 and 2018:

 
Three Months Ended
March 31,
 
 
 
2017
 
2018
 
Percent Change
Variable marketing cost per approved member
 
 
 
 
 
Medicare variable marketing cost per approved Medicare Advantage ("MA")-equivalent member (1)
$
408

 
$
289

 
(29
)%
Individual and Family Plan ("IFP") variable marketing cost per approved IFP-equivalent member (2)
$
35

 
$
41

 
17
 %
 
 
 
 
 
 
Customer care and enrollment ("CC&E") expense per approved member
 
 
 
 
 
Medicare CC&E expense per approved MA-equivalent member (3)
$
337

 
$
350

 
4
 %
IFP CC&E expense per approved IFP-equivalent member (4)
$
42

 
$
43

 
2
 %
 
 
 
 
 
 
(1)
Variable marketing cost per approved MA-equivalent member represents direct costs incurred in member acquisition for Medicare Advantage, Medicare Supplement and Medicare Part D plans from our direct, marketing partners and online advertising channels divided by MA-equivalent approved members in a given period. MA-equivalent members is a derived metric and is equal to the sum of Medicare Part D approved members divided by 4, the number of Medicare Advantage approved members and the number of Medicare Supplement approved members in the given period.
(2)
Variable marketing cost per approved IFP-equivalent member represents direct costs incurred in member acquisition for IFP plans from our direct, marketing partners and online advertising channels divided by IFP-equivalent approved members in a given period. IFP-equivalent approved members is a derived metric and is equal to the sum of the number of short-term approved members divided by 3 and the IFP approved members in the given period.
(3)
Medicare CC&E expense per approved MA-equivalent member is equal to the CC&E expense of our Medicare business included in our operating costs and reported in our condensed consolidated statements of operations divided by MA-equivalent approved members in a given period. MA-equivalent approved members is a derived metric and is equal to the sum of Medicare Part D approved members divided by 4, the number of Medicare Advantage approved members and the number of Medicare Supplement approved members in the given period.
(4)
IFP CC&E expense per approved IFP-equivalent member is equal to the CC&E expense of our IFP business included in our operating costs and reported in our condensed consolidated statement of operations divided by IFP-equivalent approved members in a given period. IFP-equivalent approved members is a derived metric and is equal to the sum of the number of short-term approved members divided by 3 and the IFP approved members in the given period.

Critical Accounting Policies and Estimates  
 
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of operations may be affected. 
 
An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions and are most critical to understanding and evaluating our reported financial results are as follows:   
 
Revenue Recognition;
Stock-Based Compensation; 
Business Combinations; 
Realizability of Long-Lived Assets and;
Accounting for Income Taxes.

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Except for our revenue recognition accounting policy, which we revised as a result of adopting ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), there have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 19, 2018, that have had a material impact on our condensed consolidated financial statements and related notes. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2017, for a complete discussion of our other critical accounting policies and estimates other than our revenue recognition policy. For a discussion of our revenue recognition policy, please see Note 1 - Summary of Business and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.


37


Results of Operations  

The following table sets forth our operating results and related percentage of total revenues for the three months ended March 31, 2017 and 2018 (in thousands):

 
For the Three Months Ended March 31,
 
2017
 
2018
Revenue
 
 
 
 
 

 
 

Commission
$
38,837

 
93
 %
 
$
40,707

 
95
 %
Other
2,719

 
7
 %
 
2,363

 
5
 %
Total revenue
41,556

 
100
 %
 
43,070

 
100
 %
Operating costs and expenses:
 
 
 

 
 
 
 

Cost of revenue
181

 
 %
 
152

 
 %
Marketing and advertising
15,055

 
36
 %
 
15,002

 
35
 %
Customer care and enrollment
12,109

 
29
 %
 
13,239

 
31
 %
Technology and content
8,072

 
19
 %
 
8,341

 
19
 %
General and administrative
9,992

 
24
 %
 
10,691

 
25
 %
Restructuring charges

 
 %
 
1,856

 
4
 %
Acquisition costs

 
 %
 
58

 
 %
Amortization of intangible assets
260

 
1
 %
 
451

 
1
 %
Total operating costs and expenses
45,669

 
110
 %
 
49,790

 
116
 %
Loss from operations
(4,113
)
 
(10
)%
 
(6,720
)
 
(16
)%
Other income (expense), net
277

 
1
 %
 
184

 
 %
Loss before benefit for income taxes
(3,836
)
 
(9
)%
 
(6,536
)
 
(15
)%
Benefit for income taxes
(4,916
)
 
(12
)%
 
(1,691
)
 
(4
)%
Net income (loss)
$
1,080

 
3
 %
 
$
(4,845
)
 
(11
)%


Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands): 

 
Three Months Ended
March 31,
 
2017
 
2018
Marketing and advertising
$
215

 
$
370

Customer care and enrollment
12