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

FORM 10-Q

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

For the quarterly period ended June 30, 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 July 31, 2018 was 19,175,834 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,
 
June 30,
 
2017
 
2018
 
(Note 1)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
40,293

 
$
30,774

Accounts receivable
1,475

 
846

Commissions receivable - current
109,666

 
88,246

Prepaid expenses and other current assets
4,305

 
5,441

Total current assets
155,739

 
125,307

Commissions receivable - non-current
169,751

 
179,150

Property and equipment, net
4,705

 
4,640

Other assets
7,287

 
9,035

Intangible assets, net
7,540

 
13,342

Goodwill
14,096

 
40,233

Total assets
$
359,118

 
$
371,707

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

 
$
2,154

Accrued compensation and benefits
15,498

 
12,032

Accrued marketing expenses
4,693

 
2,742

Earnout liability - current

 
15,766

Other current liabilities
2,008

 
3,523

Total current liabilities
25,445

 
36,217

Earnout liability - non-current

 
14,434

Deferred income taxes - non-current
45,089

 
38,607

Other non-current liabilities
1,920

 
2,197

Stockholders’ equity:
 
 
 
Common stock
30

 
30

Additional paid-in capital
281,706

 
292,159

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

 
187,866

Accumulated other comprehensive income
201

 
195

Total stockholders’ equity
286,664

 
280,252

Total liabilities and stockholders’ equity
$
359,118

 
$
371,707


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

4


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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
 
(Note 1)
 
 
 
(Note 1)
 
 
Revenue
 
 
 
 
 
 
 
Commission
$
32,451

 
$
30,646

 
$
71,288

 
$
71,353

Other
2,115

 
2,011

 
4,834

 
4,374

Total revenue
34,566

 
32,657

 
76,122

 
75,727

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
56

 
151

 
237

 
303

Marketing and advertising
14,240

 
14,606

 
29,295

 
29,608

Customer care and enrollment
12,012

 
13,219

 
24,121

 
26,458

Technology and content
7,932

 
7,287

 
16,004

 
15,628

General and administrative
10,534

 
11,240

 
20,526

 
21,931

Change in fair value of earnout liability

 
2,500

 

 
2,500

Restructuring charges

 
9

 

 
1,865

Acquisition costs

 
18

 

 
76

Amortization of intangible assets
260

 
547

 
520

 
998

Total operating costs and expenses
45,034

 
49,577

 
90,703

 
99,367

Loss from operations
(10,468
)
 
(16,920
)
 
(14,581
)
 
(23,640
)
Other income (expense), net
298

 
296

 
575

 
480

Loss before benefit from income taxes
(10,170
)
 
(16,624
)
 
(14,006
)
 
(23,160
)
Benefit from income taxes
(8,664
)
 
(4,610
)
 
(13,580
)
 
(6,301
)
Net loss
$
(1,506
)
 
$
(12,014
)
 
$
(426
)
 
$
(16,859
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
(0.63
)
 
$
(0.02
)
 
$
(0.89
)
Diluted
$
(0.08
)
 
$
(0.63
)
 
$
(0.02
)
 
$
(0.89
)
Weighted-average number of shares used in per share amounts:
 
 
 
 
 
 
 
Basic
18,481

 
19,063

 
18,424

 
18,968

Diluted
18,481

 
19,063

 
18,424

 
18,968

Comprehensive loss
 

 
 

 
 
 
 
Net loss
$
(1,506
)
 
$
(12,014
)
 
$
(426
)
 
$
(16,859
)
Foreign currency translation adjustment, net of taxes
10

 
(71
)
 
18

 
(6
)
Comprehensive loss
$
(1,496
)
 
$
(12,085
)
 
$
(408
)
 
$
(16,865
)
 

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)



 
Six Months Ended June 30,
 
2017
 
2018
 
(Note 1)
 
 
Operating activities
 
 
 
Net loss
$
(426
)
 
$
(16,859
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Deferred income taxes
(12,131
)
 
(6,482
)
Depreciation and amortization
1,513

 
1,250

Amortization of internally developed software
651

 
1,011

Amortization of intangible assets
520

 
998

Stock-based compensation expense
4,702

 
5,932

Change in fair value of earnout liability

 
2,500

Other non-cash items
(52
)
 
376

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,386

 
629

Commissions receivable
20,145

 
27,495

Prepaid expenses and other assets
(88
)
 
(1,120
)
Accounts payable
(2,798
)
 
(1,202
)
Accrued compensation and benefits
(799
)
 
(3,598
)
Accrued marketing expenses
(2,771
)
 
(1,951
)
Deferred revenue
(490
)
 
376

Accrued expense and other liabilities
(1,902
)
 
1,081

Net cash provided by operating activities
7,460

 
10,436

Investing activities
 
 
 
Capitalized internal-use software and website development costs
(1,665
)
 
(2,763
)
Purchases of property and equipment and other assets
(1,105
)
 
(1,122
)
Acquisition of business, net of cash acquired

 
(14,929
)
Net cash used in investing activities
(2,770
)
 
(18,814
)
Financing activities
 
 
 
Proceeds from exercise of common stock options
49

 
668

Cash used to net-share settle equity awards
(396
)
 
(1,742
)
Principal payments in connection with capital leases
(62
)
 
(52
)
Net cash used in financing activities
(409
)
 
(1,126
)
Effect of exchange rate changes on cash and cash equivalents
18

 
(15
)
Net increase (decrease) in cash and cash equivalents
4,299

 
(9,519
)
Cash and cash equivalents at beginning of period
61,781

 
40,293

Cash and cash equivalents at end of period
$
66,080

 
$
30,774

 
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 June 30, 2018, the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2017 and 2018 and the condensed consolidated statements of cash flows for the six months ended June 30, 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. 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 June 30, 2018, our results of operations for the three and six months ended June 30, 2017 and 2018 and our cash flows for the six months ended June 30, 2017 and 2018. The results for the three and six months ended June 30, 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 finance or operating lease. The guidance also eliminates existing real estate-specific provisions for all entities. The new

7


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

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. While we are currently evaluating the impact of adopting ASU 2016-02, based on the lease portfolio as of June 30, 2018, we anticipate recording lease assets and liabilities of approximately $31.7 million on its Condensed Balance Sheets, with no material impact to its condensed consolidated statements of comprehensive loss. However, the ultimate impact of adopting ASU 2016-02 will depend on our lease portfolio as of the adoption date.

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 early adopted ASU 2017-04 in the first quarter of 2018. The adoption of this new standard has not materially impacted 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 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 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 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 health insurance carrier may

9


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

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. 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 lifetime value" 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 lifetime value 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 June 30, 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 lifetime value of commissions per approved member are as follows:

 
Three Months Ended
 
June 30,
 
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
%
 
 
 
 
Ancillary
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 standalone selling price method.

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 and six months ended June 30, 2017 and 2018 and is consistent with how we evaluate our financial performance:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2018
 
2017
 
2018
Commission Revenue:
 
 
 
 
 
 
 
Medicare
 
 
 
 
 
 
 
Medicare Advantage
$
18,677

 
$
17,738

 
$
37,882

 
$
39,673

Medicare Supplement
2,886

 
5,355

 
6,800

 
10,947

Medicare Part D
1,203

 
715

 
2,581

 
1,874

Total Medicare
22,766

 
23,808

 
47,263

 
52,494

Individual and Family (1)
 
 
 
 
 
 
 
Non-Qualified Health Plans
1,988

 
1,069

 
5,761

 
2,510

Qualified Health Plans
2,634

 
1,675

 
5,766

 
3,837

Total Individual and Family
4,622

 
2,744

 
11,527

 
6,347

Ancillary
 
 
 
 
 
 
 
Short-term
1,029

 
1,293

 
2,875

 
2,543

Dental
1,003

 
147

 
2,850

 
1,366

Vision
282

 
391

 
852

 
731

Other
762

 
(118
)
 
1,527

 
2,653

Total Ancillary
3,076

 
1,713

 
8,104

 
7,293

Small Business
1,532

 
1,772

 
3,456

 
4,131

Commission Bonus
455

 
609

 
938

 
1,088

Total Commission Revenue
32,451

 
30,646

 
71,288

 
71,353

Other Revenue
2,115

 
2,011

 
4,834

 
4,374

Total Revenue
$
34,566

 
$
32,657

 
$
76,122

 
$
75,727

(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

12


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

(expense), net for these books-of-business for the three and six months ended June 30, 2017 and 2018 totaled $0.5 million and $0.4 million, respectively.
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 health insurance carrier, which we define as our 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 deficit)
$
(20,796
)
 
$
225,521

 
$
204,725


 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Statements of Operations
As
Reported
 
ASC 606 Adoption Adjustment
 
As
Adjusted
 
As
Reported
 
ASC 606 Adoption Adjustment
 
As
Adjusted
Revenue
$
27,957

 
$
6,609

 
$
34,566

 
$
106,896

 
$
(30,774
)
 
$
76,122

Cost of revenue
$
204

 
$
(148
)
 
$
56

 
$
1,833

 
$
(1,596
)
 
$
237

Other income, net
$
90

 
$
208

 
$
298

 
$
116

 
$
459

 
$
575

Provision (benefit) from income taxes
$
125

 
$
(8,789
)
 
$
(8,664
)
 
$
(1,448
)
 
$
(12,132
)
 
$
(13,580
)
Net income (loss)
$
(17,260
)
 
$
15,754

 
$
(1,506
)
 
$
16,161

 
$
(16,587
)
 
$
(426
)
Net income (loss) per diluted share
$
(0.93
)
 
$
0.85

 
$
(0.08
)
 
$
0.86

 
$
(0.90
)
 
$
(0.02
)

13


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


 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
Segment Information
As
Reported
 
ASC 606 Adoption Adjustment
 
As
Adjusted
 
As
Reported
 
ASC 606 Adoption Adjustment
 
As
Adjusted
Revenue
 
 
 
 
 
 
 
 
 
 
 
Medicare
$
11,014

 
$
13,148

 
$
24,162

 
$
68,988

 
$
(19,416
)
 
$
49,572

Individual, Family and Small Business
16,943

 
(6,539
)
 
10,404

 
37,908

 
(11,358
)
 
26,550

Total revenue
$
27,957

 
$
6,609

 
$
34,566

 
$
106,896

 
$
(30,774
)
 
$
76,122

 
 
 
 
 
 
 
 
 
 
 
 
Segment profit (loss)
 
 
 
 
 
 
 
 
 
 
 
Medicare segment profit (loss)
$
(15,107
)
 
$
13,094

 
$
(2,013
)
 
$
15,588

 
$
(18,530
)
 
$
(2,942
)
Individual, Family and Small Business segment profit
8,404

 
(6,339
)
 
2,065

 
19,483

 
(10,648
)
 
8,835

Total segment profit (loss)
$
(6,703
)
 
$
6,755

 
$
52

 
$
35,071

 
$
(29,178
)
 
$
5,893




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 of cash acquired, and 294,637 shares of our common stock. In addition, the members of GoMedigap 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 income (loss) from operations. 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 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).


15


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

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. The earnout liability was part of the acquisition consideration and will be adjusted to fair value at each reporting date until settled. The fair value adjustments to the earnout liability during both the three and six months ended June 30, 2018 totaled $2.5 million. We will continue to update the key assumptions each period and record any fair value adjustments, as necessary.

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 are amortizing the existing technology and trade name using the 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 of acquisition-related costs during the six months ended June 30, 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 June 30, 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 June 30, 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 or six months ended June 30, 2017 and 2018.

As of December 31, 2017 and June 30, 2018, our cash and cash equivalent balances were invested as follows (in thousands):
 
December 31, 2017
 
June 30, 2018
Cash
$
5,098

 
$
7,396

Money market funds
35,195

 
23,378

Total cash and cash equivalents
$
40,293

 
$
30,774



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

 
December 31, 2017
 
June 30, 2018
Prepaid maintenance contracts
$
1,945

 
$
1,849

Prepaid insurance
490

 
1,169

Prepaid rent
311

 
508

Other current assets
1,559

 
1,915

Total prepaid expenses and other current assets
$
4,305

 
$
5,441



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
 
June 30, 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

 
$
(1,978
)
 
$
1,722

 
2.6 years
Pharmacy and customer relationships
10,100

 
(7,884
)
 
2,216

 
10,100

 
(8,358
)
 
1,742

 
1.8 years
Trade names, trademarks and website addresses
907

 
(697
)
 
210

 
5,707

 
(943
)
 
4,764

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

 
$
(10,281
)
 
2,426

 
$
19,507

 
$
(11,279
)
 
8,228

 
 
Indefinite-lived trademarks and domain names
 
 
 
 
5,114

 
 
 
 
 
5,114

 
Indefinite
Total intangible assets
 
 
 
 
$
7,540

 
 
 
 
 
$
13,342

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





17


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

As of June 30, 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
$
333

 
$
475

 
$
284

 
$
1,092

2019
667

 
950

 
570

 
2,187

2020
667

 
317

 
510

 
1,494

2021
55

 

 
480

 
535

2022

 

 
480

 
480

Thereafter

 

 
2,440

 
2,440

Total
$
1,722

 
$
1,742

 
$
4,764

 
$
8,228



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
 
June 30, 2018
 
Carrying Value
 
Level 1
 
Total
 
Carrying Value
 
Level 1
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
35,195

 
$
35,195

 
$
35,195

 
$
23,378

 
$
23,378

 
$

 
$
23,378

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

 
$
35,195

 
$
35,195

 
$
23,378

 
$
23,378

 
$

 
$
23,378

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnout liability - current
$

 
$

 
$

 
$
15,766

 
$

 
$
15,766

 
$
15,766

Earnout liability - non-current

 

 

 
14,434

 

 
14,434

 
14,434

Total liabilities measured and recorded at fair value
$

 
$

 
$

 
$
30,200

 
$

 
$
30,200

 
$
30,200


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. See Note 2 - Acquisition for additional information on the earnout consideration.

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 six months ended June 30, 2018 (in thousands):

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

Restricted stock units granted 1
(499
)
Options granted2
(111
)
Restricted stock units cancelled 3
112

Options cancelled
17

Shares available for grant June 30, 2018
928

  
(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
111

 
$
15.69

 
 
 
 
Exercised
(46
)
 
$
13.47

 
 
 


Cancelled
(95
)
 
$
25.19

 
 
 
 
Balance outstanding at June 30, 2018
953

 
$
16.45

 
4.7
 
$
6,344

Vested and expected to vest at June 30, 2018
909

 
$
16.45

 
4.7
 
$
6,083

Exercisable at June 30, 2018
437

 
$
17.38

 
3.6
 
$
2,945

 
(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 June 30, 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
499

 
$
14.03

 
 
 
 

Vested
(264
)
 
$
14.04

 
 
 
 

Cancelled
(112
)
 
$
16.05

 
 
 
 

Unvested as of June 30, 2018
1,868

 
$
14.92

 
5.8
 
$
41,286


(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 June 30, 2018 and the number of restricted stock units outstanding as of December 31, 2017 and June 30, 2018, respectively.   

Stock Repurchase Programs — We had no stock repurchase activity during the six months ended June 30, 2018. In addition to 10,663,888 shares repurchased under our past repurchase programs as of June 30, 2018, we have in treasury 660,493 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 June 30, 2018, we had a total of 11,237,995 shares and 11,324,381 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 and six months ended June 30, 2017 and 2018 (in thousands): 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Common stock options
$
714

 
$
436

 
$
901

 
$
934

Restricted stock units
1,855

 
2,695

 
3,801

 
4,998

Total stock-based compensation expense
$
2,569

 
$
3,131

 
$
4,702

 
$
5,932



The following table summarizes stock-based compensation expense by operating function for the three and six months ended June 30, 2017 and 2018 (in thousands): 

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Marketing and advertising
$
220

 
$
553

 
$
435

 
$
923

Customer care and enrollment
124

 
206

 
136

 
371

Technology and content
274

 
383

 
668

 
726

General and administrative
1,951

 
1,989

 
3,463

 
3,661

Restructuring

 

 

 
251

Total stock-based compensation expense
$
2,569

 
$
3,131

 
$
4,702

 
$
5,932



20


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

During the six months ended June 30, 2018, as part of our workforce reduction as discussed in Note 10 - Restructuring Charges, we accelerated the vesting dates of certain stock options and restricted stock units granted to a former employee. We recorded $0.3 million of incremental stock-based compensation expense in connection with this modification.

Note 6 - Income Taxes

The following table summarizes our benefit from income taxes and our effective tax rates for the three and six months ended June 30, 2017 and 2018 (in thousands, except effective tax rate):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Loss before benefit from income taxes
$
(10,170
)
 
$
(16,624
)
 
$
(14,006
)
 
$
(23,160
)
Benefit from income taxes
$
(8,664
)
 
$
(4,610
)
 
$
(13,580
)
 
$
(6,301
)
Effective tax rate
85.2
%
 
27.7
%
 
97.0
%
 
27.2
%


For the three months ended June 30, 2018, we recognized a benefit from income taxes of $4.6 million, representing an effective tax rate of 28%, which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, non-deductible lobbying expenses, and foreign income inclusions, partially offset by research and development credits. For the three months ended June 30, 2017, we recognized a benefit from income taxes of $8.7 million, representing an effective tax rate of 85%, which was higher than the statutory federal tax 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.

For the six months ended June 30, 2018, we recognized a benefit from income taxes of $6.3 million, representing an effective tax rate of 27%, which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, non-deductible lobbying expenses, and foreign income inclusions, partially offset by research and development credits. For the six months ended June 30, 2017, we recognized a benefit from income taxes of $13.6 million, representing an effective tax rate of 97%, which was higher than the statutory federal tax 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.

As a result of our adoption of Topic 606 using the full retrospective method, we recognized a significant deferred tax liability in our recasted opening balance sheet due to the resulting acceleration of revenue recognition while revenue for tax purposes will continue to be recognized as we collect cash. 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 significantly increased deferred tax liability, we reversed the valuation allowance recorded against our U.S. deferred tax assets as of January 1, 2015, the earliest period to which the retrospective adoption of Topic 606 was applied. We continue to recognize all our deferred tax assets as of June 30, 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 Jobs Act on our provision (benefit) 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 deferred tax balances. Our estimated annual effective tax rate has been adjusted for the impact of the Jobs Act including, among other things, certain limitations 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 of June 30, 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.


21


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

Note 7 - Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period. Diluted net 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 loss per share by application of the treasury stock method.  

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

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Basic:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Net loss
$
(1,506
)
 
$
(12,014
)
 
$
(426
)
 
$
(16,859
)
Denominator:
 
 
 
 
 
 
 
Weighted-average number of common stock shares outstanding
18,481

 
19,063

 
18,424

 
18,968

Net loss per share—basic:
$
(0.08
)
 
$
(0.63
)
 
$
(0.02
)
 
$
(0.89
)
Diluted:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Net loss
$
(1,506
)
 
$
(12,014
)
 
$
(426
)
 
$
(16,859
)
Denominator:
 

 
 

 
 

 
 

Net weighted average number of common stock shares outstanding
18,481

 
19,063

 
18,424

 
18,968

Dilutive effect of potential common stock

 

 

 

Total common stock shares used in per share calculation
18,481

 
19,063

 
18,424

 
18,968

Net loss per share—diluted:
$
(0.08
)
 
$
(0.63
)
 
$
(0.02
)
 
$
(0.89
)

For the three and six months ended June 30, 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 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 June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Common stock options
841

 
1,021

 
916

 
1,013

Restricted stock units
1,094

 
1,632

 
1,109

 
1,581

Total
1,935

 
2,653

 
2,025

 
2,594



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

22


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

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 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 was 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 June 30, 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 filed a complaint against us in the Superior Court of the State of California for the County of Sacramento.  The plaintiff’s complaint was 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 only recently commenced, and as a result we cannot estimate the likelihood of liability or the amount of potential damages.

On May 8, 2018, an individual filed a putative class action complaint against us.  The complaint alleges that we violated the Telephone Consumer Protection Act, 47 U.S.C. § 227(c) and certain provisions of 47 C.F.R. § 64.1200 promulgated thereunder by initiating or causing to be initiated telephone solicitations to telephone subscribers who registered their respective telephone numbers on the National Do Not Call Registry.  The complaint alleges, among other things, that we (i) made more than one unsolicited telephone call to Plaintiff and putative class members within a 12-month period without express consent to place such calls in violation of 47 U.S.C. § 227(c)(5); and (ii) initiated calls for telemarketing purposes without instituting procedures that comply with regulatory minimum standards for implementing Do Not Call in violation of 47 C.F.R. § 64.1200(d).  The complaint seeks (i) an order certifying a class of individuals in the United States who (A) received more than one telephone call made by or on behalf of eHealth within a 12-month period; and (B) to a telephone number that had been registered with the National Do Not Call Registry for at least 30 days; (ii) an award of actual and statutory damages for each negligent violation to each member of the class pursuant to 47 U.S.C. § 227(b)(3)(B); (iii) an award of actual and statutory damages for each knowing and/or willful violation to each member of the class pursuant to 47 U.S.C. § 227(b)(3)(A); (iv) an injunction requiring us and our agents to cease all unsolicited telephone activities and otherwise protecting the interest of the class pursuant to 47 U.S.C. § 227(b)(3)(A); and (v) pre-judgment and post-judgment interest on monetary relief. Due to the preliminary nature of this matter and uncertainty of litigation, we are unable at this time to estimate the likelihood of liability or the amount of potential damages.

23


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


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 2028. 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. 

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 October 1, 2018 and ending on an estimated date of December 31, 2028. Future minimum lease payments under this lease are expected to be $17.7 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.

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.  

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 June 30, 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 June 30, 2018 (in thousands): 


24


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

For the Years Ending December 31,
Operating Lease Obligations
 
Service and Licensing Obligations
 
Total Obligations
2018
$
2,177

 
$
963

 
$
3,140

2019
4,966

 
1,681

 
6,647

2020
5,238

 
719

 
5,957

2021
3,769

 

 
3,769

2022
3,881

 

 
3,881

Thereafter
13,852

 

 
13,852

Total
$
33,883

 
$
3,363

 
$
37,246



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 customers, including but not limited to, short-term, dental and vision 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.

25


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



The following table presents summary results of our operating segments for the three and six months ended June 30, 2017 and 2018 (in thousands):

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Revenue
 
 
 
 
 
 
 
Medicare
$
24,162

 
$
25,468

 
$
49,572

 
$
56,231

Individual, Family and Small Business
10,404

 
7,189

 
26,550

 
19,496

Total revenue
$
34,566

 
$
32,657

 
$
76,122

 
$
75,727

 
 
 
 
 
 
 
 
Segment profit (loss)
 
 
 
 
 
 
 
Medicare segment profit (loss)
$
(2,013
)
 
$
(1,473
)
 
$
(2,942
)
 
$
1,707

Individual, Family and Small Business segment profit (loss)
2,065

 
(617
)
 
8,835

 
2,871

Total segment profit (loss)
52

 
(2,090
)
 
5,893

 
4,578

Corporate
(6,940
)
 
(7,994
)
 
(13,739
)
 
(15,848
)
Stock-based compensation expense
(2,569
)
 
(3,131
)
 
(4,702
)
 
(5,681
)
Depreciation and amortization
(751
)
 
(631
)
 
(1,513
)
 
(1,250
)
Change in fair value of earnout liability

 
(2,500
)
 

 
(2,500
)
Restructuring charges

 
(9
)
 

 
(1,865
)
Acquisition costs

 
(18
)
 

 
(76
)
Amortization of intangible assets
(260
)
 
(547
)
 
(520
)
 
(998
)
Other income (expense), net
298

 
296

 
575

 
480

Loss before benefit from income taxes
$
(10,170
)
 
$
(16,624
)
 
$
(14,006
)
 
$
(23,160
)

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.

Geographic Information

Our long-lived assets consisted primarily of property and equipment and internally-developed software. 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 June 30, 2018 were as follows (in thousands):  
 
Dec 31,
 
June 30,
 
2017
 
2018
United States
$
11,211

 
$
12,973

China
550

 
469

Total
$
11,761

 
$
13,442

 

26


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

Significant Customers

Substantially all revenue for the three and six months ended June 30, 2017 and 2018 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the three and six months ended June 30, 2017 and 2018 are presented in the table below: 

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2018
 
2017
 
2018
UnitedHealthcare 1
21
%
 
24
%
 
22
%
 
23
%
Humana
16
%
 
14
%
 
16
%
 
14
%

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


As of June 30, 2018, our total outstanding commissions receivable balance was $267.4 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 recognized $1.9 million in pre-tax restructuring charges, which included approximately $1.6 million for employee termination benefits and $0.3 million in non-cash accelerated stock based compensation in the six months ended June 30, 2018. The restructuring activities comprising the plan were completed during the three months ended June 30, 2018.

The following table summarizes the total cash and non-cash restructuring charges recognized during the six months ended June 30, 2018 (in thousands): 

Employee termination costs
$
1,605

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

Other restructuring related costs
9

Total restructuring charges
$
1,865


The following table summarizes the accrued restructuring charges activity during the six months ended June 30, 2018 (in thousands):

 
Six Months Ended June 30, 2018
 
Beginning balance
 
Charges
 
Payments
 
Ending balance
Employee termination costs
$

 
$
1,605

 
$
(1,490
)
 
$
115

Accrued restructuring charges - current
$

 
$
1,605

 
$
(1,490
)
 
$
115




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 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 ; 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, including short-term health insurance; our expectations relating to the seasonality of our business; our expectations relating to marketing and advertising expense and expected contributions from our marketing partner channel; the timing of our receipt of commission payments; our critical accounting policies and related estimates; 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; 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; the success of our sale of short-term health insurance and 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 and lifetime value of commissions; 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 Topic 606 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. We now recognize revenue based on an estimate of 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.


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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 adopted that would facilitate association-based health insurance plans and promote the sale of more short-term health insurance. The regulations relating to association health plans allow small businesses to join industry or geographically-based associations and collectively purchase large group health insurance plans. Unlike small group health insurance, 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 regulation is to reduce the cost of insurance for individuals who receive their health insurance under associations. The regulations relating to short-term health insurance plans extend the initial duration of short-term health insurance from three months to less than one year and allow for short-term health insurance plans to be renewed as long as the total duration of the plan does not exceed thirty six months. 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. The 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 or otherwise adversely impact our business and operating results.

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.


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.

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The following table shows submitted applications by product for the three and six months ended June 30, 2017 and 2018:

 
Submitted Applications
 
Submitted Applications
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
Percent Change
 
2017
 
2018
 
Percent Change
Medicare (1)
 
 
 
 
 
 
 
 
 
 
 
Medicare Advantage
23,071

 
23,149

 
 %
 
44,870

 
47,945

 
7
 %
Medicare Supplement
4,157

 
6,868

 
65
 %
 
8,697

 
13,256

 
52
 %
Medicare Part D
3,938

 
3,739

 
(5
)%
 
8,876

 
7,584

 
(15
)%
Total Medicare
31,166

 
33,756

 
8
 %
 
62,443

 
68,785

 
10
 %
Individual and Family (2)
 
 
 
 
 
 
 
 
 
 
 
Non-Qualified Health Plans
4,098

 
1,309

 
(68
)%
 
18,362

 
5,195

 
(72
)%
Qualified Health Plans
1,327

 
1,037

 
(22
)%
 
9,074

 
3,721

 
(59
)%
Total Individual and Family
5,425

 
2,346

 
(57
)%
 
27,436

 
8,916

 
(68
)%
Ancillary (3)
 
 
 
 
 
 
 
 
 
 
 
Short-term
22,414

 
25,779

 
15
 %