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

FORM 10-Q

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

For the quarterly period ended March 31, 2019


OR

o  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)

2625 AUGUSTINE DRIVE, SECOND FLOOR
SANTA CLARA, CALIFORNIA, 95054
 (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 x NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES x NO ☐
    




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


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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
EHTH
The NASDAQ Stock Market LLC

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 30, 2019 was 22,649,067 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


4


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

 
March 31, 2019
 
December 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
135,475

 
$
13,089

Accounts receivable
3,381

 
3,601

Commissions receivable—current
113,834

 
134,190

Prepaid expenses and other current assets
6,483

 
5,288

Total current assets
259,173

 
156,168

Commissions receivable—non-current
214,377

 
211,668

Property and equipment, net
7,963

 
7,684

Operating lease right-of-use assets
25,730

 

Other assets
12,059

 
11,276

Intangible assets, net
11,702

 
12,249

Goodwill
40,233

 
40,233

Total assets
$
571,237

 
$
439,278

Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
4,360

 
$
5,688

Accrued compensation and benefits
11,373

 
20,763

Accrued marketing expenses
3,866

 
11,013

Earnout liability—current
26,500

 
20,730

Lease liabilities—current
3,430

 

Other current liabilities
5,528

 
2,425

Total current liabilities
55,057

 
60,619

Debt

 
5,000

Earnout liability—non-current

 
19,270

Deferred income taxes—non-current
44,358

 
47,901

Lease liabilities—non-current
24,150

 

Other non-current liabilities
2,022

 
3,339

Stockholders’ equity:
 
 
 
Common stock
34

 
31

Additional paid-in capital
445,652

 
298,024

Treasury stock, at cost
(199,998
)
 
(199,998
)
Retained earnings
199,806

 
204,965

Accumulated other comprehensive income
156

 
127

Total stockholders’ equity
445,650

 
303,149

Total liabilities and stockholders’ equity
$
571,237

 
$
439,278


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

5


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

 
Three Months Ended March 31,
 
2019
 
2018
 
 
 
 
Revenue
 
 
 
Commission
$
64,227

 
$
40,707

Other
4,546

 
2,363

Total revenue
68,773

 
43,070

Operating costs and expenses:
 
 
 
Cost of revenue
(77
)
 
152

Marketing and advertising
23,941

 
15,002

Customer care and enrollment
19,944

 
13,239

Technology and content
9,017

 
8,341

General and administrative
11,278

 
10,691

Acquisition costs

 
58

Change in fair value of earnout liability
13,306

 

Restructuring

 
1,856

Amortization of intangible assets
547

 
451

Total operating costs and expenses
77,956

 
49,790

Loss from operations
(9,183
)
 
(6,720
)
Other income, net
557

 
184

Loss before benefit from income taxes
(8,626
)
 
(6,536
)
Benefit from income taxes
(3,467
)
 
(1,691
)
Net loss
$
(5,159
)
 
$
(4,845
)
Net loss per share:
 
 
 
Basic and diluted
$
(0.24
)
 
$
(0.26
)
Weighted-average number of shares used in per share amounts:
 
 
 
Basic and diluted
21,831

 
18,873

Comprehensive loss
 
 
 

Net loss
$
(5,159
)
 
$
(4,845
)
Foreign currency translation adjustment, net of taxes
29

 
65

Comprehensive loss
$
(5,130
)
 
$
(4,780
)
 

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

6


EHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)

 
Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in
Capital
 
Shares
 
Amount
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total Stockholders’ Equity
Balance at December 31, 2018
30,863

 
$
31

 
$
298,024

 
(11,426
)
 
$
(199,998
)
 
$
204,965

 
$
127

 
$
303,149

Issuance of common stock in connection with exercise of common stock options and release of vested restricted stock units, net of cash used to net settle equity awards
172

 

 
2,367

 

 

 

 

 
2,367

Common stock traded for employee tax obligation

 

 
(1,280
)
 
(24
)
 

 

 

 
(1,280
)
Stock issued in equity offering
2,760

 
3

 
126,051

 

 

 

 

 
126,054

Stock issued for GoMedigap earnout
295

 

 
17,261

 

 

 

 

 
17,261

Stock-based compensation expense

 

 
3,229

 

 

 

 

 
3,229

Foreign currency translation adjustment, net of taxes

 

 

 

 

 

 
29

 
29

Net loss

 

 

 

 

 
(5,159
)
 

 
(5,159
)
Balance at March 31, 2019
34,090

 
$
34

 
$
445,652

 
(11,450
)
 
$
(199,998
)
 
$
199,806

 
$
156

 
$
445,650

 
Common Stock
 
 
 
Treasury Stock
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in
Capital
 
Shares
 
Amount
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total Stockholders’ Equity
Balance at December 31, 2017
29,880

 
$
30

 
$
281,706

 
(11,238
)
 
$
(199,998
)
 
$
204,725

 
$
201

 
$
286,664

Issuance of common stock in connection with exercise of common stock options and release of vested restricted stock units, net of cash used to net settle equity awards
60

 

 
109

 

 

 

 

 
109

Common stock traded for employee tax obligation

 

 
(286
)
 
(16
)
 

 

 

 
(286
)
Stock-based compensation expense

 

 
2,801

 

 

 

 

 
2,801

Stock issued for GoMedigap acquisition
295

 

 
5,595

 
 
 
 
 
 
 
 
 
5,595

Foreign currency translation adjustment, net of taxes

 

 

 

 

 

 
65

 
65

Net loss

 

 

 

 

 
(4,845
)
 

 
(4,845
)
Balance at March 31, 2018
30,235

 
$
30

 
$
289,925

 
(11,254
)
 
$
(199,998
)
 
$
199,880

 
$
266

 
$
290,103



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


7


EHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(in thousands, unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Operating activities
 

 
 
Net loss
$
(5,159
)
 
$
(4,845
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Deferred income taxes
(3,543
)
 
(1,736
)
Depreciation and amortization
655

 
619

Amortization of internally developed software
719

 
477

Amortization of intangible assets
547

 
451

Stock-based compensation expense
3,229

 
2,801

Change in fair value of earnout liability
13,306

 

Other non-cash items
(1,194
)
 
389

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
221

 
807

Commissions receivable
17,648

 
22,409

Prepaid expenses and other assets
1,111

 
(1,793
)
Accounts payable
(768
)
 
(567
)
Accrued compensation and benefits
(9,390
)
 
(6,912
)
Accrued marketing expenses
(7,147
)
 
(1,891
)
Accrued restructuring charges

 
1,053

Deferred revenue
2,897

 
(289
)
Accrued expense and other liabilities
(383
)
 
(236
)
Net cash provided by operating activities
12,749

 
10,737

Investing activities
 
 
 
Capitalized internal-use software and website development costs
(1,487
)
 
(989
)
Purchases of property and equipment and other assets
(1,509
)
 
(217
)
Acquisition of business, net of cash acquired

 
(14,929
)
Net cash used in investing activities
(2,996
)
 
(16,135
)
Financing activities
 
 
 
Proceeds from issuance of common stock, net of issuance costs
126,051

 

Net proceeds from exercise of common stock options
2,367

 
109

Cash used to net-share settle equity awards
(1,280
)
 
(286
)
Payment of debt
(5,000
)
 

Acquisition-related contingent payments
(9,542
)
 

Principal payments in connection with finance leases
(25
)
 
(26
)
Net cash provided by (used in) financing activities
112,571

 
(203
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
62

 
50

Net increase (decrease) in cash, cash equivalents and restricted cash
122,386

 
(5,551
)
Cash, cash equivalents and restricted cash at beginning of period
13,089

 
40,293

Cash, cash equivalents and restricted cash at end of period
$
135,475

 
$
34,742


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

8


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


Note 1Summary 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 March 31, 2019 and December 31, 2018 and the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2019 and 2018, the condensed consolidated statements of stockholders' equity, and the condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018, respectively, are unaudited. The condensed consolidated balance sheet data as of December 31, 2018 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 14, 2019. 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 with such rules and regulations. However, the Company believes the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2018 and include all adjustments necessary for the fair presentation of our financial position as of March 31, 2019 and December 31, 2018, our results of operations for the three months ended March 31, 2019 and 2018 and our cash flows for the three months ended March 31, 2019 and 2018. The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2019 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. The condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.

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

9


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

regarding our business operations. The performance measures of our segments include total revenue and profit. Our business structure is comprised of two operating segments:

Medicare; and
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, dental, vision, and short-term 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 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.

Use of Estimates—The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to, but not limited to, the useful lives of intangible assets, fair value of investments, recoverability of intangible assets, the commissions we expect to collect for each approved member cohort, valuation allowance for deferred income taxes, provision for income taxes and the assumptions used in determining stock-based compensation. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Actual results may differ from these estimates.

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.

Cash Equivalents—We consider all investments with an original maturity of 90 days or less from the date of purchase to be cash equivalents. Cash and cash equivalents are stated at fair value.


10


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

Revenue Recognition—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. Payment is typically received within 60 days of approval.

We account for revenue under ASC 606Revenue from Contracts with Customers. The core principle of ASC 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 ASC 606:

Identification of the contract, or contracts, with a customer.  A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.
Identification of the performance obligations in the contract. Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
Determination of the transaction price. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP") basis.    
Recognition of revenue when, or as, we satisfy a performance obligation. We satisfy performance obligations either over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised good or service to the customer.

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

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

For both Medicare Advantage and Medicare Part D prescription drug plans, we receive a fixed, annual commission payment from insurance carriers once the plan is approved by the carrier and either a fixed, monthly or annual commission payment beginning with and subsequent to the second plan year. 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. 


11


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

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

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

For the three months ended March 31, 2019 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:


12


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

 
Three Months Ended
 
March 31,
 
2019
 
2018
Medicare
 
 
 
Medicare Advantage
7
%
 
7
%
Medicare Supplement
5
%
 
5
%
Medicare Part D
5
%
 
5
%
 
 
 
 
Individual and Family
 
 
 
Non-Qualified Health Plans
15
%
 
15
%
Qualified Health Plans
20
%
 
20
%
 
 
 
 
Ancillaries
10
%
 
10
%
 
 
 
 
Small Business
%
 
%
 
 
 
 

Other Revenue—Our sponsorship and advertising program allows carriers to purchase advertising space in specific markets in a sponsorship area on our website. In return, we are typically paid a monthly fee, which is recognized over the period that advertising is displayed, and often a performance fee based on metrics such as submitted health insurance applications, which is recognized based on attainment of metrics. 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 ratably over the service period.

Our commercial technology licensing business allows carriers the use of our ecommerce platform to offer their own health insurance policies on their websites and 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 ratably on a straight-line basis over the estimated term of the customer relationship (generally the initial term of the agreement), commencing once the technology is available for use by the third party, and a performance fee based on metrics such as submitted health insurance applications. 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 based on data tracked by the third party. In instances where the performance criteria data is tracked by us, we recognize revenue in the period of performance and when all other revenue recognition criteria have been met. In instances where the performance criteria data is tracked by the third party, we recognize revenue at amounts in which reversal of such amounts is not likely to occur. Typically, this occurs through our receipt of a cash payment from the third party along with a detailed statement containing the data that is tracked by the third party.

Deferred Revenue—Deferred revenue includes deferred technology licensing implementation fees and amounts billed for 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.

Disaggregation of Revenue—The table below depicts the disaggregation of revenue by product for the three months ended March 31, 2019 and 2018 and is consistent with how we evaluate our financial performance (in thousands):

13


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


 
Three Months Ended
 
March 31, 2019
 
March 31, 2018
Commission Revenue:
 
 
 
Medicare
 
 
 
Medicare Advantage
$
39,843

 
$
21,935

Medicare Supplement
8,597

 
5,592

Medicare Part D
2,336

 
1,159

Total Medicare
50,776

 
28,686

Individual and Family (1)
 
 
 
Non-Qualified Health Plans
2,629

 
1,441

Qualified Health Plans
3,508

 
2,162

Total Individual and Family
6,137

 
3,603

Ancillaries
 
 
 
Short-term
1,316

 
1,250

Dental
790

 
1,219

Vision
462

 
340

Other
951

 
2,771

Total Ancillaries
3,519

 
5,580

Small Business
2,640

 
2,359

Commission Bonus
1,155

 
479

Total Commission Revenue
64,227

 
40,707

Other Revenue
4,546

 
2,363

Total Revenue
$
68,773

 
$
43,070

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

Incremental Costs to Obtain a Contract
We reviewed our sales compensation plans, which are directed at converting leads into approved members, and concluded that they are fulfillment costs and not costs to obtain a contract with a customer. Additionally, we reviewed compensation plans related to personnel responsible for identifying new health insurance carriers and entering into contracts with new health insurance carriers and concluded that no incremental costs are incurred to obtain such contracts.

Accounting Pronouncement Not Yet Adopted

Financial Instruments—Credit Losses (Topic 326)—In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326), which amends the guidance for accounting for assets which are potentially subject to credit risk. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for us beginning January 1, 2020 using a modified retrospective transition method. We are still in process of assessing the impact, if any, this ASU will have on our condensed consolidated financial statements.

Recently Adopted Accounting Pronouncement

14


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


Leases (Topic 842)—In February 2016, the 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; for lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. The guidance also eliminates existing real estate-specific provisions for all entities. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted the standard using the modified retrospective method on January 1, 2019. As a result of adopting the ASU, as of January 1, 2019, we recorded an increase to our right-of-use asset and lease liability of $23.3 million and $24.6 million, respectively, which are discussed in Note 11—Leases in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

Note 2Acquisition

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

The GoMedigap acquisition was accounted for using the acquisition method of accounting under ASC 805Business 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 receivablecurrent
4,371

Prepaid expenses and other current assets
11

Commission receivablenon-current
11,103

Property and equipment, net
174

Accounts payable
(110
)
Accrued compensation and benefits
(132
)
Other current liabilities
(130
)
Net tangible assets acquired
15,358

Intangible assets
6,800

Goodwill
26,137

Total intangible assets acquired
32,937

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.


15


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

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

Earnout liability—The earnout liability represents the fair value of the Earnout Consideration payable and will be adjusted to fair value at each reporting date until settled. Changes in fair value will be recognized in operations while changes in the earnout liability due to the passage of time will be recognized as other expense. The earnout liability will be adjusted to the extent the specified enrollment targets are not achieved. The first earnout liability settlement was made during the three months ended March 31, 2019, which consisted of a $9.5 million cash payment as well as a $17.3 million non-cash issuance of common stock. The second payment is expected to be made in the first quarter of 2020. See Note 4—Fair Value Measurement for additional information regarding change in fair value of the earnout liability for the three months ended March 31, 2019.

Fair Value Measurements—The assets acquired and liabilities assumed of GoMedigap have been recognized at fair value in accordance with ASC 820Fair 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).

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 ended December 31, 2018 and ending December 31, 2019 and eHealth’s simulated stock price at the time of payment. The Earnout Consideration payable 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 the three months ended March 31, 2019 totaled $13.3 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


16


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


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

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

Note 3Balance Sheet Accounts

Cash and Cash Equivalents—As of March 31, 2019 and December 31, 2018, our cash equivalents consisted of money market accounts that invested in U.S. government-sponsored enterprise bonds and discount notes, U.S. government treasury bills and notes and repurchase agreements collateralized by U.S. government obligations. As of March 31, 2019 and December 31, 2018, our cash equivalents carried no unrealized gains or losses. We had no restricted cash as of March 31, 2019.

As of March 31, 2019 and December 31, 2018, our cash and cash equivalent balances were invested as follows (in thousands):
 
March 31, 2019
 
December 31, 2018
Cash
$
27,501

 
$
12,766

Money market funds
107,974

 
323

Total cash and cash equivalents
$
135,475

 
$
13,089


Total Accounts Receivable—We do not require collateral or other security for our total accounts receivable. We believe the potential for collection issues with any of our customers was minimal as of March 31, 2019. Accordingly, our estimate for uncollectible amounts at March 31, 2019 was immaterial. Total accounts receivable as of March 31, 2019 and December 31, 2018 was comprised of the following (in thousands):

 
March 31, 2019
 
December 31, 2018
Accounts receivable
$
3,381

 
$
3,601

Commissions receivable—current
113,834

 
134,190

Commissions receivable—non-current
214,377

 
211,668

Total accounts receivable
$
331,592

 
$
349,459


Concentration of Credit Risk—Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents and total accounts receivable (which includes commissions receivable). We invest our cash and cash equivalents with major banks and financial institutions and, at times, such investments are in excess of federally insured limits. We also have deposits with major banks in China that are denominated in both U.S. dollars and Chinese Yuan Renminbi and are not insured by the U.S. federal government.

We do not require collateral or other security for our total accounts receivable. Carriers that represented 10% or more of our total accounts receivable balance of $331.6 million and $349.5 million as of March 31, 2019 and December 31, 2018, respectively, were as follows (in thousands):

 
March 31, 2019
 
December 31, 2018
UnitedHealthcare (1)
20
%
 
19
%
Humana
18
%
 
19
%
Aetna (2)
20
%
 
19
%


17


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

(1)
UnitedHealthcare also includes other carriers owned by UnitedHealthcare. 
(2)
Aetna also includes other carriers owned by Aetna.

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

 
March 31, 2019
 
December 31, 2018
Prepaid maintenance contracts
$
2,778

 
$
1,937

Equity issuance costs

 
294

Prepaid insurance
213

 
161

Prepaid rent
324

 
324

Income tax receivable
1,108

 
1,108

Prepaid advertising
610

 
62

Other current assets
1,450

 
1,402

Total prepaid expenses and other current assets
$
6,483

 
$
5,288


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):

 
March 31, 2019
 
 
 
December 31, 2018
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted-Average Remaining Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Technology
$
2,000

 
$
(778
)
 
$
1,222

 
1.8
 
$
2,000

 
$
(611
)
 
$
1,389

Pharmacy and customer relationships
9,500

 
(8,471
)
 
1,029

 
1.1
 
9,500

 
(8,234
)
 
1,266

Trade names, trademarks and website addresses
5,700

 
(1,363
)
 
4,337

 
8.7
 
5,700

 
(1,220
)
 
4,480

Total intangible assets subject to amortization
$
17,200

 
$
(10,612
)
 
6,588

 
 
 
$
17,200

 
$
(10,065
)
 
7,135

Indefinite-lived trademarks and domain names
 
 
 
 
5,114

 
Indefinite
 
 
 
 
 
5,114

Total intangible assets
 
 
 
 
$
11,702

 
 
 
 
 
 
 
$
12,249


As of March 31, 2019, 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
Remainder of 2019
$
499

 
$
712

 
$
427

 
$
1,638

2020
667

 
317

 
510

 
1,494

2021
56

 

 
480

 
536

2022

 

 
480

 
480

2023

 

 
480

 
480

Thereafter

 

 
1,960

 
1,960

Total
$
1,222

 
$
1,029

 
$
4,337

 
$
6,588




18


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

Note 4Fair 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).

 
March 31, 2019
 
December 31, 2018
 
Carrying Value
 
Level 1
 
Level 3
 
Total
 
Carrying Value
 
Level 1
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
107,974

 
$
107,974

 
$

 
$
107,974

 
$
323

 
$
323

 
$

 
$
323

Total assets measured and recorded at fair value
$
107,974

 
$
107,974

 
$

 
$
107,974

 
$
323

 
$
323

 
$

 
$
323

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnout liabilitycurrent
$
26,500

 
$

 
$
26,500

 
$
26,500

 
$
20,730

 
$

 
$
20,730

 
$
20,730

Earnout liabilitynon-current

 

 

 

 
19,270

 

 
19,270

 
19,270

Total liabilities measured and recorded at fair value
$
26,500

 
$

 
$
26,500

 
$
26,500

 
$
40,000

 
$

 
$
40,000

 
$
40,000


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

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

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 year ending December 31, 2019 and our simulated stock price at the time of payment.

Earnout liability activity during the three months ended March 31, 2019 was as follows (in thousands):

Balance at December 31, 2018
$
40,000

Settlement of first earnout liability
(26,800
)
Change in fair value
13,300

Balance at March 31, 2019
$
26,500


The first earnout liability settlement was made during the three months ended March 31, 2019, which consisted of a $9.5 million cash payment as well as a $17.3 million non-cash issuance of common stock.

19


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


Note 5Stockholder's Equity

2014 Equity Incentive Plan—The following table summarizes activity under our 2014 Equity Incentive Plan (the “2014 Plan”) for the three months ended March 31, 2019 (in thousands):

 
Shares Available for Grant
Shares available for grant December 31, 2018
512

Restricted stock units granted (1)

Options granted (2)

Restricted stock units cancelled (3)
37

Options cancelled
8

Shares available for grant March 31, 2019
557

  
(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, 2018
1,005

 
$
18.34

 
5.0
 
$
20,226

Granted

 
$

 
 
 
 
Exercised
(108
)
 
$
21.88

 
 
 
 
Cancelled
(11
)
 
$
33.30

 
 
 
 
Balance outstanding at March 31, 2019
886

 
$
17.72

 
5.0
 
$
39,521

Vested and expected to vest at March 31, 2019
845

 
$
17.50

 
5.0
 
$
37,912

Exercisable at March 31, 2019
439

 
$
14.46

 
4.4
 
$
21,006

 
(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 March 31, 2019 and December 31, 2018 and the exercise price multiplied by number of in-the-money options. 
 

20


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 (years)
 
Aggregate Intrinsic Value (2)
Unvested as of December 31, 2018
1,869

 
$
16.95

 
4.8
 
$
71,816

Granted

 
$

 
 
 
 
Vested
(64
)
 
$
13.56

 
 
 
 
Cancelled
(37
)
 
$
16.78

 
 
 
 
Unvested as of March 31, 2019
1,768

 
$
17.03

 
5.3
 
$
110,230


(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 March 31, 2019 and December 31, 2018, and the number of restricted stock units outstanding as of March 31, 2019 and December 31, 2018, respectively.   

Stock Repurchase Programs—We had no stock repurchase activity during the three months ended March 31, 2019. In addition to 10,663,888 shares repurchased under our past repurchase programs as of March 31, 2019, we have in treasury 785,615 shares that were previously surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of March 31, 2019 and December 31, 2018, we had a total of 11,449,503 shares and 11,426,292 shares, respectively, held in treasury. 

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

Stock-Based Compensation Expense—The following table summarizes stock-based compensation expense recorded during the three months ended March 31, 2019 and 2018 (in thousands): 

 
Three Months Ended
March 31,
 
2019
 
2018
Common stock options
$
602

 
$
498

Restricted stock units
2,627

 
2,303

Total stock-based compensation expense
$
3,229

 
$
2,801


The following table summarizes stock-based compensation expense by operating function for the three months ended March 31, 2019 and 2018 (in thousands): 

 
Three Months Ended
March 31,
 
2019
 
2018
Marketing and advertising
$
629

 
$
370

Customer care and enrollment
273

 
165

Technology and content
549

 
343

General and administrative
1,778

 
1,672

Restructuring

 
251

Total stock-based compensation expense
$
3,229

 
$
2,801



21


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

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

Note 6Income Taxes

The following table summarizes our benefit from income taxes and our effective tax rates for the three months ended March 31, 2019 and 2018 (in thousands, except effective tax rate):

 
Three Months Ended March 31,
 
2019
 
2018
Loss before benefit from income taxes
$
(8,626
)
 
$
(6,536
)
Benefit from income taxes
(3,467
)
 
(1,691
)
Effective tax rate
40.2
%
 
25.9
%

For the three months ended March 31, 2019, we recognized a benefit for income taxes of $3.5 million, representing an effective tax rate of 40.2% which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, and lobbying and other non-deductible expenses, partially offset by research and development credits. For the three months ended March 31, 2018, we recognized a benefit from income taxes of $1.7 million, representing an effective tax rate of 25.9%, 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.

Assessing the realizability of our deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. We forecast taxable income by considering all available positive and negative evidence, including our history of operating income and losses and our financial plans and estimates that we use to manage the business. These assumptions require significant judgment about future taxable income. As a result, the amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change. We continue to recognize our deferred tax assets as of March 31, 2019, as we believe it is more likely than not that the net deferred tax assets will be realized, with the exception of certain state net operating losses that are expected to expire unutilized which have a valuation allowance.

As a result of our adoption of ASC 606 using the full retrospective method, we recognized a significant deferred tax liability due to the resulting acceleration of revenue recognition while revenue for tax purposes will continue to be recognized as we collect 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, in 2018, 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 ASC 606 was applied.

Note 7Net Loss Per Share

For each of the three months ended March 31, 2019 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 loss per share consisted of the following (in thousands): 

 
Three Months Ended
March 31,
 
2019
 
2018
Common stock options
960

 
1,006

Restricted stock units
1,426

 
1,426

Total
2,386

 
2,432


Note 8Commitments and Contingencies

Operating Leases

Refer to Note 11—Leases for commitments related to our operating leases.

Contingencies

From time to time, we receive inquiries from governmental bodies and also may be subject to various legal proceedings and claims arising in the ordinary course of business. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our consolidated financial statements. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal proceedings or other contingencies could result in material costs, even if we ultimately prevail.


22


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

Legal Proceedings

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, 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 April 17, 2019, an individual filed a putative class action complaint against us that alleges we violated the Telephone Consumer Protection Act (“TCPA”), 47 U.S.C. §§ 227(b)(1) and (c)(5) and certain provisions of 47 C.F.R. § 64.1200 promulgated thereunder.  The complaint alleges, among other things, that we (i) made unsolicited telephone calls to the Plaintiff and putative class members using a prerecorded voice message in violation of 47 U.S.C. § 227(b)(1); and (ii) made more than one unsolicited telephone call to Plaintiff and putative class members within a 12-month period without express consent and without instituting procedures that comply with regulatory minimum standards for implementing Do Not Call in violation of 47 C.F.R. § 64.1200 and 47 U.S.C. § 227(c)(5).  The complaint seeks an order certifying two classes: (i) a class of individuals in the United States who we (or agents acting on our behalf) called using a prerecorded voice message for substantially the same reason we allegedly called the Plaintiff; and (ii) a class of individuals in the United States who we (or agents acting on our behalf) called more than one time within any 12-month period for substantially the same reason we allegedly called the Plaintiff. The complaint also seeks (i) an award of actual and/or statutory damages for the benefit of Plaintiff and the classes; (ii) an order declaring that our actions violate the TCPA; (iii) an injunction requiring us to cease all unsolicited calling activity and to otherwise protect the interest of the classes; and (iv) such further other relief as the court deems just and proper.

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 contractual service and licensing obligations as of March 31, 2019 (in thousands): 

For the Years Ending December 31,
Service and Licensing Obligations
Remainder of 2019
$
3,366

2020
2,462

2021
946

2022
434

2023
444

Thereafter
229

Total
$
7,881



23


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

Note 9Operating Segments, Geographic Information and Significant Customers

Operating Segments

We report segment information based on how our chief executive officer, who is 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, dental, vision, and short-term health 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 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.

24


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


The following table presents summary results of our operating segments for the three months ended March 31, 2019 and 2018 (in thousands):

 
Three Months Ended
March 31,
 
2019
 
2018
Revenue
 
 
 
Medicare
$
54,901

 
$
30,763

Individual, Family and Small Business
13,872

 
12,307

Total revenue
$
68,773

 
$
43,070

 
 
 
 
Segment profit
 
 
 
Medicare segment profit
$
10,826

 
$
3,180

Individual, Family and Small Business segment profit
6,024

 
3,488

Total segment profit
16,850

 
6,668

Corporate
(8,296
)
 
(7,854
)
Stock-based compensation expense
(3,229
)
 
(2,550
)
Depreciation and amortization
(655
)
 
(619
)
Acquisition costs

 
(58
)
Change in fair value of earnout liability
(13,306
)
 

Restructuring

 
(1,856
)
Amortization of intangible assets
(547
)
 
(451
)
Other income, net
557

 
184

Loss before benefit from income taxes
$
(8,626
)
 
$
(6,536
)

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

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 March 31, 2019 and December 31, 2018 were as follows (in thousands):  
 
March 31, 2019
 
December 31, 2018
United States
$
16,697

 
$
15,614

China
342

 
378

Total
$
17,039

 
$
15,992

 

25


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

Significant Customers

Substantially all revenue for the three months ended March 31, 2019 and 2018 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the three months ended March 31, 2019 and 2018 are presented in the table below: 

 
Three Months Ended
March 31,
 
2019
 
2018
Humana
23
%
 
15
%
UnitedHealthcare (1)
17
%
 
21
%
Aetna (2)
17
%
 
10
%

(1)
UnitedHealthcare also includes other carriers owned by UnitedHealthcare. 
(2)
Aetna also includes other carriers owned by Aetna.

As of March 31, 2019, our total outstanding accounts receivable balance was $331.6 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 10Restructuring
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.
Total pre-tax restructuring charges for the year ended December 31, 2018 were $1.9 million, which included approximately $1.6 million for employee termination benefits and $0.3 million in non-cash accelerated stock based compensation. Substantially all of the restructuring charges resulted in cash expenditures. The restructuring activities comprising the plan were completed by December 31, 2018, and there were no restructuring charges during the three months ended March 31, 2019.

Note 11Leases

Adoption of ASC 842


26


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

On January 1, 2019, we adopted ASC 842—Leases, using the modified retrospective method. We have operating and finance leases for our corporate offices and certain equipment. Our leases have remaining lease terms of 1 year to 11 years. Our operating lease expense accounted for under ASC 842 for the three months ended March 31, 2019 was $1.3 million, and our cash outflows related to operating leases were $0.9 million for the three months ended March 31, 2019. As a result of adopting the ASU, as of January 1, 2019, we recorded an increase to our right-of-use asset and lease liability of $23.3 million and $24.6 million, respectively. For the three months ended March 31, 2019, we recorded an additional lease liability of $3.5 million related to an amendment entered into on March 26, 2019 for our Salt Lake City office, which is described further below. The adoption of this ASU resulted in a total non-cash increase to our lease liability of $28.1 million for the three months ended March 31, 2019.

Supplemental information related to leases was as follows (in thousands):

 
March 31, 2019
Operating lease right-of-use assets
$
25,730

Operating lease liabilities
$
27,580

 
 
Weighted-average remaining lease term of operating leases (in years)
7.5

Weighted-average discount rate of operating leases
6.1
%

Maturities of operating lease liabilities are as follows (in thousands):

Year ending December 31,
 
Remainder of 2019
$
3,641

2020
5,502

2021
4,068

2022
4,189

2023
3,972

Thereafter
13,765

  Total lease payments
35,137

Less imputed interest
(7,557
)
  Total
$
27,580


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 February 2029. 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 March 26, 2019, we entered into an amendment to the lease agreement for our Salt Lake City, Utah, office to expand our office space to a total of 41,813 square feet from 28,915 square feet. The lease term for the expanded office space is expected to commence on May 1, 2019. The term of the lease for the original and expanded office space was also extended to terminate on the last day of the month that is 84 months after the commencement date of the expanded space. As of March 31, 2019, future minimum payments are expected to be $7.2 million over the remaining term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease.

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 expiration of one of our leases in Mountain View, California on December 31, 2018. The term of the lease is approximately one hundred twenty-three months, commencing on October 1, 2018 and ending on an estimated date of February 28, 2029. As of March 31, 2019, future minimum payments are expected to be $17.1 million over the remaining term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease.

27


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


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 26,878 square feet of office space in Austin, Texas. The term of this lease agreement is 90 months, commencing in September 2018 and ending in May 2026. As of March 31, 2019, future minimum payments are expected to be $4.4 million over the remaining term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease.

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 March 2012, we entered into an agreement to lease 18,272 square feet of office space in Mountain View, California. In connection with this lease agreement, 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. On November 2, 2018, we entered into an agreement to sublease this office space to a third party. As of March 31, 2019, future minimum payments are expected to be $3.3 million. The obligation as of March 31, 2019 was immaterial net of sublease income.


28


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

Note 12Debt

On September 17, 2018, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”), as administrative agent and collateral agent (the “Credit Agreement”). The Credit Agreement provides for a $40 million secured asset-backed revolving credit facility with a $5 million letter of credit sub-facility. The commitments under the Credit Agreement expire on September 17, 2021, at which time any amounts drawn under facility are contractually due.
The borrowing base under the Credit Agreement is comprised of an amount equal to (a) the lesser of (i) eighty percent (80%) of Eligible Commissions Receivables (as defined in the Credit Agreement) we actually collected by during the immediately preceding period of three months or (ii) eighty percent (80%) of our Eligible Commission Receivables for the immediately succeeding period of three months, plus (b) fifty percent (50%) of our Eligible Commission Receivables for the immediately succeeding period of six months (excluding the immediately succeeding period of three months), in each case subject to reserves established by RBC (the “Borrowing Base”). The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes. The Borrowers have the right to prepay the loans under the Credit Agreement in whole or in part at any time without penalty. Subject to availability under the Borrowing Base, amounts repaid may be reborrowed.
Amounts not borrowed under the Credit Agreement will be subject to a commitment fee of 0.5% per annum on the daily unused portion of the credit facility, to be paid in arrears on the first business day of each calendar quarter. At closing, the Company paid a one-time facility fee of 1.75% of the total commitments under the Credit Agreement. The Company is also obligated to pay other customary administration fees for a credit facility of this size and type.
Availability under the credit facility is up to the lesser of $40 million or the Borrowing Base, which may be reduced from time to time pursuant to the Credit Agreement. In addition, the Credit Agreement contains a financial covenant requiring that we maintain Excess Availability (as defined in the Credit Agreement) at or above $6 million at any time. As of March 31, 2019, we were in compliance with all debt covenants.
We incurred $1.2 million of issuance costs in connection with the Credit Agreement, which were capitalized as part of other assets on the balance sheet. As of March 31, 2019, the balance of these issuance costs was $1.0 million.
As of March 31, 2019, we had no outstanding principal amount under our revolving credit facility.
Note 13Public Offering of Common Stock

Pursuant to the effective registration statement which was filed on December 17, 2018, and amended on January 22, 2019, we entered into an underwriting agreement to issue a total of 2,760,000 shares of common stock, which included the exercise in full of the underwriters’ option to purchase 360,000 additional shares of common stock, at a price to the public of $48.50 per share in January 2019. Net proceeds from the offering were approximately $126.1 million after deducting underwriting discounts, commissions and expenses of the offering. We intend to use the net proceeds of the offering for general corporate purposes, including working capital.

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 future and existing healthcare laws and regulations 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 belief that the Internet will be a frequently utilized channel for researching and enrolling in health insurance plans; the anticipated trends and market opportunity for Medicare and health insurance plans; our execution during the Medicare annual enrollment period; the scalability of our Medicare business; our expectations regarding commission rates, payment rates, conversion rates, membership retention rates and membership acquisition costs; our estimates regarding membership and the constrained lifetime value of commissions per approved member; our expectations regarding the supply and demand of individual and family health insurance; our expectations relating to the seasonality of our business; our expectations relating to marketing and advertising expense and expected contributions from our marketing partner channel; the timing of our receipt of commission and other payments; our critical accounting policies and related estimates; our estimates relating to fair value of earnout liability; our belief that cash generated from operations and our

29


current cash and cash equivalents will be sufficient to fund operations for the next twelve months; our use of proceeds from our equity offering; future capital requirements; expected competition from government-run health insurance exchanges and other sources; the timing and source of our Medicare-related revenue; political, legislative, regulatory and legal challenges; the merits or potential impact of any lawsuits filed against us; as well as other statements regarding our future operations, financial condition, prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those risks associated with the impact of healthcare reform; our ability to retain existing members and enroll a large number of new members during the annual healthcare reform open enrollment period and Medicare annual enrollment period; the impact of annual enrollment period for the purchase of individual and family health insurance and its timing on our recognition of revenue; our ability to sell qualified health insurance plans to subsidy-eligible individuals and to enroll subsidy eligible individuals through government-run health insurance exchanges; the success of our health insurance benefit packages; our ability to comply with CMS guidance and impact on conversion rates as a result of the federal exchange changes to enrollment; competition, including competition from government-run health insurance exchanges; seasonality of our business and the fluctuation of our operating results; our ability to retain existing members and limit member turnover; changes in consumer behaviors and their selection of individual and family health insurance products, including the selection of products for which we receive lower commissions; product offerings among carriers and the resulting impact on our commission revenue; carriers exiting the market of selling individual and family health insurance and the resulting impact on our supply and commission revenue; our ability to execute on our growth strategy in the Medicare and small business health insurance markets; the impact of increased health insurance costs on demand; our ability to timely receive and accurately predict the amount of commission payments from health insurance carriers; medical loss ratio requirements; delays in our receipt of items required to recognize Medicare revenue; changes in member conversion rates; our ability to accurately estimate membership 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; consumer 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; the restrictions in our debt obligations; 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 2019, 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.

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. 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.

30



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. 2016-02, Leases (Topic 842)

In February 2016, the 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; for lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. The guidance also eliminates existing real estate-specific provisions for all entities. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We adopted the standard using the modified retrospective method on January 1, 2019. As a result of adopting the ASU, as of March 31, 2019, we recorded an increase to our right-of-use asset and lease liability of $25.7 million and $27.6 million, respectively, which are discussed in Note 11—Leases in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

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.


31



Submitted Applications and Approved Members

The following table shows submitted applications and approved members by product for the three months ended March 31, 2019 and 2018 (amounts in thousands):

 
Submitted Applications (1)
 
Approved Members (1)
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Percent Change
 
2019
 
2018
 
Percent Change
Medicare (2)
 
 
 
 
 
 
 
 
 
 
 
Medicare Advantage (3)
44,491

 
24,796

 
79
 %
 
40,741

 
24,620

 
65
 %
Medicare Supplement (3)
10,303

 
6,388

 
61
 %
 
8,631

 
5,416

 
59
 %
Medicare Part D
9,052

 
3,845

 
135
 %
 
8,527

 
4,302

 
98
 %
Total Medicare
63,846

 
35,029

 
82
 %
 
57,899

 
34,338

 
69
 %
Individual and Family (4)
 
 
 
 
 
 
 
 
 
 
 
Non-Qualified Health Plans
2,372

 
3,886

 
(39
)%
 
6,071

 
9,213

 
(34
)%
Qualified Health Plans
855

 
2,684

 
(68
)%
 
5,527

 
14,686

 
(62
)%
Total Individual and Family
3,227

 
6,570

 
(51
)%
 
11,598

 
23,899

 
(51
)%
Ancillaries (5)
 
 
 
 
 
 
 
 
 
 
 
Short-term
15,609

 
19,495

 
(20
)%
 
14,932

 
20,996

 
(29
)%
Dental
11,163

 
12,993

 
(14
)%
 
13,056

 
14,162

 
(8
)%
Vision
5,531

 
5,584

 
(1
)%
 
6,415

 
6,595

 
(3
)%
Other
6,213

 
13,341

 
(53
)%
 
5,212

 
9,246

 
(44
)%
Total Ancillaries
38,516

 
51,413

 
(25
)%
 
39,615

 
50,999

 
(22
)%
Small Business (6)
1,969

 
1,720

 
14
 %
 
4,252

 
5,294

 
(20
)%
Total
107,558

 
94,732

 
14
 %
 
113,364

 
114,530

 
(1
)%
(1)
The number of approved members is equal to the number of individuals on applications that were approved during the period presented and includes individuals on approved applications that were submitted prior to the period presented. A single application for some products may cover more than one individual. Each of the individuals on a single submitted application are counted as approved members after the application is approved.
(2)
Medicare-related health insurance applications submitted on our website or through our customer care center during the period, including Medicare Advantage, Medicare Part D prescription drug and Medicare Supplement plans.
(3)
The percentage of members who submit applications for Medicare Advantage and Medicare Supplement products online through our platform increased from 7% for the three months ended March 31, 2018 to 12% for the three months ended March 31, 2019.

(4)
Major medical Individual and Family plan ("IFP") health insurance applications submitted on our website during the period. An applicant may submit more than one application. We define our IFP offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans.
(5)
Ancillary Plans consists primarily of short-term, dental and vision insurance plans submitted on our website during the period.
(6)
Applications for small business health insurance applications are counted as submitted when the applicant completes the application, the employees complete their applications, the applicant submits the application to us and we submit the application to the carrier.

Submitted Applications

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

32



Medicare submitted applications grew 82% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to 79% growth in submitted applications for Medicare Advantage plans. Individual and family plan submitted applications declined 51% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to market conditions in the individual and family plan market. The decline in the individual and family plan submitted applications also limited our ability to cross-sell ancillary plans, resulting in a decline of 25% in submitted applications for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, which was primarily due to a 20% decrease in submitted applications for short-term plans year-over-year. Small business submitted applications grew 14% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to improved focus on key partnerships, technology enhancements and increased conversions.

Approved Members

Approved Members represents the number of individuals on submitted applications that were approved by the relevant insurance carrier for the identified product during the current period. The applications may be submitted in either the current period or prior periods. Approved members may not pay for their plan and become paying members.
Medicare total approved members grew 69% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Approved Medicare Advantage members grew 65%, approved Medicare Supplement plan members grew 59% and approved members on Medicare Part D plans increased 98% compared to the first quarter of 2018. Individual and family plan approved members declined 51% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to market conditions in the individual and family plan market. Ancillary approved members declined 22% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to a decline in our cross-selling of short-term plans as a result of the decline in individual and family plan approved members. Small business approved members declined 20% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 mainly due to timing of submitted application approval and a decrease in the percentage of approved applications.

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Constrained Lifetime Value of Commissions Per Approved Member

The following table shows our estimated constrained lifetime value, or LTV, of commissions per approved member by product for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Percentage Change
Medicare
 
 
 
 
 
Medicare Advantage
$
954

 
$
880

 
8
 %
Medicare Supplement
$
999

 
$
1,029

 
(3
)%
Medicare Part D
$
258

 
$
270

 
(4
)%
 
 
 
 
 
 
Individual and Family
 
 
 
 
 
Non-Qualified Health Plans
$
178

 
$
140

 
27
 %
Qualified Health Plans
$
194

 
$
134

 
45
 %
 
 
 
 
 
 
Ancillaries
 
 
 
 
 
Short-term
 
$
65

 
$
60

 
9
 %
Dental
$
71

 
$
74

 
(4
)%
Vision
$
63

 
$
51

 
23
 %
 
 
 
 
 
 
Small Business
$
155

 
$
178

 
(13
)%

Constrained lifetime value of commissions per approved member represents commissions estimated to be collected over the estimated life of an approved member’s policy after applying constraints in accordance with our revenue recognition policy. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, expected policy churn and applied constraints. These factors may result in varying values from period to period. We evaluate lifetime values on a quarterly basis, and as part of that process, we apply an estimated future churn factor that is based on observed historical results for that relevant product. For additional information on constraints see Note 1—Summary of Business and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.

For small business the constrained lifetime value represents the estimated commissions we expect to collect on each member covered by the policy over the following 12 months. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, expected policy churn and applied constraints. These factors may result in varying values from period to period.

The constrained LTV of commissions per approved member for Medicare Advantage increased 8% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to improved member retention and commission rate increases. The constrained LTV of commissions per Medicare Supplement approved member and constrained LTV of commissions per Medicare Part D approved member decreased 3% and 4%, respectively, in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of an increase in member churn. The constrained LTV of commissions per short-term approved member increased 9% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of selling higher priced plans and an increase in average duration.


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Estimated Membership

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

The following table shows estimated membership by product as of March 31, 2019 and 2018:
 
As of March 31,
 
 
 
2019
 
2018
 
Percent Change
Medicare (1)
 
 
 
 
 
Medicare Advantage
280,763

 
218,685

 
28
 %
Medicare Supplement
76,875

 
58,507

 
31
 %
Medicare Part D
146,239

 
104,595

 
40
 %
Total Medicare
503,877

 
381,787

 
32
 %
Individual and Family (2)
130,297

 
182,655

 
(29
)%
Ancillaries (3)
 
 
 
 
 
Short-term
23,626

 
15,467

 
53
 %
Dental
137,179

 
162,570

 
(16
)%
Vision
76,303

 
79,872

 
(4
)%
Other
37,985

 
35,423

 
7
 %
Total Ancillaries
275,093

 
293,332

 
(6
)%
Small Business (4)
42,972

 
35,545

 
21
 %
Total Estimated Membership
952,239

 
893,319

 
7
 %
(1)
For Medicare-related health insurance plans, we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to two months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of applicants since that month (after reducing that number using historical experience for an assumed number of members who do not accept their approved application from the same period the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. Estimated number of members active on Medicare-related health insurance as of the date indicated based on the number of members for whom we have received or applied a commission payment during the month of estimation.
(2)
To estimate the number of members on Individual and Family health insurance plans, we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for a month that is up to six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the period being estimated; and (ii) the number of approved applications since that month (after reducing that number by the percentage of members who do not accept their approved policy from the same month of the previous year for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation.
(3)
For ancillary health insurance plans (such as short-term, dental and vision insurance), we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers.
(4)
For small business health insurance plans, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported.


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Health insurance carriers bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their plans do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date.
After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Various circumstances could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate. A member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members.
Medicare membership grew 32% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to 28% growth in Medicare Advantage membership. Individual and family plan membership declined 29% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to market conditions in the individual and family plan market. Ancillary membership declined 6% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 as a result of the decline in individual and family plan membership, partially offset by growth in short-term plan members. Small business estimated membership grew 21% in the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to improved focus on key partnerships, technology enhancements and increased conversions.
Member Acquisition

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

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The following table shows our variable marketing cost per approved member and the customer care and enrollment expense per approved member metrics for the three months ended March 31, 2019 and 2018:

 
Three Months Ended March 31,
 
 
 
2019
 
2018
 
Percent Change
Medicare variable cost per approved member
 
 
 
 
 
Medicare variable marketing cost per approved Medicare Advantage ("MA")-equivalent member (1)
$
334

 
$
289

 
16
 %
Medicare customer care and enrollment ("CC&E") cost per approved MA-equivalent member (2)
$
344

 
$
350

 
(2
)%
  Total Medicare variable cost per approved member
$
678

 
$
639

 
6
 %
 
 
 
 
 
 
Individual and Family Plan ("IFP") variable cost per approved member
 
 
 
 
 
IFP variable marketing cost per approved IFP-equivalent member (3)
$
24

 
$
41

 
(42
)%
IFP CC&E cost per approved IFP-equivalent member (4)
$
66

 
$
43

 
55
 %
  Total IFP variable cost per approved member
$
90

 
$
84

 
7
 %

Expense Metrics Per Approved Member

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