We are the leading private online source of health insurance for individuals, families and small businesses. Through our website addresses (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, 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.
We sell a greater number of Medicare plans in the fourth quarter of the year 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, compared to the number of Medicare plans we sell during the first, second or third quarters of each year. During 2013, 2014 and 2015, 68%, 62% and 56%, respectively, of our Medicare plan-related applications were submitted during the fourth quarter. During the fourth quarter, we also generate the majority of commission revenues related to new Medicare plan-related enrollments. Historically, we recognized a majority of our renewal Medicare Advantage and Medicare Part D prescription drug plan commission revenue in the first quarter of each year as the majority of policies sold during the annual enrollment period typically renew on January 1 of each year. As a result of a new regulation issued by CMS, which changed the definition of a plan year from being 12-months from the effective date of a policy to January 1 through December 31 of each year, substantially all Medicare Advantage and Medicare Part D prescription drug policies renewed on January 1, regardless of the month the policy went into effect. The regulation resulted in our recording substantially all of our Medicare Advantage and Medicare Part D prescription drug plan renewal commission revenue in the first quarter of 2015 and recognized minimal renewal commission revenue in the second, third or fourth quarters of 2015 for these products. In addition, CMS also issued another regulation prohibiting carriers from paying commissions during the fourth quarter on Medicare Advantage and Medicare Part D prescription drug policies sold during the fourth quarter with an effective date in the following year, which further increased the contribution of Medicare Advantage and Medicare Part D prescription drug commission revenues to our first quarter of 2015 relative to the total annual Medicare commission revenues for 2015.
We also actively market the availability of individual and family, small business and ancillary health insurance plans through our ecommerce platforms (www.eHealth.com and www.eHealthInsurance.com), and generate revenue from commissions we receive from health insurance carriers whose health insurance plans are purchased through us, as well as commission override payments we receive for achieving sales volume thresholds or other objectives. Ancillary health insurance plans, which primarily consist of short-term, dental, life, vision, and accident insurance plans, are sold alongside individual and family health insurance plans and also as standalone products.
A substantial number of individuals and families are eligible for subsidies under health care reform. Health care reform’s establishment of government-run health insurance exchanges through which individuals and families must purchase qualified health plans to receive government subsidies has increased our competition as individual and families may purchase qualified health plans directly from government exchanges. While they are not required to do so, government-run exchanges are permitted to allow agents and brokers to enroll individuals and families into qualified health plans through government-run exchanges. We have entered into an agreement with, and enrolled individuals and families into qualified health plans through, the Federally Facilitated Marketplace, or FFM, run by CMS. The FFM operated the health insurance exchange in 37 states during the last health care reform open enrollment period. Our ability to act as a health insurance agent for subsidy-eligible individuals purchasing qualified health plans through the FFM depends upon the FFM developing and maintaining an efficient, scalable and online enrollment process, and our ability to successfully enter into and maintain our agreement and integrate with the FFM. In order to enroll individuals in subsidy-eligible plans over the Internet through the FFM, we also need to meet a number of requirements relating to display of information on our websites as well as new and comprehensive privacy and
security requirements. These requirements are evolving. For example, we are required to translate significant portions of our website into Spanish for the next open enrollment period in certain jurisdictions. Our ability to maintain compliance with the various requirements to enroll individuals through the FFM has presented, and could in the future present, significant challenges for us. In addition, CMS recently directed us and other web-based entities to make changes to the process we developed for enrolling individual into qualified health plans through the FFM. As a result of the changes that we made to our online process in response to CMS’ requirements, which require that we use a different pathway through which individuals are enrolled in qualified health plans, we may have difficulty enrolling, and may not be able to enroll, individuals in qualified health plans in an efficient and scalable manner both during and outside of the annual open enrollment period and our number of qualified health plan enrollments could decline. See Part I, Item 1A., Risk Factors - Risks Related to Our Business.
The future impact of health care reform on health insurance carriers that pay us our commission revenue is also unclear, Health insurance carriers have the ability to unilaterally change their relationship with us, including the commission rates we receive for acting as a health insurance agent, and may reduce the amount they pay us, alter the manner and geographic areas in which they permit us to sell their products and change our relationship with them in any number of ways. As a result of higher medical utilization rates than carriers projected and for other reasons, several health insurance carriers, including large national health insurance carriers, recently reduced or eliminated commissions for individual and family health insurance enrollments outside of the open enrollment period. While health insurance carriers have indicated that they intend to increase commission rates for individuals and family health insurance we sell during the upcoming open enrollment period, they are not obligated to do so. In addition, health insurance carrier lack of desire to sell individual and family health insurance will cause a reduction in the number of plans offered on our website, which could decrease demand for the individual and family health insurance that we sell.
the commission rates we receive for the health insurance plans that we sell; and
Submitted Applications. We experience a significant increase in the number of Medicare-related submitted applications during the Medicare annual enrollment period, which occurs during the fourth quarter of each year. During 2015, we also experienced an increase in the number of Medicare-related applications submitted during the first, second and third quarters compared to the fourth quarter. Medicare Advantage applications submitted during the first, second and third quarters accounted for 45% of total submitted applications for 2015, compared to 34% for 2014. Applications submitted outside of the annual enrollment period accounted for 55% of total submitted applications, while 45% were submitted within the annual enrollment period in 2015. The number of individual and family health insurance submitted applications are highest during the health care reform open enrollment period, which begins in the fourth quarter of each year and runs into the first quarter of the following year. Individual and family applications submitted during the first quarter of 2015 were higher than the number of applications submitted during the fourth quarter of 2014, but 17% below the number of applications submitted during the first quarter of 2014. During the second and third quarters, which are outside the health care reform open enrollment periods, the number of individual and family health insurance submitted applications decreases significantly. We expect this trend to continue in 2016. We also expect individual and family submitted applications will increase significantly during the fourth quarter of 2016, relative to the second and third quarters of 2016, as a result of the open enrollment period.
Historically, the commission payments we receive for individual and family, small business and ancillary health insurance plans we sold were a percentage of the premium our customers pay for those plans. Effective January 1, 2014, many carriers began paying our individual and family health insurance commissions at a flat amount per member per month. Commission payments are typically made to us on a monthly basis until either the policy is cancelled or we otherwise do not remain the agent on the policy.
Online Sponsorship and Advertising. We generate revenue from our online sponsorship and advertising program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website and allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us. In return, we are typically paid a flat fee or, with respect to individual and family health insurance plans, a monthly fee and a performance-based fee based on metrics such as submitted health insurance applications. Health insurance carriers commit to sponsorship and advertising on a quarterly basis, if at all, and generally determine prior to the quarter whether to purchase sponsorship and
advertising from us and how much they are willing to spend. As a result, our sponsorship and advertising revenue is difficult to predict. However, since certain health insurance carriers have recently reduced or eliminated commissions on individual and family health insurance, we expect online sponsorship and advertising revenue to decrease in 2016. See Critical Accounting Policies and Estimates for details regarding our recognition of online sponsorship and advertising revenue.
Online Advertising. Our online advertising member acquisition channel consists of consumers who access our websites through paid keyword search advertising from search engines such as Google, Bing and Yahoo!, as well as various
Since a significant portion of our marketing and advertising expenses consists of expenses incurred as a result of payments owed to our marketing partners in connection with health insurance applications submitted on our ecommerce platform and other forms of marketing, such as direct mail, email marketing, television, radio and retargeting campaigns, those expenses are influenced by seasonal submitted application patterns. As a result of the annual open enrollment periods for both Medicare-related and individual and family health insurance, marketing and advertising expenses increase during the fourth quarter of each year. Additionally, since the health care reform open enrollment periods for individual and family health insurance continues into the following year, marketing and advertising expenses increase during the first quarter of each year, but to a lesser extent than the fourth quarter. During the second and third quarters, marketing and advertising expenses decrease, consistent with the decrease in submitted applications compared to periods during the open enrollment periods. We expect these seasonal trends to continue in 2016.
Because the total volume of submitted applications that we receive from our marketing partners is largely outside of our control, particularly during any short-term period, and because of our tiered marketing partner arrangements, we could incur expenses in excess of, or below, the amounts we had planned in periods of rapid change in the volume of submitted applications from marketing partner referrals. Similar to our marketing partner channel, expenses in our online advertising channel will increase or decrease in relation to any increase or decrease in consumers referred to our website as a result of search engine advertising. Increases in submitted applications resulting from marketing partner referrals or visitors to our website from our online advertising channel has in the past and could in the future result in marketing and advertising expenses significantly higher than our expectations. This has in the past and could in the future negatively impact our profitability during such periods because the revenue (if any) derived from submitted applications that are approved by health insurance carriers is not recognized until future periods.
The following table shows certain selected quarterly metrics for 2014 and 2015:
Health insurance carriers bill and collect insurance premiums paid by our members. Health insurance carriers do not report to us the number of members that we have as of a given date. The majority of our non-Medicare members who terminate their insurance plans do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our non-Medicare members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm both Medicare and non-Medicare cancellations, we estimate the number of members who are active on insurance plans we have sold as of a specified date. We estimate the number of continuing members on those plans as of a specific date as follows:
For IFP 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 the month that is six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the six-month period; and (ii) the number of approved members over the six-month period prior to the date of estimation 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 each of the six months prior to the date of estimation and for estimated member cancellations through the date of the estimate.
For ancillary health insurance plans (such as short-term, dental, vision, accident and student), we take the sum of (i) the number of members for whom we have received or applied a commission payment for the month that is one to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the one to three-month period); and (ii) the number of approved members over the one to three-month period prior to the date of estimation (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). The one to three-month period varies by insurance product
Health insurance carriers often do not communicate policy cancellation information to us. We often are made aware of policy cancellations at the time of annual renewal and update our membership statistics accordingly in the period they are reported.
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of operations may be affected.
Certain commission amounts are subject to forfeiture if the policy is subsequently cancelled and either the carrier takes back all or a portion of the commission they have paid to us or we will no longer receive monthly commission payments
for the remainder of the plan year. We record an estimate for these forfeitures based on our historical cancellation experience using data provided on commission statements. Policy cancellations and the commission amounts, if any, to be taken back by the carrier are typically reported to us by health insurance carriers several months after the policy’s cancellation date. Our estimate for forfeitures payable to a carrier, which is included in Other Current Liabilities in the consolidated balance sheets, includes an estimate of both the reporting time lag and the forfeiture amount, based on our historical experience by policy type. Similarly, our estimate for commission amounts not expected to be collected due to policy cancellations, which is recorded as a reduction of Accounts Receivable in the consolidated balance sheets, includes an estimate of the annual policy cancellation rate, based on our historical experience by policy type. Changes in our historical trends would result in changes to our estimated forfeitures in future periods. There were no changes in our average forfeiture rates or reporting time lag during the years ended December 31, 2013, 2014, and 2015 which had a material impact on our estimate for forfeitures.
Deferred revenue includes deferred technology licensing implementation fees and amounts billed for deliverables in multiple element arrangements that do not have stand-alone value from other, undelivered elements as well as amounts billed or collected from sponsorship or technology licensing customers in advance of our performing our service for such customers. It also includes the amount by which both unbilled and billed services provided under our technology licensing arrangements exceed the straight-line revenue recognized to date. We defer commission amounts that have been paid to us related to transactions where our services are complete, but where we cannot currently estimate future forfeitures related to those amounts.
We recognize stock-based compensation expense in the accompanying consolidated statements of comprehensive income (loss) based on the fair value of our stock-based awards over their respective vesting periods, which is generally four years. The estimated grant date fair value of our stock options is determined using the Black-Scholes-Merton pricing model and a single option award approach. The weighted-average expected term for stock options granted is calculated using historical option exercise behavior. The dividend yield is determined by dividing the expected per share dividend during the coming year by the grant date stock price. Through December 31, 2015, we had not declared or paid any cash dividends, and we do not expect to pay any in the foreseeable future. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of our stock options. Expected volatility is determined using a combination of the implied volatility of publicly traded options in our stock and historical volatility of our stock price. The estimated attainment of performance-based awards and related expense is based on the expectations of revenue target achievement. The estimated fair value of performance awards with market conditions is determined using the Monte-Carlo simulation model. The assumptions used in calculating the fair value of stock-based payment awards and expected attainment of performance-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. We will continue to use judgment in evaluating the expected term and volatility related to our own stock-based awards on a prospective basis, and incorporating these factors into the model. Changes in key assumptions could significantly impact the valuation of such instruments.
If events or changes in circumstances indicate the carrying value of such assets may not be recoverable, for long lived assets other than goodwill, including intangible assets with finite useful lives, which include purchased technology, pharmacy relationships, trade names, and trademarks, we measure the recoverability of assets that will continue to be used in our operations by comparing the carrying value of the asset grouping to our estimate of the related total future undiscounted net cash flows. For assets related to our book-of-business transfers, we compare the carrying amount of each asset to the commission revenue expected to be generated by the policies included in each respective book-of-business. Our estimates of commission revenue expected to be generated by each book-of-business include subjective judgments regarding expected policy cancellations. If an asset grouping’s carrying value is not recoverable through the related undiscounted cash flows, the asset grouping is considered to be impaired. The impairment charge is calculated as the amount by which the asset grouping’s carrying value exceeds its fair value, which is defined as the price that would be received from selling an asset in an orderly transaction between market participants at the measurement date.
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 at the year ended December 31, 2015, our valuation allowance is $10.5 million, which represents a full valuation allowance against the Company’s federal and state deferred tax assets. Any future change in the valuation allowance could have an effect on the income tax provision in the consolidated statement of income (loss).
The following table sets forth our operating results and related percentage of total revenues for the years ended December 31, 2013, 2014 and 2015 (dollars in thousands):
The following table presents our commission, other revenue and total revenue for the years ended December 31, 2013, 2014 and 2015 and the dollar and percentage changes from the prior year (dollars in thousands):
We expect cost of revenue to increase in absolute dollars in 2016 compared to 2015, primarily as a result of an increase in revenue-sharing payments related to health insurance policies sold to members who are referred to our website by marketing partners with whom we have revenue-sharing arrangements, partially offset by a continued decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.
2014 compared to 2013-Cost of revenue decreased $1.0 million, or 18%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to a decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.
The following table presents our marketing and advertising expenses for the years ended December 31, 2013, 2014 and 2015 and the dollar and percentage changes from the prior year (dollars in thousands):
2015 compared to 2014-Marketing and advertising expenses increased $5.8 million, or 8%, in the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to an increase of $5.6 million in variable advertising costs, and to a lesser extent an increase in compensation and benefits. This was partially offset by a $0.8 million decrease in public relation costs, as well as a decrease in costs resulting from the reduction-in-force we announced in March 2015. The increase in variable advertising costs resulted from an increase of $17.2 million in the fees we pay to marketing partners for referrals that result in the submission of a health insurance application on our website and an increase of $2.9 million in direct marketing expenses, partially offset by a decrease of $14.5 million in online advertising costs.
We expect our marketing and advertising expenses to increase in absolute dollars in 2016 compared to 2015 due primarily to an increase in variable advertising costs related to our Medicare-related health insurance business, partially offset by decreases in variable advertising costs associated with our individual and family health insurance business and compensation and benefits due to the reduction in force announced in March 2015.
The following table presents our customer care and enrollment expenses for the years ended December 31, 2013, 2014, and 2015 and the dollar and percentage changes from the prior year (dollars in thousands):
The following table presents our technology and content expenses for the years ended December 31, 2013, 2014 and 2015 and the dollar and percentage changes from the prior year (dollars in thousands):
2015 compared to 2014-Technology and content expenses decreased $4.0 million, or 10%, in the year ended December 31, 2015 compared to the year ended December 31, 2014, primarily due to a decrease in compensation, benefits and other personnel costs resulting from the reduction-in-force announced in March 2015.
We expect technology and content expenses to decrease in absolute dollars in 2016 compared to 2015 as a result of a decrease in compensation and benefits due to the reduction-in-force announced in March 2015.
The following table presents our general and administrative expenses for the years ended December 31, 2013, 2014 and 2015 and the dollar and percentage changes from the prior year (dollars in thousands):
The following table presents our intangible asset amortization expense for the years ended December 31, 2013, 2014 and 2015 and the dollar change from the prior year (dollars in thousands):
2014 compared to 2013-Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber increased for the year ended December 31, 2014 compared to the year ended December 31, 2013 due to a $0.1 million impairment charge recorded during the fourth quarter of 2014 related to certain acquired intangible assets that will not be utilized in future periods.
Other income (expense), net, in 2013, 2014 and 2015 primarily consisted of interest income earned on our invested cash, cash equivalents and marketable securities balances, offset by administrative bank fees, investment management fees and interest expense on capital lease obligations.
2014 compared to 2013-Other income, net increased in 2014 compared to 2013 due primarily to a decrease in investment interest income due to lower cash balances and declining average yields as well as higher bank fees.
On March 31, 2014, we announced that our board of directors approved a stock repurchase program authorizing us to purchase up to $50 million of our common stock. Purchases under this program were made in the open market and complied with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. We completed this stock repurchase program in July 2014 having repurchased in the aggregate 1.4 million shares for approximately $50.0 million at an average price of $36.91 per share including commissions. The cost of the repurchase was funded from available working capital.
Cumulative balances at December 31, 2015 consist of shares repurchased in connection with our stock repurchase programs announced on March 31, 2014, as well as a previous stock repurchase plans announced in 2013, 2012, 2011, 2010 and 2008.
In addition to the shares repurchased under our repurchase programs as of December 31, 2015 we have in treasury 0.4 million shares that were surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of December 31, 2014 and 2015, we had a total of 10.9 million shares and 11.0 million shares, respectively, held in treasury.
A significant portion of our marketing and advertising expenses is driven by the number of health insurance applications submitted on our ecommerce platform. Since our marketing and advertising costs are expensed and generally paid as incurred and the revenue and cash earned from approved applications is recognized and paid as commissions are subsequently reported to us, our operating cash flows could be adversely impacted by a substantial increase in the volume of applications submitted during a quarter or positively impacted by a substantial decline in the volume of applications submitted during a quarter. During the Medicare annual enrollment period, we experience an increase in the number of submitted Medicare-related health insurance applications and marketing and advertising expenses compared to outside of Medicare annual enrollment periods. During open enrollment periods for individual and family health insurance plans, we experience an increase in the number of submitted individual and family plan health insurance applications and marketing and advertising expenses compared to outside of open enrollment periods. The timing of open enrollment periods for individual and family health insurance and the Medicare annual enrollment period for Medicare-related health insurance affect the positive or negative impacts of our cash flows during each quarter. Consistent with prior years, marketing and advertising costs increased during the fourth quarter of 2015 compared to the third quarter of 2015 due to an increase in submitted applications for individual and family health insurance during the open enrollment period and due to an increase in submitted applications for Medicare plans during the annual enrollment period. We expect marketing and advertising costs to increase during the fourth quarter of 2016 due to an increase in submitted applications for Medicare plans during the annual enrollment period and the first and fourth quarters of 2016 due to an increase in submitted applications during the annual open enrollment period for individual and family health insurance. We expect marketing and advertising costs to decrease during the second and third quarters compared to cost levels during the first and fourth quarters due to a reduction in the number of health insurance applications we expect outside of annual open enrollment periods.
2014-Our operating activities generated cash of $1.8 million during the year ended December 31, 2014 and consisted of net loss of $16.2 million, increased by non-cash items of $22.9 million and cash used in working capital and other activities of $4.9 million. Adjustments for non-cash items primarily consisted of $9.2 million of deferred income taxes, $5.9 million of stock-based compensation expense, $4.2 million of depreciation and amortization, $2.0 million of amortization of book-of-business consideration and $1.5 million of amortization of intangible assets. Cash used in working capital and other activities primarily consisted of a decrease of $1.1 million in deferred revenue, a decrease of $2.1 million in accrued compensation and benefits, an increase of $3.6 million in accounts receivable and a $0.6 million increase in prepaid expense and other assets, partially offset by an increase of $0.5 million in accrued marketing expenses, a $0.4 million increase in other current liabilities and an increase of $1.6 million in accounts payable. Accounts receivable increased mainly due to increased commission receivables arising from CMS rule changes surrounding the timing of payments. Accounts payable increased due to increased marketing and advertising expenses during the open enrollment period.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of eHealth, Inc. at December 31, 2015 and 2014, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
Property and Equipment-Property and equipment are stated at cost, less accumulated depreciation and amortization. Capital lease amortization expenses are included in depreciation expense in our consolidated statements of comprehensive income (loss). Depreciation and amortization is computed using the straight-line method based on estimated useful lives as follows:
Goodwill and Intangible Assets-Goodwill represents the excess of the consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination. We do not amortize goodwill or our other indefinite-lived intangible assets but rather we test the asset for impairment on an annual basis on or about November 30 of each year and whenever events or changes in circumstances indicate a reduction in its fair value below its carrying amount.
commissions paid to us on a monthly basis, we record a receivable for the commission amounts to be received over the remainder of the plan year, net of an estimate for commission amounts not expected to be collected due to plan cancellations, which is included in Accounts Receivable in the accompanying balance sheets. We continue to receive the commission payments from the relevant insurance carrier typically until either the policy is cancelled or we otherwise do not remain the agent on the policy. We determine that there is persuasive evidence of an arrangement when we have a commission agreement with a health insurance carrier. Our services are complete when a carrier has approved an application in the initial year and when a member has renewed in a renewal year. The seller’s price is fixed or determinable and collectability is reasonably assured when a carrier has approved an application and the carrier reports to us the annual or first monthly renewal commission amount for each plan year.
Commissions for all health insurance plans we sell are reported to us by a cash payment and commission statement. We generally receive these communications simultaneously. In instances when we receive the cash payment and commission statement separately and in different accounting periods, we recognize revenue in the period that we receive the earliest communication, provided we receive the second corroborating communication shortly following the end of the accounting period. If the second corroborating communication is not received shortly following the end of the accounting period, we recognize revenue in the period the second communication is received. During 2014, CMS issued a regulation prohibiting carriers from paying commissions during the fourth quarter on Medicare Advantage and Medicare Part D prescription drug plans sold during the fourth quarter with an effective date in the following year. During the fourth quarters of 2014 and 2015, we recognized revenue for policies included on a commission statement received prior to December 31, 2014 and 2015 respectively for which payment was received shortly after year-end and in connection with the carriers’ normal payment cycle during the first quarter of 2015 and 2016. We use the data in the commission statements to help identify the members for which we are receiving a commission payment and the amount received for each member, and to estimate future forfeiture amounts due to policy cancellations. As a result, we recognize the net amount of compensation earned as the agent in the transaction. Changes in our historical trends would result in changes to our estimated forfeitures in future periods. There were no changes in our average forfeiture rates or reporting time lag during the years ended December 31, 2013, 2014 and 2015 which had a material impact on our estimate for forfeitures.
Our direct channel expenses primarily consist of costs for direct mail, email marketing, television, radio and retargeting campaigns. Advertising costs for our direct channel are expensed the first time the related advertising takes place. Our marketing partner channel expenses primarily consist of fees paid to marketing partners with which we have a relationship. Our online advertising channel expenses primarily consist of paid keyword search advertising on search engines. Advertising costs for our marketing partner channel and our online advertising channel are expensed as incurred.
Research and Development Expenses-Research and development expenses consist primarily of compensation and related expenses incurred for employees on our engineering and technical teams. Research and development costs, which totaled $10.1 million, $12.1 million and $10.6 million for the years ended December 31, 2013, 2014 and 2015, respectively, are included in technology and content expense in the accompanying consolidated statements of comprehensive income (loss).
401(k) Plan-In September 1998, our board of directors adopted a defined contribution retirement plan (401(k) Plan), which qualifies under Section 401(k) of the Internal Revenue Code of 1986. Participation in the 401(k) Plan is available to substantially all employees in the United States. Employees can contribute up to 25% of their salary, up to the federal maximum allowable limit, on a before-tax basis to the 401(k) Plan. Employee contributions are fully vested when contributed. Company contributions to the 401(k) Plan are discretionary and are expensed when incurred. We also match employee contributions to our 401(k) Plan at 25% of an employee’s contribution each pay period, up to a maximum of 1% of the employee’s salary during such pay period. Our matching contributions are expensed as incurred and vest one-third for each of the first three years of the recipient’s service. The recipient is fully vested in all 401(k) Plan matching contributions after three
Seasonality- The majority of our Medicare-related health insurance plans are sold in our fourth quarter, which includes 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. Additionally, substantially all Medicare Advantage and Medicare Part D prescription drug policies renew on January 1 of each year, resulting in our recognizing substantially all renewal Medicare Advantage and Medicare Part D prescription drug plan commission revenue in our first quarter. Accordingly, Medicare plan-related commission revenue is highest in our first quarter, with Medicare plan-related commission revenue being higher in our fourth quarter compared to our second and third quarters.
Recently Adopted Accounting Standards-In November 2015, the FASB issued ASU No. 2015-17 ("ASU 2015-17") regarding ASC Topic 470 "Income Taxes: Balance Sheet Classification of Deferred Taxes". This standard requires companies to classify deferred income tax assets and liabilities as non-current in a classified statement of financial position. It is effective for the first interim period beginning after December 15, 2016 and early adoption is permitted. We have adopted this standard prospectively as of December 31, 2015. Prior periods were not adjusted.
Cash and Cash Equivalents-As of December 31, 2014 and 2015, 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. At December 31, 2014 and 2015, our cash equivalents carried no unrealized gains or losses and we did not realize any significant gains or losses on sales of cash equivalents during the years ended December 31, 2013, 2014 and 2015.
We used observable prices in active markets in determining the classification of our money market funds as Level 1 as of December 31, 2014 and 2015.
As of December 31, 2014 and 2015, our accounts receivable consisted of the following (in thousands):
During the years ended December 31, 2013, 2014 and 2015, amortization expense related to intangible assets totaled $1.4 million, $1.5 million and $1.2 million, respectively.
As of December 31, 2015, expected amortization expense in future periods is as follows (in thousands):
Preferred Stock-Our board of directors has the authority, without any further action by our stockholders, to issue up to 110,000,000 shares, par value $0.001 per share, of which 10,000,000 shares are designated as preferred stock. As of December 31, 2014 and 2015, there were no shares of preferred stock outstanding.
Shares Reserved-We generally issue previously unissued common stock upon the exercise of stock options, the vesting of restricted stock units and upon granting of restricted common stock awards; however we may reissue previously acquired treasury shares to satisfy these future issuances. Shares of authorized but unissued common stock reserved for future issuance were as follows (in thousands):
2013, 2014 and 2015 include grants of restricted stock units with both service and performance-based vesting criteria to our executive officers.
The fair value of the restricted stock units is based on eHealth’s stock price on the date of grant. Compensation expense for awards that include only service-based vesting criteria is recognized on a straight-line basis over the vesting period. Compensation expense for awards that include both service and performance-based vesting criteria is recognized using accelerated attribution over the vesting period. The total fair value of restricted stock units vested during the years ended December 31, 2013, 2014 and 2015 was $3.5 million, $10.3 million and $2.6 million, respectively. As of December 31, 2015, there was $11.7 million of unrecognized stock-based compensation expense related to restricted stock units, which is expected to be recognized over the next 2.5 years.
In addition to the shares repurchased under our repurchase programs as of December 31, 2015, we have in treasury an additional 362,045 shares that were previously surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of December 31, 2014 and 2015, we had a total of 10,945,607 shares and 11,025,933 shares, respectively, held in treasury.
Stock-Based Compensation-The fair value of stock options granted to employees for the years ended December 31, 2013, 2014 and 2015 was estimated using the following weighted average assumptions:
The weighted-average fair value of the market-based stock unit awards was determined using the Monte Carlo simulation model using the following weighted average assumptions:
There were no market-based stock unit awards granted during the year ended December 31, 2014.
The following table summarizes stock-based compensation expense by operating function for the years ended December 31, 2013, 2014 and 2015 (in thousands):
Our effective tax rate in 2013 was higher than statutory federal and state tax rates primarily due to non-deductible lobbying expenses. Our effective tax rate in 2014 differs from the federal statutory rate primarily due to the recording of a valuation allowance against our federal and state deferred tax assets. Our effective tax rate in 2015 differs from the federal statutory rate primarily due to the reversal of previously recorded reserves related to federal and state tax 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. As at the year ended December 31, 2015, the valuation allowance is $10.5 million, which represents a full valuation allowance against the Company’s federal and state deferred tax assets. The valuation allowance was recorded as a result of increased uncertainty regarding the Company’s future taxable income and a lack of sources of other taxable income.
The net valuation allowance decreased by $1.2 million during the year ended December 31, 2015 and increased by $11.3 million during the year ended December 31, 2014. The change in the net valuation allowance during the year ended December 31, 2013 was not material.
For tax return purposes, we had net operating loss carry forwards at December 31, 2015 of approximately $14.7 million and $66.8 million for federal income tax and state income tax purposes, respectively. Included in the federal and state net operating loss carry forwards are unrealized federal and state net operating loss deductions resulting from stock option exercises of approximately $13.3 million and $58.3 million, respectively. The benefit of these unrealized stock option-related deductions has not been included in the deferred tax assets table above and will be recognized as a credit to additional paid-in capital when realized. Federal and state net operating loss carry forwards begin expiring in 2015 and 2023, respectively. The federal net operating loss carry forward is subject to an annual limitation of approximately $2.5 million due to section 382 of the Internal Revenue Code. Approximately $3.1 million of the state net operating loss carry forward is subject to an annual limitation of approximately $0.1 million due to section 382 of the Internal Revenue Code.
The following table summarizes the total cash and non-cash restructuring charges recorded during the year ended December 31, 2015 (in thousands):
The following table summarizes the cash-based restructuring charges liability activity during the year ended December 31, 2015 (in thousands):
In March 2012, we entered into an agreement to lease a building in Mountain View, California, adjacent to our headquarters office. The term of the operating lease is ten years from the date the building was delivered to us in August 2013 and the base rent is approximately $0.6 million for the first year of the lease. The base rent increases annually by 3%. Future minimum payments related to this operating lease total $6.8 million over the term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease. Lease payments began in the third quarter of 2013.
In connection with the Mountain View, California office 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. The remaining balance on the financial guarantee is $0.3 million as of December 31, 2015.
In the ordinary course of our business, we have received and may continue to receive inquiries from state regulators relating to various matters. We have become, and may in the future become, involved in litigation in the ordinary course of our business. If we are found to have violated laws or regulations in any of the states, we could be subject to various fines and penalties, including revocation of our license to sell insurance in those states, and our business and financial results would be harmed. We would also be harmed to the extent that related publicity damages our reputation as a trusted source of objective information relating to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome. At December 31, 2014 and 2015, we had no material liabilities included in our consolidated balance sheet for outstanding legal claims.
Guarantees and Indemnifications-We have agreed to indemnify members of our board of directors and our executive officers for fees, expenses, judgments, fines and settlement amounts incurred in any action or proceeding, including actions or proceedings by or in the right of the Company, to which any of them is, or is threatened to be, made a party by reason of their service as a director or officer of the Company or service provided to another company or enterprise at our request. The term of the director and officer indemnification is perpetual as to events or occurrences that take place while the director or officer is, or was, serving at our request. As such, the maximum potential amount of future payment we could be required to make under these indemnification arrangements is unlimited. We, however, maintain directors and officers insurance coverage that limits our exposure under certain circumstances and that may allow us to recover a portion of future amounts paid. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2014 and 2015.
Geographic Information-As of December 31, 2014 and 2015, our long-lived assets consisted primarily of property and equipment, goodwill and other indefinite-lived intangible assets and finite-lived intangible assets. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area were as follows (in thousands):
Significant Customers-Substantially all revenue for the years ended December 31, 2013, 2014 and 2015 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the years ended December 31, 2013, 2014 and 2015 are presented in the table below: