The following table sets forth the location, approximate square footage and primary use of each of the principal properties we occupied at December 31, 2014:
We are the leading 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 individual and family, Medicare-related, ancillary and small business 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 have invested heavily in technology and content related to our ecommerce platform. 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 website as well as through our network of marketing partners.
In March 2010, the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act were signed into law. These health care reform laws contain provisions that have changed and will continue to change the health insurance industry in substantial ways. We have described various aspects of health care reform in Part I, Item 1. Business - Health Care Reform and Part I, Item 1A. Risk Factors - Risks Related to Our Business. While aspects of health care reform may positively impact our business, the aggregate future impact of the implementation of health care reform on our business and financial results is uncertain. Our ability to continue to act as a health insurance agent for our members who switch to a new health insurance product will depend upon a number of factors, including health insurance company practices, individual financial circumstances and their eligibility for health care reform subsidies, our members’ existing health insurance plans, the price of health insurance and our ability to offer and sell subsidy-eligible health insurance plans efficiently in an online process. Moreover, we are facing new competition in the form of government run health insurance exchanges. Our ability to act as a health insurance agent to health care reform subsidy-eligible individuals depends upon government-run health insurance exchanges developing and maintaining an efficient, scalable and online enrollment process, and our ability to successfully enter into and maintain agreements and integrate with those government-run exchanges. In order to enroll individuals in subsidy-eligible plans over the Internet, we also need to meet a number of requirements relating to the display of information on our websites as well as new and comprehensive privacy and security requirements. Our ability
We actively market the availability of Medicare-related health insurance plans through our online Medicare plan platforms www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com. Our Medicare plan platforms and telephonic enrollment capabilities enable consumers to research, compare and purchase Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. To the extent that we assist in the sale of Medicare-related insurance plans as a health insurance agent, through either online applications or telephonically, we generate revenue from commissions we receive from health insurance carriers. Commission payments we receive for Medicare Advantage and Medicare Part D prescription drug policies sold by us are typically fixed and are earned over a period of six years, or longer depending on the carrier arrangement, and are paid to us either monthly or annually. Commission payments we receive for Medicare Supplement policies sold by us typically are a percentage of the premium on the policy and paid to us until either the health insurance policy is cancelled or we otherwise do not remain the agent on the policy.
In addition to the commission revenue we derive from the sale of health insurance plans, we derive other revenue from our online sponsorship and advertising program and from licensing the use of our ecommerce technology. We offer advertising services for our Medicare plan carriers to purchase advertising on separate websites developed, hosted and maintained by us for a pre-determined amount of time. In addition, our online sponsorship program allows carriers to purchase advertising space in specific markets in a sponsorship area on our website. The technology platform we license enables health insurance carriers and agents to market and distribute health insurance plans online.
On March 11, 2015, we announced an organizational restructuring and cost reduction plan. As part of the plan, we expect to eliminate approximately 160 full-time positions, representing approximately 15% of our workforce primarily in our technology and content and customer care and enrollment groups, and to a lesser extent, in our marketing and advertising and general and administrative groups. We expect to incur pre-tax restructuring charges of between approximately $3.2 million and $3.8 million for employee termination benefits and related costs as well as between $0.5 million and $0.9 million in other pre-tax restructuring charges, including facility costs. The majority of the restructuring charges are expected to be recorded in the first and second quarters of 2015, when the activities comprising the plan are expected to be substantially completed.
Our individual and family health insurance commission revenue is influenced by the number of applications for individual and family health insurance we submit to health insurance carriers, the number of members on submitted applications, the rate at which the individuals and families on those applications turn into paying members, the commission rates we receive for the plans that we sell and our membership retention. In connection with the initial open enrollment period, which began on October 1, 2013 and ended on March 31, 2014, we experienced a significant increase, relative to historical levels, in the number of submitted applications for individual and family health insurance during the fourth quarter of 2013 and the first quarter of 2014. Following the conclusion of the initial open enrollment period, our individual and family health insurance submitted applications decreased significantly during the second and third quarters of 2014 relative to historical levels and to the first quarter of 2014. The second open enrollment period began on November 15, 2014 and ended on February 15, 2015. While we experienced a significant increase in the number of submitted applications for individual and family health insurance during the fourth quarter of 2014 compared to the second and third quarters of 2014, they were 41% below the number of submitted application during the fourth quarter of 2013. We expect individual and family health insurance submitted applications during the first quarter of 2015 will be higher than the number of applications submitted during the fourth quarter of 2014, but below the number of applications submitted during the first quarter of 2014. Similar to 2014, we expect individual and family submitted applications to decline significantly in the second and third quarters of 2015, outside of the open enrollment period, relative to the first quarter of 2015. We also expect individual and family submitted applications will increase significantly during the fourth quarter of 2015, relative to the second and third quarters of 2015, as a result of the upcoming open enrollment period.
We also experienced a decline in the average number of members on our submitted individual and family plan health insurance applications in the first quarter of 2014 compared to periods before the initial open enrollment period under health care reform. While this average returned to historical rates in the second quarter of 2014, its decrease during the first quarter of 2014, when individual and family plan submitted applications were highest as a result of the initial open enrollment period adversely impacted our membership throughout 2014 as well as the commission revenue we would have received throughout 2014 had the average in the first quarter of 2014 been consistent with historical levels prior to that period. Similar to 2014, we expect to experience a decline in the average number of members on our submitted individual and family plan health insurance applications in the first quarter of 2015.
As a result of the healthcare reform prohibition on using pre-existing health conditions as a reason to deny health insurance applications, we have experienced higher approval rates on individual and family plan applications submitted during the first quarter of 2014 compared periods before health care reform implementation. However, during the second and third quarters of 2014, we experienced a decrease in the rate at which these approvals resulted in paying members. This decrease was mainly due to an increase in the rate of non-payment of initial premium by applicants, as well as health insurance carrier-specific issues. In addition, during the second and third quarters of 2014, some carriers postponed payment of commission to us for qualified health insurance plans where the member holding the plan is receiving a subsidy, until the health insurance carrier received both the premium payment from the member and the subsidy payment from the federal government, which further delayed our ability to recognize revenue from the sale of these policies during 2014.
The average commission dollars per-member-per-month that we received for new individual and family health insurance plan members in 2014 varied based upon a number of factors, including the ratio of policies that we sold for which we receive per member-per-month commissions compared to percentage-of-premium commissions, the premiums on the policies we sold, the mix of our members by health insurance carrier and the commission rates we received from each carrier. The increased volume of individual and family health insurance submitted applications during the initial open enrollment
period caused us to experience a further shift in the concentration of our membership by health insurance carrier and type of plan purchased. For example, some health insurance carriers exited or reduced selling efforts in certain markets during the initial open enrollment period, while others increased their marketing efforts in certain markets. These and other factors resulted in a change in the concentration of our individual and family health insurance members by carrier, which has had the impact, after incorporating the positive impact of health insurance premium inflation, of reducing our average commission rate per member in the second and third quarters of 2014. While we expect that health insurance carriers will generally pay commission rates on individual and family plans with coverage effective in 2015 similar to those paid in 2014, changes in the concentration of our membership with particular health insurance carriers or health insurance plans could positively or negative impact our commission revenue in 2015. 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 our commission rates. 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 that we have already sold through the carrier.
Our individual and family health insurance commission revenue is also influenced by our individual and family health insurance member retention rates. The member retention rates on our individual and family membership were negatively impacted by health care reform beginning in the fourth quarter of 2013 and throughout 2014. As a result, the number of new individual and family health insurance members added during the second, third and fourth quarters of 2014, was not enough to offset the loss of existing members, resulting in a sequential and annual decline in individual and family health insurance estimated membership during those periods.
The majority of Medicare 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, we have generated a significant amount of Medicare plan-related revenue in the fourth quarter resulting from the sale of new Medicare plans. During 2012, 2013 and 2014, 59%, 68% and 62%, respectively, of our Medicare plan-related applications were submitted during the fourth quarter. 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 the Center for Medicare and Medicaid Studies (“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, all Medicare Advantage and Medicare Part D prescription drug policies will renew on January 1 of each year, regardless of the month the policy went into effect, which will result in our recording all Medicare Advantage and Medicare Part D prescription drug plan renewal commission revenue in the first quarter of each year and no renewal commission revenue in the second, third or fourth quarters of each year for these products. In addition, CMS also issued a 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.
Ancillary Plans. We market and sell ancillary health insurance plans, which primarily consist of short-term, dental, life, vision, and accident insurance plans, on our ecommerce platform. Historically, we have sold ancillary health insurance plans alongside individual and family health insurance plans and also as standalone products. Submitted applications for ancillary health insurance plans increased 1,423%, 57% and 43% during the years ended December 31, 2012, 2013 and 2014, respectively. The increase in 2014 was due primarily to consumers who were not qualified to enroll in an individual major medical plan outside of the open enrollment period being able to purchase short-term policies as an alternative during that period. As a result, the number of submitted short-term health insurance applications increased significantly during the second and third quarters of 2014 compared to the first and fourth quarters of 2014 as well as to historical levels. Similar to 2014, we expect submitted short-term health applications to increase in the second and third quarters of 2015 compared to the first and fourth quarters of 2015. See Critical Accounting Policies and Estimates for details regarding our recognition of ancillary health insurance plan commission revenue.
Online Sponsorship and Advertising. We offer advertising services for our Medicare plan carriers to purchase advertising on separate websites developed, hosted and maintained by us for a pre-determined amount of time. In these instances, we are typically paid a fixed, up-front fee. In addition, our online sponsorship 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 and a performance-based fee based on metrics such as submitted health insurance applications. See Critical Accounting Policies and Estimates for details regarding our recognition of online sponsorship and advertising revenue.
Technology Licensing. We derive revenue from licensing the use of our health insurance ecommerce technology. Our technology platform enables health insurance carriers and agents to market and distribute health insurance plans online. In our technology licensing business, we are typically paid implementation fees and performance-based fees that are based on metrics such as submitted health insurance applications. See Critical Accounting Policies and Estimates for details regarding our recognition of technology licensing revenue.
Marketing Partners. Our marketing partner member acquisition channel consists of consumers who access our websites through a network of affiliate partners and financial services and other companies. We compensate a significant number of our marketing partners by paying a fee each time a consumer referral from a partner results in a submitted health insurance application, regardless of whether the consumer’s application is approved by the health insurance carrier. Many of our marketing partners have tiered arrangements in which the amount of the fee increases as the volume of submitted applications we receive from the marketing partner increases over a particular period. We recognize these expenditures in the period when a marketing partner’s referral results in the submission of a health insurance application. Growth in our marketing partner channel depends upon our expanding marketing programs with existing partners and adding new partners to our network. For the years ended December 31, 2012, 2013 and 2014, applications submitted through us for individual and family health insurance plans from our marketing partner member acquisition channel constituted approximately 32%, 36% and 38%, respectively, of all individual and family health insurance applications submitted on our website.
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 Internet marketing programs such as display advertising. We incur expenses associated with search advertising in the period in which the consumer clicks on the advertisement. For the years ended December 31, 2012, 2013 and 2014, applications submitted through us for individual and family health insurance plans from our online advertising channel constituted
approximately 21%, 18% and 17%, respectively, of all individual and family health insurance applications submitted on our website.
In addition to our marketing channels, we have acquired health insurance members through transactions with broker partners. We have entered into several agreements, whereby the partners have transferred certain of their existing health insurance members to us as the broker of record on the underlying policies. These transfers included primarily Medicare plan members. The first of these transferred books-of-business occurred in February 2009 and the most recent in June 2012.
Marketing and advertising expenses consist primarily of member acquisition expenses associated with our direct, marketing partner and online advertising member acquisition channels, in addition to compensation and other expenses related to marketing, business development, partner management, public relations and carrier relations personnel who support our offerings.
During the fourth quarter of 2013 and the first quarter of 2014, as a result of the initial open enrollment period, the source of our submitted individual and family plan applications shifted from our lower cost direct marketing channel to our higher cost marketing partner channel. Additionally, the cost per submitted individual and family plan application increased for our direct marketing, online advertising and marketing partner channels in the first quarter of 2014. During the second and third quarters of 2014, with the decreases in submitted individual and family plan applications outside of the initial open enrollment period, our source of submitted individual and family plan applications shifted to our direct marketing channel. However, despite this shift, the overall cost per submitted individual and family plan application increased during the second and third quarters of 2014 compared to 2013, particularly in our online advertising channel. During the fourth quarter of 2014, as a result of the second open enrollment period, the source of our submitted individual and family plan applications again shifted to our higher cost marketing partner channel similar to the prior year. We expect this shift will continue for the first quarter of 2015. During the second and third quarters of 2015, we expect our source of submitted individual and family plan applications will shift from our marketing partner channel to our direct marketing channel, similar to the prior year. During the fourth quarter of 2015, as a result of the upcoming open enrollment period, we expect the source of our submitted individual and family plan applications to again shift to our higher cost marketing partner channel similar to prior years.
Customer care and enrollment expenses primarily consist of compensation and benefits costs for personnel engaged in pre-sales assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the underwriting process. In preparation for the Medicare annual enrollment period, and to a lesser extent the open enrollment period for individuals and family plans, during 2013 and 2014, we began ramping up our customer care center staff during our third quarter to handle the anticipated increased volume of health insurance transactions. Additionally, in the first quarters of 2014 and 2015, we retained some Medicare sales and enrollment personnel to handle the increased volume of individual and family plan applications during the initial and second open enrollment periods for individual and family health insurance that ended on March 31, 2014 and February 15, 2015, respectively. Accordingly, our customer care center staffing costs have been significantly higher in our first and fourth quarters compared to the second and third quarter. These seasonal trends are expected to continue in 2015 as we will likely need to add seasonal customer care and enrollment personnel to assist with the increase in submitted applications expected during the upcoming Medicare annual enrollment period and open enrollment period for individual and family health insurance.
General and administrative expenses include compensation and benefits costs for staff working in our executive, finance, corporate development, investor relations, government affairs, legal, human resources, internal audit, facilities and internal information technology departments. These expenses also include fees paid for outside professional services, including audit, tax, legal, government affairs and information technology fees.
The following table shows certain selected quarterly metrics for 2013 and 2014:
During the portion of the second open enrollment period for individual and family health insurance plans that ran from November 15, 2014 through December 31, 2014, we were only able to sell individual and family health insurance plans with a 2015 effective date, did not receive commission payment on these plans until 2015 and therefore included none of the members on these plans in our estimated number of members active on individual and family health insurance plans at December 31, 2014. This difference from the prior year, when we were able to sell a substantial number of individual and family health insurance plans with a 2013 effective date during the portion of the initial open enrollment period for individual and family health insurance plans that ran from October 1, 2013 through December 31, 2013, received commission payment on a significant portion of these plans during the fourth quarter of 2013 and therefore included the members on these plans in our estimated number of members active on individual and family health insurance plans at December 31, 2013.
A member who purchases and is active on multiple standalone insurance policies will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance policy and a standalone dental policy will be counted as two continuing members.
change, and the effect of the estimates and assumptions on financial condition or operating performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions and are most critical to understanding and evaluating our reported financial results are as follows:
We recognize revenue for our services when each of the following four criteria is met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. Our revenue is primarily comprised of compensation paid to us by health insurance carriers related to insurance plans that have been purchased by a member who used our service. We define a member as an individual currently covered by an insurance plan, including individual and family, Medicare-related, small business and ancillary plans, for which we are entitled to receive compensation from an insurance carrier.
We recognize individual and family, small business and ancillary commission override revenue when reported to us by a carrier based on the actual attainment of predetermined target sales levels or other objectives as determined by the carrier. Commission override revenue, which we recognize on the same basis as individual and family, small business and ancillary commissions, is generally reported to us in a more irregular pattern than such commissions.
from the relevant insurance carrier until the earlier of our being notified that the health insurance plan has been cancelled, our no longer remaining the agent on the plan, or our commission term with the carrier expires, typically for a period of at least six years from the effective date of the plan. 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 quarter of 2014 we recognized revenue for policies included on a commission statement received prior to December 31, 2014 and for which payment was received shortly after year-end and in connection with the carriers’ normal payment cycle during the first quarter of 2015. 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.
Certain commission amounts are subject to forfeiture when 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, 2012, 2013 and 2014 which had a material impact on our estimate for forfeitures.
We must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, we must make subjective judgments regarding the remaining useful lives of assets with finite useful lives. When we determine that the useful life of an asset is shorter than we had originally estimated, we accelerate the rate of amortization over the new remaining useful life of the asset.
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. During the three months ended December 31, 2014, we recorded income tax expense of $11.5 million to record a valuation allowance for deferred tax assets that we determined are not more likely than not to be realized. Any future change in the valuation allowance could have an effect on stockholders’ equity and 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, 2012, 2013 and 2014 (dollars in thousands):
Other revenue increased $1.0 million, or 4%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to a $1.7 million increase in online sponsorship and advertising revenue and a $0.5 million increase in technology licensing revenue, partially offset by a $1.2 million decrease in revenue related to our Medicare lead referral revenue. The increase in online sponsorship and advertising revenue was primarily related to individual and family health insurance plan carriers. The decrease in lead referral revenue was the result of our strategic decision to reduce the number of Medicare leads sold to third parties and to instead act as a health insurance agent to those leads.
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
The following table presents our marketing and advertising expenses for the years ended December 31, 2012, 2013 and 2014 and the dollar and percentage changes from the prior year (dollars in thousands):
open enrollment periods for individual and family health insurance and Medicare-related health insurance, which are scheduled to commence on November 1, 2015 and October 15, 2015, respectively.
The following table presents our general and administrative expenses for the years ended December 31, 2012, 2013 and 2014 and the dollar and percentage changes from the prior year (dollars in thousands):
compensation expense, partially offset by a decrease in compensation and benefits due to the reduction in force announced in March 2015.
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 impairment charge recorded during the fourth quarter of 2014 related to certain acquired intangible assets that will not be utilized in future periods.
We expect a slight decrease in the amortization of intangible assets in 2015 compared to 2014.
The following table presents our other income (expense), net for the years ended December 31, 2011, 2012 and 2013 and the dollar change from the prior year (dollars in thousands):
Other income (expense), net, in 2012, 2013 and 2014 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-In 2014, we recorded a provision for income taxes of $9.3 million, representing an effective tax rate of (136.25%). Our effective tax rate changed from 52.7% in 2013 to (136.25%) in 2014 due primarily to valuation allowance adjustments in 2014.
At December 31, 2014, our cash and cash equivalents totaled $51.4 million. Cash equivalents, which are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily consist of money market funds. At December 31, 2013, our cash and cash equivalents totaled $107.1 million. The decrease in cash and cash equivalents reflects $50.0 million used to repurchase 1.4 million shares of common stock, $3.6 million used to purchase property and equipment and $4.5 million in cash for the purchase of the internet domain name, www.Medicare.com, partially offset by cash flows generated from operations.
Stock repurchase activity under our stock repurchase programs during 2014 is summarized as follows (in thousands, except share and per share amounts):
In addition to the shares repurchased under our repurchase programs as of December 31, 2014, we have in treasury 0.3 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, 2013 and 2014, we had a total of 9.5 million shares and 10.9 million shares, respectively, held in treasury.
The following table presents a summary of our cash flows for the years ended December 31, 2012, 2013 and 2014 (in thousands):
The timing of the recognition of our commission revenue depends upon the timing of our receipt of commission reports and associated commission payments from health insurance carriers. If we were to experience a delay in receiving a commission payment from a health insurance carrier at the end of a quarter, our operating cash flows for that quarter could be adversely impacted. Additionally, commission override payments are reported to us in a more irregular pattern than premium commissions. For example, a carrier may make a commission override payment to us on an annual basis, which would positively impact our cash flows in the quarter the payment is received.
As a result of a new regulation issued by the Center for Medicare and Medicaid Studies (“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, all Medicare Advantage and Medicare Part D prescription drug policies will renew on January 1 of each year, resulting in our recording of all Medicare Advantage and Medicare Part D prescription drug plan renewal commission revenue in the first quarter of each year. As a result of this plan year change we did not recognize significant renewal commission revenue in the fourth quarter of 2014 and do not expect significant renewal commission revenue in the second, third or fourth quarters of
2013-Net cash used in investing activities of $7.3 million during the year ended December 31, 2013 was attributable entirely to capital expenditures. The increase in capital expenditures in 2013 as compared to 2012 primarily related to leasehold improvements as we expanded facilities during 2013.
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 $7.0 million over the ten-year 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 April 2013, we entered into an agreement to lease approximately 20,000 square feet of office space in Westford, Massachusetts. The lease commenced in July 2013 and is for a term of 5 years and 3 months. Future minimum payments will total approximately $2.1 million over the term of the lease.
In August 2014, we renewed our agreement to lease and expanded to approximately 50,000 square feet of office space in Gold River, California. The lease commenced in August 2014 and is for a term of 4 years and 5 months. Future minimum payments will total approximately $4.8 million over the term of the lease.
The supplementary financial information required by this Item 8 is included in Note 9 to the Consolidated Financial Statements under the caption “Selected Quarterly Financial Data (Unaudited).”
We have audited the accompanying consolidated balance sheets of eHealth, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
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, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
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 commission payment beginning with and subsequent to the second plan year for a Medicare Advantage plan or a fixed, annual commission payment beginning with and subsequent to the second plan year for a Medicare Part D prescription drug plan. Additionally, commission rates may be higher in the first twelve months of the plan if the plan is the first Medicare Advantage or Medicare Part D prescription drug plan issued to the member. In the first plan year of a Medicare Advantage and Medicare Part D prescription drug plan, after the health insurance carrier approves the application but during the effective year of the plan, we are paid a fixed commission that is prorated for the number of months remaining in the calendar year. Additionally, if the plan is the first Medicare Advantage or Medicare Part D plan issued to the member, we may receive a higher commission rate that covers a full twelve-month period, regardless of the month the plan was effective. We earn commission revenue for both Medicare Advantage and Medicare Part D prescription drug plans typically for a period of at least six years, depending on the carrier arrangement, provided that the plan remains active with us. We recognize commission revenue for both Medicare Advantage and Medicare Part D prescription drug plans for the entire plan year once the annual or first monthly commission amount for the plan year is reported to us by the carrier, net of an estimate for future forfeiture amounts due to plan cancellations. For 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 until the earlier of our being notified that the health insurance plan has been cancelled, our no longer remaining the agent on the plan, or our commission term with the carrier expires, typically for a period of at least six years from the effective date of the plan. 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.
Certain commission amounts are subject to forfeiture when the plan 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.
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 when the earned amount are fixed and determinable. We also offer Medicare advertising services, which include website development, hosting and maintenance. In these instances, we are typically paid a fixed, up-front fee, which we recognize as revenue over the service period.
Marketing and Advertising Expenses-Marketing and advertising expenses consist primarily of member acquisition expenses associated with our direct, marketing partner and online advertising member acquisition channels, in addition to compensation and other expenses related to marketing, business development, partner management, public relations and carrier relations personnel who support our offerings. Advertising costs incurred in the years ended December 31, 2012, 2013 and 2014 totaled $50.3 million, $63.4 million and $61.3 million, respectively.
Internal-Use Software and Website Development Costs-We capitalize costs of materials, consultants and compensation and benefits costs of employees who devote time to the development of internal-use software during the application development stage. Our judgment is required in determining the point at which various projects enter the phases at which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized, which is generally three years. During the year ended December 31, 2014, we capitalized $1.2 million in internal-use software and website development costs. During the year ended December 31, 2014 we recorded amortization expense of $0.2 million related to internal-use software and website development costs. Amortization expense for internal-use software and website development costs was not material for the years ended December 31, 2012 and 2013.
Stock-Based Compensation-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, 2014, 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 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.
of the first three years of the recipient’s service. The recipient is fully vested in all 401(k) Plan matching contributions after three years of service. We recognized expense of $0.2 million, $0.3 million, and $0.4 million for the years ended December 31, 2012, 2013, and 2014, respectively, related to 401(k) matching contributions.
This trend changed in the fourth quarter of 2013 and first quarter of 2014 as a result of a significant increase, relative to historical levels, in the number of individual and family applications submitted during the initial open enrollment period under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act, that began on October 1, 2013 and ended on March 31, 2014. This trend continued in the fourth quarter of 2014 as the number of individual and family applications submitted during the open enrollment period that began on November 15, 2014 increased compared to periods outside of the open enrollment period.
The majority of Medicare 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, we generate a significant amount of Medicare plan-related revenue in the fourth quarter of the year resulting from the sale of new Medicare plans. Additionally, 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 renewed on January 1 of each year. This trend continued in 2014 due to Centers for Medicare and Medicaid Services, or CMS, regulations that changed the definition of a plan year from being twelve months from the effective date of a policy to January 1 through December 31 of each year, causing all Medicare Advantage and Medicare Part D prescription drug policies to renew on January 1 of each year.
As a result of our seasonal trends in years prior to 2013, our revenue was highest in the fourth quarter of the year and our profitability was highest in the first quarter. However, in connection with the initial open enrollment period for individual and family plans which began on October 1, 2013 and ended on March 31, 2014, as well as the Medicare annual enrollment
Cash and Cash Equivalents-As of December 31, 2013 and 2014, 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, 2013 and 2014, 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, 2012, 2013 and 2014.
As of December 31, 2013 and 2014, our cash and cash equivalent balances were invested as follows (in thousands):
Concentration of Credit Risk-Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents and accounts receivable. We invest our cash and cash equivalents with major banks and
As of December 31, 2013 and 2014, our accounts receivable consisted of the following (in thousands):
On March 31, 2014, we purchased an internet domain name, www.Medicare.com, for $4.8 million. Cash consideration paid in connection with the purchase of the domain name totaled $4.5 million. The consideration paid also included $0.3 million of outstanding receivables from the owner of the domain name that were settled upon completion of the purchase. The related intangible asset was assigned an indefinite useful life. 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 useful life is as of December 31, 2014):
During the years ended December 31, 2012, 2013 and 2014, amortization expense related to intangible assets totaled $1.6 million, $1.4 million and $1.5 million, respectively.
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, 2013 and 2014, there were no shares of preferred stock outstanding.
Common Stock-On all matters submitted to our stockholders for vote, our common stockholders are entitled to one vote per share, voting together as a single class, and do not have cumulative voting rights. Accordingly, the holders of a
Our stock options and restricted stock awards granted under the 2014 Plan, 2006 Plan and 2005 Stock Plan (collectively, the “Stock Plans”) generally vest over 4 years at a rate of 25% after one year and 1/48th per month thereafter. Our stock options granted prior to December 31, 2007 generally expire after ten years from the date of grant. Stock options granted subsequent to December 31, 2007 generally expire after seven years from the date of grant. As of
are scheduled to vest in 2015. One-fourth of the shares earned and eligible to vest based on 2013 revenue for performance-based restricted stock units granted in 2013 became vested in 2014. The remaining shares granted in 2013 that are earned and eligible to vest based on 2013 revenue are scheduled to vest in equal annual installments between 2015 and 2017. None of the performance-based restricted stock units granted in 2013 or 2014 that were measured based upon the Company’s 2014 revenue were vested. $1.1 million of stock compensation expense recorded in 2013 related to performance-based restricted stock units was reversed in 2014 as a result of related financial metrics not being achieved for the year ended December 31, 2014. Expense recorded for performance-based restricted stock units is recorded over the required service periods based on the number of shares earned, or expected attainment for shares to be earned based on performance-based contingency periods that have not been completed.
Shares available for grant do not include treasury stock shares that could be granted if we determined to do so.
2012, 2013 and 2014 include cancelled restricted stock units with both service and performance-based vesting criteria.
On June 12, 2014, shares available for grant were adjusted to 4,500,000 pursuant to the terms of the 2014 Plan.
The total fair value of stock options vested during the years ended December 31, 2012, 2013 and 2014 was $2.4 million, $3.3 million and $2.3 million, respectively. As of December 31, 2014, there was $3.6 million of unrecognized stock-based compensation expense related to unvested stock options, which is expected to be recognized over the next 2.3 years.
The aggregate intrinsic value is calculated as eHealth’s closing stock price as of December 31 multiplied by the number of restricted stock units outstanding.
On September 10, 2012, we announced that our board of directors approved a stock repurchase program authorizing us to purchase up to $30 million of our common stock and on March 6, 2013, we announced that our board of directors increased the approved repurchase amount under this program to $60 million. Purchases under this program were made in the open market. The cost of the repurchased shares was funded from available working capital. We completed repurchasing common stock under this program in June 2013 having repurchased 2,957,179 shares for $60 million at an average price of $20.29 per share.
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. We completed this stock repurchase program in July 2014 having repurchased in the aggregate 1.4 million shares for approximately $50 million at an average price of $36.91 per share including commissions. The cost of the repurchase was funded from available working capital.
In addition to the shares repurchased under our repurchase programs as of December 31, 2014, we have in treasury an additional 281,719 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, 2013 and 2014, we had a total of 9,519,286 shares and 10,945,607 shares, respectively, held in treasury.
The following table summarizes stock-based compensation expense recorded during the years ended December 31, 2012, 2013 and 2014 (in thousands):
At December 31, 2014, we had tax credit carry forwards of approximately $3.6 million and $2.1 million for federal income tax and state income tax purposes, respectively. Federal tax credit carry forwards begin expiring in 2021 and state tax credits carry forward indefinitely.
As of December 31, 2013 and 2014, there were $4.6 million and $4.3 million, respectively, of unrecognized tax benefits, that, if recognized, would impact the effective tax rate.
The Company’s 2009 and 2010 California income tax returns are under audit by the Franchise Tax Board.
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
For each of the years ended December 31, 2012, 2013 and 2014, we had securities outstanding that could potentially dilute earnings per share, but the shares from the assumed conversion or exercise of these securities were excluded in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive. The number of outstanding weighted average anti-dilutive shares that were excluded from the computation of diluted net income (loss) per share consisted of the following (in thousands):
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, 2013 and 2014, we had no material liabilities included in our consolidated balance sheet for outstanding legal claims.