On April 6, 2018, a former California employee filed a complaint against us in the Superior Court of the State of California for the County of Sacramento. The plaintiff’s complaint was filed pursuant to the California Labor Code Private Attorneys General Act of 2004, purportedly on behalf of all current and former hourly-paid or non-exempt employees who work or have worked for us in California. The complaint alleges that we violated a number of wage and hour laws with respect to these non-exempt employees, including, among other things, the failure to comply with California law as to (i) the payment of overtime wages; (ii) the payment of minimum wages; (iii) providing uninterrupted meal and rest periods, (iv) the payment of wages earned during employment and owed upon the termination of employment; (v) providing complete and accurate wage statements, (vi) keeping of accurate payroll records; and (vii) the proper reimbursement for necessary business-related expenses and costs. The complaint seeks allegedly unpaid wages, civil penalties and costs, expenses and attorneys’ fees. Discovery has only recently commenced, and as a result we cannot estimate the likelihood of liability or the amount of potential damages.
In the ordinary course of our business, we have received and may continue to receive inquiries from state and federal regulators relating to various matters. We have become, and may in the future become, involved in litigation in the ordinary course of our business. If we are found to have violated laws or regulations in any jurisdiction, we could be subject to various fines and penalties, including revocation of our license to sell insurance in those states, and our business, operating results and financial condition would be harmed. Revocation of any of our licenses or penalties in one jurisdiction could cause our license to be revoked or for us to face penalties in other jurisdictions. In addition, without a health insurance license in a jurisdiction, carriers would not pay us commissions for the products we sold in that jurisdiction, and we would not be able to sell new health insurance products in that jurisdiction. We could also be harmed to the extent that related publicity damages our reputation as a trusted source of objective information relating to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome.
Financial data for 2017, 2016 and 2015 have been adjusted to reflect the impact of the adoption of ASC 606.
For more information on segment and geographic information, see Note 1-Summary of Business and Significant Accounting Policies and Note 9 - Operating Segments, Geographic Information and Significant Customers in the Notes to Consolidated Financial Statements of this Form 10-K.
Adoption of Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (ASC 606)
In March 2010, the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act were signed into law. These health care reform laws contain provisions that changed and will continue to change the health insurance industry in substantial ways. We have described various aspects of health care reform in
Part I, Item 1, Business - Health Care Reform and Part I, Item 1A, Risk Factors - Risks Related to Our Business of this Form 10-K. The implementation of health care reform has significantly reduced our individual and family health insurance membership and commission revenue.
The Trump administration and Republican leadership have repeatedly communicated their intention to alter or repeal the Affordable Care Act, but their efforts to do so have so far been unsuccessful. As a part of the tax reform law that came into effect in December 2017, the tax penalty for violating the individual mandate to have qualifying health insurance was reduced to zero effective in 2019, essentially repealing it. The essential repeal of the individual mandate could have a further adverse impact on the individual and family health insurance market. In addition to the repeal of the mandate, the Trump administration issued an executive order in October 2017 that directed the executive branch of the government to consider proposing regulations and revising guidance to expand access to association health plans, expand the availability of short term health insurance and increase the usability of health reimbursement arrangements. As a result of the executive order, new regulations have been adopted that would facilitate association-based health insurance plans and promote the sale of more short term health insurance. The regulations relating to association health plans would allow small businesses to join industry or geographically-based associations and collectively purchase large group health insurance plans. Unlike small group health insurance, large group health insurance is not subject to many of the provisions of the Affordable Care Act, including the requirement that health insurance plans cover all of the essential health benefits defined under the Affordable Care Act. The goal of the regulation is to reduce the cost of insurance for individuals who receive their health insurance under associations. The regulations relating to short-term health insurance plans extend the initial duration of short-term health insurance from three months to less than one year and allow for short-term health insurance plans to be renewed as long as the total duration of the plan does not exceed thirty-six months. However, states have authority to impose their own regulations over short-term health insurance plans sold in their markets and certain states have adopted or are contemplating laws and regulations that could ban the sale of short-term health insurance, limit their durations and renewability, apply certain aspects of the Affordable Care Act to short-term health insurance or impose stronger disclosure requirements than the federal regulation. The expansion of the use of short-term health insurance in many states may cause individuals and families to purchase short-term insurance instead of individual and family health insurance. The regulations relating to association-based health insurance and short-term health insurance could present new business opportunities for us, but also may reduce the size of the individual, family and small business health insurance markets that we address or otherwise adversely impact our business and operating results.
The following table shows submitted applications by product for the years ended December 31, 2018, 2017 and 2016:
2018 compared to 2017-Medicare submitted applications grew 39% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase was primarily due to direct-to consumer marketing initiatives, our flexible call center capabilities, an improved online experience and our acquisition of GoMedigap. Individual and family plan submitted applications declined 56% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to the continuing turmoil in the individual and family plan market as a result of the Affordable Care Act and our continued focus on the Medicare market in 2018. 16% of all Medicare Advantage and Medicare Supplement applications were submitted online for the year ended December 31, 2018, compared to 10% for the year ended December 31, 2017.
The following table shows approved members by product for the years ended December 31, 2018, 2017 and 2016:
2018 compared to 2017-Medicare approved members grew 36% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase was primarily due to 39% growth in Medicare submitted applications mainly driven by our investment in Medicare-related marketing initiatives, call center capabilities and an improved online experience and our acquisition of GoMedigap. Individual and Family Plan approved members declined 46% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to the state of the individual and family health insurance plan market. Approved members for all ancillary products combined for the year ended December 31, 2018 increased 1% compared to the year ended December 31, 2017, despite a decrease in submitted applications of 6%, due to improved conversion rates year-over-year. Small business approved members grew 28% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to improved focus on key partnerships, technology enhancements and increased conversion rates.
2017 compared to 2016-Medicare approved members grew 8% for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was primarily due to 10% growth in Medicare submitted applications mainly driven by our investment in Medicare platforms and call center capabilities. Individual and Family Plan approved members declined 55% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to the state of the
Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the month of estimation.
Health insurance carriers bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their policies do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date.
As part of our adoption of ASC 606 - Revenue from Contracts with Customers, we record the lifetime value of each policy for which we earn the right to commission payments at the time of approval, net of an estimated constraint. Refer to Note 1 - Summary of Business and Significant Accounting Policies for further discussion. The following table shows the variable marketing cost per approved member and the customer care and enrollment expense per approved member metrics for the years ended December 31, 2018, 2017 and 2016:
2017 compared to 2016-Medicare CC&E expense per approved MA-equivalent member increased 15% for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to increased sales agent and training costs. Variable marketing cost per approved MA-equivalent member decreased 9% for the year ended December 31, 2017 due to our focus on marketing optimization efforts to enhance the quality of demand we generate and enhance conversions through our direct and paid search advertising channels while reducing marketing spend with certain marketing partners. Variable marketing cost per approved IFP-equivalent member decreased 9% for the year ended December 31, 2017 compared to the year ended
December 31, 2016 due to lower marketing spend. IFP CC&E expense per approved IFP-equivalent member increased 131% for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to continuing adverse market conditions in the Individual and Family Plan market.
During the year ended December 31, 2018, there were no significant changes to our critical accounting policies and estimates other than the adoption of ASC 606 - Revenue from Contracts with Customers, using the full retrospective transition method.
Determination of the transaction price. The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.
Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that
For Medicare-related, individual and family and ancillary health insurance plans, our services are complete once a submitted application is approved by the relevant health insurance carrier. Accordingly, we recognize commission revenue based upon the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application, net of a constraint. We refer to these estimated and constrained lifetime values as the constrained LTV for the plan. We provide annual services in selling and renewing small business health insurance plans; therefore, we recognize small business health insurance plan commission revenue at the time the plan is approved by the carrier, and when it renews each year thereafter, equal to the estimated commissions we expect to collect from the plan over the following 12 months. Our estimate of commission revenue for each product line is based on a number of assumptions, which include, but are not limited to, estimating conversion of an approved member to a paying member, forecasting member churn and forecasting the commission amounts likely to be received per member. These assumptions are based on historical trends and incorporate management’s judgment in interpreting those trends and in applying constraints discussed below. To the extent we make changes to the assumptions, we will recognize any material impact of the changes to commission revenue in the reporting period in which the change is made, including revisions of estimated lifetime commissions either below or in excess of previously estimated constrained LTV recognized as revenue.
Our commercial technology licensing business allows carriers the use of our ecommerce platform to offer their own health insurance policies on their websites and agents to utilize our technology to power their online quoting, content and application submission processes. Typically, we are paid a one-time implementation fee, which we recognize as control is transferred on a straight-line basis over the estimated term of the customer relationship (generally the initial term of the agreement), commencing once the technology is available for use by the third party, and a performance fee based on metrics such as submitted health insurance applications. The metrics used to calculate performance fees for both sponsorship and advertising and technology licensing are based on performance criteria that are either measured based on data tracked by us, or based on data tracked by the third party. In instances where the performance criteria data is tracked by us, we recognize revenue in the period of performance and when all other revenue recognition criteria has been met. In instances where the performance criteria data is tracked by the third party, we recognize revenue when reversal of such amounts is not likely to occur. Typically, this occurs through our receipt of a cash payment from the third party along with a detailed statement containing the data that is tracked by the third party.
We recognize stock-based compensation expense in the accompanying Consolidated Statements of Comprehensive Income 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, 2018, 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 and earnings 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. 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.
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax expense together with assessing temporary differences that may result in deferred tax assets.
The following table sets forth our operating results and related percentage of total revenues for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
2018 compared to 2017-Commission revenue increased $50.3 million, or 28%, in 2018, due to an increase of $57.2 million, or 42%, in Medicare commission revenue, partially offset by a $5.0 million decrease in Individual, Family and Small Business commission revenue. The increase in Medicare commission revenue was due to an increase in approved members of 36%, as well as increases in the lifetime value of commissions per Medicare Supplement and Medicare Advantage approved members for the year ended December 31, 2018 compared to December 31, 2017. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 46% decline in individual and family health insurance approved members as of December 31, 2018 compared to December 31, 2017 due to the state of the individual and family health insurance plan market as a result of health care reform. Commission revenue was higher in the fourth quarter for both of the years ended December 31, 2018 and 2017 due to the seasonality of enrollments.
Other revenue decreased $2.3 million, or 14%, in 2017 due primarily to decreases of $1.5 million in online sponsorship and advertising revenue, $0.5 million in lead generation revenue and $0.3 million in licensing revenue.
The following table presents our cost of revenue for the years ended December 31, 2018, 2017 and 2016 and the dollar and percentage changes from the prior year (dollars in thousands):
2018 compared to 2017-Cost of revenue increased $0.6 million in 2018 compared to 2017, due primarily to an increased volume of Medicare submitted applications related to marketing partners with whom we have revenue sharing arrangements.
2017 compared to 2016-Cost of revenue decreased $0.3 million in 2017 compared to 2016, due primarily to a decrease in payments to marketing partners with whom we have revenue sharing arrangements.
2017 compared 2016-Marketing and advertising expenses decreased $6.3 million, or 9%, in 2017, primarily due to decreases of $7.8 million in variable advertising costs and $0.3 million in stock-based compensation, partially offset by increases of $1.2 million in personnel costs due to additional headcount and $0.6 million in consulting expenses. The decrease in variable advertising costs was largely attributable to decreases of $13.3 million in online advertising costs and $9.2 million in marketing partner channel costs, partially offset by a $14.7 million increase in direct marketing costs and was driven primarily by our strategy to shift our demand generation in the Medicare market to more cost-effective channels, as well as the lower volume of submitted individual and family applications compared to 2016. Marketing expenses were higher in the fourth quarter for both of the years ended December 31, 2017 and 2016 due to the seasonality of enrollments.
The following table presents our customer care and enrollment expenses for the years ended December 31, 2018, 2017, and 2016 and the dollar and percentage changes from the prior year (dollars in thousands):
2017 compared to 2016-Customer care and enrollment expenses increased $10.5 million, or 21%, in 2017 compared to 2016, primarily due to growth in our Medicare and small group businesses, which resulted in increases of $6.3 million in personnel costs, $2.1 million in external call center costs, $1.2 million in licensing costs and $0.8 million in facilities and other operating costs.
The following table presents our technology and content expenses for the years ended December 31, 2018, 2017 and 2016 and the dollar and percentage changes from the prior year (dollars in thousands):
2018 compared 2017-Technology and content expenses decreased $0.9 million, or 3%, in 2018 as a result of a $2.8 million decrease in personnel costs, $0.4 million in depreciation and amortization expense, and $0.1 million in other professional fees, partially offset by increases of $1.0 million in consulting expenses, $0.4 million in facilities and other operating costs, and $0.3 million in stock-based compensation expense.
During 2017, we incurred $0.6 million of costs associated with our acquisition of Wealth, Health and Life Advisors, LLC, which was completed on January 22, 2018. Acquisition costs incurred in the year ended December 31, 2018 were immaterial.
In February 2018, our Board of Directors approved a plan to close our sales call center in Massachusetts and to terminate the employment of certain employees in certain other locations. As part of the plan, we eliminated approximately 110 full-time positions in the United States, representing approximately 10% of our workforce primarily in our customer care and enrollment groups, and to a lesser extent, in our marketing and advertising and general and administrative groups. We incurred $1.9 million for employee termination benefits and related costs in the year ended December 31, 2018. The restructuring activities comprising the plan were completed during the year ended December 31, 2018.
The following table presents our intangible asset amortization expense for the years December 31, 2018, 2017 and 2016 and the dollar change from the prior year (dollars in thousands):
2018 compared to 2017-Amortization expense was driven by intangible assets purchased through our acquisitions of PlanPrescriber and GoMedigap. Amortization expense for the year ended December 31, 2018 increased year over year due to the amortization of intangible assets from the GoMedigap acquisition, which was completed on January 22, 2018.
Other income, net, for the years ended December 31, 2018, 2017 and 2016 primarily consisted of margin earned on commissions received from Medicare plan members transferred to us in 2010 through 2012 by a broker partner, whereby we became the broker of record on the underlying policies. In addition, other income, net included 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 and our debt facility.
2018 compared to 2017-Other income, net, decreased by $427,000 in 2018, primarily due to an increase in interest expense as a result of a new debt facility entered into in the year ended December 31, 2018 and realized losses.
We report segment information based on how our chief executive officer, who is our chief operating decision maker, or CODM, regularly reviews our operating results, allocates resources, and makes decisions regarding our business operations. The performance measures of our operating segments include revenues and profit and loss. Our business structure is comprised of two operating segments:
The Individual, Family and Small Business segment consists primarily of commissions earned from our sale of individual and family and small business health insurance plans and ancillary products sold to our non-Medicare-eligible customers, including but not limited to, dental, vision, life, short term disability and long term disability insurance. To a lesser extent, the Individual, Family and Small Business segment consists of amounts earned from our online sponsorship program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website, our licensing to third
parties the use of our health insurance ecommerce technology and our delivery and sale to third parties of individual and family health insurance leads generated by our ecommerce platforms and our marketing activities.
Segment profit is calculated as total revenue for the applicable segment less direct and allocated marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses, excluding stock-based compensation, depreciation and amortization expense and amortization of intangible assets.
Revenue from our Individual, Family and Small Business segment decreased $7.4 million, or 15%, in 2018, primarily attributable to a $6.9 million decrease in commission revenue and a $0.5 million decrease in other revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 46% decline in individual and family health insurance approved members in 2018 primarily attributable to lower application submission and a decrease in the membership retention rate. The decrease in other revenue also resulted from the decrease in individual and family health insurance applications submitted during 2018.
Profit from our Individual, Family and Small Business segment was $5.8 million in 2018, a $3.8 million, or 39%, decrease compared to profit of $9.6 million from the Individual, Family and Small Business segment in 2017. The decrease in profit from the Individual, Family and Small Business segment in 2018 was primarily due to a $7.4 million decrease in revenue, of which $5.0 million related to a decrease in individual and family health plan revenue and $3.5 million related to ancillary revenue, partially offset by a $1.1 million increase in Small Business revenue. The decrease in Individual, Family and Small Business segment revenue from 2017 to 2018 was mainly due to the decline in individual and family health insurance approved members as well as the number of ancillary products which are often cross-sold with our IFP policies.
Revenue from our Medicare segment increased $20.3 million, or 17%, in 2017 largely due to an $18.8 million increase in commission revenue and a $1.5 million increase in other revenue. The increase in Medicare commission revenue was primarily attributable to an 8% increase in Medicare approved members as of December 31, 2017 and the increase in lifetime value of commissions per Medicare Supplement and Medicare Advantage approved members was primarily due to higher application submissions and improved conversion rates.
Revenue from our Individual, Family and Small Business segment decreased $22.9 million, or 32%, in 2017, primarily attributable to a $19.1 million decrease in commission revenue and a $3.8 million decrease in other revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 55% decline in individual and family health insurance approved members in 2017 primarily attributable to lower application submission and a decrease in the membership retention rate. The decrease in other revenue also resulted from the decrease in individual and family health insurance applications submitted during 2017.
Profit from our Medicare segment was $22.1 million in 2017, an $11.7 million, or 113%, improvement compared to profit of $10.4 million in 2016. The improvement in profit from the Medicare segment in 2017 was primarily due to a $20.3 million increase in revenue, of which $18.3 million related to Medicare commissions revenue and $1.5 million related to other revenue, partially offset by an $8.5 million increase in operating expenses excluding stock-based compensation, depreciation and amortization expenses and amortization of intangible assets. The increase in revenue from 2016 to 2017 was mostly due to an increase in approved members. The increase in operating expenses was primarily attributable to an increase in personnel
costs associated with higher headcount, an increase in variable advertising expense associated with the increase in applications and an increase in the number of licensed sales agents.
At December 31, 2018, our cash and cash equivalents totaled $13.1 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, 2017, our cash and cash equivalents totaled $40.3 million. The decrease in cash and cash equivalents reflects $3.2 million used in operating activities, $25.8 million used in investing activities and $1.9 million provided by financing activities.
The following table presents a summary of our cash flows for the years ended December 31, 2018, 2017 and 2016 (in thousands):
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 since commission revenue is recognized upon approval of a member but commission payments are paid to us over time, our operating cash flows could be adversely impacted by a substantial decrease in the volume of applications submitted during a quarter or negatively impacted by a substantial increase in attrition 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. Similarly, 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.
Year Ended December 31, 2018-Cash used in operating activities was $3.2 million during 2018, consisting of net income of $0.2 million, offset by cash used in operating assets and liabilities and other activities of $38.6 million and adjustments for non-cash items of $35.1 million. Adjustments for non-cash items primarily consisted of $12.5 million of stock-
based compensation expense, $2.1 million of amortization of intangible assets and internally-developed software and $2.5 million of depreciation and amortization, $2.8 million decrease in deferred income taxes, and $12.3 million change in fair value of earnout liability. The cash decrease resulting from changes in net operating assets and liabilities during the year ended December 31, 2018 primarily consisted of an increase of $51.0 million in commissions receivable and a $2.1 million increase in trade receivables, partially offset by increases of $6.3 million in accrued marketing expenses, $5.1 million in accrued compensation and benefits, $1.4 million in accounts payable, $0.9 million in other current liabilities, $0.5 million in deferred revenue, and $0.2 million in prepaid expenses.
Year Ended December 31, 2017-Cash used in operating activities was $15.5 million during 2017, consisting of a net income of $25.4 million, offset by cash used in operating assets and liabilities and other activities of $25.6 million and adjustments for non-cash items of $15.4 million. Adjustments for non-cash items primarily consisted of $9.7 million of stock-based compensation expense, $2.5 million of amortization of intangible assets and internally-developed software and $2.8 million of depreciation and amortization and $30.3 million decrease in deferred income taxes. The cash decrease resulting from changes in net operating assets and liabilities during the year ended December 31, 2017 primarily consisted of decreases of $1.3 million in other liabilities, $3.4 million in accrued marketing expenses, $1.9 million in accounts payable and $0.5 million in deferred revenue and increases of $21.6 million in commissions receivable and $1.9 million in prepaid expenses and other current assets, partially offset by a $4.6 million increase in accrued compensation and benefits and a $0.5 million decrease in accounts receivable.
Year Ended December 31, 2016-Our operating activities generated cash of $4.1 million during the year ended December 31, 2016 and consisted of net income of $0.3 million and adjustments for non-cash items of $17.3 million, offset by cash used in operating assets and liabilities and other activities of $13.5 million. Adjustments for non-cash items primarily consisted of $7.3 million of stock-based compensation expense, $2.0 million of amortization of internally-developed software and intangible assets and $3.5 million of depreciation and amortization and $4.7 million increase in deferred income taxes. The cash decrease resulting from changes in net operating assets and liabilities during the year ended December 31, 2016 primarily consisted of decreases of $3.9 million in accrued marketing expenses, $3.5 million in accrued compensation and benefits, $2.0 million in accrued expense and other liabilities and increases of $8.0 million in commissions receivable and $0.5 million in prepaid expenses and other current assets. These decreases were partially offset by increases of $2.2 million in accounts payable and $0.6 million in deferred revenue and a $1.6 million decrease in accounts receivable.
Year Ended December 31, 2018-Net cash used in investing activities of $25.8 million during 2018 was due to $14.9 million of net cash used to acquire GoMedigap, $6.3 million in capitalized internal-use software and website development costs, and $4.5 million used to purchase property and equipment and other assets.
Year Ended December 31, 2017-Net cash used in investing activities of $5.1 million during 2017 was due to $3.2 million in capitalized internal-use software and website development costs and $1.9 million used to purchase property and equipment and other assets.
Year Ended December 31, 2016 - Net cash used in investing activities of $3.7 million during the year ended December 31, 2016 was due to $1.8 million in capitalized internal-use software and website development costs and $1.9 million used to purchase property and equipment and other assets.
Year Ended December 31, 2018-Net cash provided by financing activities of $1.9 million during 2018 was primarily due to $5.0 million proceeds from drawing on our line of credit, $2.7 million net proceeds from exercises of common stock options, partially offset by $4.5 million used to net-share settle the tax obligation related to vesting equity awards, $1.2 million of debt issuance costs, and $0.1 million for principal payments in connection with capital leases.
As discussed in Note 10-Debt of Notes to Consolidated Financial Statements included elsewhere in this Form 10-K, on September 17, 2018, we entered into a Credit Agreement with Royal Bank of Canada, or RBC, as administrative agent and collateral agent, or the Credit Agreement. The Credit Agreement provides for a $40 million secured asset-backed revolving credit facility with a $5 million letter of credit subfacility. The commitments under the Credit Agreement expire on September 17, 2021.
As discussed in Note 13-Subsequent Event of Notes to Consolidated Financial Statements included elsewhere in this Form 10-K, we entered into an underwriting agreement to issue 2,760,000 shares of common stock, which includes the exercise in full of the underwriters' option to purchase 360,000 additional shares of common stock, at a price to the public of $48.50 per share. Net proceeds from the offering were approximately $126.2 million after deducting underwriting discounts and commissions and the estimated expenses of the offering. We intend to use the net proceeds of the offering for general corporate purposes, including working capital.
We believe that cash generated from operations and our current cash and cash equivalents and credit facility will be sufficient to fund our operations, including the additional amounts we are obligated to pay subject to the terms of the acquisition agreement with GoMedigap, for at least twelve months after the filing date of this Annual Report on Form 10-K. Our future capital requirements will depend on many factors, including our expected membership and retention rates, our level of investment in technology, marketing and advertising and our customer care initiatives. In addition, our cash position could be impacted by further acquisitions and investments we make to pursue our growth strategy. To the extent that available funds
In March 2012, we entered into an agreement to lease a building in Mountain View, California, adjacent to our former headquarters office. The term of the operating lease is ten years from the date the building was delivered to us in August 2013. The base rent increases annually by 3%. We entered into a sublease agreement related to this lease on November 2, 2018. As of December 31, 2018, future minimum payments related to this operating lease total $3.5 million, net of sublease income over the remaining term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease.
In 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. In May 2018, we closed this facility.
approximately 11,200 square feet of this leased office space as a result of a workforce reduction. We reoccupied approximately 5,400 square feet of this previously vacated office space in 2016. As of December 31, 2018, future minimum payments related to this operating lease totaled approximately $2.3 million for the remaining term of the lease.
In August 2017, we entered into an agreement to amend our lease of approximately 28,000 square feet of office space in South Jordan, Utah. This amendment extends the term of this facility lease by 5 years and 3 months from January 2018 to March 2023. As of December 31, 2018, future minimum payments related to this operating lease totaled approximately $2.9 million for the remaining term of the lease.
We have entered into service and licensing agreements with third party vendors to provide various services, including network access, equipment maintenance and software licensing. The terms of these services and licensing agreements are generally up to three years. We record the related service and licensing expenses on a straight-line basis, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements.
The supplementary financial information required by this Item 8 is included in Note 12 to the Consolidated Financial Statements under the caption “Selected Quarterly Financial Data (Unaudited).”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 13, 2019 expressed an unqualified opinion thereon.
(1) Balances and the years ended December 31, 2016 and 2017 have been adjusted for the adoption of ASC 606 using the full retrospective method.
(1) As adjusted for the adoption of ASC 606 using the full retrospective method.
Adoption of New Accounting Standard-Effective January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (ASC 606), as discussed in detail below under Adoption of New Accounting Standards using the full retrospective method, which requires adjusting prior periods as if ASC 606 had been in effect as of the beginning of the earliest period presented. Thus, the accompanying consolidated balance sheet as of December 31, 2017 as well as the accompanying statements of comprehensive income, stockholders’ equity, and cash flows for the years ended December 31, 2017 and 2016 have been adjusted to reflect the adoption of ASC 606 as have all related disclosures, including segment information. See “Revenue Recognition” below for additional information on ASC 606 and Note 14 - Adoption Impact of New Revenue Standard for further discussion of the adoption and the impact on our previously reported historical results.
The Medicare segment consists primarily of commissions earned from our sale of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans, and to a lesser extent, ancillary products sold to our Medicare-eligible customers, including but not limited to, dental and vision insurance, as well as our advertising program that allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us and our delivery and sale to third parties of Medicare-related health insurance leads generated by our ecommerce platforms and our marketing activities.
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. In the event that we realign our reporting units, we allocate our goodwill to the new reporting units using the relative fair value approach. We test our goodwill for impairment on an annual basis in the fourth quarter of each year or whenever events or changes in circumstances indicate that the asset may be impaired. Factors that we consider in deciding when to perform an impairment test include significant negative industry or economic trends or significant changes or planned changes in our use of the intangible assets.
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a potential reduction in their fair values below their respective carrying amounts. Intangible assets with finite useful lives, which include
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 assets’ new, remaining useful life. We evaluated the remaining useful lives of our intangible assets with finite lives and determined no material adjustments to the remaining lives were required.
Recognition of revenue when, or as, we satisfy a performance obligation. We satisfy performance obligations either over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring the promised good or service to the customer.
For individual and family, Medicare Supplement, small business and ancillary plans, our commissions generally represent a flat amount per member per month or a percentage of the premium amount collected by the carrier during the period that a member maintains coverage under a plan. Premium-based commissions are reported to us after the premiums are collected by the carrier, generally on a monthly basis. We generally continue to receive the commission payment from the relevant insurance carrier until the health insurance plan is cancelled or we otherwise do not remain the agent on the policy.
We utilize a practical expedient to estimate commission revenue for each insurance product by applying the use of a portfolio approach to group approved members by the effective month of the relevant policy (referred to as a “cohort”). This allows us to estimate the commissions we expect to collect for each approved member cohort by evaluating various factors, including but not limited to, contracted commission rates, carrier mix and expected member churn.
For Medicare-related, individual and family and ancillary health insurance plans, our services are complete once a submitted application is approved by the relevant health insurance carrier. Accordingly, we recognize commission revenue based upon the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application, net of an estimated constraint. We refer to these estimated and constrained lifetime values as the "constrained LTV" for the plan. We provide annual services in selling and renewing small business health insurance plans; therefore, we recognize small business health insurance plan commission revenue at the time the plan is approved by the carrier, and when it renews each year thereafter, equal to the estimated commissions we expect to collect from the plan over the following 12-months. Our estimate of commission revenue for each product line is based on a number of assumptions, which include, but are not limited to, estimating conversion of an approved member to a paying member, forecasting member churn and forecasting the commission amounts likely to be received per member. These assumptions are based on historical trends and incorporate management’s judgment in interpreting those trends and in applying constraints discussed below. To the extent we make changes to the assumptions, we will recognize any material impact of the changes to commission revenue in the reporting period in which the change is made, including revisions of estimated lifetime commissions either below or in excess of previously estimated constrained LTV recognized as revenue.
For Medicare-related, individual and family and ancillary health insurance plans, we apply constraints to determine the amount of commission revenue to recognize per approved member. The constraints are applied to help ensure that the total estimated lifetime commissions expected to be collected for an approved member’s plan are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with future commissions receivable from the plan is subsequently resolved. We evaluate the appropriateness of these constraints on at least an annual basis, including assessing factors affecting our estimate of the estimated lifetime value of commissions per approved member based on current trends impacting our business and assessing
See Note 14 - Adoption Impact of New Revenue Standard for discussion of our adoption of ASC 606.
Other Revenue-Our sponsorship and advertising program allows carriers to purchase advertising space in specific markets in a sponsorship area on our website. In return, we are typically paid a monthly fee, which is recognized over the period that advertising is displayed, and often a performance fee based on metrics such as submitted health insurance applications, which is recognized when control has been transferred. We also offer Medicare advertising services, which include website development, hosting and maintenance. In these instances, we are typically paid a fixed, up-front fee, which we recognize as revenue as control is transferred ratably over the service period.
Book-of-Business Transfers-We entered into several agreements with a broker partner, whereby the partner transferred certain of its existing Medicare plan members to us as the broker of record on the underlying policies. The first of these book-of-business transfers occurred in November 2010 and the most recent in June 2012. Total consideration paid by us for these books-of-business amounted to $13.9 million. The consideration we paid to the broker partner was based on the discounted commissions expected to be received over the remaining life of each transferred Medicare plan member. As we receive commission payments from health insurance carriers for these plan members, we record the margin earned to other income (expense), net in the Consolidated Statements of Comprehensive Income. The margin earned and recorded to other income, net for these books-of-business for the years ended December 31, 2018, 2017 and 2016 totaled $0.8 million, $0.9 million, and $1.0 million respectively.
Incremental Costs to Obtain a Contract-We reviewed our sales compensation plans, which are directed at converting leads into approved members, and concluded that they are fulfillment costs and not costs to obtain a contract with a
health insurance carrier, which we define as our customer. Additionally, we reviewed compensation plans related to personnel responsible for identifying new health insurance carriers and entering into contracts with new health insurance carriers and concluded that no incremental costs are incurred to obtain such contracts.
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, 2018, 2017 and 2016 totaled $64.4 million, $56.0 million and $64.8 million, respectively.
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 $6.9 million, $7.6 million and $8.9 million for the years ended December 31, 2018, 2017 and 2016, respectively, are included in technology and content expense in the accompanying Consolidated Statements of Comprehensive Income.
Stock-Based Compensation-We recognize stock-based compensation expense in the accompanying Consolidated Statements of Comprehensive Income 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, 2018, 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 and earnings 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.
Seasonality-A greater number of our Medicare-related health insurance plans are sold in our fourth quarter during the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year. As a result, our Medicare plan-related commission revenue is highest in our fourth quarter.
The majority of our individual and family health insurance plans are sold in the fourth quarter during the annual open enrollment period as defined under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. Individuals and families generally are not able to purchase individual and family health insurance outside of these open enrollment periods, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance or moving to another state.
Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40)-In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Agreement That is a Service Contract, which provides guidance for accounting for implementation costs incurred in internal-use cloud computing agreements. We early adopted ASU 2018-15 in the third quarter of fiscal 2018 prospectively. It did not have a material impact on our condensed consolidated financial statements.
Goodwill Impairment (Topic 350)-In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 350). Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019 with early adoption permitted for annual goodwill impairment tests performed after
January 1, 2017. The standard must be applied prospectively. We early adopted ASU 2017-04 in the first quarter of 2018 and perform our annual impairment test in the fourth fiscal quarter of each year. The adoption of this new standard did not have a material impact on our condensed consolidated financial statements.
Leases (Topic 842)-In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement, and presentation of expenses will depend on classification as a finance or operating lease; for lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. The guidance also eliminates existing real estate-specific provisions for all entities. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. We plan to adopt the standard using the modified retrospective method, and we are substantially complete with our implementation efforts. We estimate the total right-of-use asset and lease liability to be approximately $23 million to $26 million.
On January 22, 2018, we completed our acquisition of all outstanding membership interests of Wealth, Health and Life Advisors, LLC, more commonly known as GoMedigap, a technology-enabled provider of Medicare Supplement enrollment services. The acquisition consideration consisted of cash of $15.0 million, less $0.1 million of cash acquired, and 294,637 shares of our common stock. In addition, the members of GoMedigap are entitled to receive earnout payments ("Earnout Consideration") consisting of up to $20 million in cash and 589,275 shares of our common stock. The Earnout Consideration will become payable, subject to the terms and conditions of the purchase agreement relating to the acquisition, upon the final determination of the achievement of certain milestones in 2018 and 2019.
Goodwill and Intangible Assets-Goodwill represents the excess of the purchase price of the acquired business over the acquisition date fair value of the net assets acquired. Goodwill is primarily attributable to the assembled workforce, new product development capabilities and anticipated synergies and economies of scale expected from the operations of the combined company. The goodwill was assigned to our Medicare segment. Goodwill is tested for impairment on an annual basis in the fourth quarter of each year or whenever events or changes in circumstances indicate that the asset may be impaired. Factors that we consider in deciding when to perform an impairment test include significant negative industry or economic trends or significant changes or planned changes in our use of the intangible assets. Goodwill will be deductible for tax purposes over 15 years.
Earnout liability-The earnout liability represents the fair value of the earnout consideration payable and will be adjusted to fair value at each reporting date until settled. Changes in fair value will be recognized in income (loss) from operations. The earnout liability will be adjusted to the extent the enrollment targets in the acquisition agreement are not achieved. The first earnout liability payment was made in February 2019. The second payment is expected to be made in the first quarter of 2020.
The fair value of the earnout consideration payable was measured using probability-weighted analysis and is discounted using a rate that appropriately captures the risk associated with the obligation. Key assumptions included new enrollments and volatility for the year ended December 31, 2018 and the year ending December 31, 2019, as well as eHealth’s simulated stock price at the time of payment. The earnout consideration payable was part of the acquisition consideration and will be adjusted to fair value at each reporting date until settled. The fair value adjustments to the earnout liability during the year ended December 31, 2018 totaled $12.3 million. We will continue to update the key assumptions each period and record any fair value adjustments, as necessary.
We are amortizing the existing technology, trade names, trademarks, and website addresses using the straight-line method over an estimated life of 3 and 10 years, respectively. The estimated useful lives are based on the time periods during which the intangibles are expected to result in incremental cash flows.
GoMedigap generated revenue of $15.2 million for the period from the acquisition date of January 22, 2018 through December 31, 2018.
Concentration of Credit Risk-Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents and total accounts receivable (which includes commissions receivable). We invest our cash and cash equivalents with major banks and financial institutions and, at times, such investments are in excess of federally insured limits. We also have deposits with major banks in China that are denominated in both U.S. dollars and Chinese Yuan Renminbi and are not insured by the U.S. federal government.
We do not require collateral or other security for our total accounts receivable. As of December 31, 2018, three customers represented 19%, 19% and 19%, respectively, for a combined total of 57% of our $349.5 million total outstanding accounts receivable balance. As of December 31, 2017, three customers represented 19%, 18% and 18%, respectively, or a combined total of 55%, of our $280.9 million total outstanding accounts receivable balance. No other customers represented 10% or more of our total accounts receivable at either December 31, 2018 or 2017. We believe the potential for collection issues with any of our customers was minimal as of December 31, 2018. Accordingly, our estimate for uncollectible amounts at December 31, 2018 was immaterial.
Accounts Receivable-As of December 31, 2018 and 2017, our total accounts receivable consisted of the following (in thousands):
The commissions receivable balance as of December 31, 2018 and 2017, primarily relates to Medicare Advantage and Medicare Part D plans sold during the fourth quarters of 2018 and 2017 with effective dates in 2019 and 2018, respectively.
Intangible Assets-The carrying amounts, accumulated amortization, net carrying value and weighted average remaining life of our definite-lived amortizable intangible assets, as well as our indefinite-lived intangible trademarks, are presented in the tables below (dollars in thousands, weighted-average useful life is as of December 31, 2018):
During the years ended December 31, 2018, 2017 and 2016, amortization expense related to intangible assets totaled $2.1 million, $1.0 million, and $1.0 million, respectively.
As of December 31, 2018, expected amortization expense in future periods is as follows (in thousands):
Non-current Liabilities-As of December 31, 2018 and 2017, non-current liabilities consisted of the following (in thousands):
We measure the earnout liability using internally developed assumptions, therefore it is classified as Level 3. The fair value of the earnout liability was measured using probability-weighted analysis and is discounted using a rate that appropriately captures the risk associated with the obligation. Key assumptions included new enrollments and volatility for the year ended December 31, 2018 and the year ending December 31, 2019 and our simulated stock price at the time of payment.
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, 2018 and 2017, 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 majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose. Subject to preferences that may apply to any shares of preferred stock outstanding, the holders of common stock are entitled to share equally in any dividends, when and if declared by our board of directors. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of common stock are entitled to share equally in all assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking funds provisions applicable to the common stock.
portion of the award related to that threshold will vest on the one-year anniversary of the date of achievement, subject to the employee's continued service through each vesting date. Compensation expense related to these awards is recognized on an accelerated basis over the requisite service period.
The following table summarizes activity under our 2014 Equity Incentive Plan (the “2014 Plan”) for the year ended December 31, 2018 (in thousands):
Includes cancelled restricted stock units with service, performance-based or market-based vesting criteria.
The aggregate intrinsic value is calculated as the product between eHealth’s closing stock price as of December 31, 2018 and December 31, 2017 at the exercise price of in-the-money options as of those dates.
The following table provides information pertaining to our stock options for the years ended December 31, 2018, 2017 and 2016 (in thousands, except weighted-average fair values):
The aggregate intrinsic value is calculated as the difference of our closing stock price as of December 31, 2018 and December 31, 2017 multiplied by the number of restricted stock units outstanding as of December 31, 2018 and December 31, 2017, respectively.
Stock Repurchase Programs-We had no stock repurchase activity during the years ended December 31, 2018, 2017 or 2016. In addition to 10,663,888 shares repurchased under our past repurchase programs as of December 31, 2018, we had in treasury 762,404 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, 2018 and 2017, we had a total of 11,426,292 shares and 11,237,995, respectively, held in treasury.
Stock-Based Compensation Expense-The fair value of stock options granted to employees for the years ended December 31, 2018, 2017 and 2016 was estimated using the following weighted average assumptions:
The following table summarizes stock-based compensation expense recorded during the years ended December 31, 2018, 2017 and 2016 (in thousands):
The federal and state income tax provision (benefit) is summarized as follows (in thousands):
The tax effects of significant items comprising our deferred taxes as of December 31, 2018 and 2017 were as follows (in thousands):
We had net operating loss carryforwards at December 31, 2018 of approximately $81.0 million and $82.6 million for federal income tax and state income tax purposes, respectively. Federal and state net operating loss carry forwards begin expiring in 2034 and 2021, respectively. At December 31, 2018, we had tax credit carry forwards of approximately $3.9 million and $4.9 million for federal income tax and state income tax purposes, respectively. The federal tax credit carryforwards begin expiring in 2021. The state tax credits carry forward indefinitely.
Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and similar state provisions. These ownership change limitations may limit the amount of net operating loss carryforwards and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points (by value) of the outstanding stock of a company by certain stockholders. Our ability to use the remaining net operating loss carryforwards may be further limited if we experience a Section 382 ownership change as a result of future changes in our stock ownership.
As of December 31, 2018, the total amount of gross unrecognized tax benefits was $3.7 million, of which $3.3 million, if recognized, would affect our effective tax rate. As of December 31, 2017, the total amount of gross unrecognized tax benefits was $3.1 million, of which $2.7 million, if recognized, would affect our effective tax rate.
We record interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2018, the amount accrued for estimated interest related to uncertain tax positions was immaterial. We did not record an accrual for penalties.
We are subject to taxation in various jurisdictions, including federal, state and foreign. Our federal and state income tax returns are generally not subject to examination by taxing authorities for fiscal years before 2007 due to our net operating losses. The examination of our 2009 and 2010 California income tax returns by the California Franchise Tax Board was completed in the first quarter of 2017. We assessed the impact on our unrecognized tax benefits for all open years and recorded any necessary adjustments in the first quarter of 2017.
The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):
For each of the years ended December 31, 2018, 2017 and 2016, we had securities outstanding that could potentially dilute net income per share, but the shares from the assumed conversion or exercise of these securities were excluded in the computation of diluted net income per share as their effect would have been anti-dilutive. The number of outstanding anti-dilutive shares that were excluded from the computation of diluted net income per share consisted of the following (in thousands):
minimum payments are expected to be $17.2 million over the remaining term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease.
In connection with our Mountain View, California lease agreement in March 2012, we entered into a financial guarantee consisting of a standby letter of credit for $0.6 million, which may be reduced in increments of 25% of the original amount thereof on the first, second and third anniversaries of the commencement date, subject to our compliance with the applicable conditions to such reductions set forth in the lease. The remaining balance on the financial guarantee is $0.1 million as of December 31, 2018.
Total rent expense under all operating leases was approximately $5.3 million, $4.6 million and $4.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The borrowing base under the Credit Agreement is comprised of an amount equal to (a) the lesser of (i) eighty percent (80%) of Eligible Commissions Receivables (as defined in the Credit Agreement) we actually collected by during the immediately preceding period of three months or (ii) eighty percent (80%) of our Eligible Commission Receivables for the immediately succeeding period of three months, plus (b) fifty percent (50%) of our Eligible Commission Receivables for the immediately succeeding period of six months (excluding the immediately succeeding period of three months), in each case subject to reserves established by RBC (the “Borrowing Base”). The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes. The Borrowers have the right to prepay the loans under the Credit Agreement in whole or in part at any time without penalty. Subject to availability under the Borrowing Base, amounts repaid may be reborrowed.
Availability under the credit facility is up to the lesser of $40 million or the Borrowing Base, which may be reduced from time to time pursuant to the Credit Agreement. In addition, the Credit Agreement contains a financial covenant requiring that we maintain Excess Availability (as defined in the Credit Agreement) at or above $6 million at any time. As of December 31, 2018, we were in compliance with all debt covenants.
We recognized $1.9 million in pre-tax restructuring charges, which included approximately $1.6 million for employee termination benefits and $0.3 million in non-cash accelerated stock-based compensation in the year ended December 31, 2018. The restructuring activities comprising the plan were completed during the three months ended June 30, 2018.
Selected summarized quarterly financial information for 2018 and 2017 is as follows (in thousands, except per share amounts):
Pursuant to the effective registration statement which was filed on December 17, 2018, and amended on January 22, 2019, we entered into an underwriting agreement to issue 2,400,000 shares of common stock, which included the exercise in full of the underwriters’ option to purchase 360,000 additional shares of common stock, at a price to the public of $48.50 per share in January 2019, for a total of 2,760,000 shares issued in connection with the offering. Net proceeds from the offering were approximately $126.2 million after deducting underwriting discounts, commissions and estimated expenses of the offering. We intend to use the net proceeds of the offering for general corporate purposes, including working capital.
As discussed in Note 1 - Summary of Significant Accounting Policies, the FASB issued ASU 2014-09 in
The following tables present the impact of the adoption of ASC 606 on our previously reported historical results for the periods presented (in thousands):