We lease all of the principal properties. In addition, we also lease office facilities in San Francisco, California and Westford, Massachusetts for our marketing and advertising, technology and content, customer care and enrollment, and general and administrative personnel. We believe our existing facilities are adequate for our current needs and that suitable additional space will be available in the future to accommodate any expansion of our operations, if necessary. As a result of a reduction in our workforce, we have 11,275 square feet of excess space available in our Gold River, California facility that we intend to vacate.
We generate revenue primarily from commissions we receive from health insurance carriers whose health insurance policies are purchased through our ecommerce platform. Commission revenue represented 84%, 86% and 88% of total revenue in the years ended December 31, 2012, 2013 and 2014, respectively.
to maintain compliance with these and other requirements could present significant challenges for us. In addition, the implementation of an open enrollment period for the purchase of individual health insurance also presents challenges to our ability to enroll a significant number of individuals into health insurance over a limited period of time and inhibits our ability to obtain new health insurance members outside of the open enrollment period. The impact of health care reform on our health insurance carrier partners and their reaction is also unclear. For instance, health insurance carriers have the ability to unilaterally change their relationship with us, including the commission rates we receive for acting as a health insurance agent and may reduce the amount they pay us, alter the manner and geographic areas in which they permit us to sell their products and change our relationship with them in any number of ways. In light of these and other considerations, health care reform could in the aggregate have a material adverse effect on our business and results of operations
generally continue to receive the commission payment from the relevant insurance carrier until the health insurance policy is cancelled or we otherwise do not remain the agent on the policy. As a result, the majority of our individual and family plan commission revenue is recurring in nature. See Critical Accounting Policies and Estimates for details regarding our recognition of individual and family health insurance plan commission revenue.
The implementation of health care reform has had a significant impact on our individual and family health insurance membership and commission revenue. Health care reform established open enrollment periods for the purchase of individual and family insurance. The first open enrollment period ran from October 1, 2013 through March 31, 2014 for coverage effective in 2014, and the second ran from November 15, 2014 through February 15, 2015 for coverage effective in 2015. The next annual open enrollment period for individual and family health insurance is scheduled to run from November 1, 2015 through January 31, 2016 for coverage effective in 2016. Individuals and families generally are not able to purchase individual and family health insurance outside of 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, moving to another state or becoming eligible or ineligible for a government subsidy for their health insurance. Open enrollment periods have changed the seasonality of our individual and family health insurance business and individual and family health insurance submitted applications.
Medicare Plans. Commission rates for Medicare-related health insurance plans may vary by carrier, by geography and by the type of plan purchased by a member. Additionally, commission rates may be higher in the first twelve months of the policy if the policy is the first Medicare Advantage or Medicare Part D prescription drug policy 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 policy, we are paid a fixed commission that is prorated for the number of months remaining in the calendar year. Additionally, if the policy is the first Medicare Advantage or Medicare Part D policy issued to the member, we may receive a higher commission rate that covers a full twelve-month period, regardless of the month the policy 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 policy remains active with us. For Medicare Supplement plans, our commission rates generally represent a percentage of the premium amount collected by the carrier during the period that a member maintains coverage under a policy. We generally continue to receive the Medicare Supplement commission payment from the relevant insurance carrier until the health insurance policy is cancelled or we otherwise do not remain the agent on the policy. As a result, the majority of our Medicare commission revenue is recurring in nature. See Critical Accounting Policies and Estimates for details regarding our recognition of Medicare plan commission revenue.
Direct. Our direct member acquisition channel consists of consumers who access our website addresses, including www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com, either directly, through algorithmic natural search listings on Internet search engines and directories, or other forms of marketing, such as direct mail, email marketing, television, radio and retargeting campaigns. For the years ended December 31, 2012, 2013 and 2014, applications submitted through us for individual and family health insurance from our direct channel constituted 47%, 47% and 45%, respectively, of all individual and family health insurance applications submitted on our website.
Included in cost of revenue are payments related to health insurance policies sold to members who were referred to our website by marketing partners with whom we have revenue-sharing arrangements. In order to enter into a revenue-sharing arrangement, marketing partners must be licensed to sell health insurance in the state where the policy is sold. Costs related to revenue-sharing arrangements are expensed as the related revenue is recognized.
Additionally, cost of revenue includes the amortization of consideration we paid to certain broker partners in connection with the transfer of their health insurance members to us as the new broker of record on the underlying policies. These transfers include primarily Medicare plan members. Total consideration paid in connection with these transfers that occurred between 2009 and 2012 amounted to $13.9 million. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.
Since a significant portion of our marketing and advertising expenses consists of expenses incurred in search engine advertising at the time a consumer clicks on an advertisement and payments owed to our marketing partners in connection with health insurance applications submitted on our ecommerce platform, those expenses are influenced by seasonal patterns. In periods prior to the fourth quarter of 2013, marketing and advertising expenses related to individual and family health insurance plans have historically been highest in our first and third quarters, while marketing and advertising expenses related to Medicare-related plans have historically been highest in our fourth quarter during the Medicare annual enrollment period. However, as a result of the initial open enrollment period for individual and family health insurance plans, which began on October 1, 2013 and ended on March 31, 2014, we experienced a substantial increase in marketing and advertising expenses related to individual and family health insurance during the fourth quarter of 2013 and the first quarter of 2014. During the second and third quarters of 2014, outside of the initial open enrollment period, there was a significant decrease in the number of individual and family applications submitted compared to first quarter of 2014 and the same periods in 2013, and as a result, a significant decrease in marketing and advertising expenses related to individual and family plans. Similar to the prior year, during the fourth quarter of 2014, we experienced a substantial increase in marketing and advertising expenses related to individual and family plans compared to the second and third quarters of 2014 as a result of the second open enrollment period. We expect individual and family health insurance submitted applications and related marketing and advertising expense during the first quarter of 2015 will be higher than the fourth quarter of 2014. Additionally, we expect individual and family submitted applications and related marketing and advertising expense 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 both Medicare and individual and family submitted applications and related marketing and advertising expenses will increase significantly during the fourth quarter of 2015, relative to the second and third quarters of 2015, as a result of the upcoming Medicare annual enrollment period and individual and family health insurance open enrollment period.
Because the total volume of submitted applications that we receive from our marketing partners is largely outside of our control, particularly during any short-term period, and because of our tiered marketing partner arrangements, we could incur expenses in excess of, or below, the amounts we had planned in periods of rapid change in the volume of submitted applications from marketing partner referrals. Similar to our marketing partner channel, expenses in our online advertising channel will increase or decrease in relation to any increase or decrease in consumers referred to our website as a result of search engine advertising. Increases in submitted applications resulting from marketing partner referrals or visitors to our
website from our online advertising channel has in the past and could in the future result in marketing and advertising expenses significantly higher than our expectations. This has in the past and could in the future negatively impact our profitability during such periods because the revenue (if any) derived from submitted applications that are approved by health insurance carriers is not recognized until future periods.
For ancillary insurance policies (such as short-term, dental, vision, accident and student), we take the sum of (i) the number of members for whom we have received or applied a commission payment for the month that is one to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the one to three-month period); and (ii) the number of approved members over the one to three-month period prior to the date of estimation (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated
member cancellations through the date of the estimate). The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers.
Additionally, our carrier partners often do not communicate policy cancellation information to us. We often are made aware of policy cancellations at the time of annual renewal and update our membership statistics accordingly in the period they are reported.
After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our membership in the membership estimate for the period we receive such updated information, if applicable. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. In addition, and as a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions such as health care reform implementation on our membership retention. Health care reform and other factors could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.
An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to
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 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 policy cancellations, which is included in Accounts Receivable in the consolidated balance sheets. We continue to receive the commission payments
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 on a straight-line basis over the estimated term of the customer relationship (generally the initial term of the agreement), commencing once the
technology is available for use by the third party, and a performance fee based on metrics such as submitted health insurance applications. The metrics used to calculate performance fees for both sponsorship and advertising and technology licensing are based on performance criteria that are either measured based on data tracked by us, or based on data tracked by the third party. In instances where the performance criteria data is tracked by us, we recognize revenue in the period of performance and when all other revenue recognition criteria have been met. In instances where the performance criteria data is tracked by the third party, we recognize revenue when the amounts earned are either fixed or determinable and collection is reasonably assured. 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.
A deliverable constitutes a separate unit of accounting when it has stand-alone value and there are no customer-negotiated right of refunds for the delivered elements. If the arrangement includes a customer-negotiated right of refund relative to the delivered item, and the delivery and performance of the undelivered item is considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. In circumstances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements, and the allocation of the arrangement consideration and revenue recognition is determined for the combined unit as a single unit. Allocation of the consideration is determined at the inception of the arrangement on the basis of each unit’s relative selling price. After the arrangement consideration has been allocated to each unit of accounting based on their relative selling prices, we apply revenue recognition criteria separately to each respective unit of accounting in the arrangement in accordance with applicable accounting guidance.
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.
Future changes in various factors, such as the amount of stock-based compensation we record during the period and the related tax benefit we realize upon the exercise of employee stock options, potential limitations on the use of our federal
and state net operating loss credit carry forwards, pending or future tax law changes including rate changes and the tax benefit from or limitations on our ability to utilize research and development credits, the amount of non-deductible lobbying and acquisition-related costs, changes in our valuation allowance and state and foreign taxes, would impact our estimates, and as a result, could affect our effective tax rate and the amount of income tax expense we record, and pay, in future periods.
2014 compared to 2013-Commission revenue increased $5.2 million, or 3%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, primarily due to a $8.1 million increase in Medicare-related commission revenue, partially offset by a $2.8 million decrease in non-Medicare plan commission revenue, consisting primarily of individual and family health insurance commission revenue. The increase in Medicare related commission revenue is due to increased Medicare estimated membership for the year ended December 31, 2014 compared to the year ended December 31, 2013. The decrease in non-Medicare plan related commission revenue is primarily due to decreased individual and family plan estimated membership for the year ended December 31, 2014 compared to the year ended December 31, 2013.
Other revenue decreased $4.7 million, or 18%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to a $5.4 million decrease in online sponsorship and advertising revenue, partially offset by a $0.5 million increase in technology licensing revenue.
We expect commission revenue to decline in absolute dollars in 2015 compared to 2014, primarily as a result of a decrease in non-Medicare plan related commission revenue, partially offset by a continued increase in Medicare plan related commission revenue. We expect other revenue to decline in absolute dollars in 2015 compared to 2014, primarily due to a continued decrease in online sponsorship and advertising revenue.
2013 compared to 2012-Commission revenue increased $22.7 million, or 17%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due to a $13.8 million increase in non-Medicare plan related commission revenue, consisting primarily of individual and family health insurance commission revenue and ancillary product commission revenue, and an $8.9 million increase in Medicare plan related commission revenue. The increase in revenue of both Medicare plan related and non-Medicare plan related commission revenue is due to increased membership for the year ended December 31, 2013 compared to the year ended December 31, 2012.
The following table presents our cost of revenue for the years ended December 31, 2012, 2013 and 2014 and the dollar and percentage changes from the prior year (dollars in thousands):
consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.
2013 compared to 2012-Cost of revenue increased $0.7 million, or 14%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to an increase in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.
We expect our marketing and advertising expenses to increase in absolute dollars in 2015 compared to 2014 due primarily to increased variable advertising costs associated with the second open enrollment period for individual and family health insurance plans, which ended on February 15, 2015, and the upcoming 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, partially offset by a decrease in compensation and benefits due to the reduction in force announced in March 2015.
The following table presents our customer care and enrollment expenses for the years ended December 31, 2012, 2013 and 2014 and the dollar and percentage changes from the prior year (dollars in thousands):
2014 compared to 2013-Customer care and enrollment expenses increased $7.6 million, or 22%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to additional customer care center personnel hired in connection with the open enrollment periods for individual and family health insurance and Medicare-related health insurance. As a result, compensation, benefits, stock-based compensation, licensing and other personnel costs increased $7.2 million.
We expect customer care and enrollment expenses to significantly decrease in absolute dollars in 2015 compared to 2014 as a result of a decrease in compensation and benefits due to the reduction in force announced in March 2015, partially offset by the cost of seasonal customer care center staffing necessary to handle the volume of applications during the upcoming
2013 compared to 2012-Customer care and enrollment expenses increased $4.8 million, or 16%, in the year ended December 31, 2013 compared to the year ended December 31, 2012, due primarily to additional customer care center personnel hired to service the increased enrollment in individual and family health insurance plans and Medicare-related health insurance plans. As a result, compensation, benefits, stock-based compensation, licensing and other personnel costs increased $4.2 million.
The following table presents our technology and content expenses for the years ended December 31, 2012, 2013 and 2014 and the dollar and percentage changes from the prior year (dollars in thousands):
2014 compared to 2013-Technology and content expenses increased $7.8 million, or 24%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to an increase of $6.9 million in compensation, benefits, stock-based compensation, and other personnel costs, as a result of an increase in technology and content personnel. The remainder of the increase is due to increased spending to support website operations and increases in data center infrastructure maintenance costs and depreciation expense.
We expect technology and content expenses to decrease in absolute dollars in 2015 compared in 2014 as a result of a decrease in compensation and benefits due to the reduction in force announced in March 2015.
2014 compared to 2013-General and administrative expenses decreased $1.7 million, or 6%, in the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to the non-achievement of performance bonuses for fiscal 2014 and the reversal of stock-based compensation expense associated with performance-based restricted stock units granted to executives within the general and administrative group as a result of related financial metrics not being achieved for the year ended December 31, 2014.
We expect our general and administrative expenses to increase in absolute dollars in 2015 compared to 2014 as a result of the accrual of annual performance bonuses for fiscal 2015 and anticipated increases in both legal fees and stock-based
The following table presents our intangible asset amortization expense for the years ended December 31, 2012, 2013 and 2014 and the dollar change from the prior year (dollars in thousands):
The following table presents our provision for income taxes for the years ended December 31, 2012, 2013 and 2014 and the dollar change from the prior year (dollars in thousands):
We expect our provision for income taxes to decrease in 2015 compared to 2014.
In September, 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 in March, 2013, we announced that our board of directors increased the approved repurchase amount under this program to $60 million. We completed this repurchase program in June 2013. Purchases under this program were made in the open market and complied with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The cost of the repurchased shares was funded from available working capital.
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 $50.0 million at an average price of $36.91 per share including commissions. The cost of the repurchase was funded from available working capital.
Cumulative balances at December 31, 2013 consist of shares repurchased in connection with our previous stock repurchase plans announced in 2013, 2012, 2011, 2010 and 2008.
Cumulative balances at December 31, 2014 consist of shares repurchased in connection with our stock repurchase programs announced on March 31, 2014, as well as a previous stock repurchase plan announced in 2013, 2012, 2011, 2010 and 2008.
In periods prior to the fourth quarter of 2013, we experienced a reduction in operating cash flows during the first quarter of the year compared to the other quarters due to the payment of annual performance bonuses to employees in the first quarter of the year. Additionally, a significant portion of our marketing and advertising expenses are driven by the number of health insurance applications submitted on our ecommerce platform. Since our marketing and advertising costs are expensed and generally paid as incurred and the revenue and cash earned from approved applications is recognized and paid as commissions are subsequently reported to us, our operating cash flows could be adversely impacted by a substantial increase in the volume of applications submitted during a quarter or positively impacted by a substantial decline in the volume of applications submitted during a quarter. During the fourth quarter of 2013 and the first quarter of 2014, we experienced a substantial increase in marketing and advertising expenses related to the increase in the number of individual and family plan applications submitted during the initial open enrollment period for individual and family health insurance, which had a negative impact on our cash flows. The significantly increased marketing and advertising expenses during the first quarter of 2014 were paid during the second quarter of 2014 resulting in a net cash outflow. During the third quarter of 2014, we experienced a decrease in marketing and advertising expenses related to the decrease in the number of individual and family plan applications submitted outside the initial open enrollment period resulting in positive cash flow. The annual open enrollment period for individual and family health insurance, which began on November 15, 2014 and ended February 15, 2015 resulted in an increase in marketing and advertising expenses during the fourth quarter of 2014, related to the increase in the number of individual and family plan submitted applications, which had a negative impact on cash flows. We expect marketing and advertising costs to increase during the first and fourth quarters of 2015 due to an increase in submitted applications during the annual open enrollment period for individual and family health insurance and during the fourth quarter of 2015 due to an increase in submitted applications for Medicare plans during the annual enrollment period. We expect marketing and advertising costs to decrease during the second and third quarters compared to cost levels during the first and fourth quarters due to a reduction in the number of health insurance applications we expect outside of annual open enrollment periods.
2015. 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. In connection with this change, an estimated $3 million of Medicare plan-related commission revenue for policies sold during the annual enrollment period was not recognized by us during the fourth quarter of 2014. We anticipate it will be recognized as revenue during the first quarter of 2015.
2013-Our operating activities generated cash of $20.9 million during the year ended December 31, 2013 and consisted of net income of $1.7 million, increased by non-cash items of $15.2 million and cash provided by working capital and other activities of $4.0 million. Adjustments for non-cash items primarily consisted of $1.4 million of deferred income taxes, $7.8 million of stock-based compensation expense, $3.3 million of depreciation and amortization, $3.1 million of amortization of book-of-business consideration, $0.9 million of deferred rent and $1.4 million of amortization of intangible assets. Cash provided by working capital and other activities primarily consisted of an increase of $4.3 million in accrued marketing expenses, an increase of $0.9 million in deferred revenue, a $1.0 million increase in other current liabilities and an increase of $2.0 million in accrued compensation and benefits, partially offset by a decrease of $1.7 million in accounts payable and an increase of $2.3 million in prepaid expenses and other assets. Accrued marketing expenses increased due to higher marketing and advertising expenses in the fourth quarter of 2013 related to the increased submission of health insurance applications on our website. Accrued compensation and benefits increased primarily due to increased salaries and performance and incentive bonuses related to an increased employee headcount.
2012-Our operating activities generated cash of $24.9 million during the year ended December 31, 2012 and consisted of net income of $7.1 million, increased by non-cash items of $13.6 million and cash provided by working capital and other activities of $4.2 million. Adjustments for non-cash items primarily consisted of $1.1 million of deferred income taxes, $5.6 million of stock-based compensation expense, $2.4 million of depreciation and amortization, $2.7 million of amortization of book-of-business consideration and $1.6 million of amortization of intangible assets. Amortization of book-of-business consideration includes a $0.4 million asset impairment charge to the carrying value of an acquired Medicare book-of-business. Cash provided by working capital and other activities primarily consisted of a decrease of $3.6 million in accounts receivable, an increase of $3.7 million in accounts payable, an increase of $1.0 million in deferred revenue and an increase of $0.3 million in accrued compensation and benefits, partially offset by a decrease of $2.3 million in accrued marketing expenses and an increase of $1.1 million in prepaid expenses and other assets. Accounts payable increased due primarily to the timing of payments to our vendors, accrued compensation and benefits decreased primarily due to the payment of performance bonuses to employees that were earned during 2011 and accounts receivable decreased due to collections.
2012-Net cash used in investing activities of $10.1 million during the year ended December 31, 2012 was attributable to consideration of $6.2 million paid to a partner related to the transfer of two books-of-business, whereby we became the broker of record on the underlying policies for certain Medicare insurance members that were transferred to us, and capital expenditures of $3.9 million.
We lease our operating facilities and certain of our equipment and furniture and fixtures under various operating leases, the latest of which expires in July 2023. Certain of these leases have free or escalating rent payment provisions. We recognize rent expense on our operating leases on a straight-line basis over the terms of the leases, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements.
The following table presents a summary of our future minimum payments under non-cancellable operating lease agreements and contractual service and licensing obligations as of December 31, 2014 (in thousands):
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), eHealth, Inc.’s internal control over financial reporting as of December 31, 2014, 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 16, 2015 expressed an unqualified opinion thereon.
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 acquisition. We do not amortize goodwill or our other indefinite-lived intangible assets but test for impairment on an annual basis on or about November 30 of each year and whenever events or changes in circumstances indicate a reduction in its fair value below its carrying amount.
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 in the fourth quarter of 2014 and determined no material adjustments to the remaining lives were required.
Book-of-Business Transfers-We have entered into several agreements with a broker partner, whereby the partner has 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 for these books-of-business amounted to $13.9 million, of which $6.3 million is related to transfers during 2012. Consideration for these books-of-business is included in Prepaid Expenses and Other Current Assets and in Other Assets in the accompanying consolidated balance sheets. The consideration, which was based on the discounted commissions expected to be received over the remaining life of each transferred Medicare plan member, is being amortized to Cost of Revenue in the consolidated statements of comprehensive income (loss) and is presented as Amortization of Book-of-Business Consideration in the consolidated statements of cash flows as we recognize commission revenue related to the transferred Medicare plan members. The amount of consideration we amortize to cost of revenue each quarter is proportional to the amount of commission revenue we recognize on the underlying policies each quarter in relation to the total amount of remaining commission revenue expected to be recognized. Amortization expense recorded to cost of revenue for these books-of-business for the years ended December 31, 2012, 2013 and 2014 totaled $2.7 million, $3.1 million and $2.0 million, respectively. Cash consideration paid in connection with the book-of-business transfers is presented under Investing activities in the consolidated statements of cash flows.
For individual and family, Medicare Supplement, small business and ancillary plans, our compensation generally represents 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 (commissions) and, to a much lesser extent, override commissions that health insurance carriers pay us for achieving certain objectives. 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 recognize commission revenue for individual and family, Medicare Supplement, small business and ancillary plans as the commissions are reported to us by the carrier, net of an estimate for future forfeiture amounts due to policy cancellations. We determine that there is persuasive evidence of an arrangement when we have a commission agreement with a health insurance carrier, a carrier reports to us that it has approved an application submitted through our ecommerce platform and the applicant starts making payments on the plan. Our services are complete when a carrier has approved an application. The
seller’s price is fixed or determinable and collectability is reasonably assured when commission amounts have been reported to us by a carrier.
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 plan cancellations. As a result, we recognize the net amount of compensation earned as the agent in the transaction. Changes in our historical trends would result in changes to our estimated forfeitures in future periods. There were no changes in our average forfeiture rates or reporting time lag during the years ended December 31, 2012, 2013 and 2014 which had a material impact on our estimate for forfeitures.
Cost of Revenue-Included in Cost of Revenue are payments related to health insurance policies sold to members who were referred to our website by marketing partners with whom we have revenue-sharing arrangements. In order to enter into a revenue-sharing arrangement, marketing partners must be licensed to sell health insurance in the state where the policy is sold. Costs related to revenue-sharing arrangements are expensed as the related revenue is recognized.
401(k) Plan-In September 1998, our board of directors adopted a defined contribution retirement plan (401(k) Plan), which qualifies under Section 401(k) of the Internal Revenue Code of 1986. Participation in the 401(k) Plan is available to substantially all employees in the United States. Employees can contribute up to 25% of their salary, up to the federal maximum allowable limit, on a before-tax basis to the 401(k) Plan. Employee contributions are fully vested when contributed. Company contributions to the 401(k) Plan are discretionary and are expensed when incurred. In April 2006, we began matching employee contributions to our 401(k) Plan at 25% of an employee’s contribution each pay period, up to a maximum of 1% of the employee’s salary during such pay period. Our matching contributions are expensed as incurred and vest one-third for each
We consider stock option deduction benefits in excess of book compensation charges realized when we obtain an incremental benefit determined by the “With and Without” calculation method. Under the “With and Without” approach, excess tax benefits related to share-based payments are not deemed to be realized until after the utilization of all other tax benefits available to us. For example, net operating loss and tax credit carry forwards from prior years are used to reduce taxes currently payable prior to deductions from stock option exercises for purposes of financial reporting, while for tax return purposes, current year stock compensation deductions are generally used before net operating loss carry forwards. Indirect effects of excess tax benefits, such as the effect on research and development tax credits, are not considered.
Seasonality- In periods prior to the fourth quarter of 2013, the number of individual and family health insurance applications submitted through our ecommerce platform generally increased in our first quarter compared to our fourth quarter and in our third quarter compared to our second quarter. Conversely, we generally experienced a decline or flattening of individual and family submitted applications in our second quarter compared to our first quarter and in our fourth quarter compared to our third quarter.
Since a significant portion of our marketing and advertising expenses consists of expenses incurred in search engine advertising at the time a consumer clicks on an advertisement and payments owed to our marketing partners in connection with health insurance applications submitted on our ecommerce platform, those expenses are influenced by seasonal submitted application patterns. As a result, in periods prior to the fourth quarter of 2013, marketing and advertising expenses related to individual and family health insurance plans have been highest in our first and third quarters, while marketing and advertising expenses related to Medicare-related plans have been highest in our third and fourth quarters. However, these historical trends were impacted by the initial open enrollment period for individual and family plans that began in October 2013 and ended on March 31, 2014. Marketing and advertising expenses increased significantly in the fourth quarter of 2013 and first quarter of 2014, relative to historical levels, and decreased significantly during the second and third quarters of 2014, consistent with the respective increases and decreases in submitted applications. During the fourth quarter of 2014, marketing and advertising expenses increased significantly in line with the open enrollment period that began on November 15, 2014.
period for Medicare plans in the fourth quarter of 2013, we experienced an increase in revenue in both the fourth quarter of 2013 and the first quarter of 2014 compared to the fourth quarter of 2012 and first quarter of 2013, respectively. However, given our significantly higher marketing and advertising expenses associated with the increase in the number of individual and family health insurance applications and Medicare related health insurance applications during the enrollment periods without a commensurate level of additional revenue resulting from applicants who did not convert to members, we incurred a net loss in the fourth quarter of 2013, the first quarter of 2014 and the fourth quarter of 2014. Conversely, in both the second and third quarters of 2014, we recorded net income due to significantly lower marketing and advertising expenses associated with the decrease in the number of individual and family health insurance applications outside of the open enrollment period and increased revenue resulting from members who submitted applications during the open enrollment period in the prior respective quarters.
Recent Accounting Pronouncement-In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and can be adopted using either a full retrospective or modified retrospective approach. Early adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, (ASU 2015-15) “Going Concern.” ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable). The guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within that fiscal year. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.
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 Renminbi and are not insured by the U.S. federal government.
The other commissions receivable balance as of December 31, 2014 is recorded net of a $1.0 million allowance for estimated forfeitures related to Medicare Advantage and Medicare Part D plans sold during the fourth quarter of 2014 with effective dates in 2015.
Depreciation and amortization expense related to property and equipment totaled $2.4 million, $3.3 million and $4.2 million in the years ended December 31, 2012, 2013 and 2014, respectively.
Intangible Assets-As a result of the streamlining of a legacy software product, we assessed intangible assets for impairment in the fourth quarter of 2012 and recorded an impairment charge of $0.3 million related to certain acquired intangible assets. The impairment charge is included in Amortization of Intangible Assets on the consolidated statements of comprehensive income (loss). During the fourth quarter 2014 we recorded an impairment charge of $0.1 million related to certain acquired intangible assets that will not be utilized in future periods.
As of December 31, 2014, expected amortization expense in future periods is as follows (in thousands):
As of December 31, 2013 and 2014, our cash equivalents were invested in money market funds and were classified as Level 1. We endeavor to utilize the best available information in measuring fair value. We used observable prices in active markets in determining the classification of our money market funds as Level 1.
The determination of fair value of the acquired book-of-business for which a $0.4 million impairment charge was recorded during 2012 was classified as a Level 3 fair value assessment because of the use of unobservable inputs in the calculation. We utilized an income approach, under which the fair value of the book of business was determined based on the present value of the estimated future cash flows using the expected present value technique. Under the expected present value technique possible cash flows are probability-weighted to determine an expected cash flow. The discount rate used was adjusted from a risk-free rate to reflect a market risk premium. The unobservable inputs used to calculate the fair value of the book-of-business included the projected cash flows and the market risk premium added to the discount rate.
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.
Stock Plans-On June 12, 2014, upon approval at the Annual Meeting of Stockholders, we adopted the 2014 Equity Incentive Plan (the “2014 Plan”). The 2014 Plan replaced the 2006 Equity Incentive Plan and 4,500,000 shares were authorized for issuance under the 2014 Plan. The 2014 Plan does not include an evergreen provision to automatically increase the number of shares available under it and increases in the number of shares authorized for issuance under the 2014 Plan require stockholder approval. Also, under the 2014 Plan the following shares are not recycled for future grant under the 2014 Plan: (i) shares used in connection with the exercise of an option and/or stock appreciation right to pay the exercise price or purchase price of such award or satisfy applicable tax withholding obligations; and (ii) the gross number of shares subject to stock appreciation rights that are exercised. Furthermore, the 2014 Plan included a provision that prohibits repricing of outstanding stock options or stock appreciation rights and formalized and updated procedures to qualify awards as “performance-based” compensation under Section 162(m) of the Internal Revenue Code in order to preserve full tax deductibility of such awards.
We previously granted options to purchase shares of our common stock and restricted stock units under our 2006 Equity Incentive Plan and 2005 Stock Plan. The 2006 Equity Incentive Plan was terminated with respect to the grant of additional awards on June 12, 2014, upon adoption of our 2014 Plan. The 2005 Stock Plan was terminated with respect to the grant of additional awards upon the effectiveness of the 2006 Equity Incentive Plan. We will continue to issue new shares of common stock upon vesting of restricted stock units and the exercise of stock options previously granted under the 2006 Equity Incentive Plan and 2005 Stock Plan.
On December 31, 2014, no shares were subject to repurchase. Our restricted stock unit awards granted under the 2006 Plan generally vest over four years at a rate of 25% after one year and 25% annually thereafter.
In 2012, 2013 and 2014, we issued restricted stock units with both service and performance-based vesting criteria to our executive officers. The performance-based contingency period for our restricted stock units with both service and performance-based vesting criteria granted in the fiscal year 2012 was the fiscal year ending December 31, 2012, and the measurement of achievement was based on our revenue, non-GAAP operating earnings and EBITDA results for 2012. The performance-based contingency period for our restricted stock units with both service and performance-based vesting criteria granted in the fiscal year 2013 was the fiscal years ending December 31, 2013 and 2014, and the measurement of achievement was based on our revenue results for the fiscal years ending December 31, 2013 and 2014. The performance-based contingency period for our restricted stock units with both service and performance-based vesting criteria granted in the fiscal year 2014 is the fiscal years ending December 31, 2014 and 2015, and the measurement of achievement is based on our revenue results for the fiscal years ending December 31, 2014 and 2015. One-third of the shares earned and eligible to vest for performance-based restricted stock units granted in 2012 vested in 2013 and 2014. The remaining one-third of shares earned and eligible to vest
On January 1, 2012, 2013 and 2014, the number of shares authorized for issuance under the 2006 Equity Incentive Plan was automatically increased pursuant to the terms of the 2006 Equity Incentive Plan.
2012, 2013 and 2014 include grants of restricted stock units with both service and performance-based vesting criteria to our executive officers.
The fair value of the restricted stock units is based on eHealth’s stock price on the date of grant. Compensation expense for awards that include only service-based vesting criteria is recognized on a straight-line basis over the vesting period. Compensation expense for awards that include both service and performance-based vesting criteria is recognized using accelerated attribution over the vesting period. The total fair value of restricted stock units vested during the years ended December 31, 2012, 2013 and 2014 was $3.8 million, $3.5 million and $10.3 million, respectively. As of December 31, 2014, there was $13.4 million of unrecognized stock-based compensation expense related to restricted stock units, which is expected to be recognized over the next 2.9 years.
Stock repurchase activity under our stock repurchase programs during the year ended December 31, 2012, 2013 and 2014 is summarized as follows (dollars in thousands, except share and per share amounts):
Stock-Based Compensation-The fair value of stock options granted to employees for the years ended December 31, 2012, 2013 and 2014 was estimated using the following weighted average assumptions:
The following table summarizes stock-based compensation expense by operating function for the years ended December 31, 2012, 2013 and 2014 (in thousands):
Our effective tax rates in 2012 and 2013 were higher than statutory federal and state tax rates primarily due to non-deductible lobbying expenses and, for 2012, tax shortfalls related to share-based payments. Our effective tax rate in 2014 differs from the federal statutory rate primarily due to the recording of a valuation allowance against our federal and state deferred tax assets.
The net valuation allowance increased by $11.3 million during the year ended December 31, 2014. The change in the net valuation allowance during the years ended December 31, 2013 and 2012 was not material.
For tax return purposes, we had net operating loss carry forwards at December 31, 2014 of approximately $20.6 million and $77.7 million for federal income tax and state income tax purposes, respectively. Included in the federal and state net operating loss carry forwards are unrealized federal and state net operating loss deductions resulting from stock option exercises of approximately $10.3 million and $61.0 million, respectively. The benefit of these unrealized stock option-related deductions has not been included in the deferred tax assets table above and will be recognized as a credit to additional paid-in capital when realized. Federal and state net operating loss carry forwards begin expiring in 2023 and 2016, respectively. The federal net operating loss carry forward is subject to an annual limitation of approximately $2.5 million due to section 382 of the Internal Revenue Code. Approximately $2.5 million of the state net operating loss carry forward is subject to an annual limitation of approximately $0.1 million due to section 382 of the Internal Revenue Code.
During the years ended December 31, 2012, 2013 and 2014 we utilized excess tax benefits related to share-based payments, which resulted in a decrease in cash generated from operating activities and a corresponding increase in cash generated from financing activities of $4.5 million, $3.4 million and $0.1 million for the years ended December 31, 2012, 2013 and 2014, respectively.
We lease our office, operating facilities and certain of our equipment and furniture and fixtures under various operating leases, the latest of which expires in July 2023. Certain of these leases have free or escalating rent payment provisions. We recognize rent expense on our operating leases on a straight-line basis over the terms of the leases, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements.
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 total approximately $2.1 million over the term of the lease.
Legal Proceedings-On January 26 and March 10, 2015, two purported class action lawsuits were filed against us, our Chairman and chief executive officer, Gary L. Lauer (“Mr. Lauer”), and our senior vice president and chief financial officer, Stuart M. Huizinga (“Mr. Huizinga”), in the United States District Court for the Northern District of California. The complaints allege that the defendants made false and misleading statements regarding our financial performance, guidance and operations during alleged class periods of October 31, 2014 to January 14, 2015 and June 5, 2014 to January 14, 2015, respectively. The complaints allege that we and Messrs. Lauer and Huizinga violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaints seek compensatory damages, attorneys’ fees and costs, rescission or a rescissory measure of damages, equitable/injunctive relief and such other relief as the court deems proper.
Guarantees and Indemnifications-We have agreed to indemnify members of our board of directors and our executive officers for fees, expenses, judgments, fines and settlement amounts incurred in any action or proceeding, including actions or proceedings by or in the right of the Company, to which any of them is, or is threatened to be, made a party by reason of their service as a director or officer of the Company or service provided to another company or enterprise at our request. The term of the director and officer indemnification is perpetual as to events or occurrences that take place while the director or officer is, or was, serving at our request. As such, the maximum potential amount of future payment we could be required to make under these indemnification arrangements is unlimited. We, however, maintain directors and officers insurance coverage that limits our exposure under certain circumstances and that may allow us to recover a portion of future amounts paid. Accordingly, we have not recorded any liabilities for these agreements as of December 31, 2013 or 2014.
Operating Segments- Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance of the Company. We operate in one segment and accordingly we have provided only enterprise-wide disclosures. Our chief executive officer, who is our chief operating decision maker, reviews our financial information in a similar manner.
Geographic Information-As of December 31, 2013 and 2014, our long-lived assets consisted primarily of property and equipment, goodwill and other indefinite-lived intangible assets and finite-lived intangible assets. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area were as follows (in thousands):
Significant Customers-Substantially all revenue for the years ended December 31, 2012, 2013 and 2014 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the years ended December 31, 2012, 2013 and 2014 are presented in the table below:
Commission revenue attributable to major medical individual and family health insurance plans was approximately 75%, 69% and 61% of our total commission revenue in the years ended December 31, 2012, 2013 and 2014, respectively. We define our individual and family plan offerings as major medical individual and family health insurance plans, which do not include Medicare-related health insurance plan offerings, small business or other ancillary products such as short-term, stand-alone dental, life, accident, vision, travel and student insurance plan offerings.
Selected summarized quarterly financial information for 2014 and 2013 is as follows (in thousands, except per share amounts):