The following table sets forth the location, approximate square footage and primary use of each of the principal properties we occupied at December 31, 2018:
On May 8, 2018, an individual filed a putative class action complaint against us. The complaint alleges that we violated the Telephone Consumer Protection Act, 47 U.S.C. § 227(c) and certain provisions of 47 C.F.R. § 64.1200 promulgated thereunder by initiating or causing to be initiated telephone solicitations to telephone subscribers who registered their respective telephone numbers on the National Do Not Call Registry. The complaint alleged, among other things, that we (i) made more than one unsolicited telephone call to Plaintiff and putative class members within a 12-month period without express consent to place such calls in violation of 47 U.S.C. § 227(c)(5); and (ii) initiated calls for telemarketing purposes without instituting procedures that comply with regulatory minimum standards for implementing Do Not Call in violation of 47 C.F.R. § 64.1200(d). The complaint sought (i) an order certifying a class of individuals in the United States who (A) received more than one telephone call made by or on behalf of eHealth within a 12-month period; and (B) to a telephone number that had been registered with the National Do Not Call Registry for at least 30 days; (ii) an award of actual and statutory damages for each negligent violation to each member of the class pursuant to 47 U.S.C. § 227(b)(3)(B); (iii) an award of actual and statutory damages for each knowing and/or willful violation to each member of the class pursuant to 47 U.S.C. § 227(b)(3)(A); (iv) an injunction requiring us and our agents to cease all unsolicited telephone activities and otherwise protecting the interest of the class pursuant to 47 U.S.C. § 227(b)(3)(A); and (v) pre-judgment and post-judgment interest on monetary relief. A first amended complaint was filed in the action in September 2018 to add an additional plaintiff, and we answered the first amended complaint in October 2018. In October 2018, we also entered into a settlement agreement with the original plaintiff that included a release of the original plaintiff’s individual claims. The second plaintiff dismissed the first amended complaint without prejudice in November 2018.
Financial data for 2014 has not been adjusted to reflect the impact of the adoption of ASC 606.
Financial data for 2017 and 2016 have been adjusted to reflect the impact of the adoption of ASC 606.
We are a leading private health insurance exchange for individuals, families and small businesses. Through our website addresses (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com, www.PlanPrescriber.com and www.GoMedigap.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase Medicare-related, individual and family, small business and ancillary health insurance plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. As a result, we simplify and streamline the complex and traditionally paper-intensive health insurance sales and purchasing process.
On January 22, 2018, we completed our acquisition of Wealth, Health and Life Advisors, LLC, more commonly known as GoMedigap, a technology-enabled provider of Medicare Supplement enrollment services. GoMedigap has built a leading consumer acquisition and engagement platform focused on meeting the Medicare Supplement insurance needs of its individual customers with a technology-enabled, consumer-centric approach that aligns with our mission and operations. This strategic acquisition significantly enhances our growing presence in the Medicare Supplement market, puts us in a stronger position with carriers and strategic partners and allowed us to accelerate our projected Medicare plan enrollment growth in 2018 and beyond. For more information on our acquisition of GoMedigap, see Note 2 - Acquisition in the Notes to Consolidated Financial Statements of this Form 10-K.
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). The standard is a comprehensive new revenue recognition model requiring 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. Effective January 1, 2018, we adopted ASC 606 using the full retrospective method, which required us to revise our historical financial information to be consistent with the new standard. The adoption had a material impact on our consolidated financial statements. The most significant impact of the standard was on our commission revenue. We now recognize revenue based on an estimate of the lifetime value of commissions we expect to collect from Medicare-related, individual and family and ancillary health insurance plans at the time the carrier approves the plans, and for small business health insurance plans, the estimated commissions we expect to collect from the plan over the following 12 months. For additional information on the change in our revenue recognition policy and the related impact to our previously reported results, see Note 1 - Summary of Business and Significant Accounting Policies in the Notes to Consolidated Financial Statements of this Form 10-K.
In addition to traditional financial metrics, we rely upon certain metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate strategic planning. Our commission revenue is influenced by a number of factors including:
2017 compared to 2016-Medicare submitted applications grew 10% for the year ended December 31, 2017 compared to the year ended December 31, 2016. a deceleration from prior years’ growth, driven primarily by the change in our marketing strategy as we de-emphasized less profitable customer acquisition channels and worked on building out the more efficient direct and strategic partner channels. As a result of this strategy, we experienced an improvement in conversion of leads to applications and lower cost of acquisition in the second half of 2017 compared to the first half of 2017 and the same
period a year ago, and anticipate that we will see higher growth in Medicare submitted applications in 2018. Individual and family plan submitted applications declined 51% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to a continuing challenging environment in this market, as well as our reduction in marketing spend. The decline in individual and family plan submitted applications has also limited our ability to cross-sell ancillary plans, resulting in a decline of 16% in submitted applications for all ancillary products combined for the year ended December 31, 2017 compared to the year ended December 31, 2016. Small business submitted applications grew 9% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to progress in implementing a focused marketing strategy for this market, technology enhancements and an increased conversion rate.
individual and family health insurance plan market. The decline in Individual and Family Plan approved members has also limited our ability to cross-sell ancillary plans, resulting in a decline of 16% in approved members for all ancillary products combined for the year ended December 31, 2017 compared to the year ended December 31, 2016. Small business approved members grew 75% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to improved focus on key partnerships, technology enhancements and an increased conversion rate.
2018 compared to 2017-The constrained lifetime value of commissions per approved member improved 7% and 8% for Medicare Advantage and Medicare Supplement, respectively, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The improvement in constrained lifetime value per approved member for Medicare Advantage was driven by higher commission rates and customer retention, and the improvement in constrained lifetime value for Medicare Supplement was driven by an improvement in commission rates and our acquisition of GoMedigap in January 2018. The constrained lifetime value of commissions per approved member for Non-Qualified Health Plans and Qualified Health Plans increased 11% and 8%, respectively, mostly driven by improved churn, for the year ended December 31, 2018 compared to the year ended December 31, 2017, while the constrained lifetime value of commissions per approved member for Medicare Part D, Short Term and Small Business plans decreased 9%, 14% and 1%, respectively, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in Medicare Part D was due to higher churn year-over-year. The decrease in Short Term constrained lifetime value was mainly driven by a regulatory change issued in April 2017 that reduced the maximum length of a short-term policy from one year to 90 days. The change year-over-year in Small Business was not material.
2017 compared to 2016-The constrained lifetime value of commissions per approved member improved 9% and 3% for Medicare Advantage and Medicare Supplement, respectively, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The improvement in constrained lifetime value per approved member for Medicare Advantage was driven by higher commission rates and customer retention, and the improvement in constrained lifetime value for Medicare Supplement was driven by an improvement in commission rates. The constrained lifetime value of commissions per approved member for Medicare Part D, Non-Qualified and Qualified Health Plans, Dental and Vision remained relatively unchanged for the year ended December 31, 2017 compared to the year ended December 31, 2016. The constrained lifetime value of commissions per approved member decreased 11% for Short-term for the year ended December 31, 2017 compared to the year ended December 31, 2016, mainly driven by a regulatory change that reduced the maximum length of a short-term policy from one year to 90 days. The constrained lifetime value of commissions per approved member improved 6% for Small Business for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to improved customer retention and higher commission rates.
The following table shows estimated membership by product as of December 31, 2018, 2017 and 2016:
After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Health care reform and its impacts as well as 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.
2018 compared to 2017-Medicare estimated membership grew 26% as of December 31, 2018 compared to December 31, 2017 primarily due to our continued investment in Medicare-related marketing activities, call center capabilities and an improved online experience and our acquisition of GoMedigap. Individual and Family Plan estimated membership declined 32% as of December 31, 2018 compared to December 31, 2017 due to the state of the Individual and Family Plan market as a result of health care reform and our continued shift in focus on the Medicare market. Ancillary plan estimated membership declined 7% as of December 31, 2018 compared to December 31, 2017 as a result of the decline in our ability to cross-sell dental and vision plans as a result of the decline in Individual and Family Plan membership. Small Business estimated membership grew 23% as of December 31, 2018 compared to December 31, 2017 due to improved focus on technology enhancements and an increased conversion rate.
2017 compared to 2016-Medicare estimated membership grew 26% as of December 31, 2017 compared to December 31, 2016 primarily due to our continued investment in the Medicare market. Individual and Family Plan estimated membership declined 38% as of December 31, 2017 compared to December 31, 2016 due to the state of the Individual and Family Plan market as a result of health care reform. Ancillary plan estimated membership declined 8% as of December 31, 2017 compared to December 31, 2016 as a result of the decline in our ability to cross-sell dental and vision plans as a result of the decline in Individual and Family Plan membership. Small Business estimated membership grew 7% as of December 31, 2017 compared to December 31, 2016 due to improved focus on technology enhancements and an increased conversion rate.
2018 compared to 2017-Medicare CC&E expense per approved MA-equivalent member decreased 5% for the year ended December 31, 2018 compared to the year ended December 31, 2017 due to the scalability of a flexible agent staffing model. Variable marketing cost per approved MA-equivalent member decreased 12% for the year ended December 31, 2018 due to an increase in demand generated from direct channels, including direct mail, television, search engine optimization, and paid search advertising, while reducing the purchases of customer leads from third-party lead generation sources. Variable marketing cost per approved IFP-equivalent member increased 18% for the year ended December 31, 2018 compared to the year ended December 31, 2017 due to higher marketing spend. IFP CC&E expense per approved IFP-equivalent member decreased 18% for the year ended December 31, 2018 compared to the year ended December 31, 2017 due to cost saving efforts.
We are compensated by the receipt of commission payments from health insurance carriers whose health insurance policies are purchased through our ecommerce platforms or our customer care centers. We may also receive commission bonuses based on our attaining predetermined target sales levels for Medicare, individual and family, small business and ancillary health insurance products, or other objectives, as determined by the health insurance carrier, which we recognize as commission revenue when we achieve the predetermined target sales levels or other objectives. In addition, we also generate revenue from non-commission revenue sources, which include online sponsorship and advertising, technology licensing and lead referrals.
contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP, basis.
Commission Revenue-Our commission revenue is primarily comprised of commissions paid to us by health insurance carriers related to insurance plans that have been purchased by a member through our health insurance exchange service. We define a member as an individual currently covered by an insurance plan, which include Medicare-related, individual and family, small business and ancillary plans. We are compensated by the health insurance carrier, which we define as our customer.
We 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, 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
Deferred revenue includes deferred technology licensing implementation fees and amounts billed for performance obligations, including professional services, undelivered performance obligations, as well as amounts billed or collected from sponsorship or technology licensing customers in advance of our performing our service for such customers. It also includes the amount by which both unbilled and billed services provided under our technology licensing arrangements exceed the revenue recognized to date.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Jobs Act, was signed into law resulting in significant changes to the Internal Revenue Code. The Jobs Act reduces the federal corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017, changes U.S international taxation from a worldwide tax system to a territorial system, and implements a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. During the year ended December 31, 2017, we made reasonable estimates of the effects of the Jobs Act and recorded provisional amounts. During the year ended December 31, 2018, we finalized the accounting for the enactment of the Jobs Act, without any material adjustments to our previous estimates.
The following table presents our commission revenue, other revenue and total revenue for the years ended December 31, 2018, 2017 and 2016 and the dollar and percentage changes from the prior year (dollars in thousands):
Other revenue increased $10.4 million, or 75% in 2018 due primarily to increases of $7.7 million in sponsorship and advertising revenue and $4.6 million in lead generation revenue, offset partially by a decrease of $1.9 million in licensing revenue.
The following table presents our marketing and advertising 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 to 2017-Customer care and enrollment expenses increased $11.4 million, or 19%, in 2018 compared to 2017, primarily due to growth in our Medicare and small group businesses, which resulted in increases of $6.3 million in personnel costs, $4.3 million in consulting costs, and $0.4 million in stock-based compensation expense, partially offset by a decrease of $0.4 million in facilities and other operating costs.
2017 compared 2016-Technology and content expenses remained relatively flat in 2017 as a result of a $1.2 million increase in personnel costs, offset by decreases of $0.7 million in facilities and other operating costs and $0.4 million in stock-based compensation expense.
The following table presents our general and administrative 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 to 2017-General and administrative expenses increased $5.9 million, or 15%, in 2018, primarily due to increases of $3.2 million in personnel costs, $1.0 million in stock-based compensation expense, $1.1 million in legal and other professional fees, and $0.5 million in facilities and other operating costs.
2017 compared to 2016-General and administrative expenses increased $4.8 million, or 13%, in 2017, primarily due to increases of $3.2 million in stock-based compensation expense, $1.9 million in personnel costs largely due to higher headcount, $0.7 million in lobbying fees, and $0.4 million in facilities and other operating costs, partially offset by decreases of $1.2 million in legal fees and $0.4 million in consulting expenses.
During the year ended December 31, 2018, we recorded $12.3 million of additional earnout consideration expense due to an adjustment in the estimated fair value of the earnout liability related to the acquisition of GoMedigap, which was completed on January 22, 2018. The increase in the fair value of the earnout liability was primarily related to an increase in the value of our common stock.
The following table presents our other income, net for the years ended December 31, 2018, 2017 and 2016 and the dollar change from the prior year (dollars in thousands):
2017 compared to 2016-Other income, net, increased $33,000 in 2017, primarily due to an increase in interest income.
The following table presents our provision (benefit) for income taxes for the years ended December 31, 2018, 2017 and 2016 and the dollar change from the prior year (dollars in thousands):
2018 compared to 2017-For the year ended December 31, 2018, we recorded a provision for income taxes of $3.1 million, representing an effective tax rate of 92.7%, which was higher than the statutory federal rate due primarily to a one-time increase of $2.4 million in the valuation allowance related to deferred tax assets related to state net operating loss carryforwards that are expected to expire unutilized. The remaining $0.7 million of provision for income taxes was impacted by lobbying and other non-deductible expenses, partially offset by research and development tax credits and stock-based compensation windfalls.
(1)As adjusted for the adoption of ASC 606 using the full retrospective method
Revenue from our Medicare segment increased $68.1 million, or 48%, in 2018 largely due to a $57.3 million increase in commission revenue and a $10.9 million increase in other revenue. The increase in Medicare commission revenue was primarily attributable to a 36% increase in Medicare approved members as of December 31, 2018 and an increase in lifetime value of commissions per Medicare Supplement and Medicare Advantage approved members due primarily to higher application submissions and improved conversion rates. The increase in other Medicare revenue was driven primarily by carrier sponsorship programs and sale of Medicare leads.
Profit from our Medicare segment was $60.8 million in 2018, a $38.7 million, or 175%, improvement compared to profit of $22.1 million in 2017. The improvement in profit from the Medicare segment in 2018 was primarily due to a $68.1 million increase in revenue, of which $57.3 million related to Medicare commission revenue and $10.9 million related to other revenue, partially offset by a $29.4 million increase in operating expenses excluding stock-based compensation, depreciation and amortization expenses and amortization of intangible assets. The increase in revenue from 2017 to 2018 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.
Profit from our Individual, Family and Small Business segment was $9.6 million in 2017, a $23.5 million, or 71%, decrease compared to profit of $33.1 million from the Individual, Family and Small Business segment in 2016. The decrease in profit from the Individual, Family and Small Business segment in 2017 was primarily due to a $22.9 million decrease in revenue, of which $24.3 million related to a decrease in individual and family health plan revenue offset by a $1.4 million increase in Small Business revenue. The decrease in Individual, Family and Small Business segment revenue from 2016 to 2017 was mainly due to the decline in individual and family health insurance approved members.
As of December 31, 2018, we had in treasury 762,404 shares that were previously surrendered by employees to satisfy tax withholdings in connection with the vesting of certain restricted stock units. As of December 31, 2018 and December 31, 2017, we had a total of 11,426,292 shares and 11,237,995 shares, respectively, held in treasury.
Year Ended December 31, 2017-Net cash used in financing activities of $0.9 million during 2017 was primarily due to $1.0 million proceeds from the exercise of stock options and $1.8 million used to net-share settle the tax obligation related to vesting equity awards.
We incurred $1.2 million of issuance costs in connection with the Credit Agreement, which were capitalized as part of Other assets on the balance sheet as of December 31, 2018.
are insufficient to fund our future activities, we plan to raise additional capital through bank debt, or public or private equity or debt financing to the extent such funding sources are available.
In March 2018, we entered into an agreement to lease 26,878 square feet of office space in Austin, Texas. The term of this lease agreement is 90 months, commencing in September 2018 and ending in May 2026. As of December 31, 2018, future minimum payments are expected to be $4.4 million over the remaining term of the lease plus our proportionate share of certain operating expenses, insurance costs and taxes for each calendar year during the lease.
On April 25, 2018, we entered into a lease agreement to lease approximately 32,492 square feet of office space located in Santa Clara, California. We entered into this lease agreement as a result of the expiration of one of our leases in Mountain View, California on December 31, 2018. The term of the lease is approximately one hundred twenty-three months, commencing on October 1, 2018 and ending on an estimated date of February 28, 2029. As of December 31, 2018, future 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 August 2014, we renewed our agreement to lease and expanded to approximately 44,738 square feet of office space in Gold River, California. The lease commenced in August 2014 and is for a term of 4 years and 5 months. In 2015, we vacated
See Note 1 of Notes to Consolidated Financial Statements for recently issued accounting standards that could have an effect on us.
We have audited the accompanying consolidated balance sheets of eHealth, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Principles of Consolidation-The consolidated financial statements include the accounts of eHealth, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles.
Operating Segments-We report segment information based on how our chief executive officer, who is our chief operating decision maker ("CODM"), regularly reviews our operating results, allocates resources and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit (loss). Our business structure is comprised of two operating segments:
Use of Estimates-The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to, but not limited to, the useful lives of intangible assets, fair value of investments, recoverability of intangible assets, the commissions we expect to collect for each approved member cohort, valuation allowance for deferred income taxes, provision for income taxes and the assumptions used in determining stock-based compensation. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Actual results may differ from these estimates.
Reclassifications-For presentation purposes, certain prior period amounts have been reclassified to conform to the reporting in the current period financial statements. Specifically, for the year ended December 31, 2016, we reclassified $0.8 million of operating expenses related to our licensing department, which were previously reported as general and administrative expenses, to customer care and enrollment expenses due to a realignment of our departmental structures. This reclassification did not affect previously reported operating results, cash flows or stockholders’ equity.
Property and Equipment-Property and equipment are stated at cost, less accumulated depreciation and amortization. Capital lease amortization expenses are included in depreciation expense in our Consolidated Statements of Comprehensive Income. Depreciation and amortization is computed using the straight-line method based on estimated useful lives as follows:
See Note 3 - Balance Sheet Accounts of the Notes to Consolidated Financial Statements for additional information regarding our property and equipment.
Business Combinations-We allocate the fair value of the purchase consideration of our acquired businesses to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related costs are recognized separately from the business combination and are expensed as incurred.
We realigned our reporting units into two operating segments during the year ended December 31, 2016, at which time we allocated $3.7 million and $10.4 million of the carrying value of the goodwill to the Medicare and Individual, Family and Small Business segments, respectively, based on the relative fair value of the operating segments. We continued to report the same two segments during the years ended December 31, 2018 and 2017, and no goodwill impairment has been identified in any of the years presented.
purchased technology, pharmacy and customer relationships, trade names, and certain trademarks, are amortized over their estimated useful lives.
Revenue Recognition-In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (ASC 606), requiring 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. As noted above, we adopted ASC 606 using the full retrospective method and, accordingly, our historical financial statements and related disclosures have been restated herein to reflect the adoption of ASC 606 for all periods presented.
We are compensated by the receipt of commission payments from health insurance carriers whose health insurance policies are purchased through our ecommerce platforms or our customer care centers. We may also receive commission bonuses based on our attaining predetermined target sales levels for Medicare, individual and family, small business and ancillary health insurance products, or other objectives, as determined by the health insurance carrier, which we recognize as commission revenue when we achieve the predetermined target sales levels or other objectives. In addition, we also generate revenue from non-commission revenue sources, which include online sponsorship and advertising, technology licensing and lead referrals. Payment is typically received within 60 days of approval.
Allocation of the transaction price to the performance obligations in the contract. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP") basis.
For both Medicare Advantage and Medicare Part D prescription drug plans, we receive a fixed, annual commission payment from insurance carriers once the plan is approved by the carrier and either a fixed, monthly or annual commission payment beginning with and subsequent to the second plan year. In the first plan year of a Medicare Advantage and Medicare Part D prescription drug plan, after the health insurance carrier approves the application but during the effective year of the plan, we are paid a fixed commission that is prorated for the number of months remaining in the calendar year. Additionally, if the plan is the first Medicare Advantage or Medicare Part D plan issued to the member, we may receive a higher commission rate that covers a full twelve-month period, regardless of the month the plan was effective. We earn commission revenue for Medicare Advantage and Medicare Part D prescription drug plans for which we are the broker of record, typically until either the policy is cancelled or we otherwise do not remain the agent on the policy.
whether any adjustment to those constraints should be made. We update the assumptions when we observe a sufficient level of evidence that would suggest that the long term expectation of the assumption has changed.
Deferred Revenue-Deferred revenue includes deferred technology licensing implementation fees and amounts billed for amounts billed or collected from sponsorship or technology licensing customers in advance of our performing our service for such customers. It also includes the amount by which both unbilled and billed services provided under our technology licensing arrangements exceed the straight-line revenue recognized to date.
Disaggregation of Revenue-The table below depicts the disaggregation of revenue by product for the years ended December 31, 2018, 2017 and 2016, and is consistent with how we evaluate our financial performance (in thousands):
Internal-Use Software and Website Development Costs-We capitalize costs of materials, consultants and compensation and benefits costs of employees who devote time to the development of internal-use software during the application development stage. Our judgment is required in determining the point at which various projects enter the phases at which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized, which is generally three years. For the years ended December 31, 2018, 2017 and 2016, we capitalized internal-use software and website development costs of $6.3 million, $3.2 million and $1.8 million respectively, and recorded amortization expense of $2.2 million, $1.5 million, and $0.9 million respectively.
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. Our contributions to the 401(k) Plan are discretionary and are expensed when incurred. We also match employee contributions to our 401(k) Plan at 25% of an employee’s contribution each pay period, up to a maximum of 2% of the employee’s salary during such pay period for the year ended December 31, 2018, compared to a maximum of 1% for the years ended December 31, 2017 and 2016. Our matching contributions are expensed as incurred and vest one-third for each of the first three years of the recipient’s service. The recipient is fully vested in all 401(k) Plan matching contributions after three years of service. We recognized expense of $1.0 million, $0.4 million and $0.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, related to 401(k) matching contributions.
Compensation - Stock Compensation (Topic 718)-In May 2017, the FASB issued ASU No 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. ASU 2017-09 is to be applied on a prospective basis to an award modified on or after the adoption date. We adopted ASU 2017-09 in the first quarter of 2018 and the adoption of this new standard did not have a material impact on our consolidated financial statements.
Statement of Cash Flows (Topic 230)-In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash flows. As a result, entities would no longer present transfers between cash/equivalents and restricted cash/equivalents in the statement of cash flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash/equivalents and restricted cash/equivalents. ASU 2016-18 was effective for us beginning on January 1, 2018 and was applied on a retrospective basis. The adoption of this new standard did not have an impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are presented on the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017. We adopted ASU 2016-15 in the first quarter of 2018 and the adoption of this new standard did not have a material impact on our consolidated financial statements.
The GoMedigap acquisition was accounted for using the acquisition method of accounting under ASC 805, Business Combinations. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The major classes of assets and liabilities to which we have allocated the acquisition consideration were as follows (in thousands):
Fair Value Measurements-The assets acquired and liabilities assumed of GoMedigap have been recognized at fair value in accordance with ASC 820, Fair Value Measurement. ASC 820 defines fair value as the price that would be received to
sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires three levels of hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy level assigned to each asset and liability is based on the assessment of the transparency and reliability of inputs used in the valuation of such items based on the lowest level of input that is significant to fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements).
The fair value of prepaid expenses and other current assets, property and equipment, net, accounts payable, accrued compensation and benefits and other current liabilities approximated their carrying value at the date of acquisition. The fair value of commissions receivable was determined using a discounted rate of interest, which is a Level 2 input. Intangible assets and the earnout liability were valued using Level 3 inputs.
Cash and Cash Equivalents-As of December 31, 2018 and 2017, our cash equivalents consisted of money market accounts that invested in U.S. government-sponsored enterprise bonds and discount notes, U.S. government treasury bills and notes and repurchase agreements collateralized by U.S. government obligations. As of December 31, 2018 and 2017, our cash equivalents carried no unrealized gains or losses and we did not realize any significant gains or losses on sales of cash equivalents during the years ended December 31, 2018 and 2017.
As of December 31, 2018 and 2017, our cash and cash equivalent balances were invested as follows (in thousands):
Prepaid Expenses and Other Current Assets-As of December 31, 2018 and 2017, prepaid expenses and other current assets consisted of the following (in thousands):
Property and Equipment-As of December 31, 2018 and 2017, property and equipment consisted of the following (in thousands):
Depreciation and amortization expense related to property and equipment totaled $2.5 million, $2.8 million, and $3.5 million in the years ended December 31, 2018, 2017 and 2016, respectively.
Other Assets-As of December 31, 2018 and 2017, other assets consisted of the following (in thousands):
Other Current Liabilities-As of December 31, 2018 and 2017, other current liabilities consisted of the following (in thousands):
The following table is a summary of financial assets measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands).
Earnout liability activity during the year ended December 31, 2018 was as follows (in thousands):
Our stock options granted under the 2014 Plan generally vest over four years at a rate of 25% after one year and 1/48th per month thereafter. Stock options granted under the 2014 Plan generally expire after seven years from the date of grant. On December 31, 2018, no shares were subject to repurchase.
Our restricted stock unit awards granted under the 2014 Plan, 2006 Plan and 2005 Stock Plan generally vest over four years at a rate of 25% after one year and 25% annually thereafter.
We have granted market-based restricted stock units to our executive officers and certain members of our senior management team. Each market-based stock unit represents a contingent right to receive certain shares of our common stock upon the attainment of certain stock prices over a four-year performance period. Once a stock price threshold is achieved, the
Includes grants of stock options with service, performance-based or market-based vesting criteria.
Includes certain restricted stock units with service, performance-based or market-based vesting criteria.
As of December 31, 2018, there were $4.8 million of total unamortized compensation costs, net of estimated forfeitures, related to stock options, and these costs are expected to be recognized over a weighted average period of 2.8 years. As of December 31, 2018, there were $21.9 million of total unamortized compensation costs, net of estimated forfeitures, related to restricted stock units, and these costs are expected to be recognized over a weighted average period of 2.8 years.
In 2018, we had worldwide consolidated income before tax of $3.3 million, and tax expense of $3.1 million, with an annual effective tax rate of 92.7%. Our 2018 effective income tax rate differed from the U.S. statutory rate primarily due to a $2.4 million valuation allowance related to state net operating loss carryforwards that are expected to expire unutilized.
The Tax Cuts and Jobs Act ("Jobs Act") was passed on December 22, 2017, which has various impacts on our income tax provision. The main impact of the Jobs Act on our provision (benefit) for income taxes is the decrease in our statutory federal income tax rate from 35% to 21%. During the year ended December 31, 2017, we made reasonable estimates of the effects of the Jobs Act and recorded provisional amounts. During the year ended December 31, 2018, we finalized the accounting for the enactment of the Jobs Act, without any material adjustments to our previous estimates. In addition, our tax provision for the year ended December 31, 2018 has been adjusted for other impacts of the Jobs Act including, among other things, certain limitations on deductions, taxes on Global Intangible Low-Taxed Income ("GILTI") earned by our China subsidiary and changes to the Section 162(m) limitation rules for executive compensation. An accounting policy election is allowed to either treat taxes due to GILTI inclusions as a current period expense or account for GILTI in the measurement of deferred tax assets. We have elected to treat GILTI as a current period expense. As such, we have not recognized any deferred taxes related to GILTI.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, together with operating losses and tax credit carryforwards.
partial valuation allowance of $2.4 million is recorded against California net operating losses. The valuation allowance was recorded as a result of increased uncertainty regarding our future taxable income and a lack of sources of other taxable income to realize those net operating losses.
A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows (in thousands):
Tax positions are evaluated in a two-step process. We first determine whether it is more likely than not that a tax position will be sustained upon examination. If a tax position meets the more-likely-than-not recognition threshold it is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Included in the balance of income tax liabilities and accrued interest at December 31, 2018 is an immaterial amount related to tax positions for which it is reasonably possible that the statute of limitations will expire in various jurisdictions and income tax exams will close within the next twelve months.
From time to time, we receive inquiries from governmental bodies and also may be subject to various legal proceedings and claims arising in the ordinary course of business. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our consolidated financial statements. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal proceedings or other contingencies could result in material costs, even if we ultimately prevail.
We lease our operating facilities and certain of our equipment and furniture and fixtures under various operating leases, the latest of which expires in February 2029. Certain of these leases have free or escalating rent payment provisions. We recognize rent expense on our operating leases on a straight-line basis over the terms of the leases, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements.
On April 25, 2018, we entered into a lease agreement to lease approximately 32,492 square feet of office space located in Santa Clara, California. We entered into this lease agreement as a result of the upcoming expiration of one of our leases in Mountain View, California on December 31, 2018. The term of the lease is approximately one hundred twenty-three months, commencing on October 1, 2018 and ending on an estimated date of February 28, 2029. As of December 31, 2018, future
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, 2018 (in thousands):
The following table presents summary results of our operating segments for the years ended December 31, 2018, 2017 and 2016 (in thousands):
Our long-lived assets consist primarily of property and equipment, internally-developed software, goodwill and other indefinite-lived intangible assets and finite-lived intangible assets. All of our intangible assets are located in the United States. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area as of December 31, 2018 and 2017 were as follows (in thousands):
On September 17, 2018, we entered into a Credit Agreement with Royal Bank of Canada (“RBC”), as administrative agent and collateral agent (the “Credit Agreement”). The Credit Agreement provides for a $40 million secured asset-backed revolving credit facility with a $5 million letter of credit subfacility. The commitments under the Credit Agreement expire on September 17, 2021, at which time any amounts drawn under facility are contractually due.
Amounts not borrowed under the Credit Agreement will be subject to a commitment fee of 0.5% per annum on the daily unused portion of the credit facility, to be paid in arrears on the first business day of each calendar quarter. At closing, the Company paid a one-time facility fee of 1.75% of the total commitments under the Credit Agreement. The Company is also obligated to pay other customary administration fees for a credit facility of this size and type.
As of December 31, 2018, we had $5.0 million outstanding principal amount under our revolving credit facility, which was repaid in full in January 2019.
In February 2018, our Board of Directors approved a plan to close our sales call center in Massachusetts and to terminate the employment of other employees in certain other locations. As part of this plan, we eliminated approximately 110 full-time positions, representing approximately 10% of our workforce, primarily within customer care and enrollment, and to a lesser extent, in our marketing and advertising and general and administrative groups.
The following table summarizes the total cash and non-cash restructuring charges recognized during the year ended December 31, 2018 (in thousands):
The following table summarizes the accrued restructuring charges activity during the year ended December 31, 2018 (in thousands):
(2) Computed using weighted-average share amounts outstanding for the respective periods presented
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.