eHealth, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS EHEALTH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, 2020* December 31, 2019 Assets (Unaudited) Current assets: Cash and cash equivalents $ 87,833 $ 23,466 Short-term marketable securities 108,637 — Accounts receivable 3,854 2,332 Contract assets – commissions receivable – current 158,773 174,526 Prepaid expenses and other current assets 19,335 7,822 Total current assets 378,432 208,146 Contract assets – commissions receivable – non-current 445,572 414,696 Property and equipment, net 14,488 10,518 Long-term marketable securities 1,294 — Operating lease right-of-use assets 43,886 36,621 Restricted cash 3,354 3,354 Other assets 24,790 18,004 Intangible assets, net 8,856 10,062 Goodwill 40,233 40,233 Total assets $ 960,905 $ 741,634 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 21,439 $ 24,554 Accrued compensation and benefits 22,140 29,578 Accrued marketing expenses 6,592 12,041 Earnout liability – current — 37,273 Lease liabilities – current 5,111 4,759 Deferred revenue 26,471 2,570 Other current liabilities 4,731 2,210 Total current liabilities 86,484 112,985 Deferred income taxes – non-current 52,782 64,130 Lease liabilities – non-current 42,400 34,305 Other non-current liabilities 3,553 3,050 Stockholders’ equity: Common stock 38 35 Additional paid-in capital 719,104 455,159 Treasury stock, at cost ( 199,998 ) ( 199,998 ) Retained earnings 256,282 271,852 Accumulated other comprehensive income 260 116 Total stockholders’ equity 775,686 527,164 Total liabilities and stockholders’ equity $ 960,905 $ 741,634 _____________ * Reflects the impact from the adoption of ASC 326 on January 1, 2020. See Note 1 – Summary of Business and Significant Accounting Policies for details. The accompanying notes are an integral part of these condensed consolidated financial statements. 2 EHEALTH, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands, except per share amounts, unaudited) Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue: Commission $ 73,544 $ 59,762 $ 253,986 $ 184,595 Other 20,740 10,151 35,472 19,858 Total revenue 94,284 69,913 289,458 204,453 Operating costs and expenses: Cost of revenue 482 410 2,160 782 Marketing and advertising 33,405 25,812 104,042 72,857 Customer care and enrollment 43,342 40,144 101,025 81,567 Technology and content 17,673 12,033 46,786 31,487 General and administrative 19,942 16,608 60,308 42,748 Amortization of intangible assets 287 547 1,207 1,641 Change in fair value of earnout liability — ( 5,400 ) — 15,106 Total operating costs and expenses 115,131 90,154 315,528 246,188 Loss from operations ( 20,847 ) ( 20,241 ) ( 26,070 ) ( 41,735 ) Other income (expense), net ( 101 ) 568 724 1,824 Loss before benefit from income taxes ( 20,948 ) ( 19,673 ) ( 25,346 ) ( 39,911 ) Benefit from income taxes ( 6,443 ) ( 8,649 ) ( 10,923 ) ( 17,974 ) Net loss $ ( 14,505 ) $ ( 11,024 ) $ ( 14,423 ) $ ( 21,937 ) Net loss per share: Basic and diluted $ ( 0.55 ) $ ( 0.47 ) $ ( 0.56 ) $ ( 0.96 ) Weighted-average number of shares used in per share amounts: Basic and diluted 26,487 23,493 25,838 22,840 Comprehensive loss: Net loss $ ( 14,505 ) $ ( 11,024 ) $ ( 14,423 ) $ ( 21,937 ) Unrealized holding gain (loss) for available for sales debt securities, net of tax ( 97 ) — 71 — Foreign currency translation adjustment 104 ( 34 ) 73 ( 30 ) Comprehensive loss $ ( 14,498 ) $ ( 11,058 ) $ ( 14,279 ) $ ( 21,967 ) The accompanying notes are an integral part of these condensed consolidated financial statements. 3 EHEALTH, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, unaudited) Three Months Ended September 30, 2020 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Shares Amount Shares Amount Balance as of June 30, 2020 37,373 $ 37 $ 720,976 11,698 $ ( 199,998 ) $ 270,787 $ 253 $ 792,055 Issuance of common stock in connection with equity incentive plans 275 1 262 — — — — 263 Repurchase of shares to satisfy employee tax withholding obligations — ( 9,014 ) 112 — — — ( 9,014 ) Stock-based compensation — — 6,880 — — — — 6,880 Other comprehensive income, net of tax — — — — — — 7 7 Net loss — — — — — ( 14,505 ) — ( 14,505 ) Balance as of September 30, 2020 37,648 $ 38 $ 719,104 11,810 $ ( 199,998 ) $ 256,282 $ 260 $ 775,686 Three Months Ended September 30, 2019 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Shares Amount Shares Amount Balance as of June 30, 2019 34,267 $ 34 $ 449,046 11,482 $ ( 199,998 ) $ 194,052 $ 131 $ 443,265 Issuance of common stock in connection with equity incentive plans 335 1 1,912 — — — 1,913 Repurchase of shares to satisfy employee tax withholding obligations — — ( 8,059 ) 89 — — ( 8,059 ) Stock-based compensation — — 5,510 — — — 5,510 Foreign currency translation adjustment, net of taxes — — — — — ( 34 ) ( 34 ) Net loss — — — — — ( 11,024 ) — ( 11,024 ) Balance as of September 30, 2019 34,602 $ 35 $ 448,409 11,571 $ ( 199,998 ) $ 183,028 $ 97 $ 431,571 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 EHEALTH, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands, unaudited) Nine Months Ended September 30, 2020 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Shares Amount Shares Amount Balance as of December 31, 2019 34,752 $ 35 $ 455,159 11,616 $ ( 199,998 ) $ 271,852 $ 116 $ 527,164 Cumulative effect from the adoption of ASU 2016-13 — — — — — ( 1,147 ) — ( 1,147 ) Issuance of common stock in connection with equity incentive plans 531 1 1,576 — — — — 1,577 Repurchase of shares to satisfy employee tax withholding obligations — — ( 17,174 ) 194 — — — ( 17,174 ) Shares issued in equity offering 2,070 2 228,022 — — — — 228,024 Settlement of earnout liability 295 — 28,521 — — — — 28,521 Stock-based compensation — — 23,000 — — — — 23,000 Other comprehensive income, net of tax — — — — — — 144 144 Net loss — — — — — ( 14,423 ) — ( 14,423 ) Balance as of September 30, 2020 37,648 $ 38 $ 719,104 11,810 $ ( 199,998 ) $ 256,282 $ 260 $ 775,686 Nine Months Ended September 30, 2019 Common Stock Additional Paid-in Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Shares Amount Shares Amount Balance as of December 31, 2018 30,863 $ 31 $ 298,024 11,426 $ ( 199,998 ) $ 204,965 $ 127 $ 303,149 Issuance of common stock in connection with equity incentive plans 684 1 5,167 — — — — 5,168 Repurchase of shares to satisfy employee tax withholding obligations — — ( 11,511 ) 145 — — — ( 11,511 ) Shares issued in equity offering 2,760 3 126,048 — — — — 126,051 Settlement of earnout liability 295 — 17,264 — — — — 17,264 Stock-based compensation — — 13,417 — — — — 13,417 Foreign currency translation adjustment, net of taxes — — — — — — ( 30 ) ( 30 ) Net loss — — — — — ( 21,937 ) — ( 21,937 ) Balance as of September 30, 2019 34,602 $ 35 $ 448,409 11,571 $ ( 199,998 ) $ 183,028 $ 97 $ 431,571 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 EHEALTH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands, unaudited) Nine Months Ended September 30, 2020 2019 Operating activities: Net loss $ ( 14,423 ) $ ( 21,937 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,604 2,153 Amortization of internally developed software 5,307 2,443 Amortization of intangible assets 1,207 1,641 Stock-based compensation expense 21,722 13,417 Deferred income taxes ( 10,982 ) ( 18,166 ) Change in fair value of earnout liability — 15,106 Other non-cash items 421 ( 936 ) Changes in operating assets and liabilities: Accounts receivable ( 1,522 ) 2,920 Contract assets – commissions receivable ( 16,772 ) ( 11,878 ) Prepaid expenses and other assets ( 9,398 ) ( 9,346 ) Accounts payable ( 3,196 ) 13,155 Accrued compensation and benefits ( 7,438 ) ( 2,624 ) Accrued marketing expenses ( 5,449 ) ( 6,927 ) Deferred revenue 23,901 8,207 Accrued expenses and other liabilities 3,059 ( 1,942 ) Net cash used in operating activities ( 10,959 ) ( 14,714 ) Investing activities: Capitalized internal-use software and website development costs ( 12,082 ) ( 6,356 ) Purchases of property and equipment and other assets ( 6,454 ) ( 5,616 ) Purchases of marketable securities ( 180,505 ) — Proceeds from redemption and maturities of marketable securities 70,750 — Payments for security deposits — ( 72 ) Net cash used in investing activities ( 128,291 ) ( 12,044 ) Financing activities: Proceeds from issuance of common stock, net of issuance costs 228,024 126,051 Net proceeds from exercise of common stock options 1,577 5,168 Repurchase of shares to satisfy employee tax withholding obligations ( 17,174 ) ( 11,511 ) Repayment of debt — ( 5,000 ) Acquisition-related contingent payments ( 8,751 ) ( 9,542 ) Principal payments in connection with leases ( 121 ) ( 81 ) Net cash provided by financing activities 203,555 105,085 Effect of exchange rate changes on cash, cash equivalents and restricted cash 62 8 Net increase in cash, cash equivalents and restricted cash 64,367 78,335 Cash, cash equivalents and restricted cash at beginning of period 26,820 13,089 Cash, cash equivalents and restricted cash at end of period $ 91,187 $ 91,424 The accompanying notes are an integral part of these condensed consolidated financial statements. 6 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1 – Summary of Business and Significant Accounting Policies Description of Business – eHealth, Inc. (the “Company,” “eHealth,” “we” or “us”) is a leading health insurance marketplace with a technology and service platform that provides consumer engagement, education and health insurance enrollment solutions. Our mission is to connect every person with the highest quality, most affordable health insurance and Medicare plans for their life circumstances. Our platform integrates proprietary and third-party developed educational content regarding health insurance plans with decision support tools to aid consumers in what has traditionally been a confusing and opaque health insurance purchasing process, and to help them obtain the health insurance products that meet their individual health and economic needs. Our omni-channel consumer engagement platform is designed to meet the consumer wherever they prefer to engage with us, and enables consumers to use our services online, through interactive chat, or by telephone with a licensed insurance agent. We have created a marketplace that offers consumers a broad choice of insurance products that includes thousands of Medicare Advantage, Medicare Supplement, Medicare Part D prescription drug, individual and family, small business and other ancillary health insurance products from over 180 health insurance carriers across all fifty states and the District of Columbia. Basis of Presentation – The accompanying condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, the condensed consolidated statements of comprehensive loss and stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019, respectively, are unaudited. The condensed consolidated balance sheet data as of December 31, 2019 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 2, 2020. The accompanying financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and reflect all normal recurring adjustments that are necessary to present fairly the results for the interim periods presented. The condensed consolidated financial statements include the accounts of eHealth, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in accordance with those rules and regulations. Certain reclassifications have been made to conform with the current presentation. However, the Company believes that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2019 and include all adjustments necessary for the fair presentation of our financial position as of September 30, 2020 and December 31, 2019, and our results of operations for the periods presented. Our financial position as of September 30, 2020, results of operations for the three and nine months ended September 30, 2020, and cash flows for the nine months ended September 30, 2020 were not materially impacted by the COVID-19 pandemic but the Company is continuously assessing the evolving situation related to the pandemic. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2020 and therefore should not be relied upon as an indicator of future results. Significant Accounting Polices, Estimates and Judgements – The preparation of condensed 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 condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to, but not limited to, the commissions we expect to collect for each approved member cohort, allowance for credit loss, the useful lives of intangible assets, fair value of investments, recoverability of intangible assets, valuation allowance for deferred income taxes, provision (benefit) 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. 7 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) With the exception of the change for the accounting of credit losses as a result of the adoption of Accounting Standard Updates (“ASU”) No. 2016-13, Financial Instruments – Credit Losses discussed below, there have been no material changes to our significant accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2019. Seasonality – Open enrollment periods drive the seasonality of our business. A greater number of our Medicare-related health insurance plans are sold in our fourth quarter during the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug coverage for the following year. As a result, our Medicare plan-related commission revenue is highest in our fourth quarter. Any changes or additional enrollment periods may change the seasonality of our business. For instance, due to the recent reintroduction of the Medicare Advantage open enrollment period that takes place in the first quarter of the year, our first quarter is generally the second-highest revenue generating quarter. The majority of our major medical individual and family health insurance plans are sold in the fourth quarter during the annual open enrollment period under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. Individuals and families generally are not able to purchase major medical individual and family health insurance outside of the open enrollment period, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance or moving to another state. Recently Adopted Accounting Pronouncement Financial Instruments – Credit Losses (Topic 326) – In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), that requires companies to present certain financial assets net of the amount expected to be collected. The guidance requires the measurement of expected credit losses to be based on relevant information from past events, including historical experiences, current conditions and reasonable and supportable forecasts that affect collectability. Contract assets – commissions receivable were the Company's only financial assets that were materially impacted by this guidance. We adopted ASU 2016-13, including applicable amendments in other ASUs issued subsequent to ASU 2016-13, using a modified retrospective transition method on January 1, 2020 for all financial assets measured at amortized cost. Results for periods after January 1, 2020 are presented under ASU 2016-13 while prior period amounts continue to be reported under the previous accounting standards. We recorded a $ 1.1 million decrease, net of income taxes, to retained earnings as of January 1, 2020 for the cumulative effect of adopting ASU 2016-13. See Note 3 – Supplemental Financial Statement Information for further discussion on credit losses. T he impact from the adoption of ASU 2016-13 is summarized as follows (in thousands): Balance Sheet Impact: December 31, 2019 Transition Adjustments January 1, 2020 Contract assets – commissions receivable – current $ 174,526 $ ( 71 ) $ 174,455 Contract assets – commissions receivable – non-current 414,696 ( 1,442 ) 413,254 Other assets* 18,004 366 18,370 Total assets 741,634 ( 1,147 ) 740,487 Retained earnings 271,852 ( 1,147 ) 270,705 ____________ * Adjustment to Other assets is due to the increase in deferred tax assets resulting from the adoption of ASU 2016-13. 8 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Financial Instruments (Topic 820) – In 2018, the FASB issued ASU No. 2018-13, to change the disclosure requirements for fair value measurement with the objective of improving the effectiveness of the notes to financial statements. This new guidance removed and modified certain disclosure requirements under Topic 820. We adopted this guidance in the first quarter of 2020 with no material impact on our condensed consolidated financial statements. Intangible – Goodwill and Other (Topic 350) – In 2017, the FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In addition, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. We adopted this guidance in the first quarter of 2020 with no material impact on our condensed consolidated financial statements. Accounting Pronouncements Not Yet Adopted Income Taxes (Topic 740) – In December 2019, the FASB issued ASU No. 2019-12, Income Tax, Simplifying the Accounting for Income Taxes , which aims to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and improve consistent application of and simplify U.S. GAAP for other areas under this Topic by clarifying existing guidance. ASU 2019-12 will be effective for us beginning January 1, 2021. The amendments in this standard update have individually different adoption approaches. We do not anticipate a material impact on our consolidated financial statements and disclosures from the adoption of this standard update. 9 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 2 – Revenue Disaggregation of Revenue – The table below disaggregates our revenue by product (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Medicare Medicare Advantage $ 41,901 $ 36,735 $ 168,834 $ 113,185 Medicare Supplement 7,321 8,229 32,384 25,082 Medicare Part D 329 1,805 7,148 5,906 Total Medicare 49,551 46,769 208,366 144,173 Individual and Family (1) Non-Qualified Health Plans 9,915 3,146 12,585 11,592 Qualified Health Plans 1,466 839 3,559 4,900 Total Individual and Family 11,381 3,985 16,144 16,492 Ancillary Short-term 2,438 3,151 6,724 7,162 Dental 4,452 1,420 5,791 3,138 Vision 1,798 537 2,228 1,294 Other 847 1,104 2,693 2,778 Total Ancillary 9,535 6,212 17,436 14,372 Small Business 1,723 1,938 6,975 6,576 Commission Bonus 1,354 858 5,065 2,982 Total Commission Revenue 73,544 59,762 253,986 184,595 Other Revenue 20,740 10,151 35,472 19,858 Total Revenue $ 94,284 $ 69,913 $ 289,458 $ 204,453 _____________ (1) We define our individual and family plan offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans. Individual and family health insurance plans include both qualified and non-qualified plans. Qualified health plans are individual and family health insurance plans that meet the requirements of the Affordable Care Act and are offered through the government-run health insurance exchange in the relevant jurisdiction. Non-qualified health plans are individual and family health insurance plans that meet the requirements of the Affordable Care Act and are not offered through the exchange in the relevant jurisdiction. Individuals that purchase non-qualified health plans cannot receive a subsidy in connection with the purchase of non-qualified plans. Revenue Recognition Based on Estimated Constrained LTV Our revenue primarily consists of commission revenue generated from health insurance carriers, which we define as our customers under the Accounting Standards Codification 606 – Revenue from Contracts with Customers (“ASC 606”). We recognize revenue for plans approved during the period by applying the latest estimated constrained lifetime value (“LTV”) for that product. We recognize adjustment revenue for plans approved in prior periods when changes in assumptions for constrained LTV calculations are made and when there is sufficient evidence demonstrating a trend that is different from the estimated constrained LTV at the time of approval resulting in a change in estimate to expected cash collections. Net adjustment revenue consists of increases in revenue for certain prior period cohorts as well as reductions in revenue for certain prior period cohorts. We recognize positive adjustment revenue to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We assess the risk of significant revenue reversal based on statistical and qualitative analysis given historical information and current market conditions. 10 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Our commission revenue for each product line is based on a number of assumptions, which include, but are not limited to, estimating conversion of an approved member to a paying member, forecasting average plan duration and forecasting the commission amounts likely to be received per member. These assumptions are based on our analysis of historical trends for different cohorts and incorporate management’s judgment in interpreting those trends and in applying the constraints discussed below. For our Medicare commission revenue, which represented 82 % and 78 % of our total commission revenue for the nine months ended September 30, 2020 and 2019, respectively, the estimated average plan duration, which is the average length of time paying members are active on their plans, used to calculate Medicare health insurance plan LTVs historically has been approximately 3 years for Medicare Advantage plans, approximately 5 years for Medicare Part D prescription drug plans, and approximately 5 years for Medicare Supplement plans. While the average plan duration has been approximately 3 years for Medicare Advantage plans, certain members may have a duration of up to 15 years. The estimated average plan duration used to calculate the LTV for major medical individual and family health insurance plans historically has been approximately 1.5 to 2 years. For short term health insurance plan LTVs, the estimated average plan duration historically has been approximately six months. For all other ancillary health insurance plan LTVs, the estimated average plan duration has historically varied from 1 to 3 years. Constraints are applied to LTV for revenue recognition purposes to help ensure that the total estimated lifetime commissions expected to be collected for an approved member’s plan are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with future commissions receivable from the plan is subsequently resolved. Significant judgment can be involved in determining the constraint. To determine the constraints to be applied to LTV, we compare prior calculations of LTV to actual cash received and review the reasons for any variations. We then apply judgment in assessing whether the difference between historical cash collections and LTV is representative of differences that can be expected in future periods. We also analyze whether circumstances have changed and consider any known or potential modifications to the inputs into LTV in light of the factors that can impact the amount of cash expected to be collected in future periods, including but not limited to commission rates, carrier mix, plan duration, cancellations of insurance plans offered by health insurance carriers with which we have a relationship, changes in laws and regulations, and changes in the economic environment. We evaluate the appropriateness of our constraints on a quarterly basis, and we update our assumptions when we observe a sufficient amount of evidence that would suggest that the long-term expectation underlying the assumptions has changed. Since the adoption of ASC 606, we re-compute LTVs for all outstanding cohorts on a quarterly basis. We continually review and monitor changes in the data used to estimate LTV and compare the cash received for each cohort to our original estimates at the time of approval. The fluctuations of cash received for each cohort as compared to our estimates and the fluctuations in LTV can be significant and may or may not be indicative of the need to adjust revenue for prior period cohorts. Changes in LTV may result in an increase or a decrease to revenue and a corresponding increase or decrease to contract assets – commissions receivable. We analyze these fluctuations and, to the extent we see changes in our estimates of the cash commission collections that we believe are indicative of an increase or decrease to prior period LTVs, we adjust revenue for the affected cohorts at the time such determination is made and when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. As we accumulate more historical data, we continue to enhance our LTV estimation models using statistical tools to increase the accuracy of LTV estimates with an emphasis on improving member attrition forecasting. The enhancements to the LTV estimation model provide greater statistical certainty on expected cash collections, particularly for earlier period cohorts where there is more historical data available. During the first half of 2020, our LTV estimation models indicated increases in LTVs and estimates of future cash collections for earlier period cohorts of certain products within our Individual, Family and Small Business segment. However, after considering various market factors and recent changes due to the impact of COVID-19 on the U.S. economy, such as increases in unemployment rate, potential delays in insurance premium payments and/or health insurance carrier commission payments, potential changes to enrollment periods, and potential changes to qualified health plan subsidies, we limited the adjustment revenue recognized during the six months ended June 30, 2020 to actual cash collected in excess of previously recognized revenue for certain individual and family and ancillary plan cohorts. During the three months ended September 30, 2020, despite the impact of COVID-19 and uncertainties regarding the Presidential election and the U.S. economy, we continued to observe stronger member retention rates in our latest LTV assessment for the majority of the earlier period cohorts of certain products in our Individual, Family and Small Business segment. Based on our evaluation of the updated LTV models and current retention trends, we recognized $ 18.2 million of net adjustment revenue for the Individual, Family and Small Business segment during the three months ended September 30, 2020. 11 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) We will continue to monitor our member retention rates as compared to our forecasts and other market factors and evaluate whether any addition or reduction of adjustment revenue shall be recorded as we continue to assess our LTV models in future periods. Commission revenue by segment is summarized as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Medicare Commission Revenue from Members Approved During the Period (1) $ 52,040 $ 43,888 $ 205,330 $ 141,898 Net Commission Revenue from Members Approved in Prior Periods (2) ( 698 ) 3,813 8,966 5,226 Total Medicare Segment Commission Revenue $ 51,342 $ 47,701 $ 214,296 $ 147,124 Individual, Family and Small Business Commission Revenue from Members Approved During the Period (1) $ 4,012 $ 4,392 $ 14,170 $ 14,403 Net Commission Revenue from Members Approved in Prior Periods (2) 18,190 7,669 25,520 23,068 Total IFP/SMB Segment Commission Revenue $ 22,202 $ 12,061 $ 39,690 $ 37,471 Total Commission Revenue from Members Approved During the Period (1) $ 56,052 $ 48,280 $ 219,500 $ 156,301 Total Net Commission Revenue from Members Approved in Prior Periods (2) (3) 17,492 11,482 34,486 28,294 Total Commission Revenue $ 73,544 $ 59,762 $ 253,986 $ 184,595 _____________ (1) These amounts include commission bonus revenue. (2) These amounts reflect our revised estimates of cash collections for certain members approved prior to the relevant reporting period that are recognized as net adjustment revenue within the relevant reporting period. The net adjustment revenue includes both increases in revenue for certain prior period cohorts as well as reductions in revenue for certain prior period cohorts. (3) The impacts of total net commission revenue from members approved in prior periods were $ 0.66 and $ 0.49 per basic and diluted share for the three months ended September 30, 2020 and 2019, respectively; and $ 1.33 and $ 1.24 per basic and diluted share for the nine months ended September 30, 2020 and 2019, respectively. The total reductions to revenue from members approved in prior periods were $ 5.3 million and $ 2.1 million for the nine months ended September 30, 2020 and 2019, respectively, and $ 3.7 million and $ 0.6 million for the three months ended September 30, 2020 and 2019, respectively. These reductions to revenue primarily related to the Medicare segment. Note 3 – Supplemental Financial Statement Information Cash, Cash Equivalents and Restricted Cash We consider all investments with an original maturity of 90 days or less from the date of purchase to be cash equivalents. Cash and cash equivalents are stated at fair value. We also invested in marketable securities that are measured and recorded at fair value. See Note 4 – Fair Value Measurements for further discussion about our marketable securities. As of September 30, 2020 and December 31, 2019, our cash, cash equivalent and restricted cash balances were invested as follows (in thousands): September 30, 2020 December 31, 2019 Cash $ 41,441 $ 16,205 Cash equivalents 46,392 7,261 Restricted cash 3,354 3,354 Total cash, cash equivalents and restricted cash $ 91,187 $ 26,820 12 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) As of September 30, 2020 and December 31, 2019, we had $ 3.4 million of restricted cash which was classified as a non-current asset on our Condensed Consolidated Balance Sheets. This amount collateralizes letters of credit related to certain lease commitments. Contract Assets and Accounts Receivable We do not require collateral or other security for our contract assets and accounts receivable. We believe the potential for collection issues with any of our customers was minimal as of September 30, 2020. Our contract assets and accounts receivable consisted of the following for the periods presented (in thousands): September 30, 2020 December 31, 2019 Contract assets – commissions receivable – current $ 158,773 $ 174,526 Contract assets – commissions receivable – non-current 445,572 414,696 Accounts receivable 3,854 2,332 Total contract assets and accounts receivable $ 608,199 $ 591,554 We estimate the allowance for credit loss balance using relevant available information from internal and external sources, related to past events, current conditions, and reasonable and supportable forecasts. Specifically, for the purpose of measuring the probability of default parameters, we utilize Capital IQ’s, Standard & Poor’s and Moody’s analytics. Our estimates of loss given default are determined by using our historical collections data as well as historical information obtained through our research and review of other insurance related companies. Our estimated exposure at default is determined by applying these internal and external data sources to our commission receivable balances. As such, we apply an immediate reversion method and revert to historical loss information when computing our credit loss exposure. Credit loss expenses are assessed quarterly and included in general and administrative expense on our Condensed Consolidated Statement of Comprehensive Loss. Subsequent to the adoption of ASC 326, we considered the impact of recent events and global economic condition when evaluating the appropriate adjustments to our allowance as of September 30, 2020. Determining the extent of these adjustments in the three and nine months ended September 30, 2020 was especially challenging because we do not have any historical loss information for a period of similar economic decline. We considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not materially impacted as of September 30, 2020. Credit loss expenses recorded during the three and nine months ended September 30, 2020 were immaterial. Our contract assets – commission receivable activities, net of credit loss allowance are summarized as follows (in thousands): Nine Months Ended September 30, 2020 Medicare Segment IFP/SMB Segment Total Beginning balance $ 550,922 $ 38,300 $ 589,222 Commission revenue from members approved during the period 205,330 14,170 219,500 Net commission revenue adjustments from members approved in prior period 8,966 25,520 34,486 Cash receipts ( 201,256 ) ( 35,957 ) ( 237,213 ) Net change in credit loss allowance* ( 1,536 ) ( 114 ) ( 1,650 ) Ending balance $ 562,426 $ 41,919 $ 604,345 13 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Nine Months Ended September 30, 2019 Medicare Segment IFP/SMB Segment Total Beginning balance $ 311,977 $ 33,881 $ 345,858 Commission revenue from members approved during the period 141,898 14,403 156,301 Net commission revenue adjustments from members approved in prior period 5,226 23,068 28,294 Cash receipts ( 133,425 ) ( 39,292 ) ( 172,717 ) Ending balance $ 325,676 $ 32,060 $ 357,736 _____________ * Amount consists of transition adjustment of $ 1.5 million related to the adoption of ASC 326 as of January 1, 2020 and the subsequent credit loss adjustment of $ 0.1 million during the nine months ended September 30, 2020. See Note 1 – Summary of Business and Significant Accounting Policies for details regarding the adoption impact. Credit Risk Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents, contract assets – commissions receivable, and accounts receivable. We invest our cash and cash equivalents with major banks and financial institutions and, at times, such investments are in excess of federally insured limits. We also have deposits with a major bank in China that are denominated in both U.S. dollars and Chinese Yuan Renminbi and are not insured by the U.S. federal government. The deposits in China were $ 3.4 million as of September 30, 2020. We do not require collateral or other security for either our contract assets or accounts receivable. Carriers that represented 10% or more of our total contract assets and accounts receivable balance are summarized as of the dates presented below: September 30, 2020 December 31, 2019 Humana 21 % 22 % Aetna (1) 21 % 20 % UnitedHealthCare (2) 20 % 20 % _____________ (1) Aetna also includes other carriers owned by Aetna. (2) UnitedHealthcare also includes other carriers owned by UnitedHealthcare . Prepaid Expenses and Other Current Assets – Prepaid expenses and other current assets are summarized as follows (in thousands): September 30, 2020 December 31, 2019 Prepaid maintenance contracts $ 7,485 $ 3,853 Prepaid expenses 9,537 2,207 Prepaid insurance 680 918 Income tax receivable 1,041 584 Other 592 260 Prepaid expenses and other current assets $ 19,335 $ 7,822 14 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 4 – Fair Value Measurements We define fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques we use to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We classify the inputs used to measure fair value into the following hierarchy: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities; or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs other than quoted prices that are observable for the asset or liability; and Level 3 Unobservable inputs for the asset or liability. Our financial assets and liabilities measured at fair value on a recurring basis are summarized below by their classification within the fair value hierarchy for the period presented below (in thousands): As of September 30, 2020 Carrying Value Level 1 Level 2 Level 3 Total Assets Cash equivalents Money market funds $ 16,205 $ 16,205 $ — $ — $ 16,205 Commercial paper 30,187 — 30,187 — 30,187 Short-term marketable securities Commercial paper 47,380 — 47,380 — 47,380 Agency bonds 56,259 — 56,259 — 56,259 Treasury bills 4,999 — 4,999 — 4,999 Long-term marketable securities Agency bonds 1,294 — 1,294 — 1,294 Total assets measured and recorded at fair value $ 156,324 $ 16,205 $ 140,119 $ — $ 156,324 As of December 31, 2019 Carrying Value Level 1 Level 2 Level 3 Total Assets Cash equivalents Money market funds $ 7,261 $ 7,261 $ — $ — $ 7,261 Liabilities Earnout liability – current $ 37,273 $ — $ — $ 37,273 $ 37,273 Our cash equivalents invested in money market funds and commercial paper with original maturity of 90 days or less 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 investments as Level 1. As of September 30, 2020, our Level 2 assets included our available for sale marketable securities, which consisted of commercial paper, agency bonds and treasury bills with maturity less than two years. We classify our marketable debt securities within Level 2 in the fair value hierarchy, because we use quoted market prices to the extent available or alternative pricing sources and models utilizing market observable inputs to determine fair value. Our portfolio primarily consisted of financial 15 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) instruments with credit rating of AA+ or equivalent by S&P Rating and Moody's Investor Services. There were no transfers between the hierarchy levels during the nine months ended September 30, 2020. The following table summarizes our cash equivalents and available-for-sale debt securities by contractual maturity (in thousands): As of September 30, 2020 Amortized Cost Fair Value Due in 1 year $ 154,940 $ 155,030 Due in 1 year through 5 years 1,288 1,294 Total $ 156,228 $ 156,324 Unrealized gains and losses on available-for-sale debt securities are included in accumulated other comprehensive income and summarized as follows as of September 30, 2020: Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash equivalents Money market funds $ 16,205 $ — $ — $ 16,205 Commercial paper 30,188 — ( 1 ) 30,187 Short-term marketable securities Commercial paper 47,348 33 ( 1 ) 47,380 Agency bonds 56,201 58 — 56,259 Treasury bills 4,998 1 — 4,999 Long-term marketable securities Agency bonds 1,288 6 — 1,294 Total $ 156,228 $ 98 $ ( 2 ) $ 156,324 As of September 30, 2020, there were twenty securities in net loss positions and their unrealized losses were immaterial. We did not record any credit losses regarding our available-for-sales debt securities during the nine months ended September 30, 2020. Earnout Liabilities Our earnout liabilities in connection with our GoMedigap acquisition in 2018 were recognized at fair value. We measured the earnout liability using internally developed assumptions; therefore, it is classified as Level 3. The fair value of the earnout liability was measured using probability-weighted analysis and was discounted using a rate that appropriately captured the risk associated with the obligation. Key assumptions included new enrollments and volatility for the years ended December 31, 2019 and 2018 and our stock price at the time of payment. Earnout liability activities are summarized as follows (in thousands): Balance as of December 31, 2019 $ 37,273 Change in fair value — Settlements ( 37,273 ) Balance as of September 30, 2020 $ — 16 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) In February 2019, we made the first earnout payment to GoMedigap consisting of $ 9.5 million in cash and 294,608 shares of our common stock with a value of $ 17.3 million. In January 2020, we made the second and last payment, which consisted of $ 8.8 million in cash and 294,608 shares of our common stock with a value of $ 28.5 million. Note 5 – Equity Public Offering of Common Stock – Pursuant to an effective registration statement which was filed on December 17, 2018, and amended on January 22, 2019 and March 2, 2020, we entered into an underwriting agreement in March 2020 to issue a total of 2,070,000 shares of common stock, which included the exercise in full of the underwriters’ option to purchase 270,000 additional shares of common stock, at a price to the public of $ 115.00 per share. Net proceeds from the offering were approximately $ 228.0 million after deducting underwriting discounts, commissions and expenses of the offering. We intend to use the net proceeds of the offering for general corporate purposes, including working capital. Stock Repurchase Programs – We had no stock repurchase activity during the three and nine months ended September 30, 2020. In addition to 10,663,888 shares repurchased under our previous repurchase programs, we have in treasury 1,146,720 shares as of September 30, 2020 that were previously surrendered by employees to satisfy tax withholding due in connection with the vesting of certain restricted stock units. As of September 30, 2020 and December 31, 2019, we had a total of 11,810,608 shares and 11,615,558 shares, respectively, held in treasury. For accounting purposes, common stock repurchased under our stock repurchase programs is recorded based upon the settlement date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method. Stock-Based Compensation Expense – Our stock-based compensation expense is summarized as follows by award types (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Common stock options $ 254 $ 542 $ 867 $ 1,745 Restricted stock units 6,078 4,968 20,855 11,672 Total stock-based compensation expense $ 6,332 $ 5,510 $ 21,722 $ 13,417 Our stock-based compensation expense is summarized as follows by operating functions (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Marketing and advertising $ 1,869 $ 872 $ 5,138 $ 2,212 Customer care and enrollment 527 369 1,762 927 Technology and content 1,430 729 2,965 1,946 General and administrative 2,506 3,540 11,857 8,332 Total stock-based compensation expense $ 6,332 $ 5,510 $ 21,722 $ 13,417 Amount capitalized internal-use software 548 — 1,278 — Total stock-based compensation $ 6,880 $ 5,510 $ 23,000 $ 13,417 17 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 6 — Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and common equivalent shares outstanding during the period. Diluted net loss per share is computed giving effect to all potential dilutive common stock equivalent shares, including options and restricted stock units. The dilutive effect of outstanding awards is reflected in diluted net loss per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Basic and Diluted: Net loss $ ( 14,505 ) $ ( 11,024 ) $ ( 14,423 ) $ ( 21,937 ) Shares used in per share calculation – basic and diluted 26,487 23,493 25,838 22,840 Net loss per share – basic and diluted $ ( 0.55 ) $ ( 0.47 ) $ ( 0.56 ) $ ( 0.96 ) For the three and nine months ended September 30, 2020 and 2019, we had securities outstanding that could potentially dilute earnings per share, but the shares from the assumed conversion or exercise of these securities were excluded in the computation of diluted net loss per share as their effect would have been anti-dilutive. The number of outstanding anti-dilutive shares that were excluded from the computation of diluted net loss per share consisted of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Common stock options 414 729 453 850 Restricted stock units 599 1,461 748 1,537 Total 1,013 2,190 1,201 2,387 Note 7 – Commitments and Contingencies Operating Leases Refer to Note 9 – Leases for commitments related to our operating leases. Contingencies 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. Legal Proceedings Securities Class Action – On April 8, 2020 and April 29, 2020, two purported class action lawsuits were filed against us, our chief executive officer, Scott N. Flanders, our chief financial officer, Derek N. Yung, and our then-chief operating 18 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) officer, David K. Francis, in the United States District Court for the Northern District of California. The cases are captioned Patel v. eHealth, Inc., et al ., Case No. 5:20-cv-02395 (N.D. Cal.) and Bertrand v. eHealth, Inc. et al., Case No. 3:20-cv-02967 (N.D. Cal.). The complaints allege, among other things, that we and Messrs. Flanders, Yung and Francis made materially false and misleading statements and/or failed to disclose material information regarding our accounting and modeling assumptions, rate of member churn and our profitability during the alleged class period of March 19, 2018 to April 7, 2020. The complaints allege that we and Messrs. Flanders, Yung and Francis violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaints seek compensatory and (in the Patel lawsuit) punitive damages, attorneys’ fees and costs, and such other relief as the court deems proper. On June 24, 2020, the Court consolidated the above-referenced matters under the caption In re eHealth Securities Litig. , Master File No. 4:20-cv-02395-JST (N.D. Cal.). The Court also appointed a lead plaintiff and lead counsel for the consolidated matter. The lead plaintiff filed an amended complaint on August 25, 2020, which Defendants moved to dismiss. The motion to dismiss is set to be heard by the court on February 17, 2021. Derivative Actions – On July 7, 2020 and October 13, 2020, two derivative lawsuits were filed against our chief executive officer, Mr. Flanders, our chief financial officer, Mr. Yung, our then-chief operating officer, Mr. Francis, and the members of our Board of Directors (collectively, the “Individual Defendants”), in the United States District Court for the Northern District of California and the Superior Court of California, County of Santa Clara. The cases are captioned Chernet v. Flanders et al ., Case No. 3:20-cv-04477-SK (N.D. Cal.), and Lincolnshire Police Pension Fund v. Flanders et al. , Case No. 20CV371555 (Cal. Super. Ct.), and also name the Company as a nominal defendant. The complaints allege, among other things, that beginning on March 19, 2018, the Individual Defendants made or caused the Company to make materially false and misleading statements and/or failed to disclose material information regarding our accounting and modeling assumptions, rate of member churn, profitability, and internal controls. Both complaints purport to assert claims for breach of fiduciary duty, unjust enrichment and waste of corporate assets. The Chernet lawsuit also alleges that the Individual Defendants violated Sections 14(a), 10(b), and 20(a) of the Securities Exchange Act of 1934, and asserts claims for abuse of control and gross mismanagement. The complaints seek damages, restitution, attorneys’ fees and costs, and certain measures with respect to the Company’s corporate governance and internal procedures, and (in the Lincolnshire lawsuit) equitable and/or injunctive relief. The Gonzalez and Le ’ Vias Complaints – On April 6, 2018, a former employee, Lupita Gonzalez, filed a complaint against us in the Superior Court of the State of California for the County of Sacramento (the “Gonzalez Complaint”). The Gonzalez Complaint is brought under the California Private Attorney General Act (“PAGA”) on behalf of all current and former hourly-paid or non-exempt employees who work or have worked for us in California. The claim alleges that we violated wage and hour laws with respect to these non-exempt employees, including, among other things, the failure to comply with California law as to (i) the payment of overtime wages; (ii) the payment of minimum wages; (iii) providing compliant meal and rest periods, (iv) the payment of wages earned during employment and owed upon the termination of employment; (v) providing complete and accurate wage statements, (vi) keeping of accurate payroll records; and (vii) the proper reimbursement for necessary business-related expenses and costs. The Gonzalez Complaint seeks penalties and costs, expenses and attorneys’ fees. On July 1, 2019, two other current or former employees, Michael Le’Vias and Ramona Meadows, filed a related complaint against us and eHealth Ins. Serv. Co., in the Superior Court of the State of California for the County of Santa Clara (the “Le’Vias Complaint”). A substantial overlap exists between the facts and circumstances alleged in the Gonzalez Complaint and the Le’Vias Complaint. Specifically, the Le’Vias Complaint is also brought under PAGA on behalf of all current and former hourly-paid or non-exempt employees who work or have worked for us in California. The claim alleges that we violated wage and hour laws with respect to these non-exempt employees, including, among other things, the failure to comply with California law as to (i) the payment of overtime wages; (ii) the payment of minimum wages; (iii) providing compliant meal and rest periods, (iv) the payment of wages earned during employment and owed upon the termination of employment; (v) providing complete and accurate wage statements, (vi) keeping of accurate payroll records; and (vii) the proper reimbursement for necessary business-related expenses and costs. The Le’Vias Complaint seeks unpaid wages, penalties and costs, expenses and attorneys’ fees. The parties have agreed to resolve both the Le’Vias and Gonzalez Complaints and have executed a settlement agreement to resolve both matters, which settlement will require court approval. In the interim, the parties have filed notices of conditional settlement in both matters, and the April 13, 2020 trial date for the Gonzalez matter was vacated. 19 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Service and Licensing Obligations We have entered into service and licensing agreements with third party vendors to provide various services, including network access, equipment maintenance, and software licensing. As the benefits of these agreements are experienced uniformly over the applicable contractual periods, we record the related service and licensing expenses on a straight-line basis, although actual cash payment obligations under certain of these agreements fluctuate over the terms of the agreements. Our future minimum payments under non-cancellable contractual service and licensing obligations as of September 30, 2020 are summarized as follows (in thousands): For the Years Ending December 31, Service and Licensing Obligations Remainder of 2020 $ 2,593 2021 4,538 2022 2,484 2023 1,797 2024 1,582 Thereafter 2,706 Total $ 15,700 Note 8 – Segment and Geographic Information 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. Our business structure is comprised of two operating segments: Medicare and Individual, Family and Small Business. Please refer to Note 1 – Summary of Business and Significant Accounting Policies of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2019 for our accounting policies relating to operating segments. 20 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following table presents summary results of our operating segments for the three and nine months ended September 30, 2020 and 2019 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenue: Medicare $ 70,361 $ 57,189 $ 246,891 $ 164,357 Individual, Family and Small Business 23,923 12,724 42,567 40,096 Total revenue $ 94,284 $ 69,913 $ 289,458 $ 204,453 Segment profit (loss): Medicare segment profit (loss) $ ( 16,010 ) $ ( 11,004 ) $ 19,380 $ 5,917 Individual, Family and Small Business segment profit 18,286 3,753 23,459 15,045 Total segment profit (loss) 2,276 ( 7,251 ) 42,839 20,962 Corporate ( 15,581 ) ( 11,568 ) ( 43,376 ) ( 30,380 ) Stock-based compensation expense ( 6,332 ) ( 5,510 ) ( 21,722 ) ( 13,417 ) Change in fair value of earnout liability — 5,400 — ( 15,106 ) Depreciation and amortization ( 923 ) ( 765 ) ( 2,604 ) ( 2,153 ) Amortization of intangible assets ( 287 ) ( 547 ) ( 1,207 ) ( 1,641 ) Other (income) expense, net ( 101 ) 568 724 1,824 Loss before benefit from income taxes $ ( 20,948 ) $ ( 19,673 ) $ ( 25,346 ) $ ( 39,911 ) There were no inter-segment revenue transactions for the periods presented. With the exception of contract assets – commissions receivable, which is presented by segment in Note 3 – Supplemental Financial Statement Information , our CODM does not separately evaluate assets by segment, and therefore, assets by segment are not presented. Geographic Information Our long-lived assets primarily consist of property and equipment and internally-developed software. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area are summarized as follows (in thousands): September 30, 2020 December 31, 2019 United States $ 38,561 $ 64,408 China 452 471 Total $ 39,013 $ 64,879 21 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Significant Customers Substantially all revenue for the three and nine months ended September 30, 2020 and 2019 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue for the three and nine months ended September 30, 2020 and 2019 are presented in the table below: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Humana 26 % 26 % 21 % 24 % UnitedHealthcare (1) 17 % 18 % 21 % 18 % Aetna (2) 12 % 17 % 14 % 17 % __________ (1) UnitedHealthcare also includes other carriers owned by UnitedHealthcare. (2) Aetna also includes other carriers owned by Aetna. Note 9 – Leases We have operating and finance leases for our corporate offices and certain equipment. Our leases have remaining lease terms of one month to nine years . Our operating lease expense recognized under ASC 842 was $ 2.1 million and $ 2.0 million for the three months ended September 30, 2020 and 2019, respectively, and $ 6.4 million and $ 4.9 million for the nine months ended September 30, 2020 and 2019, respectively. Our cash outflows related to operating leases were $ 5.2 million and $ 3.5 million for the nine months ended September 30, 2020 and 2019, respectively. During the nine months ended September 30, 2020 and 2019, we had non-cash investing activities of $ 10.9 million and $ 39.2 million, respectively, related to right-of-use assets on the Condensed Consolidated Statements of Cash Flows, of which $ 23.3 million related to the adoption of ASC 842 as of January 1, 2019. Supplemental information as of September 30, 2020 related to leases is as follows (in thousands): Operating lease right-of-use assets $ 43,886 Operating lease liabilities $ 47,511 Weighted-average remaining lease term of operating leases 7.5 years Weighted-average discount rate used to recognize operating lease right-of-use-assets 5.4 % As of September 30, 2020, maturities of operating lease liabilities are as follows (in thousands): Year ending December 31, Reminder of 2020 $ 1,915 2021 7,644 2022 7,701 2023 8,033 2024 7,832 Thereafter 27,416 Total lease payments 60,541 Less imputed interest ( 13,030 ) Total $ 47,511 22 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Operating Lease Obligations We lease our operating facilities and certain of our equipment, furniture and fixtures under various operating leases, the latest of which expires in January 2030. 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 January 2020, we entered into an amendment to the lease agreement for our Gold River, California, office of 63,206 square feet. The amended lease term commenced on January 1, 2020 and has been extended to December 31, 2027. As of September 30, 2020, the total expected future minimum payments were $ 13.0 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 addition, we have an option to extend the lease for one additional period of five years at the end of the lease term and will receive a one-time refurbishment allowance from the landlord if the option to renew is exercised. On August 19, 2019, we entered into an amendment to the lease agreement for our Santa Clara, California office to expand our office space to a total of 45,657 square feet from 32,492 square feet. The lease term for the expanded office space commenced on April 15, 2020. The term of the lease for the expanded office space was coterminous with the term of the lease for the existing space, which is scheduled to expire on March 31, 2029. As of September 30, 2020, the expected future minimum payments related to our Santa Clara office totaled $ 21.0 million, including $ 6.1 million from this amendment, 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. Note 10 – Debt 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 $ 40.0 million secured asset-backed revolving credit facility with a $ 5.0 million letter of credit sub-facility. On December 20, 2019, we amended our revolving credit facility agreement with RBC (the “Amendment”) and increased the borrowing amount from $ 40.0 to $ 75.0 million. The maturity date has been extended to December 20, 2022. The borrowing base under the Credit Agreement is comprised of an amount equal to (a) the lesser of (i) eighty percent ( 80 %) of Eligible Commissions Receivables (as defined in the Credit Agreement) we actually collected by during the immediately preceding period of three months or (ii) eighty percent ( 80 %) of our Eligible Commission Receivables for the immediately succeeding period of three months, plus (b) fifty percent ( 50 %) of our Eligible Commission Receivables for the immediately succeeding period of six months (excluding the immediately succeeding period of three months), in each case subject to reserves established by RBC (the “Borrowing Base”). The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes. The borrowers have the right to prepay the loans under the Credit Agreement in whole or in part at any time without penalty. Subject to availability under the Borrowing Base, amounts repaid may be reborrowed. Amounts not borrowed under the Credit Agreement are 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, we paid a one-time facility fee of 1.75 % of the total commitments of $ 40.0 million. We also paid a one-time closing fee of 0.5 % of the new commitment of $ 75.0 million in connection with the Amendment. We are also obligated to pay other customary administration fees for a credit facility of this size and type. The availability under the credit facility is up to the lesser of $ 40 million or the Borrowing Base, which may be reduced from time to time pursuant to the Credit Agreement. The Amendment increased the availability up to the lesser of $ 75.0 million or the Borrowing Base, which may be reduced from time to time pursuant to the Credit Agreement. 23 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Financial covenants in the original Credit Agreement required that we maintain Excess Availability (as defined in the Credit Agreement) at or above $ 6 million at any time. The Amendment also changed the financial covenants to require us to maintain at least $ 6.0 million of Excess Availability at all times or, if greater, up to $ 11.3 million depending on our borrowing base as determined by eligible past and future commission receivables. In addition, the Amendment also included changes in the payment conditions to, among other things, require us to have at least $ 10.0 million of liquidity or, if greater, up to $ 18.8 million depending on our borrowing base as determined by eligible past and future commission receivables, in order for us to make certain permitted acquisitions, investments, distributions and payments of indebtedness. The Amendment also stated the seasonal amount thresholds used in connection with the cash dominion and field examination covenants in the Credit Agreement. We incurred $ 1.2 million of issuance costs in connection with the Credit Agreement, which were capitalized as part of Other assets on our Consolidated Balance Sheet in the period we entered into the Credit Agreement. The Amendment did not change the interest rate. In connection with the Amendment, we incurred closing costs totaling $ 0.5 million, which were capitalized and recorded as Other assets on our Consolidated Balance Sheet as of December 31, 2019. The remaining balance of unamortized issuance costs was $ 0.8 million and $ 1.1 million as of September 30, 2020 and December 31, 2019. As of September 30, 2020, we had no outstanding borrowings under our revolving credit facility. Note 11 – Income Taxes The following table summarizes our benefit from income taxes and our effective tax rates for the three and nine months ended September 30, 2020 and 2019 (in thousands, except effective tax rate): Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Loss before benefit from income taxes $ ( 20,948 ) $ ( 19,673 ) $ ( 25,346 ) $ ( 39,911 ) Benefit from income taxes ( 6,443 ) ( 8,649 ) ( 10,923 ) ( 17,974 ) Effective tax rate 30.8 % 44.0 % 43.1 % 45.0 % For the three months ended September 30, 2020, we recognized a benefit from income taxes of $ 6.4 million, representing an effective tax rate of 30.8 % which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, lobbying expenses and state taxes, partially offset by research and development credits. For the three months ended September 30, 2019, we recognized a benefit from income taxes of $ 8.6 million, representing an effective tax rate of 44.0 %, which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, lobbying expenses, and state taxes, partially offset by research and development credits. For the nine months ended September 30, 2020, we recognized a benefit from income taxes of $ 10.9 million, representing an effective tax rate of 43.1 %, which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, lobbying expenses and state taxes, partially offset by research and development credits. For the nine months ended September 30, 2019, we recognized a benefit from income taxes of $ 18.0 million, representing an effective tax rate of 45.0 %, which was higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, lobbying expenses and state taxes, partially offset by research and development credits. Assessing the realizability of our deferred tax assets is dependent upon several factors, including the likelihood and amount, if any, of future taxable income in relevant jurisdictions during the periods in which those temporary differences become deductible. We forecast taxable income by considering all available positive and negative evidence, including our history of operating income and losses and our financial plans and estimates that we use to manage the business. These assumptions require significant judgment about future taxable income. As a result, the amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income change. We continue to recognize our deferred tax assets as of September 30, 2020, as we believe it is more likely than not that the net deferred tax assets will be 24 EHEALTH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) realized, with the exception of certain state net operating losses that are expected to expire unutilized which have a valuation allowance. The Coronavirus Aid, Relief and Economic Security ("CARES") Act was signed into law on March 27, 2020. The business tax provisions of the CARES Act include temporary changes to income based tax laws, including the ability to utilize net operating losses, interest expense deductions, alternative minimum tax credit refunds, charitable contributions, and depreciation of qualified improvement property. The income tax provisions of the CARES Act did not have a material impact on our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2020. 25