Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
EHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
September 30, 2021 December 31, 2020 *
Assets
Current assets:
Cash and cash equivalents $ 157,530 $ 43,759
Short-term marketable securities 70,212 49,620
Accounts receivable 1,305 1,799
Contract assets – commissions receivable – current 194,197 219,153
Prepaid expenses and other current assets 36,653 16,661
Total current assets 459,897 330,992
Contract assets – commissions receivable – non-current 563,171 573,252
Property and equipment, net 13,795 14,609
Operating lease right-of-use assets 38,693 42,558
Restricted cash 3,354 3,354
Intangible assets, net 8,153 8,569
Goodwill 40,233 40,233
Other assets 32,307 26,455
Total assets $ 1,159,603 $ 1,040,022
Liabilities, convertible preferred stock, and stockholders’ equity
Current liabilities:
Accounts payable $ 10,084 $ 36,921
Accrued compensation and benefits 20,424 20,542
Accrued marketing expenses 11,263 17,788
Lease liabilities – current 5,570 5,192
Deferred revenue 10,547 308
Other current liabilities 4,546 3,657
Total current liabilities 62,434 84,408
Deferred income taxes – non-current 52,185 72,317
Lease liabilities – non-current 37,138 41,369
Other non-current liabilities 4,747 4,370
Total liabilities 156,504 202,464
Commitments and contingencies
Convertible preferred stock 225,438 —
Stockholders’ equity:
Common stock 38 38
Additional paid-in capital 744,784 721,013
Treasury stock, at cost ( 199,998 ) ( 199,998 )
Retained earnings 232,519 316,155
Accumulated other comprehensive income 318 350
Total stockholders’ equity 777,661 837,558
Total liabilities, convertible preferred stock, and stockholders’ equity $ 1,159,603 $ 1,040,022
_______
* See Note 1 – Summary of Business and Significant Accounting Policies
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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,
2021 2020 2021 2020
Revenue:
Commission $ 59,191 $ 73,544 $ 276,066 $ 253,986
Other 4,723 20,740 18,619 35,472
Total revenue 63,914 94,284 294,685 289,458
Operating costs and expenses:
Cost of revenue ( 25 ) 482 1,217 2,160
Marketing and advertising 43,317 33,405 138,772 104,042
Customer care and enrollment 48,956 43,342 121,480 101,025
Technology and content 20,369 17,673 63,996 46,786
General and administrative 16,640 19,942 57,812 60,308
Amortization of intangible assets 121 287 416 1,207
Restructuring and reorganization charges 573 — 3,004 —
Total operating costs and expenses 129,951 115,131 386,697 315,528
Loss from operations ( 66,037 ) ( 20,847 ) ( 92,012 ) ( 26,070 )
Other income (expense), net 189 ( 101 ) 511 724
Loss before benefit from income taxes ( 65,848 ) ( 20,948 ) ( 91,501 ) ( 25,346 )
Benefit from income taxes ( 12,834 ) ( 6,443 ) ( 19,278 ) ( 10,923 )
Net loss ( 53,014 ) ( 14,505 ) ( 72,223 ) ( 14,423 )
Paid-in-kind dividends for preferred stock ( 4,561 ) — ( 7,643 ) —
Change in preferred stock redemption value ( 2,373 ) — ( 3,770 ) —
Net loss attributable to common stockholders $ ( 59,948 ) $ ( 14,505 ) $ ( 83,636 ) $ ( 14,423 )
Net loss per share attributable to common stockholders:
Basic $ ( 2.24 ) $ ( 0.55 ) $ ( 3.13 ) $ ( 0.56 )
Diluted $ ( 2.24 ) $ ( 0.55 ) $ ( 3.13 ) $ ( 0.56 )
Weighted-average number of shares used in per share amounts:
Basic and diluted 26,786 26,487 26,688 25,838
Comprehensive loss:
Net loss $ ( 53,014 ) $ ( 14,505 ) $ ( 72,223 ) $ ( 14,423 )
Unrealized holding gain (loss) for available for sales debt securities, net of tax 3 ( 97 ) ( 48 ) 71
Foreign currency translation adjustment ( 26 ) 104 16 73
Comprehensive loss $ ( 53,037 ) $ ( 14,498 ) $ ( 72,255 ) $ ( 14,279 )
The accompanying notes are an integral part of these condensed consolidated financial statements.
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EHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
Three Months Ended September 30, 2021
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, 2021 38,094 $ 38 $ 738,906 11,925 $ ( 199,998 ) $ 292,467 $ 341 $ 831,754
Issuance of common stock in connection with equity incentive plans 231 — 1,933 — — — — 1,933
Repurchase of shares to satisfy employee tax withholding obligations — — ( 2,061 ) 51 — — — ( 2,061 )
Paid-in-kind dividend and accretion related to convertible preferred stock — — — — — ( 6,934 ) — ( 6,934 )
Stock-based compensation — — 6,006 — — — — 6,006
Other comprehensive income, net of tax — — — — — — ( 23 ) ( 23 )
Net loss — — — — — ( 53,014 ) — ( 53,014 )
Balance as of September 30, 2021 38,325 $ 38 $ 744,784 11,976 $ ( 199,998 ) $ 232,519 $ 318 $ 777,661
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
The accompanying notes are an integral part of these condensed consolidated financial statements.
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EHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, unaudited)
Nine Months Ended September 30, 2021
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, 2020 37,755 $ 38 $ 721,013 11,831 $ ( 199,998 ) $ 316,155 $ 350 $ 837,558
Issuance of common stock in connection with equity incentive plans 532 — 2,735 — — — — 2,735
Repurchase of shares to satisfy employee tax withholding obligations — — ( 7,968 ) 145 — — — ( 7,968 )
Paid-in-kind dividend and accretion related to convertible preferred stock — — — — — ( 11,413 ) — ( 11,413 )
Issuance of common stock for employee stock purchase program 38 — 2,248 — — — — 2,248
Stock-based compensation — — 26,756 — — — — 26,756
Other comprehensive income, net of tax — — — — — — ( 32 ) ( 32 )
Net loss — — — — — ( 72,223 ) — ( 72,223 )
Balance as of September 30, 2021 38,325 $ 38 $ 744,784 11,976 $ ( 199,998 ) $ 232,519 $ 318 $ 777,661
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
The accompanying notes are an integral part of these condensed consolidated financial statements.
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EHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended September 30,
2021 2020
Operating activities:
Net loss $ ( 72,223 ) $ ( 14,423 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,700 2,604
Amortization of internally developed software 9,140 5,307
Amortization of intangible assets 416 1,207
Stock-based compensation expense 24,881 21,722
Deferred income taxes ( 20,134 ) ( 10,982 )
Other non-cash items 908 421
Changes in operating assets and liabilities:
Accounts receivable 493 ( 1,522 )
Contract assets – commissions receivable 35,244 ( 16,772 )
Prepaid expenses and other assets ( 20,790 ) ( 9,398 )
Accounts payable ( 26,913 ) ( 3,196 )
Accrued compensation and benefits ( 118 ) ( 7,438 )
Accrued marketing expenses ( 6,525 ) ( 5,449 )
Deferred revenue 10,240 23,901
Accrued expenses and other liabilities 1,360 3,059
Net cash used in operating activities ( 60,321 ) ( 10,959 )
Investing activities:
Capitalized internal-use software and website development costs ( 12,589 ) ( 12,082 )
Purchases of property and equipment and other assets ( 3,554 ) ( 6,454 )
Purchases of marketable securities ( 88,967 ) ( 180,505 )
Proceeds from redemption and maturities of marketable securities 68,288 70,750
Net cash used in investing activities ( 36,822 ) ( 128,291 )
Financing activities:
Proceeds from issuance of preferred stock, net of issuance costs 214,025 —
Proceeds from issuance of common stock, net of issuance costs — 228,024
Net proceeds from exercise of common stock options and employee stock purchases 4,983 1,577
Repurchase of shares to satisfy employee tax withholding obligations ( 7,968 ) ( 17,174 )
Acquisition-related contingent payments — ( 8,751 )
Principal payments in connection with leases ( 126 ) ( 121 )
Net cash provided by financing activities 210,914 203,555
Effect of exchange rate changes on cash, cash equivalents and restricted cash — 62
Net increase in cash, cash equivalents and restricted cash 113,771 64,367
Cash, cash equivalents and restricted cash at beginning of period 47,113 26,820
Cash, cash equivalents and restricted cash at end of period $ 160,884 $ 91,187
The accompanying notes are an integral part of these condensed consolidated financial statements.
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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 omnichannel consumer engagement platform 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 200 health insurance carriers across all fifty states and the District of Columbia.
Basis of Presentation – The accompanying condensed consolidated balance sheet as of September 30, 2021, the condensed consolidated statements of comprehensive loss and stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited. The condensed consolidated balance sheet data as of December 31, 2020 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 26, 2021 and amended on April 29, 2021. 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 direct and indirect 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 prior period amounts have been reclassified to conform with our current period presentation.
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, 2020 and include all adjustments necessary for the fair presentation of our financial position as of September 30, 2021 and December 31, 2020, and our results of operations for the periods presented. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for any subsequent period or for the year ending December 31, 2021 and therefore should not be relied upon as an indicator of future results.
Subsequent to the issuance of our consolidated financial statements for the year ended December 31, 2020, we identified certain errors, including a $ 3.0 million under-recognition of stock-based compensation expense and a $ 1.5 million over-recognition of licensing costs for the year ended December 31, 2020. We adjusted for these items in the first quarter of 2021 and the adjustments reduced our net loss by approximately $ 1.5 million, or $ 0.06 per basic and diluted share in our Condensed Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2021. These items also reduced our net loss by approximately $ 1.5 million, or $ 0.06 per basic and diluted share, on our Condensed Consolidated Statement of Comprehensive Loss for the nine months ended September 30, 2021. We evaluated the effects of these out-of-period adjustments, both qualitatively and quantitatively, and concluded that the errors and the correction thereof were immaterial both individually and in the aggregate to the current reporting period and the periods in which they originated, including quarterly reporting.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Significant Accounting Policies, Estimates and Judgments – 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 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 (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. 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, 2020.
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 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. Our Medicare plan-related commission revenue is also elevated in the first quarter compared to the second and third quarters as a result of the reintroduction of the Medicare Advantage open enrollment period in the first quarter of 2019. Any changes to or adoption of open enrollment or special enrollment periods may change the seasonality of our business.
The majority of our individual and family health insurance plans is sold in the fourth quarter during the annual open enrollment period as defined under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. In the states where the Federally Facilitated marketplace operates as the state health insurance exchange, individuals and families generally are not able to purchase individual and family health insurance outside of the annual 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. Extended open enrollment or special enrollment periods may change the seasonality of our individual and family health insurance business. For example, the COVID-related special enrollment period which ended on August 15, 2021 has caused increased commission revenue from the sale of individual and family health insurance plans outside of the open enrollment period. In addition, we may experience changes in seasonality due to the extension of the 2022 open enrollment period to January 15, 2022 for most states.
Recently Adopted Accounting Pronouncements
Income Taxes (Topic 740) – In December 2019, the Financial Accounting Standard Board (“FASB”) issued ASU No. 2019-12, Income Tax, Simplifying the Accounting for Income Taxes , which aims to simplify the accounting for income taxes. We adopted this guidance in the first quarter of 2021, and it did not have a material impact on our condensed consolidated financial statements.
Codification Improvements – In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements . ASU 2020-10 is intended to facilitate codification updates for technical corrections, such as conforming amendments, clarifications to guidance, simplifications to wording or structure of guidance, and other minor improvements. It contains amendments that improve the consistency of the codification by including all disclosure guidance in the appropriate disclosure section and other updates that vary in nature. We adopted this guidance in the first quarter of 2021 with no material impact on our condensed consolidated financial statements and disclosures.
Debt with Conversion and Other Options (Topic 470) and Contracts in Entity's Own Equity (Topic 815) – In June 2020, the FASB issued ASU No. 2020-06 to simplify the accounting for convertible instruments and improve the usefulness and relevance of information regarding convertible instruments. This ASU reduces the number of accounting models for converting debt instruments and convertible preferred stock. ASU No. 2020-06 is effective for us in 2022, with early adoption permitted. We early adopted this guidance in the first quarter of 2021, and it did not have a material impact on our condensed consolidated financial statements.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 2 – Revenue
Disaggregation of Revenue – The table below depicts the disaggregation of revenue by product and is consistent with how we evaluate our financial performance (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Medicare
Medicare Advantage $ 36,557 $ 41,901 $ 209,224 $ 168,834
Medicare Supplement 3,214 7,321 15,357 32,384
Medicare Part D 1,338 329 ( 2,953 ) 7,148
Total Medicare 41,109 49,551 221,628 208,366
Individual and Family (1)
Non-Qualified Health Plans 5,909 9,915 20,352 12,585
Qualified Health Plans 2,266 1,466 7,204 3,559
Total Individual and Family 8,175 11,381 27,556 16,144
Ancillary
Short-term 1,370 2,438 4,639 6,724
Dental 3,938 4,452 9,326 5,791
Vision 642 1,798 1,781 2,228
Other 845 847 1,901 2,693
Total Ancillary 6,795 9,535 17,647 17,436
Small Business 2,190 1,723 7,703 6,975
Commission Bonus and Other 922 1,354 1,532 5,065
Total Commission Revenue 59,191 73,544 276,066 253,986
Other Revenue
Sponsorship and Advertising Revenue 4,165 18,855 16,002 32,114
Other 558 1,885 2,617 3,358
Total Other Revenue 4,723 20,740 18,619 35,472
Total Revenue $ 63,914 $ 94,284 $ 294,685 $ 289,458
_____________
(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 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 those plans.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Commission revenue by segment is presented in the table below (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Medicare
Commission Revenue from Members Approved During the Period (1)
$ 42,698 $ 52,040 $ 235,974 $ 205,330
Net Commission Revenue from Members Approved in Prior Periods (2)
( 171 ) ( 698 ) ( 11,700 ) 8,966
Total Medicare Segment Commission Revenue $ 42,527 $ 51,342 $ 224,274 $ 214,296
Individual, Family and Small Business
Commission Revenue from Members Approved During the Period (1)
$ 4,892 $ 4,012 $ 16,495 $ 14,170
Commission Revenue from Renewals of Small Business Members During the Period (3)
1,744 1,122 6,154 5,005
Net Commission Revenue from Members Approved in Prior Periods (2)
10,028 17,068 29,143 20,515
Total IFP/SMB Segment Commission Revenue $ 16,664 $ 22,202 $ 51,792 $ 39,690
Total Commission Revenue from Members Approved During the Period (1)
$ 47,590 $ 56,052 $ 252,469 $ 219,500
Commission Revenue from Renewals of Small Business Members During the Period (3)
1,744 1,122 6,154 5,005
Total Net Commission Revenue from Members Approved in Prior Periods (2)(4)
9,857 16,370 17,443 29,481
Total Commission Revenue $ 59,191 $ 73,544 $ 276,066 $ 253,986
_____________
(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 adjustments to 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) Commission revenue from renewals of small business members during the period was previously included in net commission revenue from members approved in prior periods. However, beginning in the first quarter of 2021, we enhanced our reporting by separately disclosing commission revenue from renewals of small business members during the period in a separate line item.
(4) The impacts of total net commission revenue from members approved in prior periods were $ 0.37 and $ 0.62 per basic and diluted share for the three months ended September 30, 2021 and 2020, respectively. The impacts of total net commission revenue from members approved in prior periods were $ 0.65 and $ 1.14 per basic and diluted share, for the nine months ended September 30, 2021 and 2020, respectively.
The total reductions to revenue from members approved in prior periods were $ 3.2 million and $ 3.7 million for the three months ended September 30, 2021 and 2020, respectively, and $ 22.6 million and $ 5.3 million for the nine months ended September 30, 2021 and 2020, 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 invest in marketable securities that are measured and recorded at fair value. See Note 4 – Fair Value Measurements for further discussion about our marketable securities.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Our cash, cash equivalent and restricted cash balances are summarized as follows (in thousands):
September 30, 2021 December 31, 2020
Cash $ 37,765 $ 39,552
Cash equivalents 119,765 4,207
Cash and cash equivalents 157,530 43,759
Restricted cash 3,354 3,354
Total cash, cash equivalents and restricted cash $ 160,884 $ 47,113
As of September 30, 2021 and December 31, 2020, 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, 2021.
We estimate an allowance for credit losses 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. There were no write-offs during any of the three or nine month periods ended September 30, 2021 and 2020.
We considered the impact of recent events and global economic conditions when evaluating the appropriate adjustments to our allowance for credit losses as of September 30, 2021. We also considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic.
The change in the allowance for credit losses for the nine months ended September 30, 2021 is summarized as follows (in thousands):
Beginning balance $ 2,026
Change in allowance ( 207 )
Ending balance $ 1,819
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Our contract assets – commission receivable activities, net of credit loss allowances are summarized as follows (in thousands):
Nine Months Ended September 30, 2021
Medicare Segment IFP/SMB Segment Total
Beginning balance $ 739,637 $ 52,768 $ 792,405
Commission revenue from members approved during the period 235,974 16,495 252,469
Commission revenue from renewals of small business members during the period (1)
— 6,154 6,154
Net commission revenue from members approved in prior periods ( 11,700 ) 29,143 17,443
Cash receipts ( 276,825 ) ( 34,485 ) ( 311,310 )
Net change in credit loss allowance 188 19 207
Ending balance $ 687,274 $ 70,094 $ 757,368
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
Commission revenue from renewals of small business members during the period (1)
— 5,005 5,005
Net commission revenue from members approved in prior periods 8,966 20,515 29,481
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
_____________
(1) Commission revenue from renewals of small business members during the period was previously included in net commission revenue from members approved in prior periods. However, starting in the first quarter of 2021, we enhanced our reporting by separately disclosing commission revenue from renewals of small business members during the period in a separate line item.
Credit Risk
Our financial instruments that are exposed to concentrations of credit risk principally consist of cash, cash equivalents, marketable securities, contract assets – commissions receivable, and accounts receivable. We invest our cash and cash equivalents with major banks and financial institutions and such investments are in excess of federally insured limits. We also have deposits with major banks in China that are denominated in both U.S. dollars and Chinese Yuan Renminbi and are not insured by the U.S. federal government. The deposits in China were $ 3.8 million as of September 30, 2021. See Note 4 – Fair Value Measurements for more information regarding our marketable securities.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, 2021 December 31, 2020
Humana 27 % 21 %
UnitedHealthCare (1)
24 % 21 %
Aetna (1)
17 % 20 %
Centene (1)(2)
8 % 11 %
_____________
(1) Percentages include the carriers' subsidiaries.
(2) Centene Corporation acquired WellCare Health Plans, Inc. in 2020, and the contract assets and accounts receivable of WellCare are included in the percentage calculation for September 30, 2021 and December 31, 2020.
Prepaid Expenses and Other Current Assets – Our prepaid expenses and other current assets are summarized as of the periods presented as follows (in thousands):
September 30, 2021 December 31, 2020
Prepaid maintenance contracts $ 8,448 $ 7,715
Prepaid licenses 3,302 —
Prepaid expenses 23,828 6,628
Prepaid insurance 672 1,672
Others 403 646
Prepaid expenses and other current assets $ 36,653 $ 16,661
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; unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability.
Level 3 Unobservable inputs for the asset or liability.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Our financial assets measured at fair value on a recurring basis are summarized below by their classification within the fair value hierarchy as of the dates presented below (in thousands):
September 30, 2021
Carrying Value Level 1 Level 2 Level 3 Total
Assets
Cash equivalents
Money market funds $ 19,371 $ 19,371 $ — $ — $ 19,371
Commercial paper 100,394 — 100,394 — 100,394
Short-term marketable securities
Agency bonds 1,276 — 1,276 — 1,276
Commercial paper 66,414 — 66,414 — 66,414
Corporate bond 2,522 — 2,522 — 2,522
Total assets measured at fair value $ 189,977 $ 19,371 $ 170,606 $ — $ 189,977
December 31, 2020
Carrying Value Level 1 Level 2 Level 3 Total
Assets
Cash equivalents
Money market funds $ 4,207 $ 4,207 $ — $ — $ 4,207
Short-term marketable securities
Agency bonds 35,423 — 35,423 — 35,423
Commercial paper 14,197 — 14,197 — 14,197
Total assets measured at fair value $ 53,827 $ 4,207 $ 49,620 $ — $ 53,827
As of September 30, 2021, o ur cash equivalents consisted of money market funds and commercial paper with original maturity of 90 days or less were classified as Level 1 and 2, respectively. We endeavor to utilize the best available information in measuring fair value. We used observable prices in active markets in determining the classification of our money market funds as Level 1. Our Level 2 assets consisted of available for sale marketable securities, which included commercial paper, agency bonds, and a corporate bond with maturities of less than one year. 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 instruments with a credit rating of AA or equivalent by S&P Rating and Moody's Investor Services. There were no transfers between the hierarchy levels during either the nine months ended September 30, 2021 or the year ended December 31, 2020.
The following table summarizes our cash equivalents and available-for-sale debt securities by contractual maturity (in thousands):
As of September 30, 2021
Amortized Cost Fair Value
Due in 1 year $ 189,980 $ 189,977
15
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Unrealized gains and losses on available-for-sale debt securities that are not credit related are included in accumulated other comprehensive income and summarized as follows as of September 30, 2021 (in thousands):
Amortized Cost Unrealized Gain Unrealized Loss Fair Value
Cash equivalents
Money market funds $ 19,371 $ — $ — $ 19,371
Commercial paper 100,398 — ( 4 ) 100,394
Short-term marketable securities
Agency bonds 1,276 — — 1,276
Commercial paper 66,413 4 ( 3 ) 66,414
Corporate bond 2,522 — — 2,522
Total $ 189,980 $ 4 $ ( 7 ) $ 189,977
As of September 30, 2021, we had forty-one securities in net loss positions and their unrealized losses were immaterial individually and in aggregate. We did not record any credit losses regarding our available-for-sales debt securities during the nine months ended September 30, 2021. We do not intend to sell these securities and it is more likely than not that we will not be required to sell these securities before the recovery of their amortized cost basis.
Note 5 – Equity
2021 Inducement Plan – On September 22, 2021, the Company adopted an inducement plan (the “2021 Inducement Plan”), pursuant to which the Company reserved 410,000 shares of its common stock (subject to customary adjustments in the event of a change in capital structure of the Company) to be used exclusively for grants of awards to individuals who were not previously employees or directors of the Company, other than following a bona fide period of non-employment, as an inducement material to the individual's entry into employment with the Company within the meaning of Rule 5635(c)(4) of the Nasdaq Listing Rules (“Nasdaq Rules”). The Inducement Plan was approved by the Company's board of directors (the “Board”) without stockholder approval pursuant to Rule 5635(c)(4) of the Nasdaq Rules, and the terms and conditions of the Inducement Plan and awards to be granted thereunder are substantially similar to the Company's stockholder-approved Amended and Restated 2014 Equity Incentive Plan. As of September 30, 2021, no shares were issued under the 2021 Inducement Plan. Subsequently, 390,584 shares were issued under the 2021 Inducement Plan in October 2021.
Stock Repurchase Programs – We had no stock repurchase activity during the three and nine months ended September 30, 2021. In addition to 10.7 million shares repurchased under our previous repurchase programs, we have in treasury 1.3 million shares as of September 30, 2021 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, 2021 and December 31, 2020, we had a total of 12.0 million shares and 11.8 million 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.
16
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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,
2021 2020 2021 2020
Restricted stock units* $ 4,666 $ 6,078 $ 23,031 $ 20,855
Common stock options 82 254 402 867
Employee stock purchase plan 486 — 1,448 —
Total stock-based compensation expense $ 5,234 $ 6,332 $ 24,881 $ 21,722
_________
* Amounts include market-based and performance-based restricted stock units.
The following table summarizes stock-based compensation expense by operating function for the periods presented below (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Marketing and advertising $ 2,297 $ 1,869 $ 6,922 $ 5,138
Customer care and enrollment 740 527 1,901 1,762
Technology and content 2,380 1,430 7,483 2,965
General and administrative* ( 183 ) 2,506 8,575 11,857
Total stock-based compensation expense $ 5,234 $ 6,332 $ 24,881 $ 21,722
Amount capitalized in internal-use software 772 548 1,875 1,278
Total stock-based compensation $ 6,006 $ 6,880 $ 26,756 $ 23,000
_________
* Stock-based compensation expense for both three and nine months ended September 30, 2021 was impacted by a $ 4.1 million credit related to forfeited equity awards due to our chief executive officer's separation.
Note 6 — Convertible Preferred Stock
On April 30, 2021 (the “Closing Date”), we issued and sold to Echelon Health SPV, LP (“H.I.G.”), an investment vehicle of H.I.G. Capital, in a private placement, 2,250,000 shares of our newly designated Series A convertible preferred stock (the “Series A preferred stock”), par value $ 0.001 per share, at an aggregate purchase price of $ 225.0 million. We received $ 214.0 million in net proceeds from the private placement with H.I.G., net of sales commissions and certain transaction fees totaling $ 11.0 million. The Series A preferred stock ranks senior to all other equity securities of the Company with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company.
Dividends – Dividends initially accrue on the Series A preferred stock daily at 8 % per annum on the stated value of $ 100 per share (“Stated Value”) and compound semiannually, payable in kind (“PIK”) until the second anniversary of the Closing Date on June 30 and December 31 of each year (each, a “Dividend Payment Date”), beginning on June 30, 2021, and thereafter 6 % PIK and 2 % payable in cash in arrears on June 30 and December 31 of each year, beginning on June 30, 2023. PIK dividends are cumulative and are added to the Accrued Value (as defined below). “Accrued Value” means, as of any date, with respect to any share of Series A preferred stock, the sum of the Stated Value per share plus, on each Dividend Payment Date, on a cumulative basis, all accrued PIK dividends on such share that have not previously compounded and been added to the Accrued Value. The Series A preferred stock participates, on an as-converted basis in all dividends paid to the holders of our common stock.
17
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Conversion Rights – The Series A preferred stock is convertible at any time into common stock at a conversion rate equal to (i) the Accrued Value plus accrued PIK dividends that have not yet been added to the Accrued Value, (ii) divided by the conversion price as of the applicable conversion date (the “Conversion Price”). As of the date of this report, the Conversion Price is equal to $ 79.5861 per share. This Conversion Price is subject to further adjustment and the number of shares of common stock issuable upon conversion of the Series A preferred stock is subject to certain limitations, each as set forth in the Certificate of Designations of Series A preferred stock, as filed with the Secretary of State of the State of Delaware on April 30, 2021 (the “Certificate of Designations”).
Redemption Put Right – At any time on or after the sixth anniversary of the Closing Date, holders of the Series A preferred stock will have the right to cause the Company to redeem all or any portion of the Series A preferred stock in cash at an amount equal to the greater of (i) 135 % of the Accrued Value per share as of the redemption date, plus accrued PIK dividends that have not yet been added to the Accrued Value and (ii) the amount per share that would be payable on an as-converted basis on such Series A preferred stock at the then-current Accrued Value, plus accrued PIK dividends that have not yet been added to the Accrued Value, and in either case of (i) or (ii) plus any unpaid cash dividends that would have otherwise been settled in cash in connection with such conversion (the greater of (i) and (ii), the “Redemption Price”).
Redemption Call Right – At any time on or after the sixth anniversary of the Closing Date, the Company will have the right (but not the obligation) to redeem out of legally available funds and for cash consideration all (but not less than all) of the Series A preferred stock upon at least 30 days prior written notice at an amount equal to the Redemption Price.
Board Nomination Rights – H.I.G. is entitled to nominate one individual for election to the the Board so long as it continues to own at least 30 % of the common stock issuable or issued upon conversion of the Series A preferred stock originally issued to it in the private placement. H.I.G. also has the right to nominate an additional individual to the Board if the Company fails to maintain certain levels of commissions receivable and liquidity.
Voting Rights – The Series A preferred stock will vote together with the common stock as a single class on all matters submitted to a vote of the holders of the common stock (subject to certain voting limitations set forth in, and the terms and conditions of, the Certificate of Designations). Each holder of Series A preferred stock shall be entitled to the number of votes, rounded down to the nearest whole number, equal to the product of (i) the aggregate Accrued Value of the issued and outstanding shares of Series A preferred stock divided by the Minimum Price (as defined below), multiplied by (ii) a fraction, the numerator of which is the number of shares of Series A preferred stock held by such holder and the denominator of which is the aggregate number of issued and outstanding shares of Series A preferred stock. “Minimum Price” means the lower of: (i) the Nasdaq Official Closing Price per share of common stock on the Closing Date; or (ii) the average Nasdaq Official Closing Price per share of common stock for the five trading days immediately prior to the Closing Date. Holders of Series A preferred stock will have one vote per share on any matter on which the holders of the Series A preferred stock are entitled to vote separately as a class (subject to certain voting limitations set forth in, and the terms and conditions of, the Certificate of Designations).
Mandatory Conversion of the Series A Preferred Stock – At any time on or after the third anniversary of the Closing Date, if the volume-weighted average price per share of our common stock is greater than 167.5 % of the then-current Conversion Price for 20 consecutive trading days in a 30 -day trading day period, the Company will have the right to convert all, but not less than all, of the Series A preferred stock into common stock at a conversion rate with respect to each share of Series A preferred stock of (i) the Accrued Value plus accrued PIK dividends that have not yet been added to the Accrued Value, (ii) divided by the then applicable Conversion Price.
Covenants and Liquidity Requirements – As long as H.I.G. continues to own at least 30 % of the Series A preferred stock originally issued to it in the private placement, the consent of H.I.G. will be required for the Company to incur certain indebtedness and to take certain other corporate actions as set forth in the Company's investment agreement with H.I.G. entered into on February 17, 2021 (the “Investment Agreement”). In addition, the Company is required to maintain an asset coverage ratio (as defined in the Investment Agreement) of at least 2 x, which increases to 2.5 x thirty months after the date of the Investment Agreement. Additionally, the Investment Agreement requires the Company to maintain a minimum liquidity amount (as defined in the Investment Agreement) for certain periods that ranges from $ 65 million to $ 125 million. If the Company fails to maintain the minimum asset coverage ratio or minimum liquidity amount as of a certain date or for a certain time period required by the Investment Agreement and H.I.G continues to own at least 30 % of the Series A preferred stock originally issued to it in the private placement, H.I.G will have the right to nominate an additional director to the Board, and the consent of H.I.G. will be required to approve the Company's annual budget, hire or terminate certain key executives, and incur
18
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
certain indebtedness as outlined in the Investment Agreement. H.I.G. will no longer have these additional board nomination and consent rights if the Company is able to satisfy the minimum liquidity amount requirements in the Investment Agreement for any subsequent 12 consecutive months.
Our Series A preferred stock is considered temporary equity in our condensed consolidated financial statements. We have determined there are no material embedded features that require recognition as a derivative asset or liability. We recognized the Series A preferred stock at its stated amount less issuance costs of $ 11.0 million, or $ 214.0 million.
As of September 30, 2021, the estimated Series A preferred stock redemption value equals 135 % of the Accrued Value per share as of the redemption date, plus any accrued and unpaid dividends, which is significantly in excess of the fair value of the common stock into which the Series A preferred stock is convertible as of September 30, 2021. We have elected to apply the accretion method to adjust the carrying value of the Series A preferred stock to its redemption value at the earliest date of redemption, April 30, 2027. Amounts recognized to accrete the Series A preferred stock to its estimated redemption value are treated as a deemed dividend and are recorded as a reduction to retained earnings. The estimated redemption value will vary in subsequent periods due to the redemption put right described above and we have elected to recognize such changes prospectively. No shares of Series A preferred stock have been converted and the Series A preferred stock was convertible into 2.9 million shares of common stock as of September 30, 2021.
The following table summarizes the proceeds and changes to our Series A preferred stock (in thousands):
Gross proceeds $ 225,000
Less: issuance costs 10,975
Net proceeds $ 214,025
Balance as of Closing Date $ 214,025
Accrued paid-in-kind dividends 7,643
Change in preferred stock redemption value 3,770
Balance as of September 30, 2021 $ 225,438
Note 7 – Net Loss Per Share Attributable to Common Stockholders
Our Series A preferred stock is considered a participating security which requires the use of two-class method for the computation of basic and diluted per share amounts. Under the two-class method, earnings available to common stockholders for the period are allocated between common stockholders and participating securities according to dividends accumulated and participation rights in undistributed earnings. Net loss attributable to common stockholders is not allocated to the convertible preferred stock as the holder of the Series A preferred stock does not have a contractual obligation to share in losses. Basic net loss attributable to common stockholders per share is computed by dividing net loss available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common and common equivalent shares outstanding during the period. Diluted net loss attributable to common stockholders per share reflects all potential dilutive common stock equivalent shares, including conversion of preferred stock, stock options, restricted stock units and shares to be issued under our employee stock purchase program (“ESPP”).
19
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table sets forth the computation of basic and diluted net loss attributable to common stockholders per share (in thousands, except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Numerator:
Net loss attributable to common stockholders $ ( 59,948 ) $ ( 14,505 ) $ ( 83,636 ) $ ( 14,423 )
Denominator:
Shares used in per share calculation – basic 26,786 26,487 26,688 25,838
Dilutive effect of common stock — — — —
Shares used in diluted share calculation 26,786 26,487 26,688 25,838
Net loss attributable to common stockholders per share – basic and diluted $ ( 2.24 ) $ ( 0.55 ) $ ( 3.13 ) $ ( 0.56 )
For each of the three and nine months ended September 30, 2021 and 2020, we had securities outstanding that could potentially dilute per share amounts, 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 income (loss) per share consisted of the following (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Convertible preferred stock 2,866 — 1,595 —
Restricted stock units 1,134 599 1,055 748
Common stock options 278 414 330 453
ESPP 7 — 12 —
Total 4,285 1,013 2,992 1,201
Note 8 – Commitments and Contingencies
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.
20
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Our future minimum payments under non-cancellable contractual service and licensing obligations as of September 30, 2021 (in thousands):
For the Years Ending December 31,
Remainder of 2021 $ 2,845
2022 10,407
2023 8,067
2024 2,256
2025 —
Thereafter —
Total $ 23,575
Operating Leases
Refer to Note 10 – 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 condensed consolidated financial statements. An estimated loss contingency is accrued in the condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. There was no material litigation-related accrual during the three and nine months ended September 30, 2021. 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 30, 2020, two purported class action lawsuits were filed against us, our then-chief executive officer, Scott N. Flanders, our then-chief financial officer, Derek N. Yung, and our then-chief operating officer, David K. Francis (collectively, the “Defendants”), 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. 4:20-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 the Defendants moved to dismiss on October 23, 2020. The Defendants’ motion, which the plaintiff opposed, was granted in part and denied in part on August 12, 2021. The court dismissed the plaintiff's claims to the extent premised upon alleged misrepresentations or omissions relating to churn, but denied the Defendants motion with respect to alleged misstatements regarding purported operating costs. On October 1, 2021, the Company filed an answer denying in part and admitting in part the remaining allegations, and denying any wrongdoing.
Derivative Actions – On July 7, 2020 and October 13, 2020, two derivative lawsuits were filed against our then-chief executive officer, Mr. Flanders, our then-chief financial officer, Mr. Yung, our then-chief operating officer, Mr. Francis, and the members of our Board at the time of filing of the complaints (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. A third derivative lawsuit was filed against the same defendants on October 5, 2021 in the United States District Court for the Northern District of California, captioned Badwal v. Flanders et al ., Case No. 4:21-cv-07795 (N.D. Cal.). The complaints allege, among
21
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. The Chernet and Lincolnshire 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 Badwal complaint purports to assert a claim for breach of fiduciary duty, an insider trading claim, and violations of Section 14(a), 10(b) and 20D of the Securities Exchange Act of 1934. The Chernet and Lincolnshire complaints seek damages, restitution, attorneys’ fees and costs, and certain measures with respect to our corporate governance and internal procedures, and (in the Lincolnshire lawsuit) equitable and/or injunctive relief. The Badwal complaint seeks damages, declaratory relief, corporate governance measures, equitable and injunctive relief, restitution and disgorgement, and attorneys' fees and costs. On August 10, 2020, the parties filed a Stipulation and Proposed Order in the Chernet matter to stay the action until and through the resolution of the Defendants' anticipated motion to dismiss the consolidated securities class action, and filed a similar stipulation in the Lincolnshire matter on December 11, 2020. The Chernet stipulation was granted by the court on August 12, 2020 and the Lincolnshire stipulation on December 11, 2020. The agreed-upon stays terminated with the filing of an answer in the securities class action and the parties are engaged in discussions regarding further proceedings.
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”). 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”). Both complaints asserted claims under the California Private Attorney General Act on behalf of all current and former hourly-paid or non-exempt employees who work or have worked for us in California, based on alleged failures to comply with California wage and hour laws. The parties have entered into a court-approved settlement agreement that resolves both matters related to the Gonzalez and Le'Vias Complaints, and both the Gonzalez and Le'Vias Complaints have been dismissed with prejudice.
Note 9 – 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, 2020 for our accounting policies relating to operating segments.
22
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The results of our operating segments are summarized for the periods presented below (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenue:
Medicare $ 46,381 $ 70,361 $ 240,633 $ 246,891
Individual, Family and Small Business 17,533 23,923 54,052 42,567
Total revenue $ 63,914 $ 94,284 $ 294,685 $ 289,458
Segment profit (loss):
Medicare segment profit (loss) (1)
$ ( 52,882 ) $ ( 14,139 ) $ ( 46,141 ) $ 23,993
Individual, Family and Small Business segment profit (1)
12,499 18,487 38,476 24,153
Total segment profit (loss) ( 40,383 ) 4,348 ( 7,665 ) 48,146
Corporate ( 14,827 ) ( 15,581 ) ( 43,206 ) ( 43,376 )
Stock-based compensation expense ( 5,234 ) ( 6,332 ) ( 24,881 ) ( 21,722 )
Depreciation and amortization (2)
( 4,899 ) ( 2,995 ) ( 12,840 ) ( 7,911 )
Amortization of intangible assets ( 121 ) ( 287 ) ( 416 ) ( 1,207 )
Restructuring and reorganization charges ( 573 ) — ( 3,004 ) —
Other income (expense), net 189 ( 101 ) 511 724
Loss before benefit from income taxes $ ( 65,848 ) $ ( 20,948 ) $ ( 91,501 ) $ ( 25,346 )
_____________
(1) During the first quarter of 2021, we revised the calculation of segment profit by excluding amortization of capitalized software development costs to enhance comparability of our financial metrics with peer companies. The amortization of capitalized software development costs were $ 3.4 million and $ 2.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 9.1 million and $ 5.3 million for the nine months ended September 30, 2021 and 2020, respectively.
(2) Depreciation and amortization has been adjusted to include amortization of software development costs.
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, 2021 December 31, 2020
United States $ 45,465 $ 40,500
China 637 565
Total $ 46,102 $ 41,065
23
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Significant Customers
Substantially all revenue for the three and nine months ended September 30, 2021 and 2020 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue are summarized as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
UnitedHealthCare (1)
21 % 17 % 21 % 21 %
Aetna (1)
15 % 12 % 20 % 14 %
Humana 20 % 26 % 18 % 21 %
Centene (2)
11 % 8 % 12 % 10 %
__________
(1) Percentages include the carriers' subsidiaries.
(2) Centene Corporation acquired WellCare Health Plans, Inc. in 2020, and the revenue of WellCare is included in the percentage calculation for the three and nine months ended September 30, 2021 and 2020.
Note 10 – Leases
Our leases have remaining lease terms of 2 to 8 years. Certain of these leases have free or escalating rent payment provisions. We recognize lease expense 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. Most leases include options to renew, and the exercise of these options is at our discretion.
Total operating lease expenses were $ 1.9 million and $ 2.1 million for the three months ended September 30, 2021 and 2020, and $ 5.7 million and $ 6.4 million for the nine months ended September 30, 2021 and 2020, respectively and sublease income was immaterial for both periods.
Supplemental information related to leases are as follows (dollars in thousands):
September 30, 2021 December 31, 2020
Weighted-average remaining lease term of operating leases 6.6 years 7.2 years
Weighted-average discount rate used to recognize operating lease right-of-use-assets 5.4 % 5.4 %
Nine Months Ended September 30,
2021 2020
Operating lease expense $ 5,738 $ 6,411
Cash outflows related to operating leases 5,722 5,173
24
EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of September 30, 2021, maturities of operating lease liabilities are as follows (in thousands):
Year ending December 31,
Remainder of 2021 $ 1,926
2022 7,701
2023 8,033
2024 7,832
2025 8,009
Thereafter 19,407
Total lease payments (1)
52,908
Less imputed interest ( 10,200 )
Total $ 42,708
____________
(1) Noncancellable sublease income for the remainder of 2021 and years ending December 31, 2022 and 2023 of $ 0.3 million, $ 0.4 million, and $ 0.4 million, respectively, is not included in the table above.
Note 11 — Restructuring and Reorganization
Our restructuring and reorganization costs and liabilities consist primarily of severance, transition and other related costs. The following table summarizes the cash-based restructuring and reorganization related liabilities (in thousands):
Nine Months Ended September 30, 2021
Beginning balance $ —
Restructuring and reorganization charges 3,004
Payments ( 2,466 )
Ending balance $ 538
In February 2021, we eliminated approximately 89 full-time positions, primarily in the United States, representing approximately 5 % of our workforce, primarily within our customer care and enrollment group, and to a lesser extent, in our marketing and advertising, technology and content, and general and administrative groups. Total pre-tax restructuring charges were $ 2.4 million for the nine months ended September 30, 2021, which primarily related to employee termination benefits. Substantially all of the restructuring charges resulted in cash expenditures. The restructuring activities were completed by March 31, 2021.
In September 2021, we announced the transition of our chief executive officer. Mr. Scott Flanders resigned as a member of our Board and chief executive officer, effective October 31, 2021. We recognized $ 0.5 million in severance costs related to his separation in September 2021 and we expect to recognize an additional $ 1.9 million in the fourth quarter of 2021. Stock-based compensation expense for both three and nine months ended September 30, 2021 was impacted by a $ 4.1 million credit related to forfeited equity awards due to Mr. Flanders' separation, which was included in general and administrative expenses on our Condensed Consolidated Statement of Comprehensive Loss.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 12 – 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 million 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 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 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 the closing of the Credit Agreement, 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. The Company is also obligated to pay other customary administration fees for a credit facility of this size and type.
The availability under the credit facility was up to the lesser of $ 40.0 million or the Borrowing Base in the original 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.
Financial covenants in the original Credit Agreement required that we maintain Excess Availability (as defined in the Credit Agreement) at or above $ 6.0 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 commissions receivable. 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 the Borrowing Base as determined by eligible past and future commissions receivable, 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 $ 0.5 million and $ 0.7 million as of September 30, 2021 and December 31, 2020, respectively.
As of September 30, 2021, we had no outstanding borrowings under our revolving credit facility.
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EHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 13 – Income Taxes
The following table summarizes our benefit from income taxes and our effective tax rates for the periods presented below (in thousands, except effective tax rate):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Loss before benefit from income taxes $ ( 65,848 ) $ ( 20,948 ) $ ( 91,501 ) $ ( 25,346 )
Benefit from income taxes ( 12,834 ) ( 6,443 ) ( 19,278 ) ( 10,923 )
Effective tax rate 19.5 % 30.8 % 21.1 % 43.1 %
For the three and nine months ended September 30, 2021, we recognized a benefit from income taxes of $ 12.8 million and $ 19.3 million, representing an effective tax rate of 19.5 % and 21.1 %, respectively. These effective tax rates are higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, non-deductible lobbying expenses and state taxes, partially offset by research and development credits. For the three and nine months ended September 30, 2020, we recognized benefits from income taxes of $ 6.4 million and $ 10.9 million, representing an effective tax rate of 30.8 % and 43.1 %, respectively, which were higher than the statutory federal tax rate due primarily to stock-based compensation adjustments, non-deductible 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, 2021, as we believe it is more likely than not that the net deferred tax assets will be realized, with the exception of certain net operating losses and credits that are expected to expire unutilized which have a valuation allowance.
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