eHealth, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to the Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB ID: 42 ) 87 Consolidated Balance Sheets 89 Consolidated Statements of Comprehensive Income (Loss) 90 Consolidated Statements of Stockholders’ Equity 91 Consolidated Statements of Cash Flows 92 Notes to Consolidated Financial Statements 93 86 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of eHealth, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of eHealth, Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 87 Revenue recognition: Estimated constrained lifetime value of commission revenue Description of the Matter The Company recognized commission revenue of approximately $493.1 million in 2021 and related commissions receivable were approximately $908.3 million at December 31, 2021. As described in Notes 1 and 2 to its consolidated financial statements, the Company’s commission revenue is recognized as the amount of the total estimated lifetime value of the commissions expected to be received when a member obtains a plan through the Company and is approved by the carrier (“LTV”). Auditing management’s determination of the LTV of commission revenue was especially complex and highly judgmental due to the complexity of the models used and the subjectivity required by the Company to estimate the amount and timing of future cash flows, calculate the amount of commission revenue that is probable of not being reversed, and determine the timing and amount of any adjustment revenue that results from changes in the estimates of previously recorded LTV. The Company utilizes statistical tools and methodologies to estimate member attrition, which is a key driver when estimating the amount and timing of future cash flows and can be particularly volatile during the first several years. To determine the initial constraint to be applied to LTV, the Company evaluates the difference between prior estimates of LTV and actual cash received and applies judgment to determine the constraint to apply. For the ongoing evaluation of the constraint, the Company also analyzes whether circumstances have changed and considers any known or potential modifications to the inputs into LTV and the factors that can impact the amount of cash expected to be collected in future periods such as commission rates, carrier mix, estimated average plan duration, changes in laws and regulations, and cancellations of insurance plans offered by health insurance carriers with which the Company has a relationship. The Company also compares actual versus expected cash collections of previously recorded LTV and assesses qualitative and quantitative factors to determine whether adjustment revenue should be recognized and, if so, the amount and timing of such. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to estimate the amount and timing of future cash flows and LTV. These processes and controls include those covering the models and methods used to calculate LTV, the use of management judgment to determine the constraint applied to LTV, management’s evaluation of any required adjustments to previously recorded LTV estimates, and the completeness and accuracy of the data used in such estimates and calculations. Our audit procedures also included, among others, evaluating the methodology used and significant assumptions discussed above, and testing the completeness and accuracy of the underlying data used by the Company. We involved our valuation specialists to assist in our testing of the estimated average plan duration, which includes member attrition assumptions, including performing certain corroborative calculations. We inspected and compared the results of the Company’s retrospective review analysis of historical estimates for certain plan effective years to historical cash collection experience, including reperforming the calculations and validating the completeness and accuracy of the underlying data used. In addition, we performed inquiries of key personnel regarding their evaluation of changes to LTV, the adjustments made to the constraint for current and expected future economic conditions, and any decisions on the timing and amount of adjustment revenue recognized. We also reviewed analyst reports, press releases, and other relevant third-party and/or industry trends data for contrary evidence including competitor data. /s/ Ernst & Young LLP We have served as the Company's auditor since 2000. Redwood City, California March 1, 2022 88 EHEALTH, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) December 31, 2021 December 31, 2020 Assets Current assets: Cash and cash equivalents $ 81,926 $ 43,759 Short-term marketable securities 41,306 49,620 Accounts receivable 5,750 1,799 Contract assets – commissions receivable – current 254,821 219,153 Prepaid expenses and other current assets 23,784 16,661 Total current assets 407,587 330,992 Contract assets – commissions receivable – non-current 653,441 573,252 Property and equipment, net 12,105 14,609 Operating lease right-of-use assets 37,373 42,558 Restricted cash 3,239 3,354 Other assets 33,624 26,455 Intangible assets, net 1,923 8,569 Goodwill — 40,233 Total assets $ 1,149,292 $ 1,040,022 Liabilities, convertible preferred stock, and stockholders’ equity Current liabilities: Accounts payable $ 13,750 $ 36,921 Accrued compensation and benefits 16,458 20,542 Accrued marketing expenses 36,384 17,788 Lease liabilities – current 5,543 5,192 Other current liabilities 3,330 3,965 Total current liabilities 75,465 84,408 Deferred income taxes – non-current 50,796 72,317 Lease liabilities – non-current 35,826 41,369 Other non-current liabilities 5,094 4,370 Total liabilities 167,181 202,464 Commitments and contingencies Convertible preferred stock, par value $ 0.001 per share; 2,250 issued and outstanding as of December 31, 2021; none issued and outstanding as of December 31, 2020 232,592 — Stockholders’ equity: Preferred stock, par value $ 0.001 per share, other than convertible preferred stock; 7,750 authorized; none issued and outstanding — — Common stock, par value $ 0.001 per share; 100,000 authorized; 38,704 and 37,755 issued as of December 31, 2021 and 2020, respectively; 26,688 and 25,924 outstanding as of December 31, 2021 and 2020, respectively 39 38 Additional paid-in capital 755,875 721,013 Treasury stock, at cost: 12,016 and 11,831 shares as of December 31, 2021 and 2020, respectively ( 199,998 ) ( 199,998 ) Retained earnings 193,213 316,155 Accumulated other comprehensive income 390 350 Total stockholders’ equity 749,519 837,558 Total liabilities, convertible preferred stock, and stockholders’ equity $ 1,149,292 $ 1,040,022 The accompanying notes are an integral part of these consolidated financial statements. 89 EHEALTH, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands, except per share amounts) Year Ended December 31, 2021 2020 2019 Revenue Commission $ 493,119 $ 508,189 $ 466,676 Other 45,080 74,585 39,525 Total revenue 538,199 582,774 506,201 Operating costs and expenses Cost of revenue 1,992 4,083 2,738 Marketing and advertising 271,300 209,340 150,249 Customer care and enrollment 179,295 172,895 134,304 Technology and content 83,800 65,188 47,085 General and administrative 75,699 76,452 64,150 Amortization of intangible assets 536 1,493 2,187 Change in fair value of earnout liability — — 24,079 Restructuring and reorganization charges 4,878 — — Impairment charges 46,344 — — Total operating costs and expenses 663,844 529,451 424,792 Income (loss) from operations ( 125,645 ) 53,323 81,409 Other income, net 755 666 2,090 Income (loss) before income taxes ( 124,890 ) 53,989 83,499 Provision for (benefit from) income taxes ( 20,515 ) 8,539 16,612 Net income (loss) $ ( 104,375 ) $ 45,450 $ 66,887 Paid-in-kind dividends for preferred stock ( 12,206 ) — — Change in preferred stock redemption value ( 6,361 ) — — Net income (loss) per share attributable to common stockholders: $ ( 122,942 ) $ 45,450 $ 66,887 Net income (loss) per share attributable to common stockholders: Basic $ ( 4.59 ) $ 1.75 $ 2.90 Diluted $ ( 4.59 ) $ 1.68 $ 2.73 Weighted-average number of shares used in per share amounts: Basic 26,781 26,025 23,075 Diluted 26,781 27,014 24,539 Comprehensive income (loss): Net income (loss) $ ( 104,375 ) $ 45,450 $ 66,887 Unrealized holding gain for available for sale debt securities, net of tax ( 49 ) 28 — Foreign currency translation adjustment 89 206 ( 11 ) Comprehensive income (loss) $ ( 104,335 ) $ 45,684 $ 66,876 The accompanying notes are an integral part of these consolidated financial statements. 90 EHEALTH, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands) 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 834 1 5,534 — — — — 5,535 Repurchase of shares to satisfy employee tax withholding obligations — — ( 14,281 ) 190 — — — ( 14,281 ) Shares issued in equity offering 2,760 3 126,048 — — — — 126,051 Settlement of earnout liability 295 — 17,264 — — — — 17,264 Stock-based compensation expense — — 22,570 — — — — 22,570 Other comprehensive loss, net of tax — — — — — — ( 11 ) ( 11 ) Net income — — — — — 66,887 — 66,887 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 638 1 1,940 — — — — 1,941 Repurchase of shares to satisfy employee tax withholding obligations — — ( 19,808 ) 215 — — — ( 19,808 ) Shares issued in equity offering 2,070 2 228,022 — — — — 228,024 Settlement of earnout liability 295 — 28,521 — — — — 28,521 Stock-based compensation — — 27,179 — — — — 27,179 Other comprehensive income, net of tax — — — — — — 234 234 Net Income — — — — — 45,450 — 45,450 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 849 1 4,904 — — — — 4,905 Repurchase of shares to satisfy employee tax withholding obligations — — ( 9,333 ) 185 — — — ( 9,333 ) Paid-in-kind dividend and accretion related to convertible preferred stock — — — — — ( 18,567 ) — ( 18,567 ) Issuance of common stock for employee stock purchase program 100 — 3,813 — — — — 3,813 Stock-based compensation — — 35,478 — — — — 35,478 Other comprehensive income, net of tax — — — — — — 40 40 Net loss — — — — — ( 104,375 ) — ( 104,375 ) Balance as of December 31, 2021 38,704 $ 39 $ 755,875 12,016 $ ( 199,998 ) $ 193,213 $ 390 $ 749,519 The accompanying notes are an integral part of these consolidated financial statements. 91 EHEALTH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2021 2020 2019 Operating activities: Net income (loss) $ ( 104,375 ) $ 45,450 $ 66,887 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 5,430 3,694 2,983 Amortization of internally developed software 12,901 7,756 3,821 Amortization of intangible assets 536 1,493 2,187 Stock-based compensation expense 32,857 25,172 22,570 Deferred income taxes ( 21,522 ) 8,817 16,197 Change in fair value of earnout liability — — 24,079 Impairment charges 46,344 — — Other non-cash items 1,466 1,091 ( 755 ) Changes in operating assets and liabilities: Accounts receivable ( 3,952 ) 533 1,270 Contract assets – commissions receivable ( 116,030 ) ( 205,209 ) ( 243,364 ) Prepaid expenses and other assets ( 7,945 ) ( 6,180 ) ( 466 ) Accounts payable ( 23,052 ) 12,294 19,694 Accrued compensation and benefits ( 4,083 ) ( 9,036 ) 8,814 Accrued marketing expenses 18,596 5,747 1,028 Deferred revenue 20 ( 2,262 ) 1,694 Accrued expenses and other liabilities 187 2,780 1,869 Net cash used in operating activities ( 162,622 ) ( 107,860 ) ( 71,492 ) Investing activities: Capitalized internal-use software and website development costs ( 16,992 ) ( 16,005 ) ( 10,231 ) Purchases of property and equipment and other assets ( 3,865 ) ( 7,751 ) ( 6,641 ) Purchases of marketable securities ( 103,058 ) ( 180,505 ) — Proceeds from redemption and maturities of marketable securities 111,284 130,978 — Payments for security deposits — — ( 72 ) Net cash used in investing activities ( 12,631 ) ( 73,283 ) ( 16,944 ) Financing activities: Proceeds from issuance of preferred stock, net of issuance costs 214,025 — — Proceeds from issuance of common stock, net of issuance costs — 228,024 126,051 Net proceeds from exercise of common stock options and employee stock purchases 8,699 1,941 5,535 Repurchase of shares to satisfy employee tax withholding obligations ( 9,333 ) ( 19,808 ) ( 14,281 ) Debt issuance costs — — ( 517 ) Repayment of debt — — ( 5,000 ) Acquisition-related contingent payments — ( 8,751 ) ( 9,542 ) Principal payments in connection with leases ( 150 ) ( 157 ) ( 105 ) Net cash provided by financing activities 213,241 201,249 102,141 Effect of exchange rate changes on cash, cash equivalents and restricted cash 64 187 26 Net increase in cash, cash equivalents and restricted cash 38,052 20,293 13,731 Cash, cash equivalents and restricted cash at beginning of period 47,113 26,820 13,089 Cash, cash equivalents and restricted cash at end of period $ 85,165 $ 47,113 $ 26,820 Supplemental disclosure of cash flows Cash paid for interest $ — $ — $ 42 Cash refunds from income taxes, net $ 103 $ 882 $ 741 The accompanying notes are an integral part of these consolidated financial statements. 92 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 – Our consolidated financial statements include the accounts of eHealth, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP.”) Certain prior period amounts have been reclassified to conform with our current period presentation. 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 $ 0.05 per basic and diluted share, on our Consolidated Statement of Comprehensive Loss for the year ended December 31, 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. Operating Segments – We report segment information based on how our chief executive officer, who is our chief operating decision maker (“CODM”), regularly reviews our operating results, allocates resources and makes decisions regarding our business operations. The performance measures of our segments include total revenue and profit (loss). Our business structure is comprised of two operating segments: • Medicare; and • Individual, Family and Small Business The Medicare segment consists primarily of commissions earned from our sale of Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans, and to a lesser extent, ancillary products sold to our Medicare-eligible customers, including but not limited to, dental and vision insurance, as well as our advertising program that allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us or pursuant to which we perform other services as marketing and our delivery and 93 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS sale to third parties of Medicare-related health insurance leads generated by our ecommerce platforms and our marketing activities. The Individual, Family and Small Business segment consists primarily of commissions earned from our sale of individual and family and small business health insurance plans and ancillary products sold to our non-Medicare-eligible customers, including but not limited to, dental, vision, short term disability and long term disability insurance. To a lesser extent, the Individual, Family and Small Business segment includes amounts earned from our online sponsorship program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website, our licensing to third parties the use of our health insurance ecommerce technology and our delivery and sale to third parties of individual and family health insurance leads generated by our ecommerce platforms and our marketing activities. Marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses that are directly attributable to a segment are reported within the applicable segment. Indirect marketing and advertising, customer care and enrollment and technology and content operating expenses are allocated to each segment based on usage. Other indirect general and administrative operating expenses are managed in a corporate shared services environment and, since they are not the responsibility of segment operating management, are not allocated to the two operating segments and are presented as a reconciling item to our consolidated financial results. Segment profit is calculated as total revenue for the applicable segment less direct and allocated marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses, excluding stock-based compensation, depreciation and amortization expense and amortization of intangible assets. Use of Estimates – The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to, but not limited to, the useful lives of intangible assets, fair value of investments, recoverability of intangible assets, the commissions we expect to collect for each approved member cohort, valuation allowance for deferred income taxes, provision for income taxes and the assumptions used in determining stock-based compensation. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. Actual results may differ from these estimates. Cash Equivalents – 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. 94 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and Equipment – Property and equipment are stated at cost, less accumulated depreciation and amortization. Finance lease amortization expenses are included in depreciation expense in our Consolidated Statements of Comprehensive Income (Loss). Maintenance and minor replacements are expensed as incurred. Depreciation and amortization expenses are computed using the straight-line method based on estimated useful lives as follows: Computer equipment and software 3 to 5 years Office equipment and furniture 5 years Leasehold improvements* 5 to 10 years _______ * Lesser of useful life or related lease term See Note 3 – Supplemental Financial Statement Information of the Notes to Consolidated Financial Statements for additional information regarding our property and equipment. Business Combinations – We allocate the fair value of the acquisition consideration transferred in exchange for our acquired businesses to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values at the acquisition date. The excess of the fair value of acquisition consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Acquisition-related costs are recognized separately from the business combination and are expensed as incurred. Goodwill and Intangible Assets – Goodwill represents the excess of the consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination. We test our goodwill for impairment on an annual basis in the fourth quarter of each year or whenever events or changes in circumstances indicate that the asset may be impaired. Factors that we consider in deciding when to perform an impairment test include significant negative industry or economic trends or significant changes or planned changes in our use of the intangible assets. Our goodwill is allocated among our two segments, (1) Medicare and (2) Individual, Family and Small Business. All of our goodwill resulting from our prior business combinations was allocated to the Medicare segment. Goodwill and intangible assets are considered non-financial assets and therefore, subsequent to their initial recognition are not revalued at fair value each reporting period unless an impairment charge is recognized. For the years ended December 31, 2020 and 2019, there was no goodwill impairment identified, and therefore, there were no changes in carrying value of goodwill in the accompanying Consolidated Statements of Comprehensive Income. We performed a goodwill impairment assessment as of December 31, 2021, which included both qualitative and quantitative assessments. Our assessment included a comparison of carrying value to an estimated fair value using a market approach based on our market capitalization. Based on this assessment, we concluded the fair value of our Medicare segment was below the carrying value primarily due to the recent change in our market valuation and financial performance and recorded a $ 40.2 million 95 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS impairment of our goodwill. The change in the carrying amount of goodwill is summarized as follows (in thousands): Balance as of December 31, 2020 $ 40,233 Impairment charges ( 40,233 ) Balance as of December 31, 2021 $ — Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate a potential reduction in their fair values below their respective carrying amounts. Intangible assets with finite useful lives, which include purchased technology, pharmacy and customer relationships, trade names, and certain trademarks, are amortized over their estimated useful lives. We must make subjective judgments in determining the independent cash flows that can be related to specific asset groupings. In addition, we must make subjective judgments regarding the remaining useful lives of assets with finite useful lives. When we determine that the useful life of an asset is shorter than we had originally estimated, we accelerate the rate of amortization over the assets’ new, remaining useful life. We evaluated the remaining useful lives of our intangible assets with finite lives and determined no material adjustments to the remaining lives were required. See Note 3 – Supplemental Financial Statement Information of the Notes to Consolidated Financial Statements for additional information regarding our intangible assets. Other Long-Lived Assets – We evaluate other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Revenue Recognition – Our commission revenue consists of commission payments from health insurance carriers whose health insurance policies are purchased through our ecommerce platforms or telephonically via our customer care center, regular payments with respect to administrative services, and bonus payments, which are generally based on our attaining predetermined target sales levels or other objectives, as determined by the health insurance carriers. In addition, we also generate revenue from non-commission sources, which include, among other things, online sponsorship, advertising, lead referrals, and technology licensing. We account for revenue under ASC 606 – Revenue from Contracts with Customers. The core principle of ASC 606 is to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. Accordingly, we recognize revenue for our services through the application of the following steps: • Identification of the contract, or contracts, with a customer. • Identification of the performance obligations in the contract. • Determination of the transaction price. • Allocation of the transaction price to the performance obligations in the contract. • Recognition of revenue when, or as, we satisfy a performance obligation. 96 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commission Revenue — Our commission revenue results from approval of an application from health insurance carriers, which we define as our customers under ASC 606. Our commission revenue is primarily comprised of commissions from health insurance carriers which is computed using the estimated constrained lifetime value of commission payments that we expect to receive. Included in commissions are regular administrative payments we receive with respect to administrative services. We estimate commission revenue for each insurance product by using a portfolio approach to a group of approved members by plan type and the effective month of the relevant plan, which we refer to as “cohorts”. 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 adjustments to 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. 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 the different cohorts and incorporate management’s judgment in interpreting those trends and applying the constraints discussed below. For our Medicare commission revenue, which represented 86 %, 86 % and 87 % of our total commission revenue for the years ended December 31, 2021, 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, and approximately 4 to 5 years for both Medicare Supplement and Medicare Part D prescription drug plans. While the average plan duration has been approximately 3 years for Medicare Advantage plans, certain members may have a duration of up to approximately 14 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 less than six months . For all other ancillary health insurance plan LTVs, the estimated average plan duration has historically varied from 1 to 5 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 an ongoing basis, and we update our assumptions 97 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS when we observe a sufficient amount of evidence that would suggest that the long-term expectation underlying the assumptions has changed. 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. For both Medicare Advantage and Medicare Part D prescription drug plans, we receive a fixed, annual commission payment from insurance carriers once the plan is approved by the carrier and either a fixed, monthly, or annual commission payment beginning with and subsequent to the second plan year. In the first plan year of a Medicare Advantage and Medicare Part D prescription drug plan, after the health insurance carrier approves the application but during the effective year of the plan, we are paid a fixed commission that is prorated for the number of months remaining in the calendar year. Additionally, if the plan is the first Medicare Advantage or Medicare Part D prescription drug plan issued to the member, we may receive a higher commission rate that covers a full 12-month period, regardless of the month the plan was effective. We earn commission revenue for Medicare Advantage and Medicare Part D prescription drug plans for which we are the broker of record, typically until either the policy is cancelled or we otherwise do not remain the agent on the policy. For individual and family, Medicare Supplement, small business and ancillary plans, our commissions generally represent a flat amount per member per month or a percentage of the premium amount collected by the carrier during the period that a member maintains coverage under a plan. Premium-based commissions are reported to us after the premiums are collected by the carrier, generally on a monthly basis. We generally continue to receive the commission payment from the relevant insurance carrier until the health insurance plan is cancelled or we otherwise do not remain the agent on the policy. For Medicare-related, individual and family and ancillary health insurance plans, our services are complete once a submitted application is approved by the relevant health insurance carrier. Accordingly, we recognize commission revenue based upon the total estimated lifetime commissions we expect to receive for selling the plan after the carrier approves an application, net of an estimated constraint. We refer to these as estimated and constrained LTVs for the plan. We provide annual services in selling and renewing small business health insurance plans; therefore, we recognize small business health insurance plan commission revenue at the time the plan is approved by the carrier, and when it renews each year thereafter, equal to the estimated commissions we expect to collect from the plan over the following 12 months. See Note 2 – Revenue of the Notes to Consolidated Financial Statements for additional information regarding our commission revenue. 98 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other Revenue – Our non-Medicare plan related sponsorship and advertising program allows carriers to purchase advertising space in specific markets in a sponsorship area on our website. In return, we are typically paid a fee, which is recognized over the period that advertising is displayed, and often a performance fee based on metrics such as submitted health insurance applications, which is recognized when the service has been performed. We also offer Medicare advertising and other services, which include, among other things, marketing and website development, hosting and maintenance. In these instances, we are typically paid a fixed, up-front fee, which we recognize as revenue ratably over the service period as service is performed. Our commercial technology licensing business allows carriers the use of our ecommerce platform to offer their own health insurance policies on their websites and agents to utilize our technology to power their online quoting, content and application submission processes. Typically, we are paid a one-time implementation fee, which we recognize on a straight-line basis over the estimated term of the customer relationship, and a performance fee based on metrics such as submitted health insurance applications. The performance fees are based on performance criteria. In instances where the performance criteria data is tracked by us, we recognize revenue in the period of performance and when all other revenue recognition criteria has been met. In instances where the performance criteria data is tracked by the third party, we recognize revenue when reversal of such amounts is not likely to occur. Deferred Revenue – Deferred revenue includes deferred fees and amounts billed to or collected from advertising, sponsorship or technology licensing customers in advance of our performing our service for such customers. It also includes the amount by which both unbilled and billed services provided under our technology licensing arrangements exceed the revenue recognized to date. Incremental Costs to Obtain a Contract — Our sales compensation plans, which are directed at converting leads into approved members, represent fulfillment costs and not costs to obtain a contract with a customer. Additionally, we reviewed compensation plans related to personnel responsible for identifying new health insurance carriers and entering into contracts with new health insurance carriers and concluded that no incremental costs are incurred to obtain such contracts. Therefore, costs related these compensation plans are expensed as incurred. Cost of Revenue – Included in cost of revenue are payments related to health insurance policies sold to members who were referred to our website by marketing partners with whom we have revenue-sharing arrangements. In order to enter into a revenue-sharing arrangement, marketing partners must be licensed to sell health insurance in the state where the policy is sold. Costs related to revenue-sharing arrangements are expensed as the related revenue is recognized. Marketing and Advertising Expenses – Marketing and advertising expenses consist primarily of member acquisition expenses associated with our direct, marketing partner and online advertising member acquisition channels, in addition to compensation and other expenses related to marketing, business development, partner management, public relations and carrier relations personnel who support our offerings. We recognize direct marketing expenses in our direct member acquisition channel in the period in which they are incurred. We recognize online marketing expenses associated with search advertising in the period in which the consumer clicks on the advertisement. Advertising costs incurred in the years ended December 31, 2021, 2020 and 2019 totaled $ 240.4 million, $ 178.9 million, and $ 122.6 million, respectively. 99 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our direct channel expenses primarily consist of costs for direct mail, email marketing and television and radio advertising. Advertising costs for our direct channel are expensed the first time the related advertising takes place. Our marketing partner channel expenses primarily consist of fees paid to marketing partners with which we have a relationship. Our online advertising channel expenses primarily consist of paid keyword search advertising on search engines and retargeting campaigns. Advertising costs for our marketing partner channel and our online advertising channel are expensed as incurred. Research and Development Expenses – Research and development expenses consist primarily of compensation and related expenses incurred for employees on our engineering and technical teams, which are expensed as incurred. Research and development costs, which totaled $ 10.4 million, $ 9.1 million and $ 8.1 million for the years ended December 31, 2021, 2020 and 2019, respectively, are included in technology and content expense in the accompanying Consolidated Statements of Comprehensive Income (Loss). Internal-Use Software and Website Development Costs – We capitalize costs of materials, consultants and compensation and benefits costs of employees who devote time to the development of internal-use software during the application development stage. The amortization of these assets are recorded in technology and content. Our judgment is required in determining the point at which various projects enter the phases at which costs may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized, which is generally 3 years. For the years ended December 31, 2021, 2020 and 2019, we capitalized internal-use software and website development costs of $ 19.6 million, $ 18.0 million and $ 10.2 million respectively, and recorded amortization expense of $ 12.9 million, $ 7.8 million, and $ 3.8 million respectively. Capitalized internal-use software and website development costs are included in Other Assets on our Consolidated Balance Sheets and were $ 31.3 million and $ 24.6 million as of December 31, 2021 and 2020, respectively. See Note 5 - Equity of the Notes to Consolidated Financial Statements for the amount of stock-based compensation capitalized for internal-use software. Stock-Based Compensation – We recognize stock-based compensation expense in the accompanying Consolidated Statements of Comprehensive Income (Loss) based on the fair value of our stock-based awards over their respective vesting periods, which is generally 4 years. The estimated attainment of performance-based awards and related expense is based on the expectations of revenue and earnings target achievement. The estimated fair value of performance awards with market conditions is determined using the Monte-Carlo simulation model. The assumptions used in calculating the fair value of stock-based payment awards and expected attainment of performance-based awards represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. We will continue to use judgment in evaluating the expected term and volatility related to our own stock-based awards on a prospective basis, and incorporating these factors into the model. Changes in key assumptions could significantly impact the valuation of such instruments. The estimated grant date fair value of our stock options is determined using the Black-Scholes pricing model and a single option award approach. The weighted-average expected term for stock options granted is calculated using historical option exercise behavior. The dividend yield is determined by dividing the expected per share dividend during the coming year by the grant date stock price. Through December 31, 2021, we had not declared or paid any cash dividends to common stockholders. We base the risk-free interest rate on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of our stock options. Expected volatility is determined using a combination of the implied volatility of publicly traded options in our stock and historical volatility of our stock price. 100 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 401(k) Plan – Our board of directors adopted a defined contribution retirement plan ("401(k) Plan") in 1998, which qualifies under Section 401(k) of the Internal Revenue Code of 1986. Participation in the 401(k) Plan is available to substantially all employees in the United States. Employees can contribute up to 25 % of their salary, up to the federal maximum allowable limit, on a before-tax basis to the 401(k) Plan. Employee contributions are fully vested when contributed. Our contributions to the 401(k) Plan are discretionary and are expensed when incurred. We also match employee contributions to our 401(k) Plan at 100 % of an employee’s contribution each pay period, up to a maximum of 3 % of the employee’s salary during such pay period for the years ended December 31, 2021 and 2020, compared to 25 % contribution match, with maximum of 3 % for the year ended December 31, 2019, respectively. Our matching contributions are expensed as incurred and vest one-third for each of the first three years of the recipient’s service. The recipient is fully vested in all 401(k) Plan matching contributions after three years of service. We recognized expense of $ 4.2 million, $ 3.5 million and $ 2.3 million for the years ended December 31, 2021, 2020 and 2019, respectively, related to 401(k) matching contributions. Income Taxes – We account for income taxes using the liability method. Deferred income taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities, using enacted statutory tax rates in effect for the year in which the differences are expected to reverse. We utilize a two-step approach for evaluating uncertain tax positions. Step one, Recognition , requires a company to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained upon audit, including resolution of related appeals or litigation processes, if any. Step two, Measurement , is based on the largest amount of benefit, which is more likely than not to be realized on ultimate settlement. We record interest and penalties related to uncertain tax positions as income tax expense in the consolidated financial statements. 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 or additional enrollment periods may change the seasonality of our business. The majority of our individual and family health insurance plans are sold in the fourth quarter during the annual open enrollment period as defined under the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act. In states where the Federally Facilitated market place operates as the state health insurance exchanges, 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. 101 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recently Adopted Accounting Pronouncements Codification Improvements – In October 2020, the Financial Accounting Standards Board (“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. 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 Taxe s, 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. Financial Instruments – Credit Losses (Topic 326) – In June 2016, the FASB issued Accounting Standards Update (“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 our 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 . 102 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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): Year Ended December 31, 2021 2020 2019 Medicare Medicare Advantage $ 393,868 $ 374,981 $ 339,810 Medicare Supplement 24,272 48,526 40,345 Medicare Part D 7,361 12,909 26,824 Total Medicare 425,501 436,416 406,979 Individual and Family (1) Non-Qualified Health Plans 23,579 20,813 17,559 Qualified Health Plans 9,295 5,856 6,866 Total Individual and Family 32,874 26,669 24,425 Ancillary Short-term 6,112 9,494 10,524 Dental 10,216 9,354 5,238 Vision 2,250 3,896 2,002 Other 2,776 4,392 3,985 Total Ancillary 21,354 27,136 21,749 Small Business 10,720 9,568 9,922 Commission Bonus and Other 2,670 8,400 3,601 Total Commission Revenue 493,119 508,189 466,676 Other Revenue Sponsorship and Advertising Revenue 40,560 68,383 35,375 Other 4,520 6,202 4,150 Total Other Revenue 45,080 74,585 39,525 Total Revenue $ 538,199 $ 582,774 $ 506,201 _______ (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. 103 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commission Revenue Since the adoption of ASC 606, we have evaluated changes in estimated cash collections and compare these to the initial estimates of LTV at the time of approval. We record adjustment revenue in the period when the risk of significant reversal in not probable and continue to enhance our LTV estimation models to improve the accuracy and to reduce the fluctuations of our LTV estimates. Commission revenue by segment is presented in the table below (in thousands): Years Ended December 31, 2021 2020 2019 Medicare Commission Revenue from Members Approved During the Period $ 437,738 $ 440,722 $ 355,916 Net Commission Revenue from Members Approved in Prior Periods (1) ( 8,414 ) 5,665 55,292 Total Medicare Segment Commission Revenue $ 429,324 $ 446,387 $ 411,208 Individual, Family and Small Business Commission Revenue from Members Approved During the Period $ 25,078 $ 21,971 $ 22,614 Commission Revenue from Renewals of Small Business Members during the Period (3) 8,564 6,727 6,851 Net Commission Revenue from Members Approved in Prior Periods (1) 30,153 33,104 26,003 Total Individual, Family and Small Business Segment Commission Revenue $ 63,795 $ 61,802 $ 55,468 Total Commission Revenue from Members Approved During the Period (1) $ 462,816 $ 462,693 $ 378,530 Commission Revenue from Renewals of Small Business Members During the Period (2) 8,564 6,727 6,851 Total Net Commission Revenue from Members Approved in Prior Periods (1)(3) 21,739 38,769 81,295 Total Commission Revenue $ 493,119 $ 508,189 $ 466,676 _______ (1) 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. (2) 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. (3) The impact of total net commission revenue from members approved in prior periods was $ 0.81 , $ 1.49 and $ 3.52 per basic share, respectively, or $ 0.81 , $ 1.44 and $ 3.31 per diluted share, respectively, for the years ended December 31, 2021, 2020 and 2019, respectively. The total reductions to revenue from members approved in prior periods were $ 28.8 million, $ 17.3 million and $ 3.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. These reductions to revenue primarily related to the Medicare segment. 104 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Enhancement to LTV Estimation Model and Impacts Related to COVID-19 During the fourth quarter of 2019, we enhanced our Medicare Advantage LTV estimation model to increase the accuracy of LTV estimates with an emphasis on improving member attrition forecasting by utilizing statistical tools. For the Medicare segment, we recognized adjustment revenue of $ 55.3 million for the year ended December 31, 2019, of which $ 50.8 million was recognized for Medicare Advantage plans during the fourth quarter of 2019 due to enhancements made to the Medicare Advantage LTV estimation model. For the Individual, Family and Small Business segment, we recognized net adjustment revenue of $ 26.0 million for the year ended December 31, 2019, in response to observing longer plan duration than initially anticipated at the time of enrollment for these plans. During 2020, we expanded the enhanced statistical models to our remaining insurance products. Despite the impact of COVID-19 in 2020 and uncertainties regarding the Presidential election and the U.S. economy, we continued to observe stronger member retention rates in our LTV assessments 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 retention trends, we recognized a $ 33.1 million net adjustment for the Individual, Family and Small Business segment and a net adjustment of $ 5.7 million related to our Medicare segment for the year ended December 31, 2020. During 2021, despite the extension of the COVID-related special enrollment period through August 15, 2021 and an increase in subsidies to certain individuals who purchase qualified health plans, we continued to observe stronger member retention rates in our LTV assessments for the majority of the earlier period cohorts of certain products in our Individual, Family and Small Business segment. We recognized $ 30.2 million of net adjustment revenue for the Individual, Family and Small Business segment for the year ended December 31, 2021. In addition, we evaluated various market factors related to our Medicare segment and recorded a negative net adjustment of $ 8.4 million for the year ended December 31, 2021, primarily due to decline in LTV of Medicare Supplement and Medicare Part D prescription drug plans. 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. Note 3 – Supplemental Financial Statement Information Cash, Cash Equivalents, and Restricted Cash Our cash, cash equivalent, and restricted cash balances are summarized as follows (in thousands): December 31, 2021 December 31, 2020 Cash $ 33,253 $ 39,552 Cash equivalents 48,673 4,207 Cash and cash equivalents $ 81,926 $ 43,759 Restricted cash 3,239 3,354 Total cash, cash equivalents and restricted cash $ 85,165 $ 47,113 As of December 31, 2021 and 2020, we had $ 3.2 million and $ 3.4 million, respectively, of restricted cash which was classified as a non-current asset on our Consolidated Balance Sheets. This amount collateralizes letters of credit related to certain lease commitments. 105 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 December 31, 2021. Our contract assets and accounts receivable consisted of the following for the periods presented below (in thousands): December 31, 2021 December 31, 2020 Contract assets – commissions receivable – current $ 254,821 $ 219,153 Contract assets – commissions receivable – non-current 653,441 573,252 Accounts receivable 5,750 1,799 Total contract assets and accounts receivable $ 914,012 $ 794,204 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 Consolidated Statement of Comprehensive Loss. Subsequent to the adoption of ASC 326, we considered the impact of recent events and global economic conditions when evaluating the appropriate adjustments to our allowance for credit losses as of December 31, 2021. Determining the extent of these adjustments in the year ended December 31, 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. There were no allowance for doubtful accounts or credit losses for the year ended December 31, 2019. The changes in the allowance for credit losses for the year ended December 31, 2021 are summarized as follows (in thousands): December 31, 2021 Beginning balance $ 2,026 Net current period provision for expected credit losses 172 Ending balance $ 2,198 106 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Our contract assets – commission receivable activities, net of credit loss allowances are summarized as follows (in thousands): Year Ended December 31, 2021 Medicare Segment IFP/SMB Segment Total Beginning balance $ 739,637 $ 52,768 $ 792,405 Commission revenue from members approved during the period 437,738 25,078 462,816 Commission revenue from renewals of small business members during the period (1) — 8,564 8,564 Net commission revenue from members approved in prior periods ( 8,414 ) 30,153 21,739 Cash receipts ( 331,328 ) ( 45,762 ) ( 377,090 ) Net change in credit loss allowance ( 159 ) ( 13 ) ( 172 ) Ending balance $ 837,474 $ 70,788 $ 908,262 Year Ended December 31, 2020 Medicare Segment IFP Segment Total Beginning balance $ 550,922 $ 38,300 $ 589,222 Commission revenue from members approved during the period 440,722 21,971 462,693 Commission revenue from renewals of small business members during the period (1) — 6,727 6,727 Net commission revenue from members approved in prior periods 5,665 33,104 38,769 Cash receipts ( 255,781 ) ( 47,199 ) ( 302,980 ) Net change in credit loss allowance (2) ( 1,891 ) ( 135 ) ( 2,026 ) Ending balance $ 739,637 $ 52,768 $ 792,405 _______ (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. (2) 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 $ 0.5 million during the year ended December 31, 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 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 $ 0.9 million as of December 31, 2021. 107 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: December 31, 2021 December 31, 2020 Humana 25 % 21 % UnitedHealthCare (1) 23 % 21 % Aetna (1) 17 % 20 % Centene (1)(2) 10 % 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 December 31, 2021 and 2020. Prepaid Expenses and Other Current Assets – Our prepaid expenses and other current assets are summarized as of the periods presented below (in thousands): December 31, 2021 December 31, 2020 Prepaid expenses $ 11,379 $ 6,628 Prepaid maintenance contracts 6,246 7,715 Prepaid licenses 3,076 — Prepaid insurance 2,161 1,672 Others 922 646 Prepaid expenses and other current assets $ 23,784 $ 16,661 Property and Equipment – Our property and equipment are summarized as of the periods presented below (in thousands): December 31, 2021 December 31, 2020 Computer equipment and software $ 13,243 $ 20,121 Office equipment and furniture 6,854 6,292 Leasehold improvements 7,458 7,458 Property and equipment, gross 27,555 33,871 Less accumulated depreciation and amortization ( 15,450 ) ( 19,262 ) Property and equipment, net $ 12,105 $ 14,609 Depreciation and amortization expense related to property and equipment totaled $ 5.4 million, $ 3.7 million, and $ 3.0 million in the years ended December 31, 2021, 2020 and 2019, respectively. 108 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible Assets – The carrying amounts, accumulated amortization, net carrying value and weighted average remaining life of our definite-lived amortizable intangible assets, as well as our indefinite-lived intangible trademarks, are presented in the tables below (dollars in thousands, useful life in years): December 31, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Impairment Charges Net Carrying Amount Weighted-average remaining useful life Gross Carrying Amount Accumulated Amortization Net Carrying Amount Weighted-average remaining useful life Technology $ 2,000 $ ( 2,000 ) $ — $ — 0.0 $ 2,000 $ ( 1,945 ) $ 55 0.1 Pharmacy and customer relationships 9,500 ( 9,500 ) — — 0.0 9,500 ( 9,500 ) — 0.0 Trade names, trademarks and website addresses 5,700 ( 2,780 ) ( 2,920 ) — 6.1 5,700 ( 2,300 ) 3,400 7.1 Total intangible assets subject to amortization $ 17,200 $ ( 14,280 ) $ ( 2,920 ) — $ 17,200 $ ( 13,745 ) $ 3,455 Indefinite-lived trademarks and domain names 5,114 n/a ( 3,191 ) 1,923 Indefinite 5,114 n/a 5,114 Indefinite Intangible assets $ 1,923 $ 8,569 During the years ended December 31, 2021, 2020, and 2019, amortization expense related to intangible assets totaled $ 0.5 million, $ 1.5 million, and $ 2.2 million, respectively. We performed an annual assessment of impairment over our intangible assets, both definite-lived and indefinite-lived. Prior to our annual impairment assessment as of December 31, 2021, the carrying amount of our intangible assets was $ 8.0 million, primarily consisted of trade names, trade marks, and website address. Our assessment included a recoverability test for definite-lived intangible assets and a comparison of carrying value to the estimated fair value. The fair value of our intangible assets as of December 31, 2021 was estimated using a market approach for certain indefinite-lived intangible assets as well as using the expected future cash flow approach for our definite-lived intangible assets. Based our assessment, we determined that the fair value of our Medicare segment was below the carrying value as of December 31, 2021 primarily due to the recent change in our market valuation and financial performance. Therefore, we recorded a $ 6.1 million impairment charges on our Consolidated Statements of Comprehensive Income (Loss) related to our intangible assets. No intangible asset impairment was identified during the years ended either December 31, 2020 or 2019. 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. 109 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table is a summary of financial assets measured at fair value on a recurring basis and their classification within the fair value hierarchy (in thousands): December 31, 2021 Carrying Value Level 1 Level 2 Level 3 Total Assets Cash equivalents Money market funds $ 9,217 $ 9,217 $ — $ — $ 9,217 Commercial paper 39,456 — 39,456 — 39,456 Short-term marketable securities Commercial paper 38,801 — 38,801 — 38,801 Corporate bond 2,505 — 2,505 — 2,505 Total assets measured at fair value $ 89,979 $ 9,217 $ 80,762 $ — $ 89,979 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 Commercial paper 14,197 — 14,197 — 14,197 Agency bonds 35,423 — 35,423 — 35,423 Total assets measured at fair value $ 53,827 $ 4,207 $ 49,620 $ — $ 53,827 Our cash equivalents were invested in money market funds and commercial paper with original maturity of 90 days or less were classified as Level 1 and Level 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 included our available for sale marketable securities, which consisted of commercial paper and corporate bonds with maturity 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 credit rating of AA or equivalent by S&P Rating and Moody's Investor Services. There were no transfers between the hierarchy levels in either of the years ended December 31, 2021 or 2020. The following table summarizes our cash equivalents and available-for-sale debt securities by contractual maturity (in thousands): As of December 31, 2021 As of December 31, 2020 Amortized Cost Fair Value Amortized Cost Fair Value Due in 1 year $ 89,988 $ 89,979 $ 53,788 $ 53,827 110 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unrealized gains and losses on available-for-sale debt securities that are not credit related are included in accumulated other comprehensive income (loss) and summarized as follows as of December 31, 2021: Amortized Cost Unrealized Gain Unrealized Loss Fair Value Cash equivalents Money market funds $ 9,217 $ — $ — $ 9,217 Commercial paper 39,458 — ( 2 ) 39,456 Short-term marketable securities Commercial paper 38,808 — ( 7 ) 38,801 Corporate bond 2,505 — — 2,505 Total $ 89,988 $ — $ ( 9 ) $ 89,979 As of December 31, 2021, there were thirty-six 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 year ended December 31, 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. Earnout Liabilities Earnout liabilities in connection with our GoMedigap acquisition in 2018 were recognized at fair value. We measure the earnout liability using internally developed assumptions; therefore, it is classified as Level 3. The fair value of the earnout liability was measured using probability-weighted analysis and is discounted using a rate that appropriately captures the risk associated with the obligation. The fair value of the earnout liability as of December 31, 2019 was adjusted to the amount that we settled in January 2020. 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. Our earnout liability activities are summarized as follows (in thousands): Balance as of December 31, 2019 $ 37,273 Settlements ( 37,273 ) Balance as of December 31, 2020 $ — 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 payment, which consisted of $ 8.8 million in cash and 294,608 shares of our common stock with a value of $ 28.5 million. The $ 28.5 million and $ 17.3 million of the earnout payments in 2020 and 2019, respectively, were non-cash financing activities since common stock was used to settle these liabilities. There was no activity related to earnout liabilities in 2021. 111 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2.1 million shares of common stock, which included the exercise in full of the underwriters’ option to purchase 0.3 million additional shares of common stock, at a price to the public of $ 115.00 per share in March 2020. 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. Pursuant to the effective registration statement which was filed on December 17, 2018, and amended on January 22, 2019, we entered into an underwriting agreement to issue 2.4 million shares of common stock, which included the exercise in full of the underwriters’ option to purchase 0.4 million additional shares of common stock, at a price to the public of $ 48.50 per share in January 2019, for a total of 2.8 million shares issued in connection with the offering. Net proceeds from the offering were approximately $ 126.1 million after deducting underwriting discounts, commissions and estimated expenses of the offering. We used the net proceeds of the offering for general corporate purposes, including working capital. Common Stock – On all matters submitted to our stockholders for vote, our common stockholders are entitled to one vote per share, voting together as a single class, and do not have cumulative voting rights. Accordingly, the holders of a majority of the shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose. Subject to preferences that may apply to any shares of preferred stock outstanding, the holders of common stock are entitled to share equally in any dividends, when and if declared by our board of directors. Upon the occurrence of a liquidation, dissolution or winding-up, the holders of common stock are entitled to share equally in all assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding preferred stock. Holders of common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking funds provisions applicable to the common stock. Shares Reserved – We generally issue previously unissued common stock upon the exercise of stock options, the vesting of restricted stock units and upon granting of restricted common stock awards; however we may reissue previously acquired treasury shares to satisfy these future issuances. Shares of authorized but unissued common stock reserved for future issuance were as follows (in thousands): December 31, 2021 December 31, 2020 Stock options issued and outstanding 424 527 Restricted stock units issued and outstanding 2,384 2,370 Shares available for grant 1,159 1,509 Total shares reserved 3,967 4,406 Stock Plans – On June 12, 2014, upon approval at the Annual Meeting of Stockholders, we adopted the 2014 Equity Incentive Plan (the “2014 Plan”) with 4.5 million shares authorized for issuance. The 2014 Plan does not include an evergreen provision to automatically increase the number of shares available under it and increases in the number of shares authorized for issuance under the 2014 Plan require stockholder approval. Also, under the 2014 Plan the following shares are not recycled for future grant under the 2014 Plan: (i) shares used in connection with the exercise of an option and/or stock appreciation right to pay the exercise price or purchase price of such award or satisfy applicable tax 112 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS withholding obligations; and (ii) the gross number of shares subject to stock appreciation rights that are exercised. Furthermore, the 2014 Plan included a provision that prohibits repricing of outstanding stock options or stock appreciation rights and formalized and updated procedures to qualify awards as “performance-based” compensation under Section 162(m) of the Internal Revenue Code in order to preserve full tax deductibility of such awards. In 2019, our stockholders approved an amendment to the 2014 Equity Incentive Plan to increase the maximum number of shares that may be issued by 2.5 million shares. Our stock options granted under the 2014 Plan generally vest over four years at a rate of 25 % after one year and 1/48th per month thereafter. Stock options granted under the 2014 Plan generally expire after seven years from the date of grant. We have granted market-based and performance-based restricted stock units to our executive officers and certain members of our senior management team. For market-based restricted stock units, each represents a contingent right to receive a share of our common stock upon the attainment of certain stock prices generally over a four-year performance period. These awards generally vest on the one-year anniversary of the date of achievement, subject to the employee's continued service through the vesting date. Compensation expense related to these awards is recognized over the requisite service period. For performance-based restricted stock units, each represents a contingent right to receive a share of our common stock upon the attainment of certain financial targets over a trailing 12 month performance period. These awards would vest in the middle of 2022, subject to achievement of performance targets and continued service through the vesting date. Compensation expense related to these awards is recognized over the requisite service period if the performance criteria is probable of being achieved. Achievement of these performance conditions was not probable as of December 31, 2021 and no expense has been recognized for these awards. However, such determination is subject to the discretion of the Company's compensation committee and these awards remain outstanding as of December 31, 2021. 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 our board of directors 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 our stockholder-approved Amended and Restated 2014 Equity Incentive Plan. As of December 31, 2021, 390,584 shares were issued under the 2021 Inducement Plan. 113 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes activity under our 2014 Plan and 2021 Inducement Plans for the year ended December 31, 2021 (in thousands): Beginning balance (1) 1,509 Additional shares authorized 410 Restricted stock units granted (2) ( 1,406 ) Options granted ( 200 ) Restricted stock units cancelled (3) 815 Options cancelled 31 Ending balance 1,159 _______ (1) Shares available for grant do not include treasury stock shares that could be granted if we determined to do so. (2) Includes grants of restricted stock units with service, performance-based or market-based vesting criteria. (3) Includes cancelled restricted stock units with service, performance-based or market-based vesting criteria. The following table summarizes stock option activity (in thousands, except weighted-average exercise price and weighted-average remaining contractual life data): Number of Stock Options (1) Weighted Average Exercise Price Weighted-Average Remaining Contractual Life (years) Aggregate Intrinsic Value (2) Outstanding as of December 31, 2020 527 $ 18.88 3.3 $ 29,582 Granted 200 $ 41.03 Exercised ( 272 ) $ 18.04 Cancelled ( 31 ) $ 29.70 Outstanding balance as of December 31, 2021 424 $ 29.07 3.8 $ 2,053 Vested and expected to vest as of December 31, 2021 369 $ 27.28 3.3 $ 2,053 Exercisable as of December 31, 2021 216 $ 17.63 1.0 $ 2,045 _______ (1) Includes certain stock options with service, performance-based or market-based vesting criteria. (2) The aggregate intrinsic value is calculated as the product between eHealth’s closing stock price as of December 31, 2021 and 2020 and the exercise price of in-the-money options as of those dates. The following table provides information pertaining to our stock options for the years presented below (in thousands, except weighted-average fair values): Year Ended December 31, 2021 2020 2019 Weighted average fair value of options granted $ 41.03 n/a $ 33.19 Total fair value of options vested $ 797 $ 1,367 $ 2,924 Intrinsic value of options exercised $ 5,182 $ 8,127 $ 19,890 114 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes restricted stock unit activity (in thousands, except weighted-average grant date fair value and weighted-average remaining contractual life data): Number of Restricted Stock Units (1) Weighted-Average Grant Date Fair Value Weighted-Average Remaining Service Period Aggregate Intrinsic Value (2) Outstanding as of December 31, 2020 2,370 $ 60.44 1.8 $ 177,746 Granted 1,406 $ 47.31 Vested ( 577 ) $ 53.48 Cancelled ( 815 ) $ 74.54 Outstanding as of December 31, 2021 2,384 $ 49.56 1.6 $ 60,789 _______ (1) Includes certain restricted stock units with service, performance-based or market-based vesting criteria. (2) The aggregate intrinsic value is calculated as the difference of our closing stock price as of December 31, 2021 and 2020 multiplied by the number of restricted stock units outstanding as of December 31, 2021 and 2020, respectively. Stock Repurchase Programs – We had no stock repurchase activity during the year ended December 31, 2021. In addition to 10.7 million shares repurchased under our previous repurchase programs, we have in treasury 1.3 million shares as of December 31, 2021 that were previously surrendered by employees to satisfy tax withholding due in connection with the vesting of certain restricted stock units. As of December 31, 2021 and 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. Stock-Based Compensation Expense – The fair value of stock options granted to employees was estimated using the Black-Scholes option-pricing model and with the following weighted average assumptions for the years presented below, except for 2020 in which we did not have any options granted: Year Ended December 31, 2021 2020 2019 Expected term (years) 7.0 n/a 4.3 Expected volatility 69.1 % n/a 65.3 % Expected dividend yield — % n/a — % Risk-free interest rate 1.3 % n/a 2.1 % 115 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted-average fair value of the market-based restricted stock units was determined using the Monte Carlo simulation model using the following weighted average assumptions: Year Ended December 31, 2021 2020 2019 Expected term (years) 2.0 3.5 1.4 Expected volatility 66.0 % 64.4 % 57.8 % Expected dividend yield — % — % — % Risk-free interest rate 0.9 % 0.3 % 2.4 % Weighted-average grant date fair value $ 46.36 $ 93.85 $ 58.16 We estimate a forfeiture rate to calculate the stock-based compensation for our awards. We evaluate the appropriateness of the forfeiture rate based on historical forfeiture, analysis of employee turnover, and other factors. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. 2020 Employee Share Purchase Plan – Our board of directors adopted in March 2020 and our stockholders approved in June 2020 the 2020 Employee Stock Purchase Plan (“ESPP”). A total of 500,000 shares of our common stock are available for sale under the ESPP. Eligible employees can purchase shares of our common stock based on a percentage of their compensation subject to certain limits. The purchase price per share is equal to the lower of 85 % of the fair market value of our common stock on the offering date or the purchase date. Employees purchased 99,801 shares of common stock under our ESPP in 2021. No shares of common stock were purchased under our ESPP in 2020. There were 400,199 shares remaining for purchase under our ESPP as of December 31, 2021. During the year ended December 31, 2021, we recognized $ 1.6 million in compensation cost related to our ESPP in our consolidated statement of operations. As of December 31, 2021, the unrecognized compensation cost related to our ESPP is $ 0.6 million, which is expected to be recognized over a weighted average period of 0.4 years. The following table summarizes stock-based compensation expense recognized for the years presented below (in thousands): Year Ended December 31, 2021 2020 2019 Common stock options $ 707 $ 1,097 $ 2,215 Restricted stock units* 30,512 23,729 20,355 Employee stock purchase plan 1,638 346 — Total stock-based compensation expense $ 32,857 $ 25,172 $ 22,570 _______ * Amounts include market-based and performance-based RSUs . 116 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes stock-based compensation expense by operating function for the years presented below (in thousands): Year Ended December 31, 2021 2020 2019 Marketing and advertising $ 8,660 $ 5,102 $ 4,230 Customer care and enrollment 2,836 2,723 1,451 Technology and content 10,013 5,460 3,611 General and administrative 11,348 11,887 13,278 Total stock-based compensation expense 32,857 25,172 22,570 Amount capitalized for internal-use software 2,621 2,007 — Total stock-based compensation $ 35,478 $ 27,179 $ 22,570 During the three months ended December 31, 2020, we made an adjustment to reduce stock-based compensation expense by $ 5.9 million related to our performance-based restricted stock awards due to attainment of certain performance goals deemed not probable based on our latest estimates. The impact of this adjustment was $ 0.23 and $ 0.22 per basic and diluted share, respectively, for the year ended December 31, 2020. For the year ended December 31, 2021, there was a total of $ 2.6 million stock-based compensation expense capitalized in the internal-use software and website development costs classified under Other assets, which represents a noncash investing activity. As of December 31, 2021, there was $ 1.0 million of total unamortized compensation cost, net of estimated forfeitures, related to stock options, expected to be recognized over a weighted average period of 3.2 years. As of December 31, 2021, there was $ 51.7 million of total unamortized compensation cost, net of estimated forfeitures, related to restricted stock units, expected to be recognized over a weighted average period of 2.7 years. 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 shares that have 117 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 our board of directors 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 our board of directors if we fail to maintain certain levels of commissions receivable and liquidity as further discussed below. 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 118 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 our board of directors, 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 certain indebtedness as specified 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 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 December 31, 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 December 31, 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 3.0 million shares of common stock as of December 31, 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 12,206 Change in preferred stock redemption value 6,361 Balance as of December 31, 2021 $ 232,592 119 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 – Net Income (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 income (loss) attributable to common stockholders per share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (loss) attributable to common stockholders per share is computed by dividing the net income (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 income (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”). The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts): Year Ended December 31, 2021 2020 2019 Basic Net income (loss) attributable to common stockholders $ ( 122,942 ) $ 45,450 $ 66,887 Shares used in per share calculation – basic 26,781 26,025 23,075 Net income (loss) attributable to common stockholders per share – basic $ ( 4.59 ) $ 1.75 $ 2.90 Diluted: Net income (loss) attributable to common stockholders $ ( 122,942 ) $ 45,450 $ 66,887 Shares used in per share calculation – basic 26,781 26,025 23,075 Dilutive effect of common stock — 989 1,464 Shares used in diluted share calculation 26,781 27,014 24,539 Net income (loss) attributable to common stockholders per share – diluted $ ( 4.59 ) $ 1.68 $ 2.73 120 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For each of the years ended December 31, 2021, 2020 and 2019, we had securities outstanding that could potentially dilute net income per share, but the shares from the assumed conversion or exercise of these securities were excluded in the computation of diluted net income per share as their effect would have been anti-dilutive. The number of weighted-average outstanding anti-dilutive shares that were excluded from the computation of diluted net income per share consisted of the following (in thousands): Year Ended December 31, 2021 2020 2019 Convertible preferred stock 1,905 — — Restricted stock units 1,078 151 41 ESPP 29 — — Common stock options 333 — 11 Total 3,345 151 52 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. Our future minimum payments under non-cancellable contractual service and licensing obligations as of December 31, 2021 (in thousands): For the Years Ending December 31, 2022 $ 10,493 2023 8,267 2024 2,470 2025 229 2026 — Thereafter — Total $ 21,459 121 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. We accrued approximately $ 1.2 million as of December 31, 2020 for amounts we believed to be payable for certain legal proceedings. The accrued amount was settled and paid in January 2021. There was no material additional litigation-related accrual recorded during the year ended or as of December 31, 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 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. On November 11, 2021, Plaintiff’s counsel filed a suggestion of death with respect to lead plaintiff Billy White. The parties stipulated to a schedule for the lead plaintiff process to be re-opened, which was so-ordered by the Court on January 10, 2022. Plaintiff’s counsel published notice regarding the appointment of a new lead plaintiff on January 17, 2022, and motions for appointment of lead plaintiff are due no later than 60 days after such publication. Derivative Actions – On July 7, 2020 and October 13, 2020, two derivative lawsuits were filed against our 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 of directors 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 122 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. In December 2021, the parties entered into a stipulation to further stay the Badwal and Chernet actions pending the appointment of a lead plaintiff in the consolidated action, which was so ordered by the Court on December 14, 2021. 123 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Segment and Geographic Information Operating Segments The results of our operating segments are summarized for the periods presented below (in thousands): Year Ended December 31, 2021 2020 2019 Revenue: Medicare $ 471,217 $ 516,762 $ 446,961 Individual, Family and Small Business 66,982 66,012 59,240 Total revenue $ 538,199 $ 582,774 $ 506,201 Segment profit (loss): Medicare segment profit (loss) (1) $ ( 12,079 ) $ 108,787 $ 158,061 Individual, Family and Small Business segment profit (1) 45,705 40,315 24,361 Total segment profit (loss) 33,626 149,102 182,422 Corporate ( 56,325 ) ( 57,664 ) ( 45,374 ) Stock-based compensation expense ( 32,857 ) ( 25,172 ) ( 22,570 ) Depreciation and amortization (2) ( 18,331 ) ( 11,450 ) ( 6,803 ) Change in fair value of earnout liability — — ( 24,079 ) Impairment charges ( 46,344 ) — — Restructuring and reorganization charges ( 4,878 ) — — Amortization of intangible assets ( 536 ) ( 1,493 ) ( 2,187 ) Other income, net 755 666 $ 2,090 Income (loss) before income taxes $ ( 124,890 ) $ 53,989 $ 83,499 (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 were $ 12.9 million, $ 7.8 million and $ 3.8 million for the years ended December 31, 2021, 2020 and 2019, 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. 124 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Geographic Information Our long-lived assets consist primarily 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): December 31, 2021 December 31, 2020 United States $ 45,134 $ 40,500 China 595 565 Total $ 45,729 $ 41,065 Significant Customers Substantially all revenue for the years ended December 31, 2021, 2020 and 2019 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue are summarized as follows: Year Ended December 31, 2021 2020 2019 UnitedHealthcare (1) 20 % 21 % 19 % Humana 19 % 22 % 26 % Aetna (1) 18 % 15 % 17 % Centene (1)(2) 12 % 10 % 2 % _______ (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 years ended December 31, 2021 and 2020. Note 10 – Leases We account for leases in accordance with Accounting Standards Codification Topic 842, Leases. We determine if an arrangement is a lease at inception. Our lease portfolio is primarily composed of operating leases for corporate offices and as of January 1, 2019 with the adoption of the new guidance for leasing arrangements, are included in operating lease right-of-use (“ROU”) assets and lease liabilities on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company's leases generally do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date. In determining the present value of lease payments, we utilized the assistance of third-party specialists to assist us in determining our yield curve based upon our credit rating, lease term and adjustment for security. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. 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 125 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $ 7.7 million, $ 7.8 million, and $ 6.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. We have a sublease agreement for our office space in Mountain View, California to sublease to a third party, which commenced in December 2018 and will expire in July 2023. We recorded $ 1.2 million and $ 1.2 million of sublease income during the years ended December 31, 2021 and 2020, respectively. The following table summarizes the lease-related assets and liabilities recorded on the Consolidated Balance Sheet for the periods presented below (in thousands): December 31, 2021 December 31, 2020 Operating lease right-of-use assets $ 37,373 $ 42,558 Lease liabilities – current $ 5,543 $ 5,192 Lease liabilities – non-current 35,826 41,369 Total operating lease liabilities $ 41,369 $ 46,561 Supplemental information related to leases are as follows (in thousands): December 31, 2021 December 31, 2020 Operating cash outflows from operating leases $ 7,640 $ 7,090 Non-cash investing activities relating to operating lease right-of-use assets $ — $ 10,919 Weighted-average remaining lease term of operating leases 6.3 years 7.2 years Weighted-average discount rate used to recognize operating lease right-of-use-assets 5.4 % 5.4 % As of December 31, 2021, maturities of operating lease liabilities are as follows (in thousands): Year ending December 31, 2022 $ 7,701 2023 8,033 2024 7,832 2025 8,009 2026 6,739 Thereafter 12,668 Total lease payments (1) 50,982 Less imputed interest ( 9,613 ) Total $ 41,369 _______ (1) Noncancellable sublease income for the years ending December 31, 2022 and 2023 of $ 0.4 million and $ 0.4 million, respectively, is not included in the table above. 126 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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): December 31, 2021 Beginning balance $ — Restructuring and reorganization charges 4,878 Payments ( 4,704 ) Adjustment ( 28 ) Ending balance $ 146 In February 2021, we eliminated 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 year ended December 31, 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 of directors and chief executive officer, effective October 31, 2021. We recognized $ 2.4 million in severance costs related to his separation in 2021. Stock-based compensation expense for the year ended December 31, 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 Consolidated Statement of Comprehensive Income (Loss). 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 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. 127 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 this 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 $ 0.4 million and $ 0.7 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, we had no outstanding borrowings under our revolving credit facility. On February 28, 2022, we terminated our Credit Agreement with RBC and entered into a term loan credit agreement with Blue Torch Finance LLC, as administrative agent and collateral agent, and the other lenders party thereto (the “Term Loan Credit Agreement”). This loan agreement provides for a $ 70.0 million secured term loan, which term loans were made available to us on February 28, 2022. The proceeds of the loans under the Term Loan Credit Agreement may be used for working capital and general corporate purposes, refinance our Credit Agreement with RBC and to pay fees and expenses in connection with the entry into the Term Loan Credit Agreement. We expect to incur closing costs totaling approximately $ 5.0 million, which will be amortized over the term of this agreement. 128 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 13 – Income Taxes The components of our income (loss) before provision (benefit) for income taxes were as follows (in thousands): Year Ended December 31, 2021 2020 2019 United States $ ( 125,876 ) $ 53,078 $ 82,391 Foreign 986 911 1,108 Income (loss) before income taxes $ ( 124,890 ) $ 53,989 $ 83,499 The federal and state income tax provision (benefit) is summarized as follows (in thousands): Year Ended December 31, 2021 2020 2019 Current: Federal $ — $ — $ — State 858 88 75 Foreign 148 ( 361 ) 326 Total current 1,006 ( 273 ) 401 Deferred: Federal ( 20,696 ) 7,303 13,594 State ( 825 ) 1,245 2,635 Foreign — 264 ( 18 ) Total deferred ( 21,521 ) 8,812 16,211 Provision for (benefit from) income taxes $ ( 20,515 ) $ 8,539 $ 16,612 In 2021, we had a worldwide consolidated loss before tax of $ 124.9 million, and a tax benefit of $ 20.5 million, with an annual effective tax rate of 16.4 %. 129 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effective tax rate of our provision for income taxes differs from the federal statutory rate as follows: Year Ended December 31, 2021 2020 2019 Statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 0.4 2.2 2.6 Stock-based compensation shortfalls (windfalls), net ( 1.5 ) ( 7.9 ) ( 7.0 ) Non-deductible stock-based compensation ( 0.8 ) 2.2 2.5 Non-deductible lobbying expenses ( 0.3 ) 0.8 1.0 Research and development credits 1.0 ( 2.2 ) ( 0.9 ) Changes in valuation allowance ( 0.6 ) 0.1 — Foreign income tax and income inclusion ( 0.1 ) ( 0.7 ) 0.1 Non-deductible parking expense — — 0.2 Goodwill impairment ( 2.4 ) — — Other permanent differences ( 0.3 ) 0.3 0.4 Effective tax rate 16.4 % 15.8 % 19.9 % Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, together with operating losses and tax credit carryforwards. The tax effects of significant items comprising our deferred taxes as of December 31, 2021 and 2020 were as follows (in thousands): December 31, 2021 December 31, 2020 Deferred tax assets: Net operating losses $ 149,689 $ 104,860 Accruals and reserves 1,628 2,557 Operating lease liabilities 10,146 11,368 Intangible assets 7,480 2,592 Research and development credits carryovers 9,954 7,805 Stock-based compensation 4,642 4,500 Fixed assets 402 111 Other 394 176 Total deferred tax assets 184,335 133,969 Valuation allowance ( 3,214 ) ( 2,479 ) Total deferred tax assets net of valuation allowance 181,121 131,490 Deferred tax liabilities: Commissions receivable ( 222,751 ) ( 193,416 ) Right-of-use assets ( 9,166 ) ( 10,391 ) Total deferred tax liabilities ( 231,917 ) ( 203,807 ) Net deferred tax liabilities $ ( 50,796 ) $ ( 72,317 ) 130 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. During the year ended December 31, 2021, a valuation allowance of $ 3.2 million was recorded against California net deferred tax assets. The valuation allowance was recorded as a result of increased uncertainty regarding our future taxable income and a lack of sources of other taxable income to realize our net deferred tax assets in California. The remaining deferred tax assets are supported by the reversal of deferred tax liabilities. The change in our valuation allowance is summarized as follows for the years ended (in thousands): Deferred Tax Assets - Valuation Allowance Balance at beginning of year Provision for income taxes Write-offs and Deductions Balance at end of year December 31, 2021 $ 2,479 $ 3,150 $ ( 2,415 ) $ 3,214 December 31, 2020 2,407 72 — 2,479 December 31, 2019 2,407 — — 2,407 The net operating loss and tax credit carryforwards as of December 31, 2021 are summarized as follows (in thousands): Amount Expires Net operating losses, federal (with expiration) $ 39,194 2034-2037 Net operating losses, federal (without expiration) 573,222 Indefinite Net operating losses, state (with expiration) 378,582 2033-2041 Tax credits, federal 9,559 2022-2041 Tax credits, state 9,465 n/a Utilization of the net operating loss carryforwards and credits may be subject to a substantial annual limitation due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code and similar state provisions. These ownership change limitations may limit the amount of net operating loss carryforwards and other tax attributes that can be utilized annually to offset future taxable income and tax, respectively. 131 EHEALTH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the beginning and ending amount of our unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2021 2020 2019 Beginning balance $ 6,330 $ 4,709 $ 3,740 Additions for tax positions of prior years 646 — — Lapse of statute of limitations ( 64 ) ( 8 ) — Additions based on tax positions related to the current year 1,639 1,629 969 Ending balance $ 8,551 $ 6,330 $ 4,709 As of December 31, 2021, the total amount of gross unrecognized tax benefits was $ 8.6 million, of which $ 7.6 million, if recognized, would affect our effective tax rate. As of December 31, 2020, the total amount of gross unrecognized tax benefits was $ 6.3 million, of which $ 5.7 million, if recognized, would affect our effective tax rate. We record interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2021, the amount accrued for estimated interest related to uncertain tax positions was $ 0.1 million and the amount accrued for estimated penalties related to uncertain tax positions was $ 0.1 million. Included in the balance of income tax liabilities and accrued interest as of December 31, 2021 is an immaterial amount related to tax positions for which it is reasonably possible that the statute of limitations will expire in various jurisdictions and income tax exams will close within the next 12 months. We are subject to taxation in various jurisdictions, including federal, state and foreign. Our federal and state income tax returns are generally not subject to examination by taxing authorities for fiscal years before 2002 due to our credit carryforwards. 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 Consolidated Financial Statements for the year ended December 31, 2020. 132 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.