eHealth, Inc. 10-Q

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis together with our condensed consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”). This discussion and analysis contains forward-looking statements, which involve risks and uncertainties. As a result of many factors, such as those described under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report, our actual results may differ materially from those anticipated in these forward-looking statements. Overview We are a leading private online health insurance marketplace with a technology and service platform that provides consumer engagement, education and health insurance enrollment solutions. Our mission is to expertly guide consumers through their health insurance enrollment and related options, when, where and how they prefer. Our platform leverages technology to solve a critical problem in a large and growing market by aiding consumers in what has traditionally been a complex, confusing, and opaque health insurance purchasing process. Our omnichannel consumer engagement platform differentiates our offering from other brokers and enables consumers to use our services online, by telephone with a licensed insurance agent, or through a hybrid online assisted interaction that includes live agent chat and co-browsing capabilities. We have created a consumer-centric marketplace that offers consumers a broad choice of insurance products that includes thousands of Medicare Advantage, Medicare Supplement, Medicare Part D prescription drug, individual, family, small business and other ancillary health insurance products from approximately 200 health insurance carriers across all fifty states and the District of Columbia. Our plan recommendation tool curates this broad plan selection by analyzing customer health-related information against plan data for insurance coverage fit. This tool is supported by a unified data platform and is available to our ecommerce customers and our licensed agents. We strive to be the most trusted partner to the consumer in their life's journey through the health insurance market. Business Update Beginning in the fourth quarter of 2021, the Company began to execute significant strategic and management changes to transform our business and adapt to the evolving needs of our customers in order to position ourselves for long-term success. In 2022, we purposefully slowed down our enrollment volume and revenue growth as we worked to implement a number of transformation initiatives aimed at increasing the effectiveness of our sales and marketing organizations and further enhancing consumer experience, as well as rationalizing our cost structure. As a result, we entered the first quarter of 2023 on a significantly improved cost foundation compared to the same period prior year. In the first quarter of 2023, we continued to execute our multi-year transformation plan with an emphasis on enrollment quality, member experience, and engagement built around audience segmentation and targeting, differentiated messaging based on our unique value proposition and gradual scaling of our direct and strategic partner marketing channels as we reduce our reliance on lead aggregators. Over the last several months, we have achieved significant improvement in our conversion rates, member retention and Complaint Tracking Module scores. We plan to continue improving customer experience and conversion rates across our entire omnichannel platform, driven by continued agent and technology enhancements. We continue to leverage our technology leadership, carrier relationships and distribution capabilities to pursue the diversification of our business and revenue base, which will include investing for growth in existing product lines outside of the core Medicare Advantage broker-of-record business, as well as adding new products and services and accessing adjacent markets within the broader health insurance industry. 26 Table of Contents Summary of Selected Metrics We rely upon certain metrics to estimate and recognize commission revenue, evaluate our business performance and facilitate strategic planning. Our commission revenue is influenced by a number of factors including but not limited to: • the number of individuals on applications for Medicare-related, individual and family, small business and ancillary health insurance plans that are approved by the relevant health insurance carriers; • the number of approved members for Medicare-related, individual and family, small business and ancillary health insurance plans from whom we have received an initial commission payment; and • the constrained lifetime value (“LTV”), of approved members for Medicare-related, individual and family and ancillary health insurance plans we sell, as well as the estimated annual value of approved members for small business plans we sell. Approved Members Approved members represent the number of individuals on submitted applications that were approved by the relevant insurance carrier for the identified product during the current period. The applications may be submitted in either the current period or prior periods. Not all approved members ultimately become paying members. The following table shows approved members by product for the periods presented: Three Months Ended March 31, % Change 2023 2022 Medicare Medicare Advantage 60,451 82,431 (27) % Medicare Supplement 4,585 6,556 (30) % Medicare Part D 3,846 6,823 (44) % Total Medicare 68,882 95,810 (28) % Individual and Family 10,099 9,801 3 % Ancillary 16,656 18,970 (12) % Small Business 1,939 2,514 (23) % Total Approved Members 97,576 127,095 (23) % Three Months Ended March 31, 2023 and 2022 – Total Medicare approved members decreased 28% in the three months ended March 31, 2023 compared to the same period in 2022. This decrease was attributable to a decline in approved members across all Medicare products that we market including Medicare Advantage, Medicare Supplement, and Medicare Part D prescription drug plans. This decline was driven primarily by a decrease in submitted applications as a result of reduced member acquisition spend including marketing and customer care and enrollment compared to the same period prior year as we focused on enrollments with the highest unit margins and de-emphasized unprofitable channels. Individual and family plan approved members grew 3% in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to a 20% increase in non-qualified health plans from individual coverage health reimbursement arrangement opportunities in 2023. Ancillary product approved members declined 12% in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to declines in approved members across most ancillary insurance products. Small business group health insurance approved members declined 23% in the three months ended March 31, 2023 compared to the same period in 2022 reflecting the continued shift of our focus away from the sale of small business products. 27 Table of Contents Estimated Constrained Lifetime Value of Commissions Per Approved Member The following table shows our estimated constrained LTV of commissions per approved member by product for the periods presented below: Three Months Ended March 31, % Change 2023 2022 Medicare (1) (2) Medicare Advantage $ 901 $ 948 (5) % Medicare Supplement 880 927 (5) % Medicare Part D 202 213 (5) % Individual and Family (1) Non-Qualified Health Plans 400 330 21 % Qualified Health Plans 387 302 28 % Ancillary (1) Short-term 187 182 3 % Dental 110 104 6 % Vision 70 62 13 % Small Business (1) 233 198 18 % __________ (1) Constrained LTV of commissions per approved member for Medicare, individual and family and ancillary plans represents commissions estimated to be collected over the estimated life of an approved member’s plan after applying constraints in accordance with our revenue recognition policy. Constrained LTV of commissions per approved member for small business represents the estimated commissions we expect to collect from the plan over the following twelve months. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, estimated average plan duration, the regulatory environment, and cancellations of insurance plans offered by health insurance carriers with which we have a relationship and applied constraints. The constraints are applied to help ensure that commissions estimated to be collected over the estimated life of 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. These factors may result in varying values from period to period. For additional information on constrained LTV, see " Critical Accounting Policies and Estimates " in our Annual Report on Form 10-K for the year ended December 31, 2022. (2) The constraints for all Medicare products remained the same during the three months ended March 31, 2023, as compared to the same period in the prior year. Medicare The constrained LTV of commissions per approved member declined by 5% for all Medicare product plans during the three months ended March 31, 2023 compared to the same period in 2022. The decrease was driven primarily by lower retention in all products, partially offset by increased contracted rates and improved quality metrics. Individual and Family, Ancillary and Small Business The constrained LTV of commissions per non-qualified health plan approved member increased 21% and qualified health plan approved member increased 28% during the three months ended March 31, 2023 compared to the same period in 2022. The increase was primarily due to more stable retention observations and an increase in estimated average plan duration. The constrained LTV of commissions per approved member for short-term, dental, vision, and small business insurance plans increased by 3%, 6%, 13% and 18%, respectively, during the three months ended March 31, 2023 compared with the same period in 2022 due to improved retention. The increase for small business was also due to higher commissions per group. 28 Table of Contents Estimated Membership Estimated membership represents the estimated number of members active as of the date indicated based on the number of members for whom we have received or applied a commission payment during the period of estimation. The following table shows estimated membership as of the periods presented below: As of March 31, % Change 2023 2022 Medicare (1) Medicare Advantage 577,500 585,824 (1) % Medicare Supplement 94,813 100,006 (5) % Medicare Part D 212,183 219,801 (3) % Total Medicare 884,496 905,631 (2) % Individual and Family (1) 98,983 104,849 (6) % Ancillary (1) 206,610 229,284 (10) % Small Business (2) 47,531 47,876 (1) % Total Estimated Membership 1,237,620 1,287,640 (4) % __________________ (1) To estimate the number of members on Medicare-related, individual and family, and ancillary health insurance plans, we take the respective sum of (i) the number of members for whom we have received or applied a commission payment for a month that may be up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and for estimated member cancellations through the date of the estimate). To the extent we determine through confirmations from a health insurance carrier that a commission payment is delayed or is inaccurate as of the date of estimation, we adjust the estimated membership to also reflect the number of members for whom we expect to receive or to refund a commission payment. Further, to the extent we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. For ancillary health insurance plans, the one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers. (2) To estimate the number of members on small business health insurance plans, we use the number of initial members at the time the group was approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported. A member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members. Health insurance carriers bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their policies do so by discontinuing their premium payments to the carrier or notifying the carrier directly and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date. After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior 29 Table of Contents period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. If we experience a significant variance in historical membership as compared to our initial estimates, while we keep the prior period data consistent with previously reported amounts, we may provide the updated information in other communications or disclosures. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay, we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Various circumstances could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate. Total Medicare estimated membership as of March 31, 2023 decreased 2% compared to estimated membership as of March 31, 2022 due to a decline across all Medicare products. The overall decline in Medicare estimated membership was primarily due to a decrease in overall Medicare approved applications. Individual and family plan estimated membership as of March 31, 2023 declined 6% compared to estimated membership as of March 31, 2022 due to a decrease in applications. Ancillary plan estimated membership as of March 31, 2023 declined 10% compared to estimated membership as of March 31, 2022 primarily as a result of the decline in applications across all ancillary plans. Member Acquisition Marketing initiatives are an important component of our strategy to increase revenue and are primarily designed to encourage consumers to complete an application for health insurance. Variable marketing costs represent direct costs incurred in member acquisition from our direct, marketing partners and online advertising channels. Variable marketing costs exclude fixed overhead costs, such as personnel related costs, consulting expenses, facilities and other operating costs allocated to the marketing and advertising department. In addition, we incur customer care and enrollment (“CC&E”) expenses in assisting applicants during the enrollment process. The numerator used to calculate each metric is the portion of the respective operating expenses for marketing and advertising and CC&E that is directly related to member acquisition for our sale of Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans (collectively, the “Medicare Plans”) and for all individual and family major medical plans and short-term health insurance plans (collectively, “IFP Plans”), respectively. The denominator used to calculate each metric is based on a derived metric that represents the relative value of the new members acquired. For Medicare Plans, we call this derived metric Medicare Advantage (“MA”)-equivalent approved members, and for IFP Plans, we call this derived metric IFP-equivalent approved members. The calculations for MA-equivalent approved members and for IFP-equivalent approved members are based on the weighted number of approved members for Medicare Plans and IFP Plans during the period, with the number of approved members adjusted based on the relative LTV of the product they are purchasing. Since the LTV for any product fluctuates from period to period, the weight given to each product was determined based on their relative LTVs at the time of our adoption of ASC 606. 30 Table of Contents The following table shows the variable marketing cost per approved member and the CC&E expense per approved member metrics for the periods presented below: Three Months Ended March 31, % Change 2023 2022 Medicare CC&E cost per MA-equivalent approved member (1) $ 375 $ 441 (15) % Variable marketing cost per MA-equivalent approved member (1) 396 545 (27) % Total acquisition cost per MA-equivalent approved member $ 771 $ 986 (22) % Individual and Family Plan CC&E cost per IFP-equivalent approved member (2) $ 121 $ 88 38 % Variable marketing cost per IFP-equivalent approved member (2) 40 49 (18) % Total acquisition cost per IFP-equivalent approved member $ 161 $ 137 18 % __________________ (1) MA-equivalent approved members is a derived metric with a Medicare Part D approved member being weighted at 25% of a Medicare Advantage member and a Medicare Supplement member based on their relative LTVs at the time of our adoption of ASC 606. We calculate the number of MA-equivalent approved members by adding the total number of approved Medicare Advantage and Medicare Supplement members and 25% of the total number of approved Medicare Part D members during the periods presented. (2) IFP-equivalent approved members is a derived metric with a short-term approved member being weighted at 33% of a major medical individual and family health insurance plan member based on their relative LTVs at the time of our adoption of ASC 606. We calculate the number of IFP-equivalent approved members by adding the total number of approved qualified and non-qualified health plan members and 33% of the total number of short-term approved members during the periods presented. CC&E cost per MA-equivalent approved member decreased 15% in the three months ended March 31, 2023 compared to the same period in 2022. Variable marketing cost per MA-equivalent approved member decreased 27% compared to the same period in 2022. These decreases were primarily attributable to improvements to our sales and marketing operations and our cost reduction initiatives, which began subsequent to the first quarter of 2022. These optimizations have enabled improved agent performance at a lower cost resulting in higher lead conversion rates. CC&E cost per IFP-equivalent approved member increased 38% in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to our increased investment in individual coverage health reimbursement arrangements and state exchange opportunities. Variable marketing cost per IFP-equivalent approved member decreased 18% in the three months ended March 31, 2023 compared to the same period in 2022 primarily due to lower marketing spend as part of our cost reduction initiatives. Critical Accounting Policies and Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and the accompanying notes. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future consolidated results of comprehensive income (loss) may be affected. An accounting policy is considered to be critical if the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and the effect of the estimates and assumptions on financial condition or operating 31 Table of Contents performance. The accounting policies we believe to reflect our more significant estimates, judgments and assumptions and are most critical to understanding and evaluating our reported financial results are as follows: • Revenue Recognition and contract assets - commissions receivable; • Stock-Based Compensation; and • Accounting for Income Taxes. There have been no changes to our critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023, that have had a significant impact on our condensed consolidated financial statements and related notes. Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, for a complete discussion of our other critical accounting policies and estimates. Results of Operations The following table sets forth our operating results and related percentage of total revenue for the periods presented (dollars in thousands): Three Months Ended March 31, 2023 2022 Revenue Commission $ 68,003 92 % $ 93,850 89 % Other 5,720 8 % 11,400 11 % Total revenue 73,723 100 % 105,250 100 % Operating costs and expenses (1) Cost of revenue 215 — % (127) — % Marketing and advertising 32,899 45 % 58,454 56 % Customer care and enrollment 26,957 37 % 42,164 40 % Technology and content 15,544 21 % 19,663 19 % General and administrative 21,002 28 % 19,987 19 % Impairment, restructuring and other charges — — % 4,823 5 % Total operating costs and expenses 96,617 131 % 144,964 138 % Loss from operations (22,894) (31) % (39,714) (38) % Other expense, net (592) (1) % (1,021) (1) % Loss before income taxes (23,486) (32) % (40,735) (39) % Benefit from income taxes (3,608) (5) % (7,993) (8) % Net loss $ (19,878) (27) % $ (32,742) (31) % ____________ (1) Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands): Three Months Ended March 31, 2023 2022 Marketing and advertising $ 455 $ 313 Customer care and enrollment 605 454 Technology and content 905 1,850 General and administrative 3,029 2,668 Total stock-based compensation expense $ 4,994 $ 5,285 32 Table of Contents Revenue Our commission revenue, other revenue and total revenue are summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Commission $ 68,003 $ 93,850 $ (25,847) (28) % % of total revenue 92 % 89 % Other 5,720 11,400 (5,680) (50) % % of total revenue 8 % 11 % Total revenue $ 73,723 $ 105,250 $ (31,527) (30) % Three Months Ended March 31, 2023 and 2022 – Commission revenue decreased $25.8 million, or 28%, during the three months ended March 31, 2023 compared to the same period in 2022 due to a $27.7 million, or 33%, decrease in commission revenue from the Medicare segment, partially offset by a $1.8 million, or 19%, increase in Individual, Family and Small Business segment commission revenue. The decrease in commission revenue from the Medicare segment was driven by a 28% decline in overall Medicare plan approved members, specifically a 27% decline in Medicare Advantage plan approved members compared to the same period in 2022. The increase in commission revenue from the Individual, Family and Small Business segment was primarily driven by an increase in lifetime values, a 3% increase in individual and family plan approved members and $1.5 million in net adjustment revenue from prior period enrollments for the three months ended March 31, 2023 compared to $0.4 million for the same period in 2022, partially offset by a 12% decline in ancillary product approved members. See Summary of Selected Metrics above and Segment Information below for further discussion. Other revenue decreased $5.7 million, or 50%, during the three months ended March 31, 2023 compared to the same period in 2022 due to a decrease in advertising revenue. Cost of Revenue Cost of revenue consists of payments related to health insurance plans 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. Our cost of revenue is summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Cost of revenue $ 215 $ (127) $ 342 269 % % of total revenue — % — % Three Months Ended March 31, 2023 and 2022 – Cost of revenue increased by $0.3 million during the three months ended March 31, 2023, compared to the same period in 2022, primarily due to increased activity from our revenue sharing arrangements. Marketing and Advertising 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 expenses in our direct member acquisition channel in the period 33 Table of Contents in which they are incurred. We generally compensate our marketing partners for referrals based on the consumer submitting a health insurance application on our platform, regardless of whether the consumer's application is approved by the health insurance carrier, or for the referral of a Medicare-related lead to us by the marketing partner. Some of our marketing partners have tiered arrangements where the amount we pay the marketing partner per submitted application increases as the volume of submitted applications we receive from the marketing partner increases. We recognize these expenditures in the period when a marketing partner's referral results in the submission of a health insurance application. We recognize expenses associated with our online advertising member acquisition channels in the period in which the consumer clicks on the advertisement. Increases in submitted applications resulting from marketing partner referrals or visitors to our website from our online advertising channel has in the past, and could in the future, result in marketing and advertising expenses significantly higher than our expectations. Our marketing and advertising expenses are summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Marketing and advertising $ 32,899 $ 58,454 $ (25,555) (44) % % of total revenue 45 % 56 % Three Months Ended March 31, 2023 and 2022 – Marketing and advertising expenses decreased $25.6 million, or 44%, during the three months ended March 31, 2023 compared to the same period in 2022, primarily driven by a $23.5 million decrease in variable advertising costs, a $1.1 million decrease in personnel and compensation costs and a $0.7 million decrease in consulting expenses. The decrease in variable advertising costs was due to a decrease in our advertising expense amongst all of our channels primarily as a result of more targeted deployment of our marketing budget. Customer Care and Enrollment Customer care and enrollment expenses primarily consist of compensation, benefits and licensing costs for personnel engaged in assistance to applicants who call our customer care center and for enrollment personnel who assist applicants during the enrollment process. Our customer care and enrollment expenses are summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Customer care and enrollment $ 26,957 $ 42,164 $ (15,207) (36) % % of total revenue 37 % 40 % Three Months Ended March 31, 2023 and 2022 – Customer care and enrollment expenses decreased $15.2 million, or 36%, during the three months ended March 31, 2023 compared to the same period in 2022, primarily due to a $13.6 million decrease in personnel costs from lower headcount, a $0.7 million decrease in facilities and other expenses, a $0.5 million decrease in licensing costs and a $0.2 million decrease in consulting expenses. Technology and Content Technology and content expenses consist primarily of compensation and benefits costs for personnel associated with developing and enhancing our website technology as well as maintaining our website. A portion of our technology and content group is located at our wholly-owned subsidiary in China, where technology development costs are generally lower than in the United States. 34 Table of Contents Our technology and content expenses are summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Technology and content $ 15,544 $ 19,663 $ (4,119) (21) % % of total revenue 21 % 19 % Three Months Ended March 31, 2023 and 2022 – Technology and content expenses decreased $4.1 million, or 21%, during the three months ended March 31, 2023 compared to the same period in 2022 primarily driven by a $3.7 million decrease in personnel and compensation costs due to lower headcount, a $0.9 million decrease in stock-based compensation expense and a $0.5 million decrease in consulting costs, partially offset by increases of $0.8 million in amortization of internally developed software and $0.4 million in facilities and other expenses. General and Administrative General and administrative expenses include compensation and benefits costs for personnel working in our executive, finance, investor relations, government affairs, legal, human resources, internal audit, facilities and internal information technology departments. These expenses also include fees paid for outside professional services, including audit, tax, legal, government affairs and information technology fees. Our general and administrative expenses are summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % General and administrative $ 21,002 $ 19,987 $ 1,015 5 % % of total revenue 28 % 19 % Three Months Ended March 31, 2023 and 2022 – General and administrative expenses increased $1.0 million, or 5%, during the three months ended March 31, 2023 compared to the same period in 2022, primarily driven by increases of $1.5 million in personnel costs and $0.4 million in stock-based compensation expense, partially offset by decreases of $0.4 million in professional fees and $0.2 million in facilities and other expenses. Impairment, Restructuring and Other Charges Our impairment, restructuring and other charges consist primarily of severance, transition and other related costs and impairment charges. Our impairment, restructuring and other charges are summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Impairment, restructuring and other charges $ — $ 4,823 $ (4,823) (100) % % of total revenue — % 5 % Three Months Ended March 31, 2023 and 2022 – We incurred no impairment, restructuring and other charges for the three months ended March 31, 2023 compared to $4.8 million of restructuring and reorganization charges for the three months ended March 31, 2022. These charges primarily consisted of severance and other personnel related costs related to a reduction in force. Other Expense, Net Other expense, net, primarily consisted of interest expense and fees related to our Credit Agreement, partially offset by interest income and margin earned on commissions received from Medicare plan members transferred to us in 2010 through 2012 by a broker partner. 35 Table of Contents Our other expense, net is summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Other expense, net $ (592) $ (1,021) $ 429 42 % % of total revenue (1) % (1) % Three Months Ended March 31, 2023 and 2022 – Other expense, net was $0.6 million during the three months ended March 31, 2023, compared to $1.0 million during the three months ended March 31, 2022. The change was primarily due to an increase of $1.8 million in interest income, partially offset by an increase of $1.5 million of interest expense related to the Credit Agreement entered into during the first quarter of 2022. Benefit from Income Taxes Our benefit from income taxes is summarized as follows (dollars in thousands): Three Months Ended March 31, Change 2023 2022 $ % Benefit from income taxes $ (3,608) $ (7,993) $ 4,385 55 % Effective tax rate 15.4 % 19.6 % Three Months Ended March 31, 2023 and 2022 – Our effective tax rate of 15.4% for the three months ended March 31, 2023 was lower than our 19.6% effective tax rate for the three months ended March 31, 2022 primarily due to fluctuations in stock-based compensation adjustments. Our effective tax rate for the three months ended March 31, 2023 was lower than the statutory federal tax rate due primarily to stock-based compensation adjustments and non-deductible lobbying expenses, partially offset by research and development credits and state taxes. Segment Information 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 revenue and segment profit (loss). Our business structure is comprised of two operating segments: • Medicare; and • Individual, Family and Small Business. Our CODM does not separately evaluate assets by segment, with the exception of commissions receivable, and therefore assets by segment are not presented. The Medicare segment consists primarily of amounts 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, amounts earned from our sale of ancillary products sold to our Medicare-eligible customers, including but not limited to, dental and vision plans, as well as amounts we are paid in connection with our advertising program that allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us and to purchase other services such as marketing and advertising services, as well as our delivery and 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 amounts earned from our sale of individual, family and small business health insurance plans, including both qualified and non-qualified plans, and 36 Table of Contents ancillary products sold to our non-Medicare-eligible customers, including but not limited to, dental, vision, and short-term insurance. To a lesser extent, the Individual, Family and Small Business segment consists of 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 for the use of our health insurance ecommerce technology, and our delivery and sale to third parties of individual and family health insurance plan 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. Corporate consists of other indirect general and administrative operating expenses, excluding stock-based compensation expense, depreciation and amortization, which are managed in a corporate shared services environment and, since they are not the responsibility of segment operating management, are not allocated to the reportable segments and instead are reported within Corporate. Segment profit (loss) is calculated as total revenue for the applicable segment less direct and indirect allocated marketing and advertising, customer care and enrollment, technology and content and general and administrative operating expenses, excluding stock-based compensation expense, depreciation and amortization, and impairment, restructuring and other charges. Our operating segment revenue and segment profit (loss) are summarized as follows (in thousands): Three Months Ended March 31, Change 2023 2022 $ % Revenue Medicare $ 61,834 $ 95,067 $ (33,233) (35) % Individual, Family and Small Business 11,889 10,183 1,706 17 % Total revenue $ 73,723 $ 105,250 $ (31,527) (30) % Segment profit (loss) Medicare $ (3,373) $ (14,817) $ 11,444 77 % Individual, Family and Small Business 7,413 5,254 2,159 41 % Segment loss 4,040 (9,563) 13,603 142 % Corporate (16,695) (15,265) (1,430) (9) % Stock-based compensation expense (4,994) (5,285) 291 6 % Depreciation and amortization (5,245) (4,778) (467) (10) % Impairment, restructuring and other charges — (4,823) 4,823 100 % Other expense, net (592) (1,021) 429 42 % Loss before income taxes $ (23,486) $ (40,735) $ 17,249 42 % Revenue Three Months Ended March 31, 2023 and 2022 – Revenue from our Medicare segment declined $33.2 million, or 35%, during the three months ended March 31, 2023 compared to the same period in 2022, primarily attributable to a $27.7 million decrease in commission revenue. The decrease in Medicare segment commission revenue is primarily due to a $24.0 million decrease in Medicare Advantage plan related commission revenue, as a result of a 27% decline in Medicare Advantage plan approved members compared to the same period prior year as we execute on our transformation initiatives to optimize customer acquisition spend and ultimately grow profitability. 37 Table of Contents Revenue from our Individual, Family and Small Business segment grew $1.7 million, or 17%, during the three months ended March 31, 2023 compared to the same period in 2022, primarily attributable to a $1.8 million increase in commission revenue driven by a 3% increase in individual and family plan approved members and $1.5 million in net adjustment revenue from prior period enrollments for the three months ended March 31, 2023 compared to $0.4 million for the same period in 2022, partially offset by a 12% decline in ancillary product approved members. Segment Profit (Loss) Three Months Ended March 31, 2023 and 2022 – Our Medicare segment loss was $3.4 million during the three months ended March 31, 2023, an improvement of $11.4 million, or 77%, compared to segment loss of $14.8 million for the same period in 2022. This was primarily due to a $44.7 million decrease in operating expenses, excluding stock-based compensation expense, depreciation and amortization, impairment, restructuring and other charges, and other expense, net, partially offset by a $33.2 million decrease in revenue. The decrease in operating expenses was mostly attributable to impacts from our transformation initiatives which began in the second quarter of 2022. Our Individual, Family and Small Business segment profit was $7.4 million during the three months ended March 31, 2023, an increase of $2.2 million, or 41%, compared to segment profit of $5.3 million for the same period in 2022. The increase was primarily driven by a $1.7 million increase in revenue. Liquidity and Capital Resources Material Cash Requirements Our material cash requirements include our operating leases and service and licensing obligations. See Note 10 – Leases in our Notes to Condensed Consolidated Financial Statements for details of our operating lease 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. The terms of these services and licensing agreements are generally up to three years. 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. See Note 8 – Commitments and Contingencies in ou r Notes to Condensed Consolidated Financial Statements. Short-term obligations were $8.4 million for leases and $8.2 million for service and licensing as of March 31, 2023. Long-term obligations were $37.3 million for leases and $1.4 million for service and licensing as of March 31, 2023. We expect to fund these obligations through our existing cash and cash equivalents and cash generated from operations. Our future capital requirements will depend on many factors, including our enrollment volume, membership, retention rates, telesales conversion rates, and our level of investment in technology and content, marketing and advertising, customer care and enrollment, and other initiatives. In addition, our cash position could be impacted by the level of investments we make to pursue our strategy. To the extent that available funds are insufficient to fund our future activities or to execute our financial strategy, we may raise additional capital through bank debt, or public or private equity or debt financing to the extent such funding sources are available. We have implemented a multi-year transformation plan to right-size our cost structure and drive future profitability. This plan has incorporated different operational and cost savings initiatives, including a reduction in vendor-related spend outside of mission critical areas, a reduction of our real-estate footprint as we decided to become a remote first workplace in 2022, and a targeted workforce reduction implemented during 2022. These reductions could adversely impact the growth of membership and revenue. We believe our current cash and cash equivalents, including the proceeds from the term loan we obtained on February 28, 2022 under our credit agreement with Blue Torch Finance, LLC and expected cash collections will be sufficient to fund our operations for at least 12 months after the filing date of this Quarterly Report on Form 10-Q. 38 Table of Contents Our cash, cash equivalents, and short-term marketable securities are summarized as follows (in thousands): March 31, 2023 December 31, 2022 Cash and cash equivalents $ 180,633 $ 144,401 Short-term marketable securities 22,059 — Total cash, cash equivalents, and short-term marketable securities $ 202,692 $ 144,401 Cash equivalents, which are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily consist of money market funds and commercial paper. We also maintained $3.2 million in restricted cash as of March 31, 2023 and December 31, 2022. Our cash flows for the three months ended March 31, 2023 are summarized as follows (in thousands): Three Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 60,803 $ 47,112 Net cash provided by (used in) investing activities (24,240) 26,121 Net cash provided by (used in) financing activities (439) 65,373 Operating Activities Net cash provided by operating activities primarily consists of net loss, adjusted for certain non-cash items, including, deferred income taxes, stock-based compensation expense, depreciation and amortization, amortization of internally developed software, other non-cash items, and the effect of changes in working capital and other activities. Collection of commissions receivable depends upon the timing of our receipt of commission payments and associated commission reports from health insurance carriers. If we were to experience a delay in receiving a commission payment from a significant health insurance carrier within a quarter, our operating cash flows for that quarter could be adversely impacted. While we recognize constrained LTV as revenue at the time applications are approved, our collection of the cash commissions resulting from approved applications generally occurs over a number of years. The expense associated with approved applications, however, is generally incurred at the time of enrollment. As a result, the net cash flow resulting from approved applications is generally negative in the period of revenue recognition and becomes positive over the lifetime of the member. In periods of membership growth, cash receipts associated with new and continuing members may be less than the cash outlays to acquire new members. A significant portion of our marketing and advertising expense is directly correlated with the number of health insurance applications submitted on our ecommerce platforms. Since our marketing and advertising costs are expensed and generally paid as incurred, and since commission revenue is recognized upon approval of a member but commission payments are paid to us over time, our operating cash flows could be adversely impacted by a substantial increase in the volume of applications submitted during a quarter or positively impacted by a substantial decline in the volume of applications submitted during a quarter. During the Medicare annual enrollment period that takes place during the last quarter of each year and the reintroduced Medicare Advantage open enrollment period in the first quarter of the year, we experience an increase in the number of submitted Medicare-related health insurance applications and marketing and advertising expenses compared to outside of these annual enrollment periods. Similarly, during the open enrollment period for individual and family health insurance plans which typically takes place during the fourth quarter of each year, we experience an increase in the number of submitted individual and family plan health insurance applications and marketing and advertising expenses compared to outside of open enrollment periods. The timing of open enrollment periods for individual and family 39 Table of Contents health insurance plans, the Medicare annual enrollment period and the open enrollment period for Medicare-related health insurance can positively or negatively affect our cash flows during each quarter. Three Months Ended March 31, 2023 – Net cash provided by operating activities was $60.8 million during the three months ended March 31, 2023, primarily driven by changes in net operating assets and liabilities of $74.0 million and adjustments for non-cash items of $6.7 million, partially offset by a net loss of $19.9 million. Adjustments for non-cash items primarily consisted of $5.0 million of stock-based compensation expense and $4.6 million of amortization of internally developed software, partially offset by a $3.6 million decrease due to the change in deferred income taxes. Cash provided by changes in net operating assets and liabilities during the three months ended March 31, 2023 primarily consisted of decreases of $82.5 million in contract assets – commissions receivable and $1.6 million in accounts receivable and increases of $7.2 million in accrued compensation and related expenses, partly offset by decreases of $15.0 million in accrued marketing expenses and $1.5 million in accounts payable. Three Months Ended March 31, 2022 – Net cash provided by operating activities was $47.1 million during the three months ended March 31, 2022, primarily driven by changes in net operating assets and liabilities of $77.6 million and adjustments for non-cash items of $2.2 million, partially offset by a net loss of $32.7 million. Adjustments for non-cash items primarily consisted of $5.3 million of stock-based compensation expense and $3.8 million of amortization of internally developed software, partially offset by an $8.0 million decrease due to the change in deferred income taxes. Cash provided by changes in net operating assets and liabilities during the three months ended March 31, 2022 primarily consisted of decreases of $77.1 million in contract assets – commissions receivable and $12.4 million in prepaid expenses and other current assets, and increases of $4.8 million in accrued expenses and other liabilities, partly offset by decreases of $16.8 million in accrued marketing expenses and $5.5 million in accounts payable. Investing Activities Our investing activities primarily consist of purchases and redemption of marketable securities, purchases of computer hardware and software to enhance our website and customer care operations, and capitalized internal-use software. Three Months Ended March 31, 2023 – Net cash used in investing activities of $24.2 million for the three months ended March 31, 2023 mainly consisted of $22.0 million used to purchase marketable securities and $2.2 million in capitalized internal-use software and website development costs. Three Months Ended March 31, 2022 – Net cash provided by investing activities of $26.1 million for the three months ended March 31, 2022 mainly consisted of $34.3 million of proceeds from the maturities and redemptions of marketable securities, partially offset by $4.2 million in capitalized internal-use software and website development costs and $3.9 million used to purchase marketable securities. Financing Activities Three Months Ended March 31, 2023 – Net cash used in financing activities of $0.4 million for the three months ended March 31, 2023 was primarily due to $0.4 million in repurchases of shares to satisfy employee tax withholding obligations. Three Months Ended March 31, 2022 – Net cash provided by financing activities of $65.4 million for the three months ended March 31, 2022 was primarily due to $64.9 million of net proceeds from debt financing and $1.1 million of net proceeds from the exercise of common stock options, partially offset by $0.5 million in repurchases of shares to satisfy employee tax withholding obligations. Convertible Preferred Stock On April 30, 2021 (the “Closing Date”), we issued and sold 2,250,000 shares of our newly designated Series A convertible preferred stock (“Series A preferred stock”) at an aggregate purchase price of $225.0 million to 40 Table of Contents Echelon Health SPV, LP ("H.I.G."), at a price of $100 (the “Stated Value” per share of Series A preferred stock) per share (the "Private Placement"). We received $214.0 million net proceeds from the Private Placement with H.I.G., which are net of sales commissions and certain transaction fees. Dividends on our outstanding shares of Series A preferred stock accrue daily at 8% per annum on the Stated Value per share and compound semiannually, payable in kind until April 30, 2023, which is the second anniversary of the Closing Date, on June 30 and December 31 of each year, beginning on June 30, 2021, and will thereafter be 6% payable in kind and 2% payable in cash in arrears on June 30 and December 31 of each year, beginning on June 30, 2023 (each, a “Cash Dividend Payment Date”). Dividends payable in kind will be cumulative. The Series A preferred stock also participates, on an as-converted basis (without regard to conversion limitations) in all dividends paid to the holders of our common stock. If we fail to declare and pay full cash dividend payments as required by the certificate of designations for the Series A preferred stock for two consecutive Cash Dividend Payment Dates, the cash dividend rate then in effect shall increase one time by 2%, retroactive to the first day of the semiannual period immediately preceding the first Cash Dividend Payment Date at which we failed to pay such accrued cash dividends, until such failure to pay full cash dividends is cured (at which time the dividend rate shall return to the rate prior to such increase). The dividend rights of the Series A preferred stock are senior to all of our other equity securities. Beginning on April 30, 2027, which is the sixth anniversary of the Closing Date, each holder of Series A preferred stock will have the right to require us to redeem all or any portion of the Series A preferred stock for cash at a price calculated as set forth in the certificate of designations. In addition, upon certain change of control events, holders of Series A preferred stock can require us, subject to certain exceptions, to repurchase any or all of their Series A preferred stock. See Note 6 — Convertible Preferred Stock in our Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information. Term Loan Credit Agreement We entered into a Credit Agreement with Blue Torch Finance LLC, as administrative agent and collateral agent, and the other lenders party thereto in February 2022 (the "Original Credit Agreement") and entered into an amendment (the "Amendment") to the Original Credit Agreement in August 2022 (as amended by the Amendment, the "Credit Agreement"). The Credit Agreement provides for a $70.0 million secured term loan credit facility, which term loans were made available to us on February 28, 2022. We terminated our credit agreement with Royal Bank of Canada ("RBC"), pursuant to which we had an up to $75.0 million revolving credit facility in connection with our receiving the loan under the Term Loan Credit Agreement. The Amendment replaced the LIBOR-based Adjusted Eurocurrency Rate (as defined in the Original Credit Agreement) with Adjusted Term SOFR (as defined in the Amendment) as a reference rate for loans under the Credit Agreement The proceeds of the loans under the Credit Agreement may be used for working capital and general corporate purposes, to refinance our credit agreement with RBC and to pay fees and expenses in connection with the entry into the Credit Agreement. The Original Credit Agreement bore interest, at our option, at either a rate based on the London Interbank Offered Rate ("LIBOR") for the applicable interest period or a base rate, in each case plus a margin. The base rate was the highest of the prime rate, the federal funds rate plus 0.50% and one month adjusted LIBOR plus 1.00%. The margin was 7.50% for LIBOR loans and 6.50% for base rate loans. After the Amendment, the loans under the Credit Agreement bear interest, at our option, at either a rate based on the Adjusted Term SOFR or a base rate, in each case plus a margin. The base rate is the highest of the prime rate, the federal funds rate plus 0.50% and three-month Adjusted Term SOFR plus 1.00%. The margin is 7.50% for Adjusted Term SOFR loans and 6.50% for base rate loans. Furthermore, as part of the Credit Agreement, we incur a $0.3 million fee per annum, payable annually. The outstanding obligations under the Credit Agreement are payable in full on the maturity date. The Credit Agreement matures in February of 2025. We have the right to prepay the loans under the Credit Agreement in whole or in part at any time, subject, in the case of certain mandatory prepayments or any voluntary prepayment of the loans under the Credit Agreement after February 28, 2023, to an exit fee, which right we did not exercise. Our obligations under the Credit Agreement are guaranteed by certain of our material domestic subsidiaries and substantially all of our 41 Table of Contents assets and the assets of such guarantors, in each case, subject to customary exclusions. We are obligated to pay administration fees in connection with the Credit Agreement. As of March 31, 2023, we had $66.5 million outstanding principal amount under our Credit Agreement, net of closing costs. See Note 12 – Debt of Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding the Credit Agreement. Seasonality Open enrollment periods drive the seasonality of our business. A greater number of our Medicare-related health insurance plans are sold in our fourth quarter during the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year. As a result, our Medicare plan-related commission revenue is highest in our fourth quarter. Our Medicare plan-related commission revenue is also elevated in the first quarter compared to the second and third quarters as a result of the reintroduction of the Medicare Advantage open enrollment period in the first quarter of 2019. Any changes to or 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 the states where the Federally Facilitated marketplace operates as the state health insurance exchange, individuals and families generally are not able to purchase individual and family health insurance outside of the annual enrollment period, unless they qualify for a special enrollment period as a result of certain qualifying events, such as losing employer-sponsored health insurance or moving to another state. Extended open enrollment or special enrollment periods may change the seasonality of our individual and family health insurance business. Recent Accounting Pronouncements See Note 1 – Summary of Business and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for recently issued accounting standards that could have an effect on us. 42 Table of Contents