Edgar Filing: eHealth, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

001-33071

(Commission File Number)

_____________________________________________

EHEALTH, INC.

(Exact name of registrant as specified in its charter)

_____________________________________________



Delaware (State or other jurisdiction of incorporation or organization)		56-2357876 (I.R.S Employer Identification No)

440 EAST MIDDLEFIELD ROAD

MOUNTAIN VIEW, CALIFORNIA 94043

(Address of principal executive offices)

(650) 584-2700

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

____________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ☐		Accelerated filer ☒
Non-accelerated filer ☐		Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of August 1, 2016 was 18,326,932 shares.

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EHEALTH, INC. FORM 10-Q

TABLE OF CONTENTS



	PART I FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at December 31, 2015 and June 30, 2016	1
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2016	2
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2016	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35
	PART II OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 5.	Other Item	68
Item 6.	Exhibits	69
	Signatures	71

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PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EHEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



	December 31, 2015			June 30, 2016
Assets	(Note 1)			(unaudited)
Current assets:
Cash and cash equivalents	$	62,710		$	66,714
Accounts receivable	9,647			13,931
Prepaid expenses and other current assets	5,185			5,401
Total current assets	77,542			86,046
Property and equipment, net	7,364			6,687
Other assets	4,697			4,024
Intangible assets, net	9,620			9,100
Goodwill	14,096			14,096
Total assets	$	113,319		$	119,953

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,012		$	2,344
Accrued compensation and benefits	14,386			8,499
Accrued marketing expenses	10,698			1,676
Deferred revenue	392			507
Accrued restructuring charges	223			68
Other current liabilities	3,225			5,058
Total current liabilities	31,936			18,152
Non-current liabilities	4,962			4,704
Stockholders’ equity:
Common stock	29			29
Additional paid-in capital	266,699			269,824
Treasury stock, at cost	(199,998		)	(199,998		)
Retained earnings	9,498			27,056
Accumulated other comprehensive income	193			186
Total stockholders’ equity	76,421			97,097
Total liabilities and stockholders’ equity	$	113,319		$	119,953

The accompanying notes are an integral part of these condensed consolidated financial statements.

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EHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts, unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2016			2015			2016
Revenue
Commission	$	37,396		$	34,649		$	95,215		$	104,036
Other	2,498			2,628			5,967			7,085
Total revenue	39,894			37,277			101,182			111,121
Operating costs and expenses:
Cost of revenue	670			533			3,084			2,717
Marketing and advertising	9,285			12,936			34,736			33,818
Customer care and enrollment	7,658			10,411			19,519			20,610
Technology and content	8,591			8,289			19,364			16,796
General and administrative	7,516			10,815			15,489			18,944
Restructuring charges (benefit)	58			(158		)	4,541			(158		)
Amortization of intangible assets	288			260			633			520
Total operating costs and expenses	34,066			43,086			97,366			93,247
Income (loss) from operations	5,828			(5,809		)	3,816			17,874
Other expense, net	(9		)	(21		)	(23		)	(32		)
Income (loss) before provision (benefit) for income taxes	5,819			(5,830		)	3,793			17,842
Provision (benefit) for income taxes	69			(5,354		)	125			284
Net income (loss)	$	5,750		$	(476	)	$	3,668		$	17,558

Net income (loss) per share:
Basic	$	0.32		$	(0.03	)	$	0.20		$	0.96
Diluted	$	0.32		$	(0.03	)	$	0.20		$	0.96

Weighted-average number of shares used in per share amounts:
Basic	17,967			18,258			17,906			18,206
Diluted	18,035			18,258			17,998			18,296

Comprehensive income (loss):
Net income (loss)	$	5,750		$	(476	)	$	3,668		$	17,558
Foreign currency translation adjustment	4			4			5			(7		)
Comprehensive income (loss)	$	5,754		$	(472	)	$	3,673		$	17,551

The accompanying notes are an integral part of these condensed consolidated financial statements.

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EHEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



	Six Months Ended June 30,
	2015			2016
Operating activities
Net income	$	3,668		$	17,558
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,108			1,934
Amortization of internally-developed software	318			435
Amortization of book-of-business consideration	1,991			1,603
Amortization of intangible assets	633			520
Stock-based compensation expense	3,858			4,009
Deferred rent and other	28			(53		)
Changes in operating assets and liabilities:
Accounts receivable	(1,955		)	(4,284		)
Prepaid expenses and other assets	(243		)	(568		)
Accounts payable	(3,895		)	(630		)
Accrued compensation and benefits	159			(5,887		)
Accrued marketing expenses	(6,996		)	(9,022		)
Deferred revenue	(432		)	115
Accrued restructuring charges	569			(287		)
Other liabilities	1,736			1,813
Net cash provided by operating activities	1,547			7,256
Investing activities
Purchases of property and equipment and other assets	(1,432		)	(2,318		)
Net cash used in investing activities	(1,432		)	(2,318		)
Financing activities
Net proceeds from exercise of common stock options	1,049			60
Cash used to net-share settle equity awards	(736		)	(944		)
Principal payments in connection with capital leases	(40		)	(43		)
Net cash provided by (used in) financing activities	273			(927		)

Effect of exchange rate changes on cash and cash equivalents	9			(7		)

Net increase in cash and cash equivalents	397			4,004
Cash and cash equivalents at beginning of period	51,415			62,710
Cash and cash equivalents at end of period	$	51,812		$	66,714

The accompanying notes are an integral part of these condensed consolidated financial statements.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 - Summary of Business and Significant Accounting Policies

Description of Business—eHealth, Inc. (the “Company,” “eHealth,” “we” or “us”) is the leading private online source of health insurance for individuals, families and small businesses in the United States. Through our website addresses (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase Medicare-related, individual and family, small business and ancillary health insurance plans. We actively market the availability of Medicare-related insurance plans and offer Medicare plan comparison tools and educational materials for Medicare-related insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. We are licensed to market and sell health insurance in all 50 states and the District of Columbia.

Basis of Presentation—The accompanying condensed consolidated balance sheet as of June 30, 2016, the condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2015 and 2016 and the condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2016, respectively, are unaudited. The condensed consolidated balance sheet data as of December 31, 2015 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the Securities and Exchange Commission on March 14, 2016. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, for interim financial information. Accordingly, they do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015, and include all adjustments necessary for the fair presentation of eHealth’s financial position as of June 30, 2016, its results of operations for the three and six months ended June 30, 2015 and 2016 and its cash flows for the six months ended June 30, 2015 and 2016. All adjustments are of a normal recurring nature. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for any subsequent period or for the fiscal year ending December 31, 2016.

In connection with the recent changes in our senior management and a strategic review of our business, we recorded approximately $4.0 million of operating expenses in the three months ended June 30, 2016, of which $3.4 million is included in general and administrative expenses and $0.6 million is included in marketing and advertising expenses in the accompanying condensed consolidated statements of comprehensive income (loss).

Seasonality—The majority 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. Additionally, substantially all of the Medicare Advantage and Medicare Part D prescription drug policies we have sold renew on January 1 of each year, resulting in our recognizing substantially all renewal Medicare Advantage and Medicare Part D prescription drug plan commission revenue in our first quarter. Our Medicare plan-related commission revenue is highest in our first quarter and is higher in our fourth quarter compared to our second and third quarters.

The majority of our individual and family health insurance plans are sold in 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. Individuals and families generally are not able to purchase individual and family health insurance outside of these open enrollment periods, 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.

Recent Accounting Pronouncements—In August 2015, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-14 (ASU 2015-14) "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date." ASU 2015-14 defers the effective date by one year of ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In accordance

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

with the deferral, the new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and can be adopted using either a full retrospective or modified retrospective approach. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02 (ASU 2016-02) "Leases (Topic 842). "ASU 2016-02 requires lessees to put leases on their balance sheets but recognize expenses on their income statements; for lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct finance leases. The guidance also eliminates existing real estate-specific provisions for all entities. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08 (ASU 2016-08) "Revenue from Contracts with Customers (Topic 606)." ASU 2016-8 requires an entity to determine whether it is a principal or an agent in a transaction in which another party is involved in providing goods or services to a customer by evaluating the nature of its promise to the customer. The new standard is effective for annual reporting periods beginning after December, 15 2017, including interim periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are currently in the process of evaluating the impact of the adoption of ASU 2016-08 on our consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10 (ASU 2016-10), "Identifying Performance Obligations and Licensing." ASU 2016-10 provides guidance in identifying performance obligations and determining the appropriate accounting for licensing arrangements. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by ASU 2014-09). We are currently in the process of evaluating the impact of the adoption of ASU 2016-10 on our consolidated financial statements.

Recently Adopted Accounting Standards — In April 2015, the FASB issued ASU No. 2015-05 (ASU 2015-05), "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. It is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We adopted this standard prospectively in the first quarter of 2016. Prior periods were not adjusted. The adoption of this standard did not have a material effect on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09 (ASU 2016-09), "Improvements to Employee Share-Based Payment Accounting (Topic 718)." ASU 2016-09 simplifies various aspects related to how share-based payments are accounted for and presented in the consolidated financial statements. The amendments include income tax consequences, the accounting for forfeitures, the classification of awards as either equity or liabilities and the classification on the statement of cash flows. It is effective for the first interim period beginning after December 15, 2016 and early adoption is permitted. We adopted this standard in the first quarter of 2016. Under ASU 2016-09, eHealth classifies the excess income tax benefits from stock-based compensation arrangements as a discrete item within income tax expense, rather than recognizing such excess income tax benefits in additional paid-in capital. As required by ASU 2016-09, this guidance was applied using a modified retrospective transition method and was effective as of January 1, 2016. The adoption of this guidance did not have a material effect to retained earnings or other components of equity or net assets at the beginning of the period of adoption. Under ASU 2016-09, excess income tax benefits from stock-based compensation arrangements are classified as cash flows from operations rather than as cash flows from financing activities. We have elected to apply the cash flow classification guidance of ASU 2016-09 prospectively for the period ended June 30, 2016. Prior periods were not adjusted. Under ASU 2016-09, when shares are withheld from an employee's exercise of stock awards to fund our payment of the employee's taxes, the payment is classified as a financing activity. The adoption of this provision did not have a material effect on the cash flow statements from prior periods. In addition, we have elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.

Note 2 – Balance Sheet Accounts

Cash and Cash Equivalents—As of December 31, 2015 and June 30, 2016, our cash equivalents consisted of money market accounts that invested in U.S. government-sponsored enterprise bonds and discount notes, U.S. government treasury bills and notes and repurchase agreements collateralized by U.S. government obligations. At December 31, 2015 and June 30, 2016, our cash equivalents carried no unrealized gains or losses and we did not realize any significant gains or losses on sales of cash equivalents during the three and six months ended June 30, 2015 and 2016.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As of December 31, 2015 and June 30, 2016, our cash and cash equivalent balances were invested as follows (in thousands):



	December 31, 2015		June 30, 2016
Cash	$	8,086	$	7,066
Money market funds	54,624		59,648
Total cash and cash equivalents	$	62,710	$	66,714

Our money market funds reflect unadjusted quoted prices in active markets for identical assets and are classified as Level 1 as of December 31, 2015 and June 30, 2016.

Accounts Receivable—As of December 31, 2015 and June 30, 2016, our accounts receivable consisted of the following (in thousands):



	December 31, 2015		June 30, 2016
Commission receivable	$	6,136	$	1,520
Accounts receivable—from other revenues	3,511		1,192
Commissions receivable—from Medicare renewals	—		11,219
Total accounts receivable	$	9,647	$	13,931

Note 3 – Stockholders’ Equity

Stock Plans—The following table summarizes activity under our 2014 Equity Incentive Plan, 2006 Equity Incentive Plan, 1998 Stock Plan and 2005 Stock Plan (collectively, the “Stock Plans”) (in thousands):



	Shares Available for Grant
Shares available for grant December 31, 2015	3,542
Restricted stock units granted	(354	)
Options granted	(326	)
Restricted stock units cancelled (1)	137
Options cancelled (2)	3
Shares available for grant June 30, 2016	3,002


(1)	Restricted stock units cancelled does not include restricted stock units cancelled under the 2006 Equity Incentive Plan, as our 2006 Equity Incentive Plan has been terminated with respect to the grant of additional awards.


(2)	Options cancelled does not include stock options cancelled under the 2006 Equity Incentive Plan, as our 2006 Equity Incentive Plan has been terminated with respect to the grant of additional awards.

We maintain our 2006 Equity Incentive Plan, 2005 Stock Plan and 1998 Stock Plan, under which we previously granted options to purchase shares of our common stock and restricted stock units. The 2006 Equity Incentive Plan was terminated with respect to the grant of additional awards on June 12, 2014, upon adoption of our 2014 Equity Incentive Plan. The 2005 Stock Plan and 1998 Stock Plan were terminated with respect to the grant of additional awards upon the effectiveness of the 2006 Equity Incentive Plan. We will continue to issue new shares of common stock upon vesting of restricted stock units and the exercise of stock options previously granted under the 2006 Equity Incentive Plan, 2005 Stock Plan and 1998 Stock Plan.

The following table summarizes stock option activity under the Stock Plans (in thousands, except per share amounts and weighted-average remaining contractual life data):

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



	Number of Stock Options (1)		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (2)
Balance outstanding at December 31, 2015	1,275		$	18.79	2.79	$	—
Granted	326		$	13.21
Exercised	(5	)	$	12.98
Cancelled	(175	)	$	16.61
Balance outstanding at June 30, 2016	1,421		$	17.80	2.91	$	527
Vested and expected to vest at June 30, 2016	1,366		$	17.95	2.77	$	485
Exercisable at June 30, 2016	963		$	18.95	1.56	$	183


(1)	Includes certain stock options with both service and market-based vesting criteria granted to our executive officers.


(2)	The aggregate intrinsic value is calculated as the difference between eHealth’s closing stock price as of December 31, 2015 and June 30, 2016 and the exercise price of in-the-money options as of those dates.

The following table summarizes restricted stock unit activity, including performance-based and market-based restricted stock unit activity, under the Stock Plans (in thousands, except per share amounts and weighted-average remaining contractual life data):



	Number of Restricted Stock Units (1)		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Life (years)	Aggregate Intrinsic Value (2)
Balance outstanding as of December 31, 2015	966		$	15.62	2.83	$	9,636
Granted	354		$	11.21
Vested	(262	)	$	19.12
Cancelled	(139	)	$	10.75
Balance outstanding as of June 30, 2016	919		$	14.41	3.02	$	12,888


(1)	Includes certain restricted stock units with both service and performance-based or market-based vesting criteria granted to our executive officers.


(2)	The aggregate intrinsic value is calculated as eHealth’s closing stock price as of December 31, 2015 and June 30, 2016 multiplied by the number of restricted stock units outstanding as of December 31, 2015 and June 30, 2016, respectively.

Stock Repurchase Programs—We had no stock repurchase activity during the three and six months ended June 30, 2016. In addition to 10,663,888 shares repurchased under our past repurchase programs as of June 30, 2016, we have in treasury 443,964 shares that were previously surrendered by employees to satisfy tax withholdings due in connection with the vesting of certain restricted stock units. As of December 31, 2015 and June 30, 2016, we had a total of 11,025,933 shares and 11,107,852 shares, respectively, held in treasury.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table summarizes stock-based compensation expense recorded during the three and six months ended June 30, 2015 and 2016 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2016		2015		2016
Stock options	$	371	$	308	$	833	$	634
Restricted stock units	1,456		1,869		3,025		3,375
Total stock-based compensation expense	$	1,827	$	2,177	$	3,858	$	4,009

The following table summarizes stock-based compensation expense by operating function for the three and six months ended June 30, 2015 and 2016 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2016		2015		2016
Marketing and advertising	$	446	$	417	$	1,037	$	972
Customer care and enrollment	139		147		256		270
Technology and content	511		473		946		908
General and administrative	731		1,140		1,506		1,859
Restructuring charges	—		—		113		—
Total stock-based compensation expense	$	1,827	$	2,177	$	3,858	$	4,009

Note 4 – Income Taxes

The following table summarizes our provision (benefit) for income taxes and our effective tax rates for the three and six months ended June 30, 2015 and 2016 (in thousands, except effective tax rate):



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2016			2015			2016
Income before provision (benefit) for income taxes	$	5,819		$	(5,830	)	$	3,793		$	17,842
Provision (benefit) for income taxes	$	69		$	(5,354	)	$	125		$	284
Effective tax rate	1.2		%	91.8		%	3.3		%	1.6		%

In the three and six months ended June 30, 2016, we recorded a benefit for income taxes of $5.4 million and a provision for income taxes of $0.3 million, respectively. The provision for income taxes in the six months ended June 30, 2016, primarily consisted of foreign income taxes and certain discrete items. We recorded a benefit for income taxes in the three months ended June 30, 2016 in order for the year-to-date tax provision to be in line with the estimated annual effective tax rate. We recorded a valuation allowance against the US deferred tax assets at the end of fiscal year 2014 and continue to maintain that full valuation allowance as of June 30, 2016 as we believe it is not more likely that not that the net deferred tax assets will be realized. In the three and six months ended June 30, 2015, we recorded a provision for income taxes of $0.1 million and $0.1 million, respectively. Our provision for income taxes in the six months ended June 30, 2015 primarily consisted of foreign income taxes and certain discrete items.

Note 5 – Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted-average number of common and common equivalent shares outstanding during the period.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Diluted net income (loss) per share is computed giving effect to all potential dilutive common stock equivalent shares, including options and restricted stock units. The dilutive effect of outstanding awards is reflected in diluted net income (loss) per share by application of the treasury stock method.

The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share amounts):



	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2016			2015		2016
Basic:
Numerator:
Net income (loss)	$	5,750	$	(476	)	$	3,668	$	17,558
Denominator:
Weighted-average number of common stock shares outstanding	17,967		18,258			17,906		18,206
Net income (loss) per share—basic:	$	0.32	$	(0.03	)	$	0.20	$	0.96
Diluted:
Numerator:
Net income (loss)	$	5,750	$	(476	)	$	3,668	$	17,558
Denominator:
Weighted-average number of common stock shares outstanding	17,967		18,258			17,906		18,206
Weighted-average number of options	20		—			22		17
Weighted-average number of restricted stock units	48		—			70		73
Total common stock shares used in diluted per share calculation (1)	18,035		18,258			17,998		18,296
Net income (loss) per share—diluted:	$	0.32	$	(0.03	)	$	0.20	$	0.96


(1)	Total common stock shares used in the diluted per share calculation excludes market-based stock unit awards for which the related contingency had not been met as of June 30, 2016.

For each of the three and six month periods ended June 30, 2015 and 2016, we had securities outstanding that could potentially dilute net income (loss) per share, but the shares from the assumed exercise of these securities were excluded in the computation of diluted net income (loss) per share as their effect would have been anti-dilutive for the periods presented. The number of outstanding weighted-average anti-dilutive shares that were excluded from the computation of diluted net income (loss) per share consisted of the following (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2015	2016	2015	2016
Common stock options	1,450	1,281	1,507	1,255
Restricted stock units	492	869	447	235
Total	1,942	2,150	1,954	1,490

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 6 – Geographic Information and Significant Customers

Geographic Information—As of December 31, 2015 and June 30, 2016, our long-lived assets consisted primarily of property and equipment, internally-developed software, goodwill and other indefinite-lived intangible assets and finite-lived intangible assets. Our long-lived assets are attributed to the geographic location in which they are located. Long-lived assets by geographical area were as follows (in thousands):



	As of		As of
	December 31, 2015		June 30, 2016
United States	$	35,341	$	33,495
China	436		412
Total	$	35,777	$	33,907

Significant Customers—Substantially all revenue for the three and six months ended June 30, 2015 and 2016 was generated from customers located in the United States. Carriers representing 10% or more of our total revenue in the three and six months ended June 30, 2015 and 2016 are presented in the table below:



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2016		2015		2016
Humana	13	%	16	%	26	%	27	%
Anthem (1)	11	%	9	%	9	%	8	%
UnitedHealthcare (2)	11	%	13	%	10	%	11	%
Aetna (3)	8	%	9	%	9	%	10	%

(1)Anthem includes other carriers owned by Anthem.

(2)UnitedHealthcare includes other carriers owned by UnitedHealthcare.

(3)Aetna includes other carriers owned by Aetna.

Commission revenue attributable to Medicare-related health insurance plans was approximately 26% and 50% of our commission revenue in the three and six months ended June 30, 2016, respectively. Commission revenue attributable to Medicare-related health insurance plans was approximately 18% and 38% of our commission revenue in the three and six months ended June 30, 2015, respectively. Commission revenue attributable to major medical individual and family health insurance plans was approximately 57% and 38% of our commission revenue in the three and six months ended June 30, 2016, respectively. Commission revenue attributable to major medical individual and family health insurance plans was approximately 65% and 49% of our commission revenue in the three and six months ended June 30, 2015. We define our individual and family plan offerings as major medical individual and family health insurance plans, which do not include small business, Medicare-related health insurance plan offerings and other ancillary products such as short-term, stand-alone dental, life, vision, and accident insurance plan offerings.

As of June 30, 2016, one customer represented 74% of our $13.9 million outstanding accounts receivable balance. As of December 31, 2015, three customers represented 24%, 18% and 15%, respectively, of our $9.6 million outstanding accounts receivable balance. No other customers represented 10% or more of our total accounts receivable at December 31, 2015 and June 30, 2016. We believe the potential for collection issues with any of our customers is minimal as of June 30, 2016. Accordingly, our estimate for uncollectible amounts at June 30, 2016 was not material.

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 7 – Restructuring Charges

In March 2015, we implemented an organizational restructuring and cost reduction plan designed to rebalance our resources and help reduce our cost structure as a result of lower than expected individual and family health insurance plan membership and revenue. As part of the plan, we eliminated approximately 160 full-time positions in the United States, representing approximately 15% of our workforce primarily in our technology and content and customer care and enrollment groups, and to a lesser extent, in our marketing and advertising and general and administrative groups. We incurred pre-tax restructuring charges of approximately $3.9 million for employee termination benefits and related costs, as well as $0.6 million in other pre-tax restructuring charges, primarily consisting of facility exit costs. The majority of the restructuring charges were recorded in the first quarter of 2015, when the activities comprising the plan were approved and substantially completed. In March 2015, as part of our restructuring activities, we also eliminated certain positions in our China operation.

In June 2016, we reversed $0.2 million in other restructuring charges related to facility exit costs as we reoccupied facilities previously vacated as part of our March 2015 organizational restructuring and cost reduction plan.

The following table summarizes the total cash and non-cash restructuring charges recorded during the three and six months ended June 30, 2015 and June 30, 2016, respectively (in thousands):



	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2016			2015		2016

Employee termination costs	$	57	$	—		$	3,791	$	—
Non-cash employee termination costs - stock-based compensation	—		—			113		—
Facility and other termination costs	1		(158		)	637		(158		)
Total restructuring charges	$	58	$	(158	)	$	4,541	$	(158	)

The following table summarizes the cash-based restructuring charges liability activity during the six months ended June 30, 2016 (in thousands):



	Six Months Ended June 30, 2016
	Beginning balance		Charges		Payments			Benefits			Ending balance

Employee termination costs	$	12	$	—	$	(12	)	$	—		$	—
Facility and other termination costs	421		—		(117		)	(158		)	146
Total restructuring liability	$	433	$	—	$	(129	)	$	(158	)	$	146
Less: non-current restructuring charges associated with facilities											(78		)
Restructuring charges liability - current											$	68

Note 8 - Commitments and Contingencies

Legal Proceedings— On January 26 and March 10, 2015, two purported class action lawsuits were filed against us, our chairman and chief executive officer, Gary L. Lauer (“Mr. Lauer”), and our senior vice president and chief financial officer, Stuart M. Huizinga (“Mr. Huizinga”), in the United States District Court for the Northern District of California. On May 6, 2015, the court consolidated the two cases. On June 10, 2015, a consolidated complaint was filed. The consolidated complaint alleges that the defendants made false and misleading statements regarding the Company’s financial performance, guidance and operations during an alleged class period of May 1, 2014 to January 14, 2015. The consolidated complaint alleges that we and

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EHEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Messrs. Lauer and Huizinga violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The consolidated complaint seeks compensatory damages, attorneys’ fees and costs, rescission or a rescissory measure of damages, equitable/injunctive relief and such other relief as the court deems proper. On July 15, 2015, defendants moved to dismiss the consolidated complaint. On March 14, 2016, the court entered an order granting the defendants' motion to dismiss the consolidated complaint with leave to file an amended consolidated complaint within 30 days, which was later extended to April 27, 2016. On April 27, 2016, plaintiff did not file an amended complaint but filed a notice of submission to the court's order dismissing the consolidated complaint. The court entered judgment in favor of defendants on May 27, 2016. Plaintiff did not file an appeal, and the time to appeal has expired.

In May 2016, we received a Notice of Proposed Agency Action and Opportunity for Hearing (the “Notice”) from the Office of the Montana State Auditor, Commissioner of Securities & Insurance (“CSI”). The Notice proposes that the CSI take disciplinary action against a number of parties, including us, for alleged violations of the Montana Insurance Code. Specifically, with respect to us, the Notice alleges that we sold short-term health insurance to at least 211 individuals between January 1, 2012 and April 20, 2015 without being appointed by the relevant health insurance carrier in violation of Montana law. The Notice also alleges that we misrepresented pertinent facts or insurance policy provisions in connection with the sale of short-term health insurance and made certain omissions and/or misrepresentations regarding short-term health insurance. The CSI seeks the following relief in the Notice (i) imposition of fines against us not to exceed $5,000 per violation; (ii) issuance of a cease and desist order to enjoin us from violations of the Montana Insurance Code; and (iii) suspension or revocation of our license to sell health insurance in Montana. We cannot estimate the likelihood of liability or the total amount of potential damages, if any, but an adverse result could have a material adverse impact on our financial condition and results of operations.

In the ordinary course of our business, we have received and may continue to receive inquiries from state regulators relating to various matters. We have become, and may in the future become, involved in litigation in the ordinary course of our business. If we are found to have violated laws or regulations in any of the states, we could be subject to various fines and penalties, including revocation of our license to sell insurance in those states, and our business and financial results would be harmed. Revocation of any of our licenses or penalties in one jurisdiction could cause our license to be revoked or for us to face penalties in other jurisdictions. In addition, without a health insurance license in a jurisdiction, carriers would not pay us commissions for the products we sold in that jurisdiction, and we would not be able to sell new health insurance products in that jurisdiction. We could also be harmed to the extent that related publicity damages our reputation as a trusted source of objective information relating to health insurance and its affordability. It could also be costly to defend ourselves regardless of the outcome. At December 31, 2015 and June 30, 2016 we had no material liabilities included in our consolidated balance sheet for outstanding legal claims.

Note 9 - Subsequent Event

On July 11, 2016, eHealth, Inc. (the “Company”) announced the resignation of Stuart M. Huizinga from his positions as senior vice president and chief financial officer of the Company, effective immediately. Mr. Huizinga will continue to serve as the Company’s principal financial officer and principal accounting officer to help finalize the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, and will resign such roles on September 30, 2016.


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include, among other things, statements regarding our expectations relating to submitted applications and our membership; our expectations relating to revenue (including commission revenue, advertising revenue and other revenue), sources of revenue, cost of revenue, the collectability of our accounts receivable, operating expenses, marketing and advertising expenses, customer care and enrollment employees and expenses, technology and content expenses, general and administrative expenses and profitability; our expectations regarding our strategic review and impact to our operating results; potential efforts to accelerate growth in Medicare Advantage and Medicare Supplement market; our expectations regarding the impact of healthcare reform on our business; our ability to enroll and plans relating to the enrollment of individuals and families into qualified health plans through government health insurance exchanges; our ability to enter into agreements with and meet requirements to offer qualified health plans through state and federal health insurance exchanges; our increased

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focus in public policy and lobbying efforts; our expectations relating to the commission rates that health insurance carriers will pay; our expectations relating to the seasonality of our business; our expectations relating to the renewal of Medicare-related health insurance plans and the timing of our generation of renewal commission revenue on those plans; the timing of our receipt of commission payments; our expectations relating to seasonal trends in our business relating to the sale of Medicare-related health insurance; estimations of our membership and related assumptions that we make in our membership estimations; our expectations relating to membership attrition and retention rates; the shift between marketing partner and direct marketing channels as sources of submitted individual and family plan applications during 2016; our critical accounting policies and related estimates; our expectation that we will experience an increase in submitted applications during open enrollment periods; our belief that cash generated from operations and our current cash and cash equivalents will be sufficient to fund operations for the next twelve months; our beliefs relating to the potential for collection of our accounts receivable; expected competition from government-run health insurance exchanges and other sources; our ability to adjust headcount to respond to changes in demand due to annual open enrollment periods; our ability to convert subsidy-eligible individuals and families into members; the timing of open enrollment periods including restrictions on changes outside of such periods and our readiness therefore; the timing and source of our Medicare-related revenue; the impact of the healthcare reform laws on the healthcare industry in future periods; the potential impact of lawsuits challenging certain aspects of the Affordable Care Act; the merits of any lawsuits filed against us; future capital requirements; our need for additional regulatory licenses and approvals; as well as other statements regarding our future operations, financial condition, prospects and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those risks associated with the impact of healthcare reform and court decisions relating to healthcare reform; our ability to retain existing members and enroll a large number of individuals and families during enrollment periods; our ability to align our expenses with our revenue; the impact of annual enrollment period for the purchase of individual and family health insurance and its timing on our recognition of revenue; our ability to sell qualified health insurance plans to subsidy-eligible individuals and to enroll subsidy eligible individuals through government-run health insurance exchanges; competition, including competition from government-run health insurance exchanges; political, legislative and legal challenges to the Affordable Care Act; seasonality of our business and the fluctuation of our operating results; our ability to retain existing members and limit member turnover; changes in consumer behaviors and their selection of individual and family health insurance products, including the selection of products for which we receive lower commissions; product offerings among carriers and the resulting impact on our commission revenue; the impact of healthcare reform on the cost of health insurance; the cost of health insurance in the upcoming open enrollment period; the impact of increased health insurance costs on demand; our ability to timely receive and accurately predict the amount of commission payments from health insurance carriers; variability in timing of commission payments from health insurance carriers; medical loss ratio requirements; delays in our receipt of items required to recognize Medicare revenue; changes in member conversion rates; our ability to accurately estimate membership; the evolving nature of Affordable Care Act implementation; our relationships with health insurance carriers; our success in marketing and selling health insurance plans and our unit cost of acquisition; our ability to hire, train and retain licensed health insurance agents and other employees; the need for health insurance carrier and regulatory approvals in connection with the marketing of Medicare-related insurance products; our ability to successfully market and sell Medicare-related health insurance plans; the operations of our customer care center; costs of acquiring new members; scalability of the Medicare business; lack of membership growth and retention rates; consumers' satisfaction with our service; changes in the competitive landscape; our ability to attract new members and to convert online visitors into paying members; changes in products offered on our ecommerce platforms; changes in commission rates; maintaining and enhancing our brand identity; our ability to derive desired benefits from investments in our business, including membership growth initiatives; system failures, capacity constraints, data loss or online commerce security risks; dependence on acceptance of the Internet as a marketplace for the purchase and sale of health insurance; our ability to develop an effective process for purchasing of health insurance over the Internet on smartphones, tablets and devices other than desktop or laptop computers; dependence upon Internet search engines; reliance on marketing partners; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; general economic factors; dependence on our operations in China; dependence on our carrier partners for timely information about membership changes; success of our sponsorship and advertising business; protection of our intellectual property and defense against intellectual property rights claims; legal liability and regulatory penalties; changes in our management and key employees; maintenance of relationships with business development partners; difficulties, delays, unexpected costs and an inability to achieve anticipated cost savings from the organizational restructuring and cost reduction program we implemented in March 2015; potential acquisitions; potential consolidation in the health insurance industry; maintenance of proper and effective internal controls; potential changes to accounting standards and interpretations; impact of provisions for income taxes; changes in laws and regulations, including in connection with health care reform and/or with respect to the marketing and sale of Medicare-related plans; compliance with insurance and other laws and regulations; exposure to security risks; and the performance, reliability and availability of our ecommerce platforms and underlying network infrastructure. Other risks include the risks discussed under the heading “Risk Factors” of this report and those discussed in our other Securities and Exchange Commission filings. The following discussion should be read in conjunction with our Annual Report on Form 10-K as filed with the Securities and Exchange Commission in March 2016, and

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the audited consolidated financial statements and related notes contained therein. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.

Overview

We are the leading private online source of health insurance for individuals, families and small businesses. Through our website addresses (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com), consumers can get quotes from leading health insurance carriers, compare plans side-by-side, and apply for and purchase Medicare-related, individual and family, small business and ancillary health insurance plans. Our ecommerce technology also enables us to deliver consumers’ health insurance applications electronically to health insurance carriers. As a result, we simplify and streamline the complex and traditionally paper-intensive health insurance sales and purchasing process.

We have invested heavily in technology and content related to our ecommerce platforms. We have also invested significant time and resources in obtaining licenses to sell health insurance in all 50 states and the District of Columbia, developing member acquisition programs, obtaining necessary regulatory approvals of our websites and establishing relationships and appointments with leading health insurance carriers, enabling us to offer thousands of health insurance plans online. Our ecommerce platforms can be accessed directly through our websites as well as through our network of marketing partners.

Sources of Revenue

Commission Revenue

We generate revenue primarily from commissions we receive from health insurance carriers whose health insurance policies are purchased through our ecommerce platforms. Commission revenue represented 94% of total revenue in each of the three and six months ended June 30, 2015, respectively, and represented 93% and 94% of total revenue in the three and six months ended June 30, 2016, respectively.

We typically enter into contractual agency relationships with health insurance carriers that are non-exclusive and terminable on short notice by either party for any reason. In addition, health insurance carriers often have the ability to terminate or amend our agreements unilaterally on short notice, including provisions in our agreements relating to our commission rates. The amendment or termination of an agreement we have with a health insurance carrier may adversely impact the commissions we are paid on health insurance plans that we have already sold through the carrier. See Critical Accounting Policies and Estimates in our Annual Report on Form 10-K for the year ended December 31, 2015 for details regarding our recognition of commission revenue.

We actively market the availability of Medicare-related health insurance plans through our Medicare ecommerce platforms (www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com). Our Medicare ecommerce platforms and telephonic enrollment capabilities enable consumers to research, compare and purchase Medicare-related health insurance plans, including Medicare Advantage, Medicare Supplement and Medicare Part D prescription drug plans. To the extent that we assist in the sale of Medicare-related insurance plans as a health insurance agent, either online or telephonically, we generate revenue from commissions we receive from health insurance carriers. Medicare Advantage and Medicare Part D prescription drug plan pricing is set by health insurance carriers and approved by the Centers for Medicare and Medicaid Services, or CMS, an agency of the United States Department of Health and Human Services, and is not subject to negotiation or discounting by health insurance carriers or our competitors. Similarly, Medicare Supplement plan pricing is set by the health insurance carrier and approved by state regulators and is not subject to negotiation or discounting by health insurance carriers or our competitors.

We have historically sold a greater number of Medicare plans in the fourth quarter of the year 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, compared to the number of Medicare plans we sell during the first, second or third quarters of the year. During 2015, 56% of our Medicare plan-related applications were submitted during the fourth quarter. As a result, we generate the majority of our commission revenues related to new Medicare plan-related enrollments in the fourth quarter. During the first quarter, we recognize substantially all of our Medicare Advantage and

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Medicare Part D prescription drug plan renewal commission revenue as substantially all Medicare Advantage and Medicare Part D policies renew on January 1 of each year.

In addition to Medicare plans, we also actively market the availability of individual and family, small business and ancillary health insurance plans through our ecommerce platforms (www.eHealth.com and www.eHealthInsurance.com), and generate revenue from commissions we receive from health insurance carriers whose plans are purchased through us, as well as commission override payments we receive for achieving sales volume thresholds or other objectives. We sell ancillary health insurance plans, which primarily consist of short-term, dental, life, vision, and accident insurance plans, alongside individual and family health insurance plans and also as standalone products.

In March 2010, the federal Patient Protection and Affordable Care Act and related amendments in the Health Care and Education Reconciliation Act were signed into law. These health care reform laws contain provisions that changed and will continue to change the health insurance industry in substantial ways. We have described various aspects of health care reform in Part II, Item 1A. Risk Factors - Risks Related to Our Business. Various aspects of health care reform may impact our business positively. For instance, the mandate that individuals and families have qualified health insurance or face a tax penalty and the government providing individuals and families’ subsidies in the form of premium tax credits and cost sharing reductions are provisions in the law that could benefit our business. Notwithstanding these aspects of health care reform, the implementation of health care reform has significantly reduced our individual and family health insurance membership and individual and family health insurance commission revenue and could in the future have a material adverse effect on our business and results of operations. Health care reform established annual open enrollment periods for the purchase of individual and family health insurance. For coverage effective in 2015, the open enrollment period ran from November 15, 2014 through February 15, 2015, and for coverage effective in 2016, the annual open enrollment period ran from November 1, 2015 through January 31, 2016. Individuals and families generally are not able to purchase individual and family health insurance outside of the annual enrollment periods, 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. The open enrollment period has changed the seasonality of our individual and family health insurance business and individual and family health insurance submitted applications. It also presents challenges to our ability to enroll a significant number of individuals and families into health insurance over a limited period of time and significantly reduces our ability to obtain new health insurance members outside of the open enrollment period. In addition, CMS tightened the requirements for individuals to qualify for a special enrollment period starting in 2016. We do not expect to enroll a significant number of individuals in individual and family health insurance outside of the open enrollment period in 2016.

A substantial number of individuals and families are eligible for subsidies under health care reform. Health care reform’s establishment of government-run health insurance exchanges through which individuals and families must purchase qualified health plans to receive government subsidies has increased our competition as individual and families may purchase qualified health plans directly from government exchanges. While they are not required to do so, government-run exchanges are permitted to allow agents and brokers to enroll individuals and families into qualified health plans through government-run exchanges. We have entered into an agreement with, and enrolled individuals and families into qualified health plans through, the Federally Facilitated Marketplace, or FFM, run by CMS. The FFM operated some part of the health insurance exchange in 37 states during the last health care reform open enrollment period.

Our ability to act as a health insurance agent for subsidy-eligible individuals purchasing qualified health plans through the FFM depends upon the FFM developing and maintaining an efficient, scalable and online enrollment process, and our ability to successfully enter into and maintain our agreement and integrate with the FFM. CMS has discretion with respect to allowing us to enroll individuals in qualified health plans through the FFM and broad authority over the requirements that we must meet in order to be able to do so. In addition to issuing new requirements, CMS has the authority to interpret existing requirements. In order to enroll individuals in subsidy-eligible plans over the Internet through the FFM, we need to meet a number of requirements relating to display of information on our websites as well as new and comprehensive privacy and security requirements. These requirements are evolving. For example, we are required to translate significant portions of our website into Spanish for the next open enrollment period in certain jurisdictions in order to be able to offer qualified health plans to individuals in states where greater than 10% of the state’s population is Spanish speaking (currently California and Texas), and we may not be able to meet this requirement and be able to offer qualified health plans in those states. Our ability to maintain compliance with the various requirements to enroll individuals through the FFM has presented, and could in the future present, significant challenges for us.

CMS directed us and other web-based entities to make changes after the end of the last open enrollment period to the process we developed for enrolling individuals into qualified health plans through the FFM. As a result of the changes that we made to our online process in response to CMS requirements, which require that we use a different and more cumbersome pathway through which individuals are enrolled in qualified health plans, we experienced a substantial reduction in the rate at

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which individuals and families starting the application process for qualified health plans and subsidies became members. Near the time CMS directed us to change our process for enrolling individuals in qualified health plans CMS indicated that it anticipated it would improve the alternative process that CMS directed us to use. To date, CMS has not made meaningful improvements to the process and has indicated that it no longer anticipates making important improvements. While we plan to engage in discussions with CMS to allow us to use a process similar to the process we used during the last open enrollment period, we may not be successful in doing so. If we are not successful, we anticipate that we will experience substantially reduced conversion rates for qualified health plans and may determine to significantly deemphasize the sale of qualified health plans through the FFM. Should we do so, our individual and family health insurance and ancillary product membership and commission revenue in 2017 would be adversely impacted to a significant degree. In addition, we anticipate that deemphasizing the sale of qualified health plans through the FFM would have a negative impact on our 2016 revenue and a positive impact on our 2016 earnings due to a reduction in marketing and advertising expense. We currently plan to incur significant lobbying expenses in connection with our request of CMS to allow us to utilize the process we developed for enrolling individuals and families in qualified health plans through the FFM and our lobbying efforts may be unsuccessful. Even if CMS does allow us to use the process we used to enroll individuals in qualified health plans during the last open enrollment period, we may still have difficulty enrolling, and may not be able to enroll, individuals in qualified health plans in an efficient and scalable manner both during and outside of the annual open enrollment period in the future and the number of individuals and families we are able to enroll in qualified health plans could decline significantly, which would cause a significant reduction in our membership and revenue.

The future impact of health care reform on health insurance carriers that pay us our commission revenue is also unclear. Health insurance carriers have the ability to unilaterally change their relationship with us, including the commission rates we receive for acting as a health insurance agent, and may reduce the amount they pay us, alter the manner and geographic areas in which they permit us to sell their products and change our relationship with them in any number of ways. As a result of higher medical utilization rates than carriers projected and for other reasons, several health insurance carriers with which we have a relationship, including large national health insurance carriers, reduced or eliminated our commissions for individual and family health insurance enrollments outside of the open enrollment period. Generally, carriers have not communicated to us their strategy for their individual and family health insurance business for the upcoming open enrollment period. While certain health insurance carriers that reduced or eliminated commissions indicated that they intend to increase commission rates for individual and family health insurance we sell during the upcoming open enrollment period, they are not obligated to do so, and if they do not do so, our business, operating results and financial conditions could be harmed. Given the significant losses that some of the carriers have sustained in connection with their sale of individual and family health insurance, we may see an overall reduction in our inventory of individual and family health insurance plans, an increase in the health insurance premiums consumers pay for the individual and family health insurance and an overall deterioration in the commissions that we receive for plans that we sell in the upcoming open enrollment period compared to the last open enrollment period, which would harm our business, operating results and financial condition. Moreover, certain major health insurance carriers for which we have sold individual and family health insurance have indicated that they do not plan to sell qualified health plans to subsidy-eligible individuals through the FFM and that they are exiting the individual and family health insurance market altogether in a large number of states. If health insurance carriers decline to sell individual and family health insurance, the number of plans offered on our website will be reduced, which could decrease demand for the individual and family health insurance that we sell. In addition, a significant number of our individual and family health insurance members purchased their individual and family health insurance from carriers exiting the individual and family health insurance market. As a result, we may see increased attrition in our individual and family membership, because those members will need shop for and purchase individual and family health insurance from another health insurance carrier during the upcoming open enrollment period if they desire to maintain individual and family health insurance. If they do not purchase their individual and family health insurance through us, they will no longer be our members and we will not receive the related commission revenue. If additional health insurance carriers determine not to sell qualified health plans or exit the business of selling individual and family health insurance in certain states or altogether, the impact on our individual and family membership and commission revenue will likely be more pronounced.

Our commission revenue is influenced by a number of factors including:


•	the number of applications for Medicare-related, individual and family, small business and ancillary health insurance we submit to health insurance carriers;


•	the number of members on submitted applications;


•	the rate at which the individuals on those applications turn into paying members;


•	the commission rates we receive for the health insurance plans that we sell; and


•	our membership retention.

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Submitted Applications. Historically, we have experienced a significant increase in the number of Medicare-related submitted applications during the Medicare annual enrollment period, which occurs during the fourth quarter of each year. During 2015, we experienced an increase in the number of Medicare-related applications submitted during the first, second and third quarters compared to the fourth quarter. Medicare Advantage applications submitted during the first, second and third quarters accounted for 45% of our total Medicare submitted applications in 2015, compared to 34% in 2014. Total Medicare product applications submitted outside of the annual enrollment period accounted for 55% of our total Medicare submitted applications in 2015, while 45% were submitted during the annual enrollment period in 2015. The number of individual and family health insurance applications submitted through us is historically highest during the health care reform open enrollment period, which has historically begun in the fourth quarter and run into the first quarter of the following year. Individual and family applications submitted through us during the first quarter of 2016 were lower than the number of applications submitted through us during the fourth quarter of 2015, and 47% below the number of applications submitted through us during the first quarter of 2015. During the second quarter of 2016, individual and family applications submitted through us decreased 59% compared to the second quarter of 2015. During the second and third quarters, which are outside the health care reform open enrollment periods, the number of individual and family health insurance submitted applications has historically decreased significantly compared to the first and fourth quarters. We expect this trend to continue in 2016. We also expect our individual and family submitted applications will increase significantly during the fourth quarter of 2016, relative to the second and third quarters of 2016, as a result of the open enrollment period.

Members per Submitted Application. For Medicare-related health insurance, there is only one individual on a submitted application. However, for individual and family and certain ancillary health insurance plans, there may be more than one member per submitted application. We experienced a decline in the average number of members on individual and family health insurance applications submitted in the first quarter of 2015 compared to the second through fourth quarters of 2014, but consistent with the first quarter of 2014. The average improved in the second through fourth quarters of 2015 compared to the first quarter of 2015, but did not return to the same levels as the second through fourth quarters of 2014, and did not return to historical pre-healthcare reform rates. In the first quarter of 2016, we experienced a decline in the average number of members on individual and family health insurance applications submitted through us compared to the first quarter of 2015, but again experienced an increase during the second quarter of 2016 compared to both the first quarter of 2016 and second quarter of 2015.

Approval Rates and Initial Payment Rates. Both the approval rates and initial payment rates for Medicare-related health insurance remained relatively consistent in 2014 and 2015. As a result of the health care reform prohibition on using pre-existing health conditions as a reason to deny health insurance applications, we have experienced higher approval rates on individual and family plan applications submitted during the open enrollment periods compared to periods before health care reform implementation. Approval rates have historically been lower outside of the open enrollment period than for applications submitted during the open enrollment period. In addition, during the first and second quarters of 2015, our individual and family plan commission revenue benefited from carriers paying us earlier on policies approved during the open enrollment period that ended in 2015 compared to the prior open enrollment period. We believe that the more timely payment of commissions resulted from carriers being better prepared to handle large application volumes, and we also took steps to work with our carrier partners to ensure that their processes resulted in more timely commission payments to us in 2015 and thus far in 2016.

Commission Rates. The average commission dollars per-member-per-month that we receive for new health insurance plan members varies based upon a number of factors, including the ratio of policies that we sold for which we receive per member-per-month commissions compared to percentage-of-premium commissions, the premiums on the policies we sold, the mix of our members by health insurance carrier and the commission rates we receive from each carrier. Additionally, commission rates may vary by carrier, by geography and by the type of plan purchased by a member.

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 twelve-month period, regardless of the month the plan was effective. Beginning with and subsequent to the second plan year, we typically receive fixed, monthly commissions for Medicare Advantage plans and fixed, annual commissions for Medicare Part D prescription drug plans. 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. Commission payments we receive for Medicare Supplement policies sold by us are typically a percentage of the premium on the policy and paid to us until the policy is cancelled or we otherwise do not remain the agent on the policy. See Critical Accounting Policies and Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for details regarding our recognition of Medicare plan commission revenue.

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Historically, the commission payments we receive for individual and family, small business and ancillary health insurance plans we sold were a percentage of the premium our customers pay for those plans. Effective January 1, 2014, many carriers began paying our individual and family health insurance commissions at a flat amount per member per month. Commission payments are typically made to us on a monthly basis until either the policy is cancelled or we otherwise do not remain the agent on the policy.

As a result of our commission structure, much of our revenue for a given financial reporting period relates to health insurance plans that we sold prior to the beginning of the period and is recurring in nature. However, the increased volume of health insurance applications submitted during the annual open enrollment periods compared to applications submitted outside of the annual open enrollment period has caused us to experience shifts in the concentration of our membership by health insurance carrier and type of plan purchased and corresponding fluctuations in our average commission rate. For example, we have observed higher commissions on many of the individual and family health insurance plans that we sold during the 2015 open enrollment period for coverage effective in 2016 compared to policies that we sold during the 2014 open enrollment period for coverage effective in 2015. Recently, several health insurance carriers have reduced or eliminated commissions for individual and family health insurance sold outside of the health care reform open enrollment period. While some of these carriers have indicated that they plan to increase commission rates for individual and family health insurance sold in the upcoming open enrollment period, they are not obligated and may determine not to do so.

Retention Rates. Our commission revenue is also influenced by our member retention rates. Retention rates are typically lower in the first policy year and improve each subsequent year. Additionally, the member retention rates on our individual and family membership were negatively impacted by health care reform throughout 2014, 2015 and the first half of 2016. As a result, the number of new individual and family health insurance members added during the second quarter of 2016 and the second, third and fourth quarters of 2015 was not enough to offset the loss of existing members, resulting in a decline in individual and family health insurance estimated membership during those periods. We may experience increased attrition rates as a result of carriers exiting the individual and family health insurance market and our members who purchased plans from those carriers shopping for new plans.

Other Revenue

Online Sponsorship and Advertising. We generate revenue from our online sponsorship and advertising program that allows carriers to purchase advertising space in specific markets in a sponsorship area on our website and allows Medicare-related carriers to purchase advertising on a separate website developed, hosted and maintained by us. In return, we are typically paid a flat fee or, with respect to individual and family health insurance plans, a monthly fee and a performance-based fee based on metrics such as submitted health insurance applications. Health insurance carriers commit to sponsorship and advertising on a quarterly basis, if at all, and generally determine prior to the quarter whether to purchase sponsorship and advertising from us and how much they are willing to spend. As a result, our sponsorship and advertising revenue is difficult to predict. See Critical Accounting Policies and Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for details regarding our recognition of online sponsorship and advertising revenue.

Technology Licensing. We generate revenue from licensing the use of our health insurance ecommerce technology. Our technology platform enables health insurance carriers and agents to market and distribute health insurance plans online. Health insurance carriers or agents that license our technology typically pay us implementation fees and performance-based fees that are based on metrics such as submitted health insurance applications. See Critical Accounting Policies and Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for details regarding our recognition of technology licensing revenue.

Lead Referrals. We generate revenue from referral fees paid to us based on Medicare-related and individual and family health insurance leads generated by our ecommerce platforms that are delivered and sold to third parties. See Critical Accounting Policies and Estimates in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 for details regarding our recognition of lead referral revenue.

Member Acquisition

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Marketing initiatives are an important component of our strategy to increase revenue by growing our member base. Our marketing initiatives are focused on three primary member acquisition channels: direct, marketing partners and online advertising and are primarily designed to encourage consumers to complete an application for health insurance. For the three months ended June 30, 2015 and 2016, applications submitted through us for Medicare-related, individual and family, small business and ancillary health insurance from our three member acquisition channels as a percentage of all health insurance applications submitted on our websites were as follows:



	Three Months Ended June 30,
	2015		2016
Source of total submitted applications (as a percentage of total submitted applications for the period):
Direct	61	%	63	%
Marketing partners	33	%	31	%
Online advertising	6	%	6	%
Total	100	%	100	%

Direct. Our direct member acquisition channel consists of consumers who access our website addresses, (www.eHealth.com, www.eHealthInsurance.com, www.eHealthMedicare.com, www.Medicare.com and www.PlanPrescriber.com) either directly, through algorithmic natural search listings on Internet search engines and directories, or other forms of marketing, such as Internet retargeting campaigns, television advertising, direct mail and email marketing.

Marketing Partners. Our marketing partner member acquisition channel consists of consumers who access our websites through a network of affiliate partners and financial services and other companies. We compensate a significant number of our marketing partners by paying a fee each time a consumer referral from a partner results in a submitted health insurance application, regardless of whether the consumer’s application is approved by the health insurance carrier. Some of our marketing partners have tiered arrangements in which the amount of the fee increases as the volume of submitted applications we receive from the marketing partner increases over a particular period. We recognize these expenditures in the period when a marketing partner’s referral results in the submission of a health insurance application. Growth in our marketing partner channel depends upon our expanding marketing programs with existing partners and adding new partners to our network. While we have relationships with a large number of marketing partners, we depend upon referrals from a limited number of marketing partners for a significant portion of the submitted applications we receive from our marketing partner customer acquisition channel. Moreover, a significant portion of our referrals for the purchase of Medicare plans comes from a single marketing partner.

Online Advertising. Our online advertising member acquisition channel consists of consumers who access our websites through paid keyword search advertising from search engines such as Google, Bing and Yahoo!, as well as various Internet marketing programs such as display advertising. We incur expenses associated with search advertising in the period in which the consumer clicks on the advertisement.

Operating Costs and Expenses

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.

Additionally, cost of revenue includes the amortization of consideration we paid to certain broker partners in connection with the transfer of their health insurance members to us as the new broker of record on the underlying policies. These transfers include primarily Medicare plan members. Consideration for all book-of-business transfers is being amortized to cost of revenue as we recognize commission revenue related to the transferred members.

Marketing and Advertising

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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.

Since a significant portion of our marketing and advertising expenses consists of expenses incurred as a result of payments owed to our marketing partners in connection with health insurance applications submitted on our ecommerce platforms and other forms of marketing, such as direct mail, email marketing, television, radio and retargeting campaigns, those expenses are influenced by seasonal submitted application patterns. As a result of the annual open enrollment periods for both Medicare-related and individual and family health insurance, marketing and advertising expenses increase during the fourth quarter of each year. Additionally, since the health care reform open enrollment periods for individual and family health insurance has continued into the following year, marketing and advertising expenses have increased during the first quarter of each year, but to a lesser extent than the fourth quarter. During the second and third quarters, marketing and advertising expenses decrease, consistent with the decrease in submitted applications compared to periods during the open enrollment periods. We expect these seasonal trends to continue in 2016.

Because the total volume of submitted applications that we receive from our marketing partners is largely outside of our control, particularly during any short-term period, and because of our tiered marketing partner arrangements, we could incur expenses in excess of, or below, the amounts we had planned in periods of rapid change in the volume of submitted applications from marketing partner referrals. Similar to our marketing partner channel, expenses in our online advertising channel will increase or decrease in relation to any increase or decrease in consumers referred to our website as a result of search engine advertising. 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. This has in the past and could in the future negatively impact our profitability during such periods because the revenue (if any) derived from submitted applications that are approved by health insurance carriers is not recognized until future periods.

Historically, we have experienced decreases in submitted individual and family plan applications outside of the open enrollment period compared to inside the open enrollment period and the source of our submitted individual and family plan applications shifted so that a greater number of applications came from our direct member acquisition channel. During the open enrollment period, the source of our submitted individual and family plan applications shifted so that a greater number of applications came from our higher cost marketing partner member acquisition channel compared to outside of the open enrollment period. These seasonal trends are expected to continue in 2016.

Customer Care and Enrollment

Customer care and enrollment expenses primarily consist of compensation and benefits 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. In preparation for the Medicare annual enrollment period during 2014 and 2015, and to a lesser extent the open enrollment period for individual and family health insurance plans during 2014 and 2015, we began ramping up our customer care center staff during our third quarter to handle the anticipated increased volume of health insurance transactions. Additionally, in the first quarter of 2015, we retained some Medicare sales and enrollment personnel to handle the increased volume of individual and family plan applications during the annual open enrollment periods for individual and family health insurance that ended on February 15, 2015. We expect customer care and enrollment expenses to increase in each sequential quarter of 2016 to handle the anticipated increase in volume of Medicare-related health insurance transactions during the Medicare annual enrollment period in the fourth quarter.

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 majority 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.

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General and Administrative

General and administrative expenses include compensation and benefits costs for staff 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. We anticipate incurring significant general and administrative expenses in the second half of 2016 in connection with a strategic review of our business as well as government affairs and lobbying expenses relating to our individual and family health insurance business.

Restructuring Charges

On March 10, 2015, we implemented an organizational restructuring and cost reduction plan. As part of the plan, we eliminated approximately 160 full-time positions, representing approximately 15% of our workforce primarily in our technology and content and customer care and enrollment groups, and to a lesser extent, in our marketing and advertising and general and administrative groups. We incurred pre-tax restructuring charges of approximately $3.9 million for employee termination benefits and related costs as well as $0.6 million in other pre-tax restructuring charges, primarily consisting of facility exit costs. The majority of the restructuring charges were recorded in the first quarter of 2015, when the activities comprising the plan were substantially completed.

In June 2016, we reversed $0.2 million in other pre-tax restructuring charges related to facility exit costs as we reoccupied facilities previously vacated as part of our March 2015 organizational restructuring and cost reduction plan.

Changes in Senior Management

In May 2016, we announced the resignation of Gary L. Lauer from his positions as chairperson of our board of directors and chief executive officer and the appointment of Scott N. Flanders, a member of our board of directors, as our chief executive officer. These executive changes increased general and administrative expenses, including severance costs, other personnel costs and stock-based compensation in the second quarter of 2016.

In June 2016, we announced the resignation of William T. Shaughnessy from his positions as president, chief operating officer and a member of our board of directors. This executive departure increased marketing and advertising expenses, including severance costs, other personnel costs and stock-based compensation in the second quarter of 2016.

In July 2016, we announced the resignation of Stuart M. Huizinga from his positions as our senior vice president and chief financial officer and the appointment of David K. Francis as our senior vice president and chief financial officer. Mr. Huizinga will continue to serve as our principal financial officer and principal accounting officer to help finalize our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, and will resign such roles on September 30, 2016, at which time Mr. Francis will begin his service as our principal financial officer and principal accounting officer. We anticipate these executive changes will increase general and administrative expenses, including severance costs, other personnel costs and stock-based compensation in the third quarter of 2016.

Strategic Review

In connection with the recent changes in our senior management, we are conducting a strategic review of our business. As a result of the strategic review, we are examining areas of potential emphasis and investment. Among other things, we are considering whether to pursue higher growth rates in our Medicare business at the expense of greater acquisition costs, including investing more to accelerate growth in our Medicare Advantage membership and also potentially expanding our participation in the Medicare Supplement market. Adopting this strategy would mean sacrificing near term margins. We are also considering diversifying our existing revenue streams, including entering into businesses adjacent to our existing businesses. The strategic review that we are undertaking could have significant financial implications, including a potential impact on our 2016 revenue and earnings.

Summary of Selected Metrics

The following table shows certain selected quarterly metrics for the three months ended June 30, 2015 and 2016 and as of June 30, 2015 and 2016:

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	Three Months Ended June 30,
	2015		2016		Percentage Change

Submitted applications:
Medicare submitted applications (1)	18,600		32,700		76	%
IFP submitted applications (2)	23,900		9,800		(59	)%
Other submitted applications (3)	67,100		60,600		(10	)%
Total submitted applications (4)	109,600		103,100		(6	)%

Medicare Advantage submitted applications (5)	13,705		24,923		82	%

Commission revenue (in thousands):
Medicare commission revenue (6)	$	6,851	$	9,008	31	%
IFP commission revenue (7)	24,046		19,595		(19	)%
Other commission revenue (8)	6,499		6,046		(7	)%
Total commission revenue (9)	$	37,396	$	34,649	(7	)%

	As of June 30,
	2015		2016		Percentage Change
Estimated membership:
Medicare estimated membership (10)	169,100		239,000		41	%
IFP estimated membership (11)	568,400		481,300		(15	)%
Other estimated membership (12)	404,900		380,000		(6	)%
Total estimated membership (13)	1,142,400		1,100,300		(4	)%

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Notes:
(1)		Medicare-related health insurance applications submitted on our website or through our customer care center during the period, including Medicare Advantage, Medicare Part D Prescription drug and Medicare Supplement plans. Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application.
(2)		Major medical Individual and Family plan ("IFP") health insurance applications submitted on our website during the period. Applications are counted as submitted when the applicant completes the application, clicks the submit button on our website and submits the application to us. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information and providing an electronic signature. In addition, an applicant may submit more than one application. We define our “IFP” offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans (primarily consisting of short-term, dental, life, vision, and accident insurance plans).
(3)		Applications for health insurance plans other than Medicare and IFP submitted on our website during the period. Applications for ancillary plans are counted as submitted when the applicant completes the application, clicks the submit button on our website and submits the application to us. Applications for small business plans are counted as submitted when the applicant completes the application, the employees complete their applications, the applicant submits the application to us and we submit the application to the carrier. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application.
(4)		Applications for all health insurance plans submitted on our website or through our customer care center during the period. See notes (1), (2) and (3) above for further information as to what constitutes a submitted application.
(5)		Medicare Advantage plan health insurance applications submitted on our website or through our customer care center during the period. Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. Medicare Advantage submitted applications are included in Medicare submitted applications - See note (2) above.
(6)		Commission revenue recognized on all Medicare-related health insurance during the period.
(7)		Commission revenue recognized on all IFP health insurance plans during the period, including commission overrides.
(8)		Commission revenue recognized on all insurance other than Medicare-related health insurance and IFP health insurance plans during the period.
(9)		Total commission revenue recognized on all insurance plans during the period.
(10)		Estimated number of members active on Medicare-related health insurance as of the date indicated. See the note below for additional information regarding our calculation of Medicare estimated membership.
(11)		Estimated number of members active on IFP health insurance plans as of the date indicated. See the note below for additional information regarding our calculation of IFP estimated membership.
(12)		Estimated number of members active on insurance plans other than Medicare-related health insurance and IFP health insurance plans as of the date indicated. See the note below for additional information regarding our calculation of other estimated membership.
(13)		Estimated number of members active on all insurance plans as of the date indicated. See the note below for additional information regarding our calculation of total estimated membership.

Note:

Health insurance carriers bill and collect insurance premiums paid by our members. Health insurance carriers do not report to us the number of members that we have as of a given date. The majority of our non-Medicare members who terminate their policies do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our non-Medicare 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. We estimate the number of continuing members on all policies as of a specific date as follows:


•	For Medicare-related health insurance plans, we take the number of members for whom we have received or applied a commission payment during the month of estimation.

•

For IFP health insurance plans, we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for the month that is six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the six-month period; and (ii) the number of approved members over the six-month period prior to the date of estimation after reducing that number by the percentage of members who do not accept their approved policy from the same month of the previous year for each of the six months prior to the date of estimation and for estimated member cancellations through the date of the estimate.

•

For ancillary health insurance plans (such as short-term, dental, vision, accident and student), we take the sum of (i) the number of members for whom we have received or applied a commission payment for the month that is one to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the one to three-month period); and (ii) the number of approved members over the one to three-month period prior to the date of estimation (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy and

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for estimated member cancellations through the date of the estimate). 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. For small business health insurance plans, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. 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 to us. We often are made aware of policy cancellations 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.

After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. In addition, and 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 such as health care reform implementation on our membership retention. Health care reform and other factors could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, 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 operations 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 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;


•	Stock-Based Compensation;


•	Realizability of Long-Lived Assets; and


•	Accounting for Income Taxes.

During the six months ended June 30, 2016, there were no significant changes to our critical accounting policies and estimates. 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, 2015, for a complete discussion of our critical accounting policies and estimates.

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Results of Operations

The following table sets forth our operating results and the related percentage of total revenues for the three and six months ended June 30, 2015 and 2016 (dollars in thousands):



	Three Months Ended June 30,										Six Months Ended June 30,
	2015					2016					2015					2016
Revenue:
Commission	$	37,396		94	%	$	34,649		93	%	$	95,215		94	%	$	104,036		94	%
Other	2,498			6		2,628			7		5,967			6		7,085			6
Total revenue	39,894			100		37,277			100		101,182			100		111,121			100
Operating costs and expenses:
Cost of revenue	670			2		533			1		3,084			3		2,717			2
Marketing and advertising	9,285			23		12,936			35		34,736			34		33,818			30
Customer care and enrollment	7,658			19		10,411			28		19,519			19		20,610			19
Technology and content	8,591			22		8,289			22		19,364			19		16,796			15
General and administrative	7,516			19		10,815			29		15,489			15		18,944			17
Restructuring charges	58			—		(158		)	—		4,541			4		(158		)	—
Amortization of intangible assets	288			1		260			1		633			1		520			—
Total operating costs and expenses	34,066			85		43,086			116		97,366			96		93,247			84
Income (loss) from operations	5,828			15		(5,809		)	(16	)	3,816			4		17,874			16
Other expense, net	(9		)	—		(21		)	—		(23		)	—		(32		)	—
Income (loss) before provision (benefit) for income taxes	5,819			15		(5,830		)	(16	)	3,793			4		17,842			16
Provision (benefit) for income taxes	69			—		(5,354		)	(14	)	125			—		284			—
Net income (loss)	$	5,750		14	%	$	(476	)	(1	)%	$	3,668		4	%	$	17,558		16	%

Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2015		2016		2015		2016
Marketing and advertising	$	446	$	417	$	1,037	$	972
Customer care and enrollment	139		147		256		270
Technology and content	511		473		946		908
General and administrative	731		1,140		1,506		1,859
Restructuring charges	—		—		113		—
Total stock-based compensation expense	$	1,827	$	2,177	$	3,858	$	4,009

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Three and Six Months Ended June 30, 2015 and 2016

Revenue

The following table presents our commission, other revenue and total revenue for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2015			2016			$			%		2015			2016			$		%
Commission	$	37,396		$	34,649		$	(2,747	)	(7	)%	$	95,215		$	104,036		$	8,821	9	%
Percentage of total revenue	94		%	93		%						94		%	94		%
Other	$	2,498		$	2,628		$	130		5	%	$	5,967		$	7,085		$	1,118	19	%
Percentage of total revenue	6		%	7		%						6		%	6		%
Total revenue	$	39,894		$	37,277		$	(2,617	)	(7	)%	$	101,182		$	111,121		$	9,939	10	%

Three Months Ended June 30, 2015 and 2016—Commission revenue decreased $2.7 million, or 7% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, due to a decrease of $4.2 million in individual and family health insurance-related commission revenue, a decrease of $0.7 million in commission override revenue and a decrease of $0.4 million in ancillary revenue. This was partially offset by an increase of $2.6 million in Medicare-related commission revenue. The decrease in individual and family plan related commission revenue is primarily due to decreased individual and family plan estimated membership for the period ended June 30, 2016 compared to the period ended June 30, 2015. The increase in Medicare related commission revenue is primarily due to increased Medicare estimated membership for the period ended June 30, 2016 compared to the period ended June 30, 2015.

Other revenue increased $0.1 million, or 5%, in the three months ended June 30, 2016, compared to the three months ended June 30, 2015, due primarily to an increase in online sponsorship and advertising revenue and lead generation revenue.

Six Months Ended June 30, 2015 and 2016—Commission revenue increased $8.8 million or 9%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to increases of $16.7 million in Medicare-related commission revenue. This was partially offset by decreases of $7.8 million in individual and family health insurance-related commission revenue, $1.2 million in commission override revenue, $0.3 million in small business health insurance related commission revenue and $0.6 million in ancillary health insurance commission revenue, consisting primarily of short-term, dental, vision and accident plan offerings. The increase in Medicare related commission revenue is primarily due to increased Medicare estimated membership for the period ended June 30, 2016 compared to the period ended June 30, 2015. Commission revenue from renewals of Medicare Advantage and Prescription Drug Plan products were approximately $29 million in the first quarter of 2016, representing approximately 52% annual growth compared to the first quarter of 2015. The decrease in individual and family plan related commission revenue is primarily due to decreased individual and family plan estimated membership for the period ended June 30, 2016 compared to the period ended June 30, 2015.

Other revenue increased $1.1 million, or 19%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, primarily due to an increase of $0.5 million in online sponsorship and advertising revenue and an increase of $0.8 million in lead generation revenue, partially offset by a decrease of $0.2 million in technology licensing revenue.

We expect commission revenue to increase in absolute dollars in 2016 compared to 2015, primarily as a result of a continued increase in Medicare-related commission revenue, partially offset by decreases in individual and family health insurance related commission revenue, commission override revenue, and ancillary health insurance commission revenue.

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Operating Costs and Expenses

Cost of Revenue

The following table presents our cost of revenue for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2015			2016			$			%		2015			2016			$			%
Cost of revenue	$	670		$	533		$	(137	)	(20	)%	$	3,084		$	2,717		$	(367	)	(12	)%
Percentage of total revenue	2		%	1		%						3		%	2		%

Three Months Ended June 30, 2015 and 2016—Cost of revenue decreased $0.1 million, or 20% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, due primarily to fewer payments to marketing partners with whom we have revenue-sharing arrangements.

Six Months Ended June 30, 2015 and 2016—Cost of revenue decreased $0.4 million, or 12%, in the six months ended June 30, 2016, compared to the six months ended June 30, 2015, due primarily to a decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.

We expect cost of revenue to decrease in absolute dollars in 2016 compared to 2015, primarily as a result of the decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.

Marketing and Advertising

The following table presents our marketing and advertising expenses for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2015			2016			$		%		2015			2016			$			%

Marketing and advertising	$	9,285		$	12,936		$	3,651	39	%	$	34,736		$	33,818		$	(918	)	(3	)%
Percentage of total revenue	23		%	35		%					34		%	30		%

Three Months Ended June 30, 2015 and 2016—Marketing and advertising expenses increased $3.7 million, or 39%, in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due primarily to a $3.5 million increase in variable advertising costs and a $0.2 million increase in compensation, benefits and other personnel costs due partly to severance costs from an executive departure.

Six Months Ended June 30, 2015 and 2016—Marketing and advertising expenses decreased $0.9 million, or 3%, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, due primarily to a decrease in compensation, benefits and other personnel costs of $0.6 million due to the reduction-in-force announced in March 2015 and a $0.3 million decrease in variable advertising costs.

We expect our marketing and advertising expenses to increase in absolute dollars in 2016 compared to 2015 due primarily to an increase in variable advertising costs related to our Medicare-related health insurance business, particularly during the Medicare annual enrollment period in the fourth quarter.

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Customer Care and Enrollment

The following table presents our customer care and enrollment expenses for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2015			2016			$		%		2015			2016			$		%
Customer care and enrollment	$	7,658		$	10,411		$	2,753	36	%	$	19,519		$	20,610		$	1,091	6	%
Percentage of total revenue	19		%	28		%					19		%	19		%

Three Months Ended June 30, 2015 and 2016—Customer care and enrollment expenses increased $2.8 million or 36% in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, due primarily to an increase in compensation, benefits and other personnel costs relating to the Medicare-related health insurance business as we retained a larger number of Medicare agents after the last Annual Enrollment Period to support growth in Medicare sales outside of the Annual Enrollment period.

Six Months Ended June 30, 2015 and 2016—Customer care and enrollment expenses increased $1.1 million, or 6%, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, due primarily to an increase in compensation, benefits and other personnel costs relating to the Medicare-related health insurance business as we retained a larger number of Medicare agents after the last Annual Enrollment Period to support growth in Medicare sales outside of the Annual Enrollment period.

We expect customer care and enrollment expenses to increase in absolute dollars in 2016 compared to 2015 as we retained a larger number of agents after the last Annual Enrollment Period and plan to hire additional customer care center personnel in connection with the upcoming Medicare Annual Enrollment Period to support the growth of our Medicare-related health insurance business.

Technology and Content

The following table presents our technology and content expenses for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2015			2016			$			%		2015			2016			$			%
Technology and content	$	8,591		$	8,289		$	(302	)	(4	)%	$	19,364		$	16,796		$	(2,568	)	(13	)%
Percentage of total revenue	22		%	22		%						19		%	15		%

Three Months Ended June 30, 2015 and 2016—Technology and content expenses decreased slightly in the three months ended June 30, 2016 compared to the three months ended June 30, 2015.

Six Months Ended June 30, 2015 and 2016—Technology and content expenses decreased $2.6 million, or 13%, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, primarily due to a decrease in compensation, benefits and other personnel costs due to the reduction-in-force announced in March 2015.

General and Administrative

The following table presents our general and administrative expenses for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change				Six Months Ended June 30,						Change
	2015			2016			$		%		2015			2016			$		%
General and administrative	$	7,516		$	10,815		$	3,299	44	%	$	15,489		$	18,944		$	3,455	22	%
Percentage of total revenue	19		%	29		%					15		%	17		%

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Three Months Ended June 30, 2015 and 2016—General and administrative expenses increased $3.3 million, or 44%, in the three months ended June 30, 2016 compared to the three months ended June 30, 2015, due primarily to an increase of $2.2 million in compensation, benefits and other personnel costs resulting from severance and relocation costs from executive changes and an increase of $1.6 million in third party fees related to a review and analysis of strategic plans.

Six Months Ended June 30, 2015 and 2016—General and administrative expenses increased $3.5 million, or 22%, in the six months ended June 30, 2016 compared to the six months ended June 30, 2015, due primarily to an increase of $2.0 million in compensation, benefits and other personnel costs resulting from severance and relocation costs from executive changes and an increase of $1.7 million in third party fees related to a review and analysis of strategic plans.

We expect general and administrative expenses to increase in absolute dollars in 2016 compared to 2015 as a result of severance costs, other personnel costs and stock-based compensation resulting from changes in our executive officers,

a strategic review of our business and government affairs and lobbying expenses.

Restructuring Charges

The following table presents our restructuring charges for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2015			2016			$			%		2015			2016			$			%
Restructuring charges	$	58		$	(158	)	$	(216	)	(372	)%	$	4,541		$	(158	)	$	(4,699	)	(103	)%
Percentage of total revenue	—		%	—		%						4		%	—		%

Three Months Ended June 30, 2015 and 2016—The organizational restructuring and cost reduction plan implemented in March 2015 resulted in additional restructuring expense of $0.1 million related to employee termination costs in China in the three months ended June 30, 2015 compared to a reversal of $0.2 million in other restructuring charges related to facility exit costs as we reoccupied facilities during the three months ended June 30, 2016 which we had previously vacated.

Six Months Ended June 30, 2015 and 2016—The organizational restructuring and cost reduction plan was implemented in March 2015 resulted in additional restructuring charges of $4.5 million These costs consist primarily of $3.9 million for employee termination benefits and related costs as well as $0.6 million in other restructuring charges, primarily relating to facility exit costs. For the six months ended June 30, 2016, we recorded a reversal of $0.2 million in other restructuring charges related to facility exit costs as we reoccupied facilities previously vacated.

Amortization of Intangible Assets

The following table presents our amortization of intangible assets for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



	Three Months Ended June 30,						Change					Six Months Ended June 30,						Change
	2015			2016			$			%		2015			2016			$			%
Amortization of intangible assets	$	288		$	260		$	(28	)	(10	)%	$	633		$	520		$	(113	)	(18	)%
Percentage of total revenue	1		%	1		%						1		%	—		%

Three Months Ended June 30, 2015 and 2016—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber decreased slightly in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due to certain assets that have been fully amortized compared to the prior period.

Six Months Ended June 30, 2015 and 2016—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber decreased slightly in the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to certain assets that have been fully amortized compared to the prior period.

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Other Expense, Net

The following table presents our other expense, net, for the three and six months ended June 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):



Three Months Ended June 30,		Change	Six Months Ended June 30,	Change
2015	2016	$