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 September 30, 2016 
 
OR 
 
☐  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 October 31, 2016 was 18,341,531 shares. 

Table of Contents



EHEALTH, INC. FORM 10-Q 
TABLE OF CONTENTS
 
PART I FINANCIAL INFORMATION
PAGE
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II OTHER INFORMATION
 
Item 1.
Item 1A.
Item 6.
 
 


Table of Contents

PART I 
FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS
 
EHEALTH, INC. 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(In thousands)  
 
 
December 31, 2015
 
September 30, 2016
Assets
(Note 1)
 
(unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
62,710

 
$
67,268

Accounts receivable
9,647

 
7,613

Prepaid expenses and other current assets
5,185

 
5,964

Total current assets
77,542

 
80,845

Property and equipment, net
7,364

 
6,104

Other assets
4,697

 
4,348

Intangible assets, net
9,620

 
8,840

Goodwill
14,096

 
14,096

Total assets
$
113,319

 
$
114,233

 
 
 
 
Liabilities and stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
3,012

 
$
2,332

Accrued compensation and benefits
14,386

 
9,030

Accrued marketing expenses
10,698

 
1,656

Deferred revenue
392

 
1,416

Other current liabilities
3,448

 
3,922

Total current liabilities
31,936

 
18,356

Non-current liabilities
4,962

 
3,275

Stockholders’ equity:
 
 
 
Common stock
29

 
29

Additional paid-in capital
266,699

 
271,070

Treasury stock, at cost
(199,998
)
 
(199,998
)
Retained earnings
9,498

 
21,320

Accumulated other comprehensive income
193

 
181

Total stockholders’ equity
76,421

 
92,602

Total liabilities and stockholders’ equity
$
113,319

 
$
114,233

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


1
Table of Contents

EHEALTH, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 
(In thousands, except per share amounts, unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Revenue
 
 
 
 
 
 
 
Commission
$
34,942

 
$
29,941

 
$
130,157

 
$
133,977

Other
3,282

 
2,138

 
9,248

 
9,223

Total revenue
38,224

 
32,079

 
139,405

 
143,200

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of revenue
443

 
30

 
3,527

 
2,747

Marketing and advertising
9,349

 
10,206

 
44,086

 
44,024

Customer care and enrollment
9,462

 
11,259

 
28,981

 
31,869

Technology and content
8,036

 
8,257

 
27,400

 
25,053

General and administrative
7,749

 
9,122

 
23,237

 
28,066

Restructuring charge (benefit)
—

 
(139
)
 
4,541

 
(297
)
Amortization of intangible assets
260

 
260

 
893

 
780

Total operating costs and expenses
35,299

 
38,995

 
132,665

 
132,242

Income (loss) from operations
2,925

 
(6,916
)
 
6,740

 
10,958

Other income (expense)
(27
)
 
7

 
(50
)
 
(25
)
Income (loss) before benefit for income taxes
2,898

 
(6,909
)
 
6,690

 
10,933

Benefit for income taxes
(737
)
 
(1,173
)
 
(613
)
 
(889
)
Net income (loss)
$
3,635

 
$
(5,736
)
 
$
7,303

 
$
11,822

 
 
 
 
 
 
 
 
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.20

 
$
(0.31
)
 
$
0.41

 
$
0.65

Diluted
$
0.20

 
$
(0.31
)
 
$
0.40

 
$
0.65

 
 
 
 
 
 
 
 
Weighted-average number of shares used in per share amounts:
 
 
 
 
 
 
 
Basic
18,093

 
18,329

 
17,969

 
18,247

Diluted
18,240

 
18,329

 
18,079

 
18,323

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
3,635

 
$
(5,736
)
 
$
7,303

 
$
11,822

Foreign currency translation adjustment
10

 
(5
)
 
15

 
(12
)
Comprehensive income (loss)
$
3,645

 
$
(5,741
)
 
$
7,318

 
$
11,810

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

2
Table of Contents

EHEALTH, INC. 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(In thousands, unaudited)
 
 
Nine Months Ended
 September 30,
 
2015
 
2016
Operating activities
 

 
 

Net income
$
7,303

 
$
11,822

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
3,122

 
2,749

Amortization of internally-developed software
449

 
659

Amortization of book-of-business consideration
1,998

 
1,608

Amortization of intangible assets
893

 
780

Stock-based compensation expense
5,434

 
5,356

Other non-cash items
180

 
(90
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(618
)
 
2,034

Prepaid expenses and other assets
(1,150
)
 
(1,236
)
Accounts payable
(3,892
)
 
(456
)
Accrued compensation and benefits
3,037

 
(5,356
)
Accrued marketing expenses
(7,411
)
 
(9,042
)
Deferred revenue
2,650

 
1,024

Accrued restructuring charge
489

 
(433
)
Other liabilities
(12
)
 
(636
)
Net cash provided by operating activities
12,472

 
8,783

Investing activities
 
 
 
Purchases of property and equipment and other assets
(2,335
)
 
(3,165
)
Net cash used in investing activities
(2,335
)
 
(3,165
)
Financing activities
 
 
 
Net proceeds from exercise of common stock options
1,326

 
60

Cash used to net-share settle equity awards
(824
)
 
(1,044
)
Principal payments in connection with capital leases
(57
)
 
(64
)
Net cash provided by (used in) financing activities
445

 
(1,048
)
Effect of exchange rate changes on cash and cash equivalents
19

 
(12
)
Net increase in cash and cash equivalents
10,601

 
4,558

Cash and cash equivalents at beginning of period
51,415

 
62,710

Cash and cash equivalents at end of period
$
62,016

 
$
67,268

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

3
Table of Contents
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 September 30, 2016, the condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2016 and the condensed consolidated statements of cash flows for the nine months ended September 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 September 30, 2016, its results of operations for the three and nine months ended September 30, 2015 and 2016 and its cash flows for the nine months ended September 30, 2015 and 2016. All adjustments are of a normal recurring nature. The results for the three and nine months ended September 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 $5.5 million of severance, management consulting and legal fees in the nine months ended September 30, 2016, of which $4.8 million is included in general and administrative expenses and $0.7 million is included in marketing and advertising expenses in the accompanying condensed consolidated statements of comprehensive income (loss).
 
Seasonality—A greater number of our Medicare-related health insurance plans are sold in our fourth quarter during the Medicare annual enrollment period when Medicare-eligible individuals are permitted to change their Medicare Advantage and Medicare Part D prescription drug coverage for the following year. 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

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Table of Contents
EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In accordance 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 ASU 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 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.

In August 2016, the FASB issued ASU No. 2016-15 (ASU 2016-15), "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance on how certain cash receipts and cash payments are presented on the statement of cash flows. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2016-15 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 elected to apply the cash flow classification guidance of ASU 2016-09 prospectively for the nine-months ended September 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

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EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



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 September 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 September 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 nine months ended September 30, 2015 and 2016.  
 
As of December 31, 2015 and September 30, 2016, our cash and cash equivalent balances were invested as follows (in thousands): 
 
December 31, 2015
 
September 30, 2016
Cash
$
8,086

 
$
7,591

Money market funds
54,624

 
59,677

Total cash and cash equivalents
$
62,710

 
$
67,268

 
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 September 30, 2016. 
 
Accounts Receivable—As of December 31, 2015 and September 30, 2016, our accounts receivable consisted of the following (in thousands): 
 
December 31, 2015
 
September 30, 2016
Commission receivable
$
6,136

 
$
1,794

Accounts receivable—from other revenues
3,511

 
431

Commissions receivable—from Medicare renewals
—

 
5,388

Total accounts receivable
$
9,647

 
$
7,613

 
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
(763
)
Options granted
(335
)
Restricted stock units cancelled (1)
137

Options cancelled (2) 
3

Shares available for grant at September 30, 2016
2,584

 
(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 2005 Stock Plan and 2006 Equity Incentive Plan, as these plans were terminated with respect to the grant of additional awards.
    

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EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



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): 
 
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
335

 
$
13.22

 
 
 
 

Exercised
(5
)
 
$
12.98

 
 
 
 
Cancelled
(605
)
 
$
16.63

 
 
 
 

Balance outstanding at September 30, 2016
1,000

 
$
18.25

 
3.67
 
$
45

Vested and expected to vest at September 30, 2016
954

 
$
18.47

 
3.53
 
$
40

Exercisable at September 30, 2016
682

 
$
20.05

 
1.81
 
$
1


(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 September 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
764

 
$
11.39

 
 
 
 

Vested
(280
)
 
$
18.78

 
 
 
 

Cancelled
(208
)
 
$
10.22

 
 
 
 

Balance outstanding at September 30, 2016
1,242

 
$
13.36

 
2.77
 
$
13,901

 
(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 September 30, 2016 multiplied by the number of restricted stock units outstanding as of December 31, 2015 and September 30, 2016, respectively.   
Stock Repurchase Programs—We had no stock repurchase activity during the three and nine months ended September 30, 2016. In addition to 10,663,888 shares repurchased under our past repurchase programs as of September 30, 2016, we have in treasury 451,987 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 September 30, 2016, we had a total of 11,025,933 shares and 11,115,875 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 nine months ended September 30, 2015 and 2016 (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Stock options
$
351

 
$
191

 
$
1,184

 
$
825

Restricted stock units
1,225

 
1,156

 
4,250

 
4,531

Total stock-based compensation expense
$
1,576

 
$
1,347

 
$
5,434

 
$
5,356


The following table summarizes stock-based compensation expense by operating function for the three and nine months ended September 30, 2015 and 2016 (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Marketing and advertising
$
461

 
$
19

 
$
1,498

 
$
1,038

Customer care and enrollment
110

 
90

 
366

 
360

Technology and content
362

 
384

 
1,308

 
1,293

General and administrative
643

 
854

 
2,149

 
2,665

Restructuring charge
—

 
—

 
113

 
—

Total stock-based compensation expense
$
1,576

 
$
1,347

 
$
5,434

 
$
5,356


Note 4 – Income Taxes

The following table summarizes our benefit for income taxes and our effective tax rates for the three and nine months ended September 30, 2015 and 2016 (in thousands, except effective tax rate):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
 September 30,
 
2015
 
2016
 
2015
 
2016
Income (loss) before benefit for income taxes
$
2,898

 
$
(6,909
)
 
$
6,690

 
$
10,933

Benefit for income taxes
$
(737
)
 
$
(1,173
)
 
$
(613
)
 
$
(889
)
Effective tax rate
(25.4
)%
 
17.0
%
 
(9.2
)%
 
(8.1
)%
 
In the three and nine months ended September 30, 2016, we recorded benefit for income taxes of $1.2 million and $0.9 million, respectively, primarily related to a $1.4 million decrease in our liability for unrecognized tax benefits due to the expiration of the related statute of limitations, partially offset by a provision for income taxes related to minimum tax and a foreign tax rate differential. 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 September 30, 2016 as we believe it is not more likely than not that the net deferred tax assets will be realized.

In the three and nine months ended September 30, 2015, we recorded a benefit for income taxes of $0.7 million and $0.6 million, respectively, primarily related to a $0.8 million decrease in our liability for unrecognized tax benefits due to the expiration of the related statute of limitations, partially offset by a provision for income taxes related to minimum taxes and a foreign tax rate differential.



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EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



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. 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 
 September 30,
 
Nine Months Ended
 September 30,
 
2015
 
2016
 
2015
 
2016
Basic:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Net income (loss)
$
3,635

 
$
(5,736
)
 
$
7,303

 
$
11,822

Denominator:
 
 
 
 
 
 
 
Weighted-average number of common stock shares outstanding
18,093

 
18,329

 
17,969

 
18,247

Net income (loss) per share—basic:
$
0.20

 
$
(0.31
)
 
$
0.41

 
$
0.65

Diluted:
 

 
 

 
 

 
 

Numerator:
 

 
 

 
 

 
 

Net income (loss)
$
3,635

 
$
(5,736
)
 
$
7,303

 
$
11,822

Denominator:
 

 
 

 
 

 
 

Weighted-average number of common stock shares outstanding
18,093

 
18,329

 
17,969

 
18,247

Weighted-average number of options
42

 
—

 
29

 
22

Weighted-average number of restricted stock units
105

 
—

 
81

 
54

Total common stock shares used in diluted per share calculation (1)
18,240

 
18,329

 
18,079

 
18,323

Net income (loss) per share—diluted:
$
0.20

 
$
(0.31
)
 
$
0.40

 
$
0.65


(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 September 30, 2016.
 
For each of the three and nine month periods ended September 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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Common stock options
1,205

 
1,443

 
1,313

 
1,307

Restricted stock units
218

 
700

 
339

 
271

Total
1,423

 
2,143

 
1,652

 
1,578



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EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Note 6 – Geographic Information and Significant Customers

Geographic Information— 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 as of December 31, 2015 and September 30, 2016 were as follows (in thousands):  
 
December 31, 2015
 
September 30, 2016
United States
$
35,341

 
$
32,796

China
436

 
388

Total
$
35,777

 
$
33,184

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Humana
19
%
 
9
%
 
24
%
 
23
%
UnitedHealthcare (1)
11
%
 
15
%
 
10
%
 
12
%
Aetna (2)
9
%
 
8
%
 
9
%
 
10
%
Anthem (3)
10
%
 
10
%
 
10
%
 
8
%
 
(1)UnitedHealthcare includes other carriers owned by UnitedHealthcare.
(2)Aetna includes other carriers owned by Aetna.
(3)Anthem includes other carriers owned by Anthem.

Commission revenue attributable to Medicare-related health insurance plans was approximately 22% and 44% of our commission revenue in the three and nine months ended September 30, 2016, respectively. Commission revenue attributable to Medicare-related health insurance plans was approximately 19% and 33% of our commission revenue in the three and nine months ended September 30, 2015, respectively. Commission revenue attributable to major medical individual and family health insurance plans was approximately 62% and 44% of our commission revenue in the three and nine months ended September 30, 2016, respectively. Commission revenue attributable to major medical individual and family health insurance plans was approximately 62% and 52% of our commission revenue in the three and nine months ended September 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 September 30, 2016, two customers represented 47% and 16% of our $7.6 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 September 30, 2016. We believe the potential for collection issues with any of our customers is minimal as of September 30, 2016. Accordingly, our estimate for uncollectible amounts at September 30, 2016 was not material. 


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EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




Note 7 – Restructuring Charge
    
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 and $0.6 million for facility and other termination costs. The majority of the restructuring charge was 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 the three and nine months ended September 30, 2016, we reversed $0.1 million and $0.3 million, respectively, related to facility exit costs as we reoccupied office space we had previously vacated and were also released from a lease for other office space we had previously vacated.

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

 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2016
 
2015
 
2016
 
2015
 
2016
Employee termination costs
$
—

 
$
—

 
$
3,791

 
$
—

Non-cash employee termination costs - stock-based compensation
—

 
—

 
113

 
—

Facility and other termination costs
—

 
(139
)
 
637

 
(297
)
Total restructuring charge (benefit)
$
—

 
$
(139
)
 
$
4,541

 
$
(297
)

The following table summarizes the cash-based restructuring charge liability activity during the nine months ended September 30, 2016 (in thousands):

 
Nine Months Ended September 30, 2016
 
Beginning balance
 
Charges
 
Payments
 
Benefits
 
Ending balance
Employee termination costs
$
12

 
$
—

 
$
(12
)
 
$
—

 
$
—

Facility and other termination costs (benefit)
421

 
—

 
(124
)
 
(297
)
 
—

Total restructuring liability
$
433

 
$
—

 
$
(136
)
 
$
(297
)
 
$
—




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EHEALTH, INC. 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



Note 8 - Commitments and Contingencies

Legal Proceedings— 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 proposed 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 alleged 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 alleged 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 sought 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. In September 2016, the CSI dismissed us from the action without prejudice. We were not required to pay any amount or suffer any adverse consequence in connection with the dismissal.

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 jurisdiction, 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 September 30, 2016 we had no material liabilities included in our consolidated balance sheet for outstanding legal claims.



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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 membership; our expectations relating to revenue, sources of revenue, cost of revenue, the collectability of our accounts receivable, operating expenses and profitability; our expectations regarding our strategy and investments and impact to our operating results; our efforts to accelerate growth in the Medicare Advantage and Medicare Supplement market; our focus on the small business 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 expectations regarding commission rates, conversion rates, membership attrition and retention rates; our increased focus in public policy and lobbying efforts; 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 critical accounting policies and related estimates; 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; future capital requirements; expected competition from government-run health insurance exchanges and other sources; the timing and source of our Medicare-related revenue; political, legislative and legal challenges; the merits of any lawsuits filed against us; 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; our ability to retain existing members and enroll a large number of new members during the annual healthcare reform open enrollment period and Medicare annual enrollment period; 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; 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; carriers exiting the market of selling individual and family health insurance and the resulting impact on our supply and commission revenue; our ability to execute on our growth strategy in the Medicare and small business health insurance markets; 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; 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; our relationships with health insurance carriers; customer concentration and consolidation of the health insurance industry; 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; costs of acquiring new members; scalability of the Medicare business; lack of membership growth and retention rates; consumers satisfaction of our service; changes in competitive landscape; our ability to attract and to convert online visitors into paying members; changes in products offered on our ecommerce platform; 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; dependence on acceptance of the Internet as a marketplace for the purchase and sale of health insurance; reliance on marketing partners; timing of receipt and accuracy of commission reports; payment practices of health insurance carriers; dependence on our operations in China; changes in laws and regulations, including in connection with healthcare reform and/or with respect to the marketing and sale of Medicare plans; compliance with insurance and other laws and regulations; exposure to security risks; and the performance, reliability and availability of our ecommerce platform 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 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.


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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 91% and 93% of total revenue in the three and nine months ended September 30, 2015, respectively, and represented 93% and 94% of total revenue in the three and nine months ended September 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 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

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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. For coverage effective in 2017, the current enrollment period began on November 1, 2016 and is scheduled to run through January 31, 2017. 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 have not enrolled a significant number of individuals in individual and family health insurance outside of the open enrollment period.

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 to allow 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 the display of information on our websites, as well as new and comprehensive privacy and security requirements. These requirements are evolving. For example, we were required to translate significant portions of our website into Spanish for the current 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 Texas). 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 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 have engaged in discussions with CMS to allow us to use a process similar to the process we used during the last open enrollment

15
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period, CMS has determined to not allow us to do so. We expect that the reduced conversion rates for the process that CMS has directed us to use for enrolling individuals in qualified health plans will persist during the open enrollment period that began on November 1, 2016 and is scheduled to end January 31, 2017.  The reduced conversion rates result in higher marketing and advertising costs per submitted application and reduce the cost-effectiveness of our direct and online marketing programs.  As a result, we reduced our individual and family health insurance marketing spend outside of the open enrollment period in 2016 and plan reduced individual and family health insurance marketing spend during the current open enrollment period.  As a result of these circumstances, we expect to enroll a significantly lower number of individuals and families into individual and family health insurance plans during the current open enrollment period compared to the last open enrollment period, which would positively impact our 2016 financial results due to the reduction in marketing and advertising expenses, but contribute to significantly reduced individual and family health insurance membership and commission revenue for us in 2017 compared to 2016.

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 enter into or withdraw from health insurance markets and unilaterally change their relationship with us, including altering the manner and geographic areas in which they permit us to sell their products, changing the commission rates we receive for acting as a health insurance agent, and changing our relationship with them in any number of ways. As a result of higher medical utilization rates than carriers projected and for other reasons, major health insurance carriers for which we have sold individual and family health insurance have announced their exit from the individual and family health insurance market altogether or in a large number of states. Some of these carriers have indicated that they only plan to sell individual and family health insurance through government exchanges, such as the FFM. These circumstances will result in our offering a reduced number of individual and family health insurance plans on our website compared to last year’s open enrollment period, including several states and zip codes where we have no individual and family health insurance plans to offer. We anticipate that the reduction in the number of individual and family health insurance plans we are able to offer will lead to a decrease in 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 expect to see increased attrition in our individual and family membership, because those members will need to shop for and purchase individual and family health insurance from another health insurance carrier during the current 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 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. We believe increased attrition and a reduction of the demand for individual and family health insurance plans that we sell will contribute to significant reduced individual and family insurance membership and commission revenue for us in 2017 compared to 2016.

Given the significant losses that carriers have sustained in connection with their sale of individual and family health insurance, several health insurance carriers with which we have a relationship, including large national health insurance carriers, made changes to the commissions they pay us, including reducing or eliminating our commissions for individual and family health insurance enrollments outside of the open enrollment period, reducing or eliminating our commissions for individual and family health insurance plans sold during the current open enrollment period and/or reducing our 2017 renewal commissions for individual and family health insurance plans we previously sold in prior years. As a result, we expect to see a meaningful reduction in our average commission rates for plans sold during the current open enrollment period compared to the last open enrollment period and for our aggregate individual and family health insurance plan membership in 2017 compared to 2016. While we do expect to see premium inflation offsetting some of the negative impact of lower commission rates, given that some of the carriers pay us based on percentage of premiums, the exact impact of these rate changes on our commission revenue will largely depend on the mix of individual and family health insurance products that we sell during the current open enrollment period as well as the mix of active individual and family health insurance plans held by our individual and family health insurance membership in 2017 and in future years. Additionally, to the extent an increase in the health insurance premiums consumers pay for the individual and family health insurance reduces demand for the individual and family health insurance that we sell or there is an overall deterioration in the commissions that we receive for plans that we sell in the current open enrollment period compared to the last open enrollment period, our business, operating results and financial conditions would be harmed.

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;

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•
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.

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. 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. During the third quarter of 2016, submitted applications for Medicare Advantage products grew 16% compared to the third quarter of 2015, while submitted applications for all Medicare products, which also include Medicare Supplement and Medical Part D prescription drug plans, grew 26%. These growth rates represent a deceleration compared to strong growth rates we experienced in our Medicare business in the first half of 2016 and were driven in large part by a reduction in lead volume from certain business development partners as a result of CMS rule-related changes to their advertising and a change in sales and marketing guidelines issued by CMS. The change in sales and marketing guidelines resulted in our making changes to our Medicare product sales and marketing processes during the third quarter of 2016, which impacted the effectiveness of our call center agents in converting leads into submitted applications during the third quarter of 2016.

The number of individual and family health insurance applications submitted through us has historically been highest during the health care reform open enrollment period, which has 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 and third quarters of 2016, individual and family applications submitted through us decreased 59% and 60%, respectively, compared to the second and third quarters of 2015. The second and third quarters are outside the health care reform open enrollment periods and the number of individual and family health insurance submitted applications in these periods has historically decreased compared to the first and fourth quarters. This trend has so far persisted in 2016. We 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. However, since CMS will not allow us to use a process similar to the process we used during the last open enrollment period for enrolling individuals into qualified health plans through the FFM, we expect to enroll a significantly lower number of individuals into individual and family health insurance plans during the current open enrollment period, compared to the last open enrollment period, which would significantly and negatively impact our individual and family health insurance commission revenue in 2016 and in future years.

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 and third quarters of 2016 compared to both the first quarter of 2016 and second and third quarter of 2015.

Approval Rates and Initial Payment Rates. Approval rates for Medicare-related health insurance remained relatively consistent in 2014, 2015 and during the first nine months of 2016. Initial payment rates for approved Medicare-related health insurance plans remained relatively consistent in 2014 and 2015, but declined slightly in the second and third quarters of 2016 due to a change in carrier mix. 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. Individual and family health insurance 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. The timing of carrier payments received during the first and second quarters of 2016 were similar to the first and second quarters of 2015. We believe that the more timely payment of commissions resulted from carriers being better prepared to handle large application volumes, and we also

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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. During 2015 and 2016, for certain categories of enrollments that occur outside of the annual enrollment period, CMS allowed carriers to either prorate the commission payment for the number of months remaining in the calendar year or pay the broker a full year of commissions up-front. A number of carriers for which we sell Medicare products recently changed from paying us a full-year of commissions up-front to pro-rating their payments based on the number of months remaining in the calendar year, which negatively impacted our Medicare commission revenue in the third quarter of 2016 compared to the third quarter of 2015. 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.

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 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, given the significant losses that carriers have sustained in connection with their sale of individual and family health insurance, several health insurance carriers with which we have a relationship, including large national health insurance carriers, made changes to the commissions they pay us, including reducing or eliminating our commissions for individual and family health insurance enrollments outside of the open enrollment period, reducing or eliminating our commissions for individual and family health insurance plans sold during the current open enrollment period and/or reducing our 2017 renewal commissions for individual and family health insurance plans we previously sold in prior years. As a result, we expect to see a meaningful reduction in our average commission rates for plans sold during the current open enrollment period compared to the last open enrollment period and for our aggregate individual and family health insurance plan membership in 2017 compared to 2016. While we do expect to see premium inflation offsetting some of the negative impact of lower commission rates, given that some of the carriers pay us based on percentage of premiums, the exact impact of these rate changes on our commission revenue will largely depend on the mix of individual and family health insurance products that we sell during the current open enrollment period as well as the mix of active individual and family health insurance plans held by our individual and family health insurance membership in 2017 and in future years. Additionally, to the extent an increase in the health insurance premiums consumers pay for the individual and family health insurance reduces demand for the individual and family health insurance that we sell or there is an overall deterioration in the commissions that we receive for plans that we sell in the current open enrollment period compared to the last open enrollment period, our business, operating results and financial conditions would be harmed.



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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 three quarters of 2016. The number of new individual and family health insurance members added during the second and third 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. As described in greater detail in Summary of Selected Metrics, our individual and family plan membership estimates are based on historical member attrition rates as we do not learn of membership cancellations for a period of time. We are now seeing that our actual attrition rates during the first half of 2016 were greater than the attrition rates we experienced in our individual and family health insurance business prior to that period. We believe the increased attrition related to premium inflation in the individual and family plan market. 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 further 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 current 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.

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. As a result of the decrease in individual and family health insurance submitted applications in the first, second and third quarters of 2016 compared to 2015, our online sponsorship revenue related to individual and family health insurance plans similarly declined during these periods, a trend that we expect to continue in the fourth quarter of 2016.

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.

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 online sponsorship and advertising revenue, technology licensing revenue and lead referral revenue.

Member Acquisition

Marketing initiatives are an important component of our strategy to increase revenue. 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 September 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:


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Three Months Ended 
 September 30,
 
2015
 
2016
Source of total submitted applications (as a percentage of total submitted applications for the period):
 
 
 
Direct
64
%
 
66
%
Marketing partners
31
%
 
27
%
Online advertising
5
%
 
7
%
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 marketing partners and adding new marketing partners. 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  
    
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

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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.

We have experienced substantially reduced conversion rates for qualified health plans since the last open enrollment period and anticipate that we will experience substantially reduced conversion rates for qualified health plans during the current open enrollment period, compared to the last open enrollment period. As a result, we have reduced our individual and family health insurance marketing expenditures and reduced individual and family marketing expenses for the current open enrollment period. Accordingly, we expect to enroll a significantly lower number of individuals into individual and family health plans during the current open enrollment period, compared to the last open enrollment period. The reduced enrollment, however will adversely impact our revenue and profitability in 2017 and beyond.

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, 2015 and 2016, and to a lesser extent the open enrollment period for individual and family health insurance plans during 2014, 2015 and 2016, 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. In the first quarter of 2016, we retained substantially all of our Medicare sales and enrollment personnel to handle the anticipated increased volume of Medicare-related applications outside of the open enrollment period during 2016 compared to 2015. As a result of the increase in Medicare sales and enrollment personnel to handle the anticipated increase in volume of Medicare-related health insurance transactions during the Medicare annual enrollment period in the fourth quarter of 2016, we expect customer care and enrollment expenses to increase in the fourth quarter of 2016 compared to the fourth quarter of 2015.
 
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 incurred significant general and administrative expenses in the second and third quarters of 2016 in connection with the departure of our chief executive officer and chief financial officer, a strategic review of our business as well as government affairs and lobbying expenses relating to our individual and family health insurance business.
    
Restructuring Charge
 
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 a pre-tax restructuring charge of approximately $3.9 million for employee termination benefits and related costs and $0.6 million for facility and other termination costs. The majority of the restructuring charge was recorded in the first quarter of 2015, when the activities comprising the plan were substantially completed.

In the second and third quarters of 2016, we reversed $0.3 million related to facility exit costs as we reoccupied office space we had previously vacated and were also released from a lease for other office space we had previously vacated.

Strategic Review

In connection with recent changes in our executive management team, we conducted a strategic review of our business operations, examining potential areas of investment and strategic emphasis. As a result of this review, we have identified the following three key growth opportunities:

•
Leverage our technology strength and marketing expertise to accelerate our growth in Medicare product sales, including Medicare Advantage and Medicare Supplement plans.
•
Utilize the strong platform built for our individual and family health insurance business to pursue large, attractive opportunities in the small business group insurance market.
•
Pursue cross-selling and adjacent revenue opportunities in our Medicare and small business group businesses.

In each of these areas of strategic growth emphasis, we intend to invest in and expand our technology-based product offerings, update our technology platform, utilize strategic partnerships to expand our product and market reach, and invest in optimizing our brand and our websites. In our individual and family health insurance business, we plan to continue to focus on profitability and cash flow maximization, while further reducing our individual and family plan-related marketing expenses. The significant level of investment required to implement these strategic plans will likely have a negative impact on future earnings for the fourth quarter of 2016 and for 2017.

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 continued 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 he resigned such roles on September 30, 2016, at which time

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Mr. Francis began his service as our chief financial officer and Jay W. Jennings began his service as our principal accounting officer. These executive changes resulted in increased general and administrative expenses, including severance costs, other personnel costs and stock-based compensation in the three and nine months ended September 30, 2016.

In October 2016, we announced the appointment of Robert S. Hurley as president, Medicare products and Tom G. Tsao as President, small business, individual and family products. Mr. Hurley previously served as executive vice president of sales and operations, and Mr. Tsao previously served as executive vice president, chief technology and product officer. We also announced that Mr. Francis will add the responsibilities of chief operations officer to his current responsibilities as senior vice president, chief financial officer, and principal financial officer. Among his other responsibilities, Mr. Francis will head key operational aspects of our business, including telesales and product and technology development.

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

 
Three Months Ended 
 September 30,
 
 
2015
 
2016
Percentage Change
 
 
 
 
 
Submitted applications:
 
 
 
 
Medicare submitted applications (1)
19,200

 
24,100

26
 %
IFP submitted applications (2)
22,500

 
8,900

(60
)%
Other submitted applications (3)
70,600

 
56,400

(20
)%
Total submitted applications (4)
112,300

 
89,400

(20
)%
 
 
 
 
 
Medicare Advantage submitted applications (5)
14,800

 
17,100

16
 %
 
 
 
 
 
Commission revenue (in thousands):
 
 
 
 
Medicare commission revenue (6)
$
6,578

 
$
6,558

—
 %
IFP commission revenue (7)
21,535

 
17,137

(20
)%
Other commission revenue (8)
6,829

 
6,246

(9
)%
Total commission revenue (9)
$
34,942

 
$
29,941

(14
)%
 
 
 
 
 
 
As of September 30
 
 
2015
 
2016
Percentage Change
Estimated membership:
 
 
 
 
Medicare estimated membership (10)
182,700

 
242,500

33
 %
IFP estimated membership (11)
518,000

 
390,400

(25
)%
Other estimated membership (12)
397,400

 
355,600

(11
)%
Total estimated membership (13)
1,098,100

 
988,500

(10
)%
 
 
 
 
 


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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. 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 more 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 1 above.
(6)
 
Commission revenue recognized on all Medicare-related health insurance during the period.
(7)
 
Commission revenue recognized on all IFP health insurance during the period, including commission overrides.
(8)
 
Commission revenue recognized on all insurance other than Medicare-related health insurance and IFP health insurance 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. To the extent we determine we have received substantially all of the commission payments related to a given month during the six-month period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation.

•
For ancillary health insurance plans (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-

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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 for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the one to three-month period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. 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 nine months ended September 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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Table of Contents

Results of Operations  
 
The following tables set forth our operating results and the related percentage of total revenues for the three and nine months ended September 30, 2015 and 2016 (dollars in thousands):  

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Revenue:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commission
$
34,942

 
91
 %
 
$
29,941

 
93
 %
 
$
130,157

 
93
 %
 
$
133,977

 
94
 %
Other
3,282

 
9

 
2,138

 
7

 
9,248

 
7

 
9,223

 
6

Total revenue
38,224

 
100

 
32,079

 
100

 
139,405

 
100

 
143,200

 
100

Operating costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Cost of revenue
443

 
1

 
30

 
—

 
3,527

 
3

 
2,747

 
2

Marketing and advertising
9,349

 
24

 
10,206

 
32

 
44,086

 
32

 
44,024

 
31

Customer care and enrollment
9,462

 
25

 
11,259

 
35

 
28,981

 
21

 
31,869

 
22

Technology and content
8,036

 
21

 
8,257

 
26

 
27,400

 
20

 
25,053

 
17

General and administrative
7,749

 
20

 
9,122

 
28

 
23,237

 
17

 
28,066

 
20

Restructuring charge (benefit)
—

 
—

 
(139
)
 
—

 
4,541

 
3

 
(297
)
 
—

Amortization of intangible assets
260

 
1

 
260

 
1

 
893

 
1

 
780

 
1

Total operating costs and expenses
35,299

 
92

 
38,995

 
122

 
132,665

 
95

 
132,242

 
92

Income (loss) from operations
2,925

 
8

 
(6,916
)
 
(22
)
 
6,740

 
5

 
10,958

 
8

Other income (expense)
(27
)
 
—

 
7

 
—

 
(50
)
 
—

 
(25
)
 
—

Income (loss) before benefit for income taxes
2,898

 
8

 
(6,909
)
 
(22
)
 
6,690

 
5

 
10,933

 
8

Benefit for income taxes
(737
)
 
(2
)
 
(1,173
)
 
(4
)
 
(613
)
 
—

 
(889
)
 
(1
)
Net income (loss)
$
3,635

 
10
 %
 
$
(5,736
)
 
(18
)%
 
$
7,303

 
5
 %
 
$
11,822

 
8
 %

Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2016
 
2015
 
2016
Marketing and advertising
$
461

 
$
19

 
$
1,498

 
$
1,038

Customer care and enrollment
110

 
90

 
366

 
360

Technology and content
362

 
384

 
1,308

 
1,293

General and administrative
643

 
854

 
2,149

 
2,665

Restructuring charge
—

 
—

 
113

 
—

Total stock-based compensation expense
$
1,576

 
$
1,347

 
$
5,434

 
$
5,356

 

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Table of Contents

Three and Nine Months Ended September 30, 2015 and 2016
 
Revenue  
The following tables present our commission, other revenue and total revenue for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands): 

 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Commission
$
34,942

 
$
29,941

 
$
(5,001
)
 
(14
)%
Percentage of total revenue
91
%
 
93
%
 
 

 
 

Other
$
3,282

 
$
2,138

 
$
(1,144
)
 
(35
)%
Percentage of total revenue
9
%
 
7
%
 
 
 
 

Total revenue
$
38,224

 
$
32,079

 
$
(6,145
)
 
(16
)%

Commission revenue decreased $5.0 million, or 14%, in the three months ended September 30, 2016 compared to the three months ended September 30, 2015, due to a decrease of $4.4 million in individual and family health insurance commission revenue and a decrease of $0.6 million in ancillary health insurance commission revenue, consisting primarily of short-term, dental, vision and accident plan offerings. The decrease in individual and family health insurance commission revenue was primarily due to decreased individual and family health insurance estimated membership for the period ended September 30, 2016 compared to the period ended September 30, 2015. The decrease in ancillary health insurance commission revenue was primarily due to decreased short-term health insurance estimated membership, and to a lesser extent dental and accident health insurance estimated membership, for the period ended September 30, 2016 compared to the period ended September 30, 2015.

Other revenue decreased $1.1 million, or 35%, in the three months ended September 30, 2016, compared to the three months ended September 30, 2015, due primarily to a decrease in online sponsorship and advertising revenue and technology licensing revenue.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percent
Commission
$
130,157

 
$
133,977

 
$
3,820

 
3
 %
Percentage of total revenue
93
%
 
94
%
 
 

 
 

Other
$
9,248

 
$
9,223

 
$
(25
)
 
—
 %
Percentage of total revenue
7
%
 
6
%
 
 
 
 

Total revenue
$
139,405

 
$
143,200

 
$
3,795

 
3
 %

Commission revenue increased $3.8 million, or 3%, in the nine months ended September 30, 2016, compared to the nine months ended September 30, 2015, primarily due to an increase of $15.6 million in Medicare-related commission revenue, partially offset by decreases of $9.1 million in individual and family health insurance commission revenue, $1.3 million in commission override revenue, and $1.3 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 September 30, 2016 compared to the period ended September 30, 2015. Commission revenue from renewals of Medicare Advantage and Medicare Part D prescription drug plans 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 commission revenue is primarily due to decreased individual and family health insurance estimated membership for the period ended September 30, 2016 compared to the period ended September 30, 2015. The decrease in ancillary health insurance commission revenue is primarily due to decreased dental health insurance estimated membership, and to a lesser extent short-term and accident health insurance estimated membership, for the period ended September 30, 2016 compared to the period ended September 30, 2015.


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Table of Contents

Other revenue decreased slightly in the nine months ended September 30, 2016, compared to the nine months ended September 30, 2015.  
  
We expect commission revenue to increase marginally 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 commission revenue, and ancillary health insurance commission revenue. We also expect other revenue to decrease in absolute dollars in 2016 compared to 2015, primarily as a result of a decrease in technology licensing revenue.

Operating Costs and Expenses 

Cost of Revenue 

The following tables present our cost of revenue for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands): 

 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Cost of revenue
$
443

 
$
30

 
$
(413
)
 
(93
)%
Percentage of total revenue
1
%
 
—
%
 
 

 
 


Cost of revenue decreased $0.4 million, or 93%, in the three months ended September 30, 2016 compared to the three months ended September 30, 2015, due primarily to a correction of an immaterial error and to fewer payments to marketing partners with whom we have revenue-sharing arrangements.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Cost of revenue
$
3,527

 
$
2,747

 
$
(780
)
 
(22
)%
Percentage of total revenue
2
%
 
2
%
 
 

 
 


Cost of revenue decreased $0.8 million, or 22%, in the nine months ended September 30, 2016, compared to the nine months ended September 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 and to fewer payments to marketing partners with whom we have revenue-sharing arrangements.

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 tables present our marketing and advertising expenses for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):  

 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Marketing and advertising
$
9,349

 
$
10,206

 
$
857

 
9
%
Percentage of total revenue
24
%
 
32
%
 
 

 
 



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Table of Contents

Marketing and advertising expenses increased $0.9 million, or 9%, in the three months ended September 30, 2016 compared to the three months ended September 30, 2015, due primarily to a $1.7 million increase in variable advertising costs partially offset by a $0.4 million decrease in salaries, benefits and other personnel costs and a $0.4 million decrease in stock-based compensation resulting from executive departures.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Marketing and advertising
$
44,086

 
$
44,024

 
$
(62
)
 
—
 %
Percentage of total revenue
32
%
 
31
%
 
 
 
 

Marketing and advertising expenses decreased $0.1 million in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, due primarily to a $1.2 million decrease in salaries, benefits and other personnel costs due to the reduction-in-force announced in March 2015, and a $0.5 million decrease largely due to reversal of stock based compensation resulting from executive departures, partially offset by a $1.5 million increase 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.

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

 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Customer care and enrollment
$
9,462

 
$
11,259

 
$
1,797

 
19
%
Percentage of total revenue
25
%
 
35
%
 
 

 
 


Customer care and enrollment expenses increased $1.8 million, or 19%, in the three months ended September 30, 2016 compared to the three months ended September 30, 2015, due primarily to a $1.5 million increase in compensation, benefits and other personnel costs relating to the Medicare-related health insurance business and a $0.3 million increase in facilities and other operating costs.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Customer care and enrollment
$
28,981

 
$
31,869

 
$
2,888

 
10
%
Percentage of total revenue
21
%
 
22
%
 
 
 
 

Customer care and enrollment expenses increased $2.9 million, or 10%, in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, due primarily to a $2.3 million increase in compensation, benefits and other personnel costs relating to the Medicare-related health insurance business and a $0.4 million increase in facilities and other operating costs.

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 Medicare annual enrollment period and have hired additional customer care center personnel in connection with the current Medicare annual enrollment period to support the growth of our Medicare-related health insurance business.


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Table of Contents

Technology and Content  

The following tables present our technology and content expenses for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands):  

 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percent
Technology and content
$
8,036

 
$
8,257

 
$
221

 
3
%
Percentage of total revenue
21
%
 
26
%
 
 

 
 


Technology and content expenses increased slightly in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percent
Technology and content
$
27,400

 
$
25,053

 
$
(2,347
)
 
(9
)%
Percentage of total revenue
20
%
 
17
%
 
 
 
 

Technology and content expenses decreased $2.3 million, or 9%, in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, primarily due to a $2.8 million decrease in compensation, benefits and other personnel costs due to the reduction-in-force announced in March 2015, partially offset by a $0.4 million increase in facilities and other operating costs.
 
General and Administrative  

The following tables present our general and administrative expenses for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands): 

 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percent
General and administrative
$
7,749

 
$
9,122

 
$
1,373

 
18
%
Percentage of total revenue
20
%
 
28
%
 
 

 
 


General and administrative expenses increased $1.4 million, or 18%, in the three months ended September 30, 2016 compared to the three months ended September 30, 2015, due primarily to a $0.6 million increase in compensation, benefits and other personnel costs resulting from severance and relocation costs, a $0.2 million increase in stock-based compensation resulting from executive changes and a $0.4 increase in third party fees related to review and analysis of strategic plans.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
General and administrative
$
23,237

 
$
28,066

 
$
4,829

 
21
%
Percentage of total revenue
17
%
 
20
%
 
 
 
 

General and administrative expenses increased $4.8 million, or 21%, in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, due primarily to an increase of $2.0 million in compensation, benefits and other personnel costs resulting from severance and relocation costs and a $0.5 million increase in stock based compensation expense resulting from executive changes, a $0.9 million increase in legal fees and a $0.8 million increase in third party fees related to a review and analysis of strategic plans.

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Table of Contents

    
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 as well as third-party fees related to a review and analysis of strategic plans.

Restructuring Charge (benefit)
    
The following table presents our restructuring benefit for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands): 
 
Three Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Restructuring benefit
$
—

 
$
(139
)
 
$
(139
)
 
N/A
Percentage of total revenue
—
%
 
—
 %
 
 

 
 

During the three months ended September 30, 2016, we reversed $0.1 million related to facility exit costs as we were released from a lease for office space we had previously vacated.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Restructuring charge (benefit)
$
4,541

 
$
(297
)
 
$
(4,838
)
 
(107
)%
Percentage of total revenue
3
%
 
—
 %
 
 
 
 

The organizational restructuring and cost reduction plan was implemented in March 2015 resulted in a restructuring charge of $4.5 million. These costs consisted primarily of $3.9 million for employee termination benefits and related costs and $0.6 million for facility and other termination costs. For the nine months ended September 30, 2016, we reversed $0.3 million related to facility exit costs as we reoccupied office space we had previously vacated and were also released from a lease for other office space we had previously vacated.

Amortization of Intangible Assets 
    
The following tables present our amortization of intangible assets for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands): 

 
Three Months Ended
 September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Amortization of intangible assets
$
260

 
$
260

 
$
—

 
—
%
Percentage of total revenue
1
%
 
1
%
 
 

 
 


Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber was flat in the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

 
Nine Months Ended
September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Amortization of intangible assets
$
893

 
$
780

 
$
(113
)
 
(13
)%
Percentage of total revenue
1
%
 
1
%
 
 
 
 


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Table of Contents

Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber decreased $0.1 million, or 13%, in the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to certain assets that have been fully amortized compared to the prior period.
 
Other Income (Expense) 
The following table presents our other income (expense) for the three and nine months ended September 30, 2015 and 2016 and the dollar and percentage changes from the prior year periods (dollars in thousands): 

 
Three Months Ended September 30,
 
Change
 
2015
 
2016
 
Amount
 
Percentage
Other income (expense)
$
(27
)
 
$
7

 
$
34

 
(126
)%
Percentage of total revenue
—
 %
 
—
%
 
 

 
 


Interest earned on our invested cash and foreign exchange gains in the three months ended September 30, 2016 were partially offset by administrative bank fees, foreign exchange losses, management fees and interest expense on our capital lease obligations. In the three months ended September 30, 2015 administrative bank fees, foreign exchange losses, management fees and interest expense on our capital lease obligation were partially offset by interest earned on our invested cash and foreign exchange gains.

 
Nine Months Ended September 30,
 
Change