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eHealth(EHTH) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the company Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for eHealth, Inc. as of September 30, 2020, and for the three and nine-month periods then ended, including Balance Sheets, Statements of Comprehensive Loss, Statements of Stockholders' Equity, Statements of Cash Flows, and accompanying notes, showing an increase in total assets to $960.9 million, a net loss of $14.5 million for the nine months ended September 30, 2020, and net cash provided by financing activities of $203.6 million, primarily from a common stock offering Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in millions) | Balance Sheet Item | September 30, 2020 (Unaudited) (in millions) | December 31, 2019 (in millions) | | :--- | :--- | :--- | | Total Assets | $960.9 | $741.6 | | Total current assets | $378.4 | $208.1 | | Contract assets – commissions receivable – non-current | $445.6 | $414.7 | | Total Liabilities | $185.2 | $214.5 | | Total current liabilities | $113.0 | $113.0 | | Total Stockholders' Equity | $775.7 | $527.2 | Condensed Consolidated Statements of Comprehensive Loss Statement of Comprehensive Loss Highlights (in millions, except per share data) | Metric | Three Months Ended Sep 30, 2020 (in millions) | Three Months Ended Sep 30, 2019 (in millions) | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $94.3 | $69.9 | $289.5 | $204.5 | | Commission Revenue | $73.5 | $59.8 | $254.0 | $184.6 | | Loss from Operations | ($20.8) | ($20.2) | ($26.1) | ($41.7) | | Net Loss | ($14.5) | ($11.0) | ($14.4) | ($21.9) | | Net Loss Per Share (Basic & Diluted) | ($0.55) | ($0.47) | ($0.56) | ($0.96) | Condensed Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $527.2 million at December 31, 2019, to $775.7 million at September 30, 202014 - The increase was primarily driven by the issuance of 2,070,000 shares of common stock in an equity offering, which generated net proceeds of approximately $228.0 million1478 - Other significant changes included a net loss of $14.4 million and stock-based compensation expense of $23.0 million for the nine months ended September 30, 202014 Condensed Consolidated Statements of Cash Flows Cash Flow Summary (in millions) | Cash Flow Activity | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | | :--- | :--- | :--- | | Net cash used in operating activities | ($11.0) | ($14.7) | | Net cash used in investing activities | ($128.3) | ($12.0) | | Net cash provided by financing activities | $203.6 | $105.1 | | Net increase in cash, cash equivalents and restricted cash | $64.4 | $78.3 | | Cash, cash equivalents and restricted cash at end of period | $91.2 | $91.4 | - Financing activities in 2020 were primarily driven by $228.0 million in net proceeds from a common stock issuance, partially offset by $17.2 million for share repurchases to satisfy employee tax obligations16255 - Investing activities in 2020 included $180.5 million in purchases of marketable securities, partially offset by $70.8 million in proceeds from maturities16253 Notes to Condensed Consolidated Financial Statements - eHealth is a health insurance marketplace offering Medicare, individual and family, and other health insurance products from over 180 carriers18 - The company adopted ASU 2016-13 (Credit Losses) on January 1, 2020, resulting in a $1.1 million decrease to retained earnings29 - The business is seasonal, with Medicare-related sales concentrated in the fourth quarter and individual/family plan sales also highest in Q42627 - As of September 30, 2020, the company had no outstanding borrowings under its $75.0 million revolving credit facility with RBC120112 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 42% year-over-year revenue increase for the first nine months of 2020, driven by 50% growth in the Medicare segment, covering key operational metrics, including a 37% increase in approved Medicare members, detailing the results of operations by P&L line item, segment performance, and liquidity, noting that while revenue recognition is upfront, cash collection occurs over several years, leading to negative operating cash flow during periods of high growth investment, and that the company raised $228.0 million from an equity offering in March 2020 to support working capital and growth initiatives Overview and COVID-19 Impact - eHealth operates a private health insurance marketplace connecting consumers with a wide range of insurance products from over 180 carriers132 - The company's results for the nine months ended September 30, 2020, were not materially impacted by the COVID-19 pandemic, though it shifted employees to a work-from-home model133 - Despite COVID-19, the Medicare business grew revenue by 23% in Q3 2020 vs Q3 2019, driven by increased advertising revenue and strong online enrollment134 Summary of Selected Metrics Total Approved Members Growth (YTD) | Metric | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Approved Members | 333,026 | 299,163 | 11% | | Total Medicare | 221,516 | 161,682 | 37% | | Total Individual and Family | 19,047 | 17,639 | 8% | | Total Ancillaries | 82,269 | 109,474 | (25)% | Estimated Membership Growth | Metric | As of Sep 30, 2020 | As of Sep 30, 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Estimated Membership | 1,136,714 | 991,204 | 15% | | Total Medicare | 734,403 | 551,068 | 33% | | Individual and Family | 112,834 | 131,058 | (14)% | - The constrained Lifetime Value (LTV) of commissions per approved member for Medicare Supplement plans increased by 13% in Q3 2020 vs Q3 2019, while it decreased by 3% for Medicare Advantage plans due to lower estimated plan duration154155 - Total estimated cost per approved Medicare member decreased by 2% in Q3 2020 vs Q3 2019, driven by a 7% decrease in Customer Care & Enrollment (CC&E) cost per member177178 Results of Operations Revenue Performance (in millions) | Revenue Type | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $289.5 | $204.5 | 42% | | Commission Revenue | $254.0 | $184.6 | 38% | | Other Revenue | $35.5 | $19.9 | 79% | Operating Expenses Performance (in millions) | Expense Category | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Total Operating Costs & Expenses | $315.5 | $246.2 | 28% | | Marketing and advertising | $104.0 | $72.9 | 43% | | Customer care and enrollment | $101.0 | $81.6 | 24% | | Technology and content | $46.8 | $31.5 | 49% | | General and administrative | $60.3 | $42.7 | 41% | - The increase in marketing and advertising expenses was primarily due to a $23.6 million increase in variable advertising costs to drive Medicare enrollment growth198 - The increase in customer care and enrollment expenses was mainly due to a $16.4 million rise in personnel costs from increased headcount ahead of the annual enrollment period202 Segment Information - The company operates through two segments: Medicare and Individual, Family and Small Business (IFP/SMB)221 Segment Revenue (in millions) | Segment | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Medicare | $246.9 | $164.4 | 50% | | Individual, Family and Small Business | $42.6 | $40.1 | 6% | Segment Profit (in millions) | Segment | Nine Months Ended Sep 30, 2020 (in millions) | Nine Months Ended Sep 30, 2019 (in millions) | % Change | | :--- | :--- | :--- | :--- | | Medicare Segment Profit | $19.4 | $5.9 | 228% | | Individual, Family and Small Business Segment Profit | $23.5 | $15.0 | 56% | - Medicare segment revenue growth was driven by a 51% increase in Medicare Advantage approved members and a $15.4 million increase in other revenue (primarily advertising)231 - IFP/SMB segment profit growth was primarily due to a $5.9 million decrease in operating expenses and a $2.5 million increase in revenue, largely from positive commission revenue adjustments237 Liquidity and Capital Resources - As of September 30, 2020, the company had $87.8 million in cash and cash equivalents, up from $23.5 million at year-end 2019242 - The increase in cash was primarily due to $228.0 million in net proceeds from a March 2020 common stock offering24278 - The company has a $75.0 million secured asset-backed revolving credit facility with RBC, with no outstanding borrowings as of September 30, 2020258260 - The company expects negative net cash flow in periods of membership growth because marketing and enrollment costs are incurred upfront, while commission cash is collected over several years239 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are credit risk, interest rate risk, and foreign currency exchange risk, with credit risk concentrated in cash deposits exceeding federally insured limits and in commissions receivable from insurance carriers, which is considered low risk, and exposure to foreign currency fluctuations from its operations in China, though this has not been material historically - Financial instruments exposed to credit risk include cash, cash equivalents, accounts receivable, and contract assets (commissions receivable)268 - Cash deposits are held with major banks and may exceed federally insured limits, with deposits in China of $3.4 million not insured by the U.S. government61269 - The company has exposure to foreign currency exchange risk related to operating expenses for its subsidiary in China, denominated in Chinese Yuan Renminbi274 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2020, with no material changes to the internal control over financial reporting during the quarter, and the shift to remote work due to COVID-19 did not have a material impact on these controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period276 - There were no changes in internal control over financial reporting during Q3 2020 that materially affected, or are reasonably likely to materially affect, internal controls277 - The company acknowledges the inherent limitations of any control system, stating it can provide only reasonable, not absolute, assurance against errors or fraud280 PART II. OTHER INFORMATION This section details legal proceedings, significant risk factors, and a list of exhibits filed with the report Legal Proceedings This section refers to Note 7 of the financial statements, which details ongoing legal matters, including a securities class action lawsuit alleging false and misleading statements regarding accounting and member churn, related derivative lawsuits against directors and officers, and two wage-and-hour complaints from former employees, which have been settled pending court approval - The company is subject to a securities class action lawsuit filed in April 2020, alleging materially false and misleading statements regarding accounting, member churn, and profitability8890 - Two related derivative lawsuits have been filed against directors and officers based on similar allegations91 - The company has reached a settlement agreement, pending court approval, to resolve two wage and hour complaints (Gonzalez and Le'Vias) filed by former employees in California929394 Item 1A. Risk Factors This section outlines significant risks to the company's business, including the complex and changing regulations for marketing Medicare plans, competition from government exchanges and other agents, and reliance on a small number of insurance carriers for a significant portion of revenue, with financial results sensitive to the accuracy of its constrained lifetime value (LTV) estimates for commission revenue, and other risks involving potential business harm from the COVID-19 pandemic, system failures, cybersecurity threats, dependence on operations in China, and the potential for stock price volatility Risks Related to Our Business - The marketing and sale of Medicare plans are subject to numerous, complex, and frequently changing laws and regulations (e.g., from CMS), and non-compliance could harm the business286287 - Financial results are impacted by factors affecting the estimate of constrained lifetime value (LTV) of commissions, including plan duration and member retention, with a decline in Medicare Advantage LTVs noted due to increased plan termination rates297313 - The business is concentrated in a small number of health insurance carriers, and the loss or modification of these relationships could significantly harm operating results308 - The COVID-19 pandemic poses risks of operational disruption, increased cybersecurity threats, and uncertainty in demand for health insurance products316318 - Operations in China expose the company to risks from different laws, intellectual property protection, trade tensions, and potential data security concerns from carrier partners371372373 Risks Related to Ownership of Our Common Stock - The company's stock price has been and may continue to be volatile due to market fluctuations, changes in operating results, and other factors beyond its control415 - Actual operating results may differ significantly from any guidance provided, as projections are speculative and based on assumptions that may not materialize413414 - Anti-takeover provisions in the company's certificate of incorporation, bylaws, and Delaware law could delay or prevent a change in control, potentially limiting stockholder opportunities for a premium419420 Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including an amendment to a lease agreement, certifications from the CEO and CFO as required by the Sarbanes-Oxley Act (Sections 302 and 906), and the Inline XBRL documents for financial reporting - Exhibit 10.1 is the Twelfth Amendment to a lease agreement for the Gold River, California office424 - Exhibits 31.1, 31.2, 32.1, and 32.2 are the required CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act424 - Exhibits under item 101 are the Inline XBRL (eXtensible Business Reporting Language) files, which provide the financial data in a machine-readable format424