UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

 

For the quarterly period ended March 31, 2015

or

 

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

 

For the transition period from               to

 

Commission file number 001-36371

 

Everyday Health, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware		80-0036062
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
345 Hudson Street, 16th Floor New York, NY		10014
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (646) 728-9500

 

(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   x     No   o

 

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 Regulation 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   x    No   o

 

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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		o		Accelerated filer		o
Non-accelerated filer		x   (Do not check if a smaller reporting company)		Smaller reporting company		o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x

 

The number of shares outstanding of the Registrant’s common stock, $0.01 par value per share, on May 8, 2015, was 31,674,117.

EVERYDAY HEALTH, INC.

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015

 

TABLE OF CONTENTS

 

		Page No
PART I. FINANCIAL INFORMATION			3
ITEM 1. Financial Statements:			3
Consolidated Balance Sheets as of March 31, 2015 (Unaudited) and December 31, 2014			3
Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014 (Unaudited)			4
Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2015 (Unaudited)			5
Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (Unaudited)			6
Notes to Consolidated Financial Statements (Unaudited)			7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			26
ITEM 4. Controls and Procedures			26
PART II. OTHER INFORMATION			27
ITEM 1. Legal Proceedings			27
ITEM 1A. Risk Factors			27
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			28
ITEM 3. Defaults Upon Senior Securities			28
ITEM 4. Mine Safety Disclosures			28
ITEM 5. Other Information			28
ITEM 6. Exhibits			29
SIGNATURES			30

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

EVERYDAY HEALTH, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

		March 31, 2015 (unaudited)				December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	48,530			$	50,729
Accounts receivable, net of allowance for doubtful accounts of $523 and $637 as of March 31, 2015 and December 31, 2014, respectively			57,611				68,007
Deferred tax asset			656				656
Prepaid expenses and other current assets			9,377				5,529
Total current assets			116,174				124,921
Property and equipment, net			25,847				25,502
Goodwill			143,165				127,115
Intangible assets, net			43,777				30,716
Other assets			5,811				5,237
Total assets		$	334,774			$	313,491
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	25,060			$	31,722
Deferred revenue			8,821				6,740
Current portion of long-term debt			2,625				3,000
Other current liabilities			8,977				965
Total current liabilities			45,483				42,427
Long-term debt			110,125				87,000
Deferred tax liabilities			6,912				6,673
Other long-term liabilities			4,016				4,105
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized at March 31, 2015 and December 31, 2014; no shares issued and outstanding at March 31, 2015 and December 31, 2014			—				—
Common stock, $0.01 par value: 90,000,000 shares authorized at March 31, 2015 and December 31, 2014; 31,562,028 and 31,489,196 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively			315				314
Treasury stock			(55	)			(55	)
Additional paid-in capital			295,136				292,117
Accumulated deficit			(127,158	)			(119,090	)
Total stockholders’ equity			168,238				173,286
Total liabilities and stockholders’ equity		$	334,774			$	313,491

 

See accompanying notes to consolidated financial statements.

EVERYDAY HEALTH, INC.

Consolidated Statements of Operations

(in thousands, except share and per share data, unaudited)

 

 

		Three months ended March 31,
		2015				2014
Revenues:
Advertising and sponsorship revenues		$	36,338			$	32,692
Premium services revenues			4,836				4,813
Total revenues			41,174				37,505
Operating expenses:
Cost of revenues			14,076				11,421
Sales and marketing			12,725				10,220
Product development			12,602				10,762
General and administrative			9,804				6,595
Total operating expenses			49,207				38,998
Loss from operations			(8,033	)			(1,493	)
Interest expense, net			(953	)			(1,863	)
Other expense			—				(4,114	)
Loss from operations before benefit (provision) for income taxes			(8,986	)			(7,470	)
Benefit (provision) for income taxes			918				(289	)
Net loss			(8,068	)			(7,759	)
Net loss per common share-basic and diluted		$	(0.26	)		$	(1.44	)
Weighted-average common shares outstanding-basic and diluted			31,525,559				5,403,846

 

See accompanying notes to consolidated financial statements.

EVERYDAY HEALTH, INC.

Consolidated Statement of Stockholders’ Equity

(in thousands, except share data, unaudited)

 

 

		Common stock
		Shares				Amount				Preferred stock				Treasury stock				Additional paid-in capital				Accumulated deficit				Total stockholders’ equity
Balance at December 31, 2014			31,489,196			$	314			$	—			$	(55	)		$	292,117			$	(119,090	)		$	173,286
Exercise of stock options			72,832				1				—				—				528				—				529
Stock-based compensation expense			—				—				—				—				2,491				—				2,491
Net loss			—				—				—				—				—				(8,068	)			(8,068	)
Balance at March 31, 2015			31,562,028			$	315			$	—			$	(55	)		$	295,136			$	(127,158	)		$	168,238

 

See accompanying notes to consolidated financial statements.

EVERYDAY HEALTH, INC.

Consolidated Statements of Cash Flows

(in thousands, unaudited)

 

		Three months ended March 31,
		2015				2014
Cash flows from operating activities
Net loss		$	(8,068	)		$	(7,759	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			4,662				3,558
Provision for doubtful accounts			—				215
Stock-based compensation			2,491				1,069
Amortization and write-off of financing costs			107				4,169
Provision for deferred income taxes			241				241
Changes in operating assets and liabilities:
Accounts receivable			14,802				10,935
Prepaid expenses and other current assets			(3,641	)			(2,645	)
Accounts payable and accrued expenses			(9,322	)			(8,610	)
Deferred revenue			1,884				568
Other current liabilities			32				32
Other long-term liabilities			17				307
Net cash provided by operating activities			3,205				2,080
Cash flows from investing activities
Additions to property and equipment, net			(3,005	)			(3,476	)
Proceeds from sale of business			—				152
Payment for business purchased, net of cash acquired			(24,747	)			—
Payment of security deposits and other assets			40				5
Net cash used in investing activities			(27,712	)			(3,319	)
Cash flows from financing activities
Proceeds from the exercise of stock options			460				1,172
Repayments of principal under former revolver credit facility			—				(30,000	)
Repayment of principal under former term loan facility			—				(41,333	)
Borrowings under revolver credit facility			25,000				32,300
Repayment of principal under revolver credit facility			(10,000	)			—
Borrowings under term loan facility			8,500				40,000
Repayment of principal under term loan facility			(750	)			—
Principal payments on capital lease obligations			(180	)			(145	)
Payments of credit facility financing costs			(722	)			(2,227	)
Net cash provided by (used in) financing activities			22,308				(233	)
Net decrease in cash and cash equivalents			(2,199	)			(1,472	)
Cash and cash equivalents, beginning of period			50,729				16,242
Cash and cash equivalents, end of period		$	48,530			$	14,770
Supplemental disclosure of cash flow information
Interest paid		$	1,253			$	2,262
Income taxes paid		$	10			$	16
Supplemental disclosure of non-cash investing and financing activities
Issuance of common stock for acquired business		$	—			$	919
Due to sellers of acquired business		$	8,000			$	—
Due from stock option exercises		$	111			$	—
Warrants issued in connection with website partner agreement		$	—			$	1,131
Capital lease obligations incurred		$	—			$	193

 

See accompanying notes to consolidated financial statements.

EVERYDAY HEALTH, INC.

Notes to Consolidated Financial Statements (Unaudited)

(in thousands, except share and per share data)

 

1. Business

 

Everyday Health, Inc. (the “Company”) operates a portfolio of health and wellness websites and mobile applications that provides consumers, healthcare professionals, advertisers and partners with content and advertising-based services. The Company was incorporated in the State of Delaware in January 2002 as Agora Media Inc., and changed its name to Waterfront Media Inc. in January 2004. In January 2010, the Company changed its name to Everyday Health, Inc. to better align its corporate identity with the Everyday Health brand.

 

2. Significant Accounting Policies

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The results of operations for companies acquired are included in the consolidated financial statements from the effective date of the acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Interim Financial Statements

 

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) on the same basis as the audited consolidated financial statements for the year ended December 31, 2014 and, in the opinion of management, include all adjustments of a normal recurring nature considered necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other future periods, due to seasonality and other business factors. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the year ended December 31, 2014, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 5, 2015.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience, current business factors and other available information. Actual results could differ from those estimates. On an ongoing basis, the Company evaluates its estimates and assumptions, including those related to revenue recognition and deferred revenue, allowance for doubtful accounts, internal software development costs and website development costs, valuation of long-lived assets, goodwill and other intangible assets, income taxes and stock-based compensation.

 

Reclassifications

 

Certain reclassifications have been made to the prior period financial statements to conform to the March 31, 2015 presentation.

 

Initial Public Offering

 

On April 2, 2014, the Company closed its initial public offering of common stock (“IPO”). The IPO, including the additional shares issued and sold on April 30, 2014 pursuant to the underwriters’ exercise of their over-allotment option, resulted in net proceeds of $70,622, after deducting underwriting discounts and commissions and offering costs borne by the Company totaling $8,848. As a result of the IPO, the Company issued and sold 5,676,414 shares of common stock at a public offering price of $14.00 per share, all of the Company’s redeemable convertible preferred stock outstanding automatically converted into an aggregate of 18,457,235 shares of common stock, including 577,055 additional shares of common stock related to the Series G redeemable convertible preferred stock ratchet provision.

 

Revenue Recognition and Deferred Revenue

 

The Company generates its revenue primarily through advertising and sponsorships, and premium services, including subscriptions and licensing fees.

 

Advertising revenue is recognized in the period in which the advertisement is delivered. Revenue from sponsorships is recognized over the period the Company substantially satisfies its contractual obligations as required under the respective sponsorship agreements. When contractual arrangements contain multiple elements, revenue is allocated to each element based on its relative fair value determined using prices charged when elements are sold separately. In instances where individual deliverables are not sold separately, or when third-party evidence is not available, fair value is determined based on management’s best estimate of selling price.

 

Subscriptions are generally paid in advance on a monthly, quarterly or annual basis. Subscription revenue, after deducting refunds and charge-backs, is recognized on a straight-line basis ratably over the subscription periods. Licensing revenue is generally recognized over the life of the contract.

 

Deferred revenue relates to: (i) subscription fees for which amounts have been collected but for which revenue has not been recognized, and (ii) advertising and sponsorship fees and licensing fees billed in advance of when the revenue is to be earned.

 

Cost of Revenues

 

Cost of revenues consists principally of the expenses associated with aggregating the total audience across the Company’s portfolio of websites, including (i) royalty expenses for licensing content for certain websites within the portfolio and for the portion of advertising revenue the Company pays to the owners of certain other websites within the portfolio, and (ii) media costs associated with audience aggregation activities. Cost of revenues also includes credit card fees and service charges associated with subscription fees for the Company’s premium services.

 

Media costs consist primarily of fees paid to online publishers, internet search companies and other media channels for search engine and database marketing, and display and television advertising. These media activities are attributable to revenue-generating and audience aggregation events, designed to increase the audience to the websites the Company operates, increase the number of subscribers to premium services and grow the Company’s registered user base.

 

Other Expense

 

There were no charges reflected as other expense in the three months ended March 31, 2015. In connection with the refinancing of its credit facilities in March 2014, the Company wrote-off unamortized deferred financing costs totaling $2,845 and incurred prepayment fees of $1,016, which, together with the mark-to-market adjustment on certain preferred stock warrants of $253, is reflected as other expense in the accompanying consolidated statements of operations for the three months ended March 31, 2014.

 

Comprehensive Income

 

The Company has no items of other comprehensive income, and accordingly net loss is equal to comprehensive loss for all periods presented.

Fair Value of Financial Instruments

 

Due to their short-term maturities, the carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value. Cash equivalents principally consist of the Company’s investment in highly liquid money market funds. The fair value of these investment funds is based on quoted market prices, which are Level 1 inputs, pursuant to the fair value accounting standard, which establishes a framework for measuring fair value and requires disclosures about fair value measurements by establishing a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value of the Company’s debt approximates the recorded amounts as the interest rates on the credit facilities are based on market interest rates.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the improvement.

 

The Company incurs costs to develop software for internal use. The Company expenses all costs that relate to the planning and post-implementation phases of development as product development expense. Costs incurred in the application development phase, consisting principally of payroll and related benefits, are capitalized. Upon completion, the capitalized costs are amortized using the straight-line method over their estimated useful lives, which is generally three years.

 

The Company also incurs costs to develop its websites and mobile applications. The Company expenses all costs that relate to the planning and post-implementation phases of development as product development expense. Costs incurred in the application development phase, consisting principally of third-party consultants and related charges, and the costs of content determined to provide a future economic benefit, are capitalized. Upon completion, the capitalized costs are amortized using the straight-line method over their estimated useful lives, which is generally three years.

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. There were no indicators of impairment of the Company’s property and equipment during the three months ended March 31, 2015 and 2014.

 

Segment Information

 

The Company and its subsidiaries are organized in a single operating segment, providing online health solutions, and the Company also has one reportable segment. Substantially all of the Company’s revenues are derived from U.S. sources.

 

Recent Accounting Standards

 

In April 2014, the FASB issued amended guidance for reporting discontinued operations. Under the new guidance, only disposals that represent a strategic shift having a material impact on an entity’s operations and financial results shall be reported as discontinued operations, with expanded disclosures. This amendment will be effective for the first annual reporting period beginning after December 15, 2015. The Company does not expect the impact of the adoption of this guidance to be material to the consolidated financial statements.

 

In May 2014, the FASB issued amended guidance for revenue recognition. This amendment provides a comprehensive new revenue recognition model. The core principle of the guidance is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. As currently issued, this amendment is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the effect that the new standard will have on the consolidated financial statements and related disclosures.

In June 2014, the FASB issued updated guidance on stock compensation accounting requiring that a performance target that affects vesting and could be achieved after the requisite service period should be treated as a performance condition. Current GAAP does not contain explicit guidance on how to account for such share-based payments. This updated guidance is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the impact of the adoption of this guidance to be material to the consolidated financial statements.

 

In April 2015, the FASB issued updated guidance on the presentation of debt issuance costs in financial statements. The new guidance requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. This guidance will be effective for the Company beginning in the first quarter of 2016 on a retrospective basis for all periods presented, with early adoption optional. The Company does not expect the impact of the adoption of this guidance to be material to the consolidated financial statements.

 

3. Acquisitions

 

In March 2015, the Company acquired 100% of the limited liability company membership interests of Cambridge BioMarketing Group, LLC (“Cambridge”), a provider of strategic launch and marketing solutions for orphan and rare disease products, for a total purchase price of $32,273, of which $24,273 was paid in cash at closing. The remaining $8,000 obligation is comprised of convertible notes, which will either convert into shares of the Company’s common stock or be repaid in cash by May 15, 2015, at the discretion of the Company. The total purchase price is subject to any working capital adjustments that may arise. As of March 31, 2015, the $8,000 unpaid purchase price obligation is included in other current liabilities in the accompanying consolidated balance sheet. In addition to the purchase price described above, the former members of Cambridge are eligible to receive up to an additional $5,000 in cash based on Cambridge’s achievement of certain revenue and Adjusted EBITDA targets for 2015. This earn-out payment is contingent upon the continued employment with the Company of certain former members of Cambridge at the time the earn-out payment is due to be paid in the first quarter of 2016. The Company records any such earn-out as compensation expense for the applicable period. The Company expects that the acquisition will broaden its strategic marketing and communications solutions to pharmaceutical brands targeting orphan and rare disease segments in the market.

 

The acquisition was accounted for as a business combination and, accordingly, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on a preliminary basis based on the respective fair values. The results of operations of Cambridge have been included in the consolidated financial statements of the Company from March 20, 2015, the closing date of the acquisition. For the three months ended March 31, 2015, acquisition-related costs of $169 are included in general and administrative expenses in the accompanying consolidated statement of operations.

 

The following table summarizes the preliminary allocation of the assets acquired and liabilities assumed based on their fair values on the acquisition date. The fair values presented are based on a preliminary valuation and are subject to adjustment during a measurement period of up to one year from the acquisition date. The measurement period provides the Company with the ability to adjust the fair values of acquired assets for new information that is obtained about circumstances that existed as of the acquisition date.

 

Accounts receivable		$	4,406
Other current assets			137
Property and equipment			783
Goodwill			15,576
Intangible assets			14,280
Accounts payable and accrued expenses			(2,659	)
Deferred revenue			(197	)
Other current liabilities			(53	)
Total consideration paid		$	32,273

4. Goodwill and Other Intangible Assets

 

During the three months ended March 31, 2015, goodwill of $15,576 and definite-lived intangible assets of $14,280 were recorded in connection with the Cambridge acquisition (see Note 3). Additionally, there was $474 of goodwill recorded during the three months ended March 31, 2015 for a working capital purchase price adjustment related to a November 2014 acquisition. The preliminary value of the intangible assets acquired in connection with the Cambridge acquisition consist of customer relationships of $8,810 and trade names of $5,470, each of which has an estimated useful life of 10 years.

 

The carrying value of the Company’s goodwill was $143,165 as of March 31, 2015. Goodwill is tested for impairment on an annual basis as of October 1, and whenever events or circumstances indicate that the carrying value of the asset may not be recoverable. Application of the impairment test requires judgment and results in impairment being recognized if the carrying value of the asset exceeds its fair value. No indicators of impairment were noted during or since the Company’s last evaluation of goodwill at October 1, 2014. Similarly, the Company’s definite-lived intangible assets with a net carrying value of $43,777 at March 31, 2015, consisting principally of trade names and customer relationships, is reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. There were no indicators of impairment of the Company’s definite-lived intangible assets during the three months ended March 31, 2015 and 2014.

 

Definite-lived intangible assets consist of the following:

 

		March 31, 2015																December 31, 2014
		Gross carrying amount				Accumulated amortization				Net carrying amount				Weighted- average remaining useful life (1)				Gross carrying amount				Accumulated amortization				Net carrying amount				Weighted- average remaining useful life (1)
Customer relationships		$	36,110			$	(11,775)			$	24,335				9.5			$	27,300			$	(11,247)			$	16,053				9.5
Trade names			24,085				(4,922)				19,163				7.3				18,615				(4,370)				14,245				6.5
Other intangibles			3,900				(3,621)				279				0.5				3,900				(3,482)				418				0.7
Total		$	64,095			$	(20,318)			$	43,777							$	49,815			$	(19,099)			$	30,716

 

(1)

The calculation of the weighted-average remaining useful life is based on weighting the net book value of each asset in its group, and applying the weight to its respective remaining amortization period.

 

Amortization expense relating to the definite-lived intangible assets totaled $1,219 and $545 for the three months ended March 31, 2015 and 2014, respectively, and is included in general and administrative expense in the accompanying consolidated statements of operations.

 

Future amortization expense of the intangible assets is estimated to be as follows:

 

Year ending December 31:
2015 (April 1st to December 31st)		$	4,527
2016			5,373
2017			5,365
2018			5,176
2019			5,176
Thereafter			18,160
Total		$	43,777

 

5. Long-Term Debt

 

The Company entered into a credit facility agreement with a syndicated bank group in March 2014, which replaced its then-existing credit facility. The new credit facility consisted of a revolver (“Revolver”) with a maximum borrowing limit of $35,000 and a term loan (“Term Loan”) of $40,000. In November 2014, in connection with the acquisition of DoctorDirectory.com, Inc., the credit facility was amended and restated to, among other things, (i) increase the maximum borrowing limit of the Revolver from $35,000 to $55,000; (ii) increase the Term Loan from $39,000 outstanding as of such date to $60,000; (iii) extend the maturity date of the Term Loan and the due date of principal on the Revolver from March 2019 to November 2019; and (iv) effect certain modifications to the covenants and terms set forth in the credit facility agreement. In March 2015, the amended and restated credit facility was amended twice (as amended, the “Credit Facility”) to, among other things, (i) consent to the acquisition of Cambridge, (ii) increase the Term Loan from $59,250 outstanding as of such date to $67,750; (iii) increase the maximum borrowing limit of the Revolver from $55,000 to $82,250; and (iv) effect certain modifications to the covenants and terms set forth in the Credit Facility agreement. All other materials terms of the Credit Facility, including the applicable interest rates and maturity dates, remained unchanged by the March 2015 amendments.

 

The repayment terms of the Revolver provide for quarterly interest payments, with the principal being due in full in November 2019. The repayment terms of the Term Loan provide for quarterly interest and principal payments, with a maturity date of November 2019. The interest rate on the Credit Facility is equal to the London Inter-Bank Offered Rate, or LIBOR, plus a variable rate ranging from 2.75% to 4.0% depending on the Company’s consolidated leverage ratio, as defined in the Credit Facility agreement, and there is a 0.50% commitment fee on the unused portion of the Revolver. As of March 31, 2015, the interest rate on the Credit Facility was 3.52%. As of March 31, 2015, there was $67,750 outstanding on the Term Loan and $45,000 outstanding on the Revolver, with $37,250 available to be drawn on the Revolver.

 

The Credit Facility contains certain financial and operational covenants, including requirements to maintain a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio, each as defined in the Credit Facility agreement, as well as restrictions on certain types of dispositions, mergers and acquisitions, indebtedness, investments, liens and capital expenditures, issuance of capital stock and the Company’s ability to pay dividends. The Credit Facility is secured by a first priority security interest in substantially all of the Company’s existing and future assets. The Company was in compliance with the financial and operational covenants of the Credit Facility as of March 31, 2015.

 

In connection with the March 2014 refinancing and the November 2014 amendment and restatement, the Company incurred financing costs totaling $2,899 and, in connection with the March 2015 amendments, the Company incurred financing costs of $722, each of which have been deferred and amortized using the effective interest rate method through the final maturities of the Credit Facility. Deferred financing costs are recorded in other assets in the accompanying consolidated balance sheets. Amortization expense relating to deferred financing costs is included in interest expense in the accompanying consolidated statements of operations.

 

6. Common Stock and Preferred Stock

 

As of March 31, 2015 and December 31, 2014, there were no shares of preferred stock issued and outstanding. The redeemable convertible preferred stock, Series A-G (collectively, the “Preferred Stock”), which was outstanding at the time of the Company’s IPO, fully converted to common stock in connection with the IPO.

 

In March 2014, the Company’s Board of Directors and stockholders approved an amendment to the Company’s amended and restated certificate of incorporation effecting a 1-for-1.5 reverse stock split of the Company’s issued and outstanding shares of common stock. The par value of the common stock was not adjusted as a result of the reverse stock split. All issued and outstanding common stock and per share amounts contained in the Company’s consolidated financial statements and related notes thereto have been retroactively adjusted to reflect this reverse stock split for all periods presented. The reverse stock split was effected on March 14, 2014.

 

In April 2014, in connection with the closing of the Company’s IPO, the Company filed an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware that amended and restated in its entirety the Company’s certificate of incorporation to, among other things, increase the total number of shares of the Company’s common stock that the Company is authorized to issue to 90,000,000, eliminate all references to the various series of preferred stock that were previously authorized (including certain protective measures held by the various series of preferred stock), and to authorize up to 10,000,000 shares of undesignated preferred stock that may be issued from time to time with terms to be set by the Company’s Board of Directors, which rights could be senior to those of the Company’s common stock.

7. Stock-Based Compensation

 

The Company has granted non-statutory stock options and restricted stock unit awards to employees, directors and consultants of the Company pursuant to its 2003 Stock Option Plan, as amended (the “2003 Plan”), or 2014 Equity Incentive Plan (the “2014 Plan”), which became effective immediately upon the signing of the underwriting agreement related to the IPO on March 27, 2014. Upon the effectiveness of the 2014 Plan, no additional awards have been or will be granted under the 2003 Plan. The 2014 Plan provides for the grant of stock options, restricted stock units, and other awards based on the Company’s common stock.

 

As of March 31, 2015, 339,829 shares have been reserved for issuance under the 2014 Plan. The number of shares of common stock reserved for issuance under the 2014 Plan is subject to an automatic increase on January 1 of each year through January 1, 2024, by the lesser of (a) 4% of the total number of shares of the Company’s common stock outstanding on December 31 of the preceding calendar year and (b) a number of shares determined by the Board of Directors.

 

Stock Options

 

The following table summarizes stock option activity for the three months ended March 31, 2015:

 

		Number of options				Weighted- average exercise price				Weighted- average remaining contractual life (years)				Aggregate intrinsic value
Outstanding at December 31, 2014			5,893,698			$	9.94				6.48			$	29,249
Granted			726,100				12.22
Exercised			(72,832	)			7.27
Cancelled			(7,415	)			12.84
Outstanding at March 31, 2015			6,539,551			$	10.23				6.65			$	20,931
Exercisable at March 31, 2015			3,896,925			$	8.45				5.01			$	17,987

 

Proceeds from the exercise of options and the total intrinsic value of the options exercised were $460 and $484, respectively, for the three months ended March 31, 2015, and $1,172 and $910, respectively, for the three months ended March 31, 2014.

 

The weighted-average fair value per share at date of grant for options granted was $5.49 and $7.56 during the three months ended March 31, 2015 and 2014, respectively. The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model and recognized in expense over the vesting period of the options using the graded attribution method.

 

The following table presents the weighted-average assumptions used to estimate the fair value of options granted in the three months ended March 31, 2015 and 2014:

 

			2015				2014
Volatility			44.29	%			49.77	%
Expected life (years)			6.25				6.25
Risk-free interest rate			1.72	%			1.92	%
Dividend yield			—				—

The expected stock price volatilities are estimated based on historical realized volatilities of comparable publicly traded company stock prices over a period of time commensurate with the expected term of the option award. The expected life represents the period of time for which the options granted are expected to be outstanding. The Company used the simplified method for determining expected life for options qualifying for treatment due to the limited history the Company currently has with option exercise activity. The risk-free interest rate is based on the U.S. Treasury yield curve for periods equal to the expected term of the options on the grant date.

 

Total stock-based compensation expense related to stock options was $1,958 and $1,069 for the three months ended March 31, 2015 and 2014, respectively.

 

At March 31, 2015, there was approximately $8,713 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of stock options vested during the three months ended March 31, 2015 and 2014 was $2,613 and $953, respectively.

 

Restricted Stock Unit Awards

 

The Company’s restricted stock unit awards (“RSUs”) are agreements to issue shares of the Company’s common stock to employees in the future, upon the satisfaction of certain vesting conditions, which cause them to be subject to risk of forfeiture and restrict the awardholder’s ability to sell or otherwise transfer such RSUs until they vest. Generally, the Company’s RSU grants vest over three years from the grant date subject to continued employment on the applicable vesting dates. The following table summarizes the RSU activity for the three months ended March 31, 2015:

 

										Number of RSUs				Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014											—			$	—
Granted (1)											548,424				11.99
Vested											—
Cancelled											—
Outstanding at March 31, 2015											548,424			$	11.99

 

(1)

RSUs granted during the three months ended March 31, 2015 includes the grant of 40,000 units of performance-based RSUs that are dependent upon the Company meeting certain performance criteria.

 

Total stock-based compensation expense related to RSUs was $262 for the three months ended March 31, 2015. As RSUs were issued for the first time in March 2015, there was no stock-based compensation expense related to RSUs in 2014.

 

At March 31, 2015, there was approximately $5,904 of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 1.63 years.

 

2014 Employee Stock Purchase Plan

 

The 2014 Employee Stock Purchase Plan (“ESPP”), which became effective immediately upon the signing of the underwriting agreement related to the IPO on March 27, 2014, authorizes the issuance of 500,000 shares of the Company’s common stock pursuant to purchase rights granted to employees. The number of shares of common stock reserved for issuance under the ESPP will automatically increase on January 1 of each calendar year from January 1, 2015 through January 1, 2024 by the least of (a) 1% of the total number of shares of common stock outstanding on December 31 of the preceding calendar year, (b) 400,000 shares and (c) a number determined by the Board of Directors that is less than (a) and (b). Unless otherwise determined by the Board of Directors, common stock will be purchased for participating employees at a price per share equal to the lower of (a) 85% of the fair market value of a share of the common stock on the first date of an offering, or (b) 85% of the fair market value of a share of the common stock on the date of purchase. Generally, all regular employees may participate in the ESPP and may contribute, through payroll deductions, up to 15% of their earnings toward the purchase of common stock under the ESPP. Under the terms of the ESPP, there are defined limitations as to the amount and value of common stock that can be purchased by each employee.

For the three months ended March 31, 2015, charges incurred under the ESPP totaled $271, and such charges were not material during the three months ended March 31, 2014. As of March 31, 2015, 676,707 shares of common stock were reserved for future issuance under the ESPP.

 

8. Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period.

 

Diluted net loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period, adjusted to reflect potentially dilutive securities. Potentially dilutive securities consist of incremental shares issuable upon the assumed exercise of stock options, restricted stock units, and warrants using the treasury stock method, and employee withholdings to purchase common stock under the ESPP. Due to the net losses for the three months ended March 31, 2015 and 2014, the Company had outstanding options, warrants, restricted stock units, and ESPP withholdings which were not included in the computation of diluted net loss per common share, as the effects would have been anti-dilutive. Accordingly, the basic and diluted weighted-average number of common shares outstanding are the same for the following periods presented:

 

		Three months ended
		March 31,
		2015				2014
Numerator:
Net loss		$	(8,068	)		$	(7,759	)
Denominator:
Weighted-average number of common shares outstanding - basic and diluted			31,525,559				5,403,846
Net loss per common share - basic and diluted		$	(0.26	)		$	(1.44	)

 

The following securities were outstanding at the end of the periods presented below and have been excluded from the calculation of diluted net loss per common share because the effect is anti-dilutive:

 

		Three months ended
		March 31,
		2015				2014
Warrants to purchase common stock(1)			143,782				692,501
Warrants to purchase redeemable convertible preferred stock(1)			—				148,650
Redeemable convertible preferred stock(1)			—				26,820,270
Stock option awards			6,539,511				6,673,806
RSU awards			548,424				—
Employee stock purchase plan			80,037				—
Total anti-dilutive securities			7,311,754				34,335,227

 

(1)

Upon closing of the IPO on April 2, 2014, all of the Company’s outstanding redeemable convertible preferred stock automatically converted into shares of common stock. In addition, the outstanding warrants to purchase redeemable convertible preferred stock automatically converted into warrants to purchase common stock, or were automatically exercised upon closing of the IPO.

9. Income Taxes

 

The Company’s expected and historic annual net tax provision is generally comprised of a deferred tax provision pertaining to basis differences in indefinite lived intangible assets that cannot be offset by current year deferred tax assets, as well as, to a much lesser extent, a current tax provision for federal, state, local and foreign taxes. Effective March 31, 2015, the tax provision for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items arising in the quarter, as applicable. As a result of using an estimated annual effective tax rate the Company recorded a benefit for the quarter, which is expected to reverse over the remaining quarters. In each quarter, the Company’s estimate of the annual effective tax rate will be updated and any changes will be recognized in the interim period in which the change occurs. In interim periods prior to March 31, 2015, the tax provision was based upon the estimated deferred and current tax provision for the year rather than the estimated annual effective tax rate, as the Company had historically experienced pretax losses in certain quarters and pretax income in others, and the annual results were expected to be at or near breakeven, and believed that using an annual effective tax rate would result in significant variances in the customary relationship between income tax expense (benefit) and pretax income or loss in interim periods.

 

The Company’s deferred tax assets relate primarily to net operating loss carryforwards and to a smaller extent stock based compensation and other items. The Company has provided a valuation allowance against deferred tax assets to the extent the Company has determined that it is more likely than not that such net deferred tax assets will not be realizable. In determining realizability, the Company considered various factors including historical profitability and reversing temporary differences, exclusive of indefinite-lived intangibles. The Company’s deferred tax liabilities arose primarily from basis differences in indefinite-lived intangible assets that cannot be offset by current year deferred tax assets.

 

At December 31, 2014, the Company had approximately $107,000 of net operating loss, or NOL, carryforwards available to offset future taxable income, which expire from 2020 through 2033. The full utilization of these losses in the future is dependent upon the Company’s ability to generate taxable income and may also be limited due to ownership changes, as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended. The Company’s NOL carryforwards at December 31, 2014 included $7,433 of income tax deductions related to equity compensation that are greater than the compensation recognized for financial reporting, which will be reflected as a credit to additional paid-in-capital as realized.

 

The Company is subject to taxation in the U.S. and various federal, state, local and foreign jurisdictions. In March 2014, an audit of the Company’s U.S. Federal tax return for the year ended December 31, 2011 commenced. As of March 31, 2015, none of the Company’s other tax returns have been examined by any income taxing authority. The Company is not subject to U.S. federal, state or non-U.S. income tax examinations by tax authorities for years prior to 2010. However, to the extent U.S. federal and state NOL carryforwards are utilized, the use of NOLs could be subject to examination by the tax authorities. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on assessment of many factors, including past experience and interpretations of tax law. The Company regularly assesses the adequacy of its income tax contingencies in accordance with ASC 740. As a result, the Company may adjust its income tax contingency liabilities for the impact of new facts and developments, such as changes in interpretations of relevant tax law and assessments from taxing authorities.

 

10. Commitments and Contingencies

 

The Company is subject to certain claims that have arisen in the ordinary conduct of business. Based on the advice of counsel and an assessment of the nature and status of any potential claim, and taking into account any accruals the Company may have established for them, the Company currently believes that any liabilities ultimately resulting from such claims will not, individually or in the aggregate, have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

 

11. Subsequent Events

 

The Company has completed an evaluation of all subsequent events through the issuance date of these financial statements and concluded that no subsequent events occurred that required recognition to the financial statements or disclosures in the notes to the consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited interim consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2014 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 5, 2015.

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014 and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

Overview

 

Everyday Health, Inc., or “we” or “us,” is a leading digital health and wellness company. By combining premium health and wellness content with our sophisticated proprietary data assets and analytics tools, we enable consumers to manage their health, healthcare professionals to stay informed and make better decisions for their patients, and marketers to communicate and engage with consumers and healthcare professionals. Our properties fall into the following categories: (i) properties that we own and/or operate in partnership with leading offline providers of health content or prominent health and wellness experts and personalities, including Everyday Health, MedPage Today, DoctorDirectory.com, Cambridge BioMarketing, What to Expect, Dr. Sanjay Gupta, Jillian Michaels and The South Beach Diet; and (ii) properties where we manage and sell advertising opportunities on behalf of third parties, including MayoClinic.org and Drugstore.com. We utilize our proprietary technology, together with our extensive data assets, to personalize the content experience, empower our users to make more-informed health decisions and drive better health outcomes. We deliver our content and solutions whenever, wherever and however a user makes a health-related decision through multiple channels, including desktop, mobile web, and mobile phone and tablet applications, as well as video and social media.

 

We also utilize the data we collect to enable health and wellness marketers to:

 

· reach and engage the right audience at the right time;

 

· influence purchase decisions;

 

· drive health compliance and health outcomes; and

 

· quantitatively prove the efficacy of the marketing solutions we implement.

 

We derive a significant majority of our revenues from the sale of advertising, sponsorships and other marketing solutions across a variety of health and wellness categories, including pharmaceuticals, over-the-counter products, food, retail and lifestyle. To a lesser extent, we generate revenues from the sale of our premium services, which consist primarily of subscriptions sold to individuals who purchase access to one or more properties in our portfolio.

 

In late 2010, we made a strategic decision to expand our business into the market for providing content and marketing solutions targeting healthcare professionals through our acquisition of MedPage Holdings, Inc., or MPT. We believe that the entry into the healthcare professional market provided us with a significant revenue opportunity because pharmaceutical companies spend a larger percentage of their marketing budgets on healthcare professionals as compared to consumers. In addition, the acquisition of MPT enabled us to offer marketers the ability to target both healthcare professionals and consumers with a single marketing solution.

 

In late 2014, we expanded further into the healthcare professional sector with the acquisition of DoctorDirectory.com, Inc., or DD, a provider of multi-channel marketing solutions for pharmaceutical brands seeking to influence healthcare professionals. We expect that the acquisition of DD will deepen our penetration into the healthcare professional market by significantly increasing our physician reach and enhancing our sophisticated return on investment, or ROI, based marketing solutions that we offer advertisers seeking to engage with healthcare professionals. Following the DD acquisition, we reach more than two-thirds of practicing physicians in the U.S. and expect increased user engagement by offering an expanded suite of content and tools to healthcare professionals.

In March 2015, we continued the expansion of our business through the acquisition of Cambridge BioMarketing Group, LLC, or Cambridge, a provider of strategic launch and marketing solutions for orphan and rare disease products. The acquisition broadens the strategic marketing and communications solutions we can offer to pharmaceutical brands. Following this acquisition, we believe that we can service our partners across the entire spectrum of therapeutic areas, including orphan, specialty and mass market brands, as well as provide solutions throughout the entire lifecycle of pharmaceutical marketing, from the strategic phase of pre-launch, during the growth years and beyond the loss of patent exclusivity.

 

Finally, we have also begun to focus on leveraging our existing assets to generate revenue from new customer channels across the broader healthcare landscape, particularly payors and providers. Specifically, our healthcare solutions business will concentrate on utilizing our large, highly-engaged audience, premium content and tools, and advanced data and analytics capabilities to engage and influence consumers on behalf of payors and providers. We may also explore partnering relationships and corporate development opportunities to more effectively execute on our growth strategy in this large market opportunity.

 

For the year ended December 31, 2015, we expect our revenue to increase. We also expect our operating expenses to increase in 2015, and to decrease slightly as a percentage of revenues. As a result, we expect that our Adjusted EBITDA will improve in 2015, and expect that our capital expenditures will decline as a percentage of revenues over the same period.

 

Background Information

 

Key Trends Affecting Our Business

 

We believe that the following key trends drive our ability to continue to grow our business:

 

·

Marketers are allocating an increasing proportion of their advertising spending to online advertising and are seeking solutions that better target their audience and maximize ROI. We believe that the ability to offer complex data-driven solutions that demonstrate ROI will be a key determinant in our success in attracting marketing dollars in the coming years. We also believe that the online percentage of the total health-related advertising market is still relatively small, and that this percentage will increase in the coming years.

 

·

The Internet and digital and mobile devices have become indispensable for both consumers seeking to take a more active role in managing their diverse health and wellness needs and healthcare professionals striving to provide better care for their patients and manage their practices more efficiently. We believe that individuals will increasingly seek out digital content and solutions, and spend more time interacting with these digital channels, to educate themselves, directly manage and monitor their health and wellness, and make a wide array of other health-related purchase decisions, including purchasing health insurance.

 

·

The pharmaceutical industry is experiencing a major shift from large mass-market “blockbuster” drugs to niche or specialty medications that target discrete patient populations. At the same time, dramatically-reduced sales forces and other restrictions on interacting directly with physicians have made it more difficult for pharmaceutical companies to efficiently market their products and services. As a result, we believe the need for these companies to interact with consumers and physicians more directly through digital channels will increase significantly.

 

·

The evolving healthcare environment is forcing many health-related companies to face new challenges and adopt, in many cases for the first time, strategies targeting consumers and healthcare professionals. We believe our large and engaged audience, premium brands and rich database of user information afford us a significant opportunity to grow our revenues as these entities, including health insurance companies, pharmacy benefit management companies and health information technology vendors, seek new ways to drive down costs, acquire new customers and utilize technology to achieve better health outcomes.

 

Key Metric

 

We use the following key financial metric in measuring the performance of our business, allocating resources and making decisions regarding operating strategies.

 

·

Average Advertising and Sponsorship Revenues per Advertiser. Average advertising and sponsorship revenues per advertiser is our advertising and sponsorship revenues from advertisers that marketed their products and services on the Everyday Health portfolio during a specific period divided by the total number of advertisers. We use this metric to assess our success in expanding our advertising and sponsorship relationships and increasing our market share of advertising dollars from each of our customers.

 

The following represents our recent performance with respect to this key metric:

		Three months ended March 31,(1)
		2015			2014
Advertising and sponsorship revenues per advertiser (in thousands)		$193.9			$196.9

 

(1)

Based on 178 and 166 total advertisers for the three months ended March 31, 2015 and 2014, respectively. The figures for the three months ended March 31, 2015 exclude Cambridge, which was acquired in March 2015. With respect to DD, which was acquired in November 2014, only ROI-based marketing campaigns for pharmaceutical clients are included in the figures for the three months ended March 31, 2015.

 

Revenues

 

We generate revenues primarily through advertising and sponsorships, and premium services, including subscriptions and licensing fees.

 

Our advertising and sponsorship revenues, also referred to as marketing solutions revenue, consist primarily of revenues generated from:

 

·

display advertisements on properties in the Everyday Health portfolio and in our free e-mail newsletters, which are primarily sold based on a cost-per-impression advertising model;

 

·

interactive brand sponsorships, which consist of our integrated database marketing programs and sponsorships within the Everyday Health portfolio, which typically include both components that are sold based on a cost-per-impression basis (in which we are paid based on the number of advertisements we display) and components that are sold based on a cost-per-visitor basis (in which we are paid for delivering a visitor to an advertiser’s website), and sometimes include a production fee;

 

·

customer acquisition marketing programs, which are sold based on the number of qualified potential customers that are provided to our advertisers;

 

·

our Health Reach marketing programs that allow marketers the opportunity to target specific audiences outside of the Everyday Health portfolio using our audience data and analytics;

 

·

marketing programs that provide for revenues based upon the ROI we deliver for our customers; and

 

·

marketing programs that are sold based on a time and materials basis.

 

Although we typically do not distinguish between desktop and mobile channels in the structuring and pricing of our marketing campaigns, mobile channels have become increasingly important in fulfilling these campaigns, including our interactive brand sponsorships. Revenues delivered via mobile channels increased 34.6% to $15.6 million in the first quarter of 2015 from $11.6 million in the first quarter of 2014.

 

In addition, by virtue of our acquisition of DD, we now conduct certain marketing campaigns that provide for revenues based entirely upon the ROI we deliver for our customers. Furthermore, by virtue of our recent acquisition of Cambridge, we now conduct strategic launch and marketing solutions for orphan and rare disease products that are sold based on a time and materials basis.

 

Our advertisers and sponsors consist primarily of pharmaceutical companies, manufacturers and retailers of over-the-counter products and consumer-packaged-goods, and healthcare providers, such as hospitals and other healthcare professionals.

 

Our premium services revenues consist primarily of revenues generated from subscriptions sold to individuals who purchase access for a defined period of time to one or more of the properties in the Everyday Health portfolio. Our subscription services are designed to provide the consumer with the ability to access consumer health content from well-recognized sources, and to personalize or customize a specific health or wellness program.

 

Over the last several years, we have intentionally focused more directly on increasing our advertising and sponsorship revenues, which represents a much larger revenue opportunity than premium services. As a result, the mix of our total revenues from advertising and sponsorship services and premium services has changed. In the three months ended March 31, 2015, our advertising and sponsorship revenues accounted for 88.3% of total revenues, compared to 87.2% in the three months ended March 31, 2014. In the three months ended March 31, 2015, our premium services revenues accounted for 11.7% of total revenues, compared to 12.8% in the three months ended March 31, 2014.

We anticipate that revenues derived from advertising and sponsorship services will continue to grow in the future as a percentage of total revenues. Our premium services, however, generate a significant portion of our registered users, and the valuable data that is voluntarily provided to us through our premium services, including demographic information and health-related interests, enables us to grow our advertising and sponsorship revenues. As a result, while we expect that premium services revenues will continue to decrease as a percentage of total revenues, our subscription products will continue to serve as an important source for registered users that will drive our advertising and sponsorship revenues and potentially offset any decline in our direct revenue from premium services. Although to date, revenues from payors, providers and employers have been immaterial, we expect that these revenues will likely increase as we seek to utilize our existing assets to address the consumer engagement needs of these entities. To the extent that our revenues from these sources increase in the future, this may alter the trends described above.

 

The timing of our revenues is affected by certain seasonal factors. Our advertising and sponsorship revenues are traditionally the lowest in the first quarter of the year, due primarily to the seasonal spend patterns of our advertising customers, and increases throughout the remainder of the year. Conversely, due to high consumer demand for diet and fitness programs at the start of each year associated with annual resolutions to live healthier lifestyles, we traditionally increase our media expenditures in the first calendar quarter to promote properties in the Everyday Health portfolio that focus on diet and fitness. As a result of these trends, our gross margin tends to be lowest in the first quarter of each calendar year, typically increasing with each consecutive quarter. We anticipate that, as our revenues increase, our gross profit will continue to increase while our period-over-period gross margin may not increase commensurately.

 

Cost of Revenues, Gross Profit and Gross Margin

 

The Everyday Health portfolio includes properties that we own, properties that we operate in partnership with leading offline health brands and properties where we manage and sell advertising opportunities on behalf of partners. Cost of revenues consists primarily of the expenses associated with aggregating the total audience across the Everyday Health portfolio or delivering an audience to fulfill a marketing campaign. These costs include:

 

· media costs;

 

· royalty payments to the Everyday Health portfolio partners; and

 

· to a lesser extent, transaction processing costs associated with subscription fees for our premium services, ad serving and other expenses.

 

Media costs consist primarily of fees paid to online publishers, Internet search companies and other media channels where we advertise our Everyday Health portfolio. These media activities are directly attributable to generating revenue, increasing the audience to the properties we operate, increasing the number of individuals subscribing to our premium services and growing our registered user base. Our partner royalties are generally based on the amount of revenues generated on the particular property. In some cases, we guarantee the partner a minimum annual payment.

 

We carefully monitor our gross profit and gross margin because they are key indicators of our financial performance and success in aggregating and monetizing our audience across the entire Everyday Health portfolio. Gross profit is defined as total revenues minus cost of revenues. Gross margin is defined as our gross profit as a percentage of our total revenues. While we focus on the growth of both gross profit and gross margin, we may make investments from time to time that will position us for growth at the expense of gross margin.

 

Since our operating decisions are based on aggregating and monetizing the Everyday Health portfolio audience as a whole, we believe that our aggregate gross profit is an important measure of our overall performance and do not believe that the gross profit associated with any individual property or category of properties is meaningful to an analysis of our overall operating performance. The gross margin we realize on revenues generated on our owned and our operated properties, however, is generally higher than the gross margin generated from properties within our portfolio that are operated by our partners because we typically pay a higher royalty rate to partners that operate their own properties. At the same time, some of the other costs to operate the properties in the Everyday Health portfolio, such as product development expenses, website hosting and maintenance expenses, are included in operating expenses and not reflected in our cost of revenues. As a result, we also believe that our Adjusted EBITDA is an important metric for measuring our overall financial performance (for a detailed description of Adjusted EBITDA, see “Supplemental Financial Information” below).

 

Both our revenues and gross profit increased for the three months ended March 31, 2015, compared to the prior year period, as shown in the table below.

		Three months ended March 31,
(dollars in thousands)		2015				2014
Revenues		$	41,174			$	37,505
Revenue growth			9.8	%			23.0	%
Cost of revenues		$	14,076			$	11,421
Gross profit		$	27,098			$	26,084
Gross margin			65.8	%			69.5	%

 

We expect our gross profit to continue to improve in the near term as we continue to aggregate our audience more efficiently and enhance our monetization capabilities across the entire Everyday Health portfolio. While we expect our cost of revenues to continue to increase on an absolute basis in the foreseeable future, we do not believe that any such increases will negatively impact our gross profit or Adjusted EBITDA since we anticipate that the growth in our total revenues will continue to exceed the increase in our cost of revenues.

 

Operating Expenses

 

Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs, including commissions and non-cash stock compensation, for our account management, research, marketing, sales and data analytics and creative design personnel, as well as fees for third-party professional marketing and analytical services and depreciation and amortization expense pertaining to property and equipment. Our sales and marketing departments include data analytics personnel that analyze traffic and advertising ROI data to determine the effectiveness of advertising and marketing campaigns. We expect our sales and marketing expenses to increase as we increase the number of sales, sales support and analytical personnel.

 

Product Development. Product development expenses consist of costs related to the products and services we provide to our audience, including the costs associated with the operation and maintenance of the properties in the Everyday Health portfolio that we operate. These costs primarily consist of personnel-related expenses, including non-cash stock compensation, for our editorial, product management, technology and customer service personnel. Product development expenses also include fees paid to editorial and technology consultants; other technology costs; and depreciation and amortization expense pertaining to property and equipment and capitalized technology costs, including website and mobile development costs. We expect our investment in product development to increase as we continue to increase our editorial, product development and technology personnel, and as we enhance our product offerings by creating and licensing content, tools and applications, including new offerings for payors, providers and employers.

 

General and Administrative. General and administrative expenses consist primarily of personnel-related expenses, including non-cash stock compensation, for our executive, finance, legal, human resources and other administrative personnel, as well as accounting and legal professional fees and other general corporate expenses, including insurance, facilities expenses and depreciation and amortization expense pertaining to property and equipment and amortization of definite-lived intangible assets. We expect our general and administrative expenses, including accounting and legal-related expenses and insurance costs, to increase as we have transitioned to being a public company.

 

Interest Expense, Net

 

These amounts consist principally of interest expense, partially offset by interest income, as well as amortization expense related to deferred financing costs. Interest expense is primarily related to our credit facilities.

 

Other Expense

 

Other expense consists of certain non-operating expenses, primarily the write-off of unamortized deferred financing costs and prepayment fees incurred in connection with refinancing our credit facilities.

 

Income Taxes

 

We are subject to tax at the federal, state and local level in the U.S. and in one foreign jurisdiction. Earnings from our limited non-U.S. activities are subject to local country income tax and may also be subject to U.S. income tax.

 

As of December 31, 2014, we had approximately $107 million of U.S. federal and state net operating loss, or NOL, carryforwards available to offset future taxable income. The U.S. federal NOL carryforwards will expire from 2020 through 2033. The full utilization of these NOL carryforwards in the future will be dependent upon our ability to generate taxable income and could be limited due to ownership changes, as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended. Specifically, Section 382 contains rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to use its previously-recognized NOL carryforwards and specified built-in losses in years after the ownership change. We completed an analysis in 2013 to determine the impact that past ownership changes may have on our ability to use our NOL carryforwards and have determined that, through 2012, approximately $0.5 million of the then-existing NOL carryforwards will be limited by Section 382. However, changes in our stock ownership resulting from our initial public offering, or IPO, or other potential future transactions, could result in additional ownership changes under Section 382. Our NOLs may also be limited under similar provisions of state law. The NOL carryforwards at December 31, 2014 include approximately $7.4 million in income tax deductions related to stock options, which will be reflected as a credit to additional paid-in-capital as realized.

Results of Operations

 

The following table sets forth our consolidated statement of operations data for the periods presented. The period-to-period comparisons of the results are not necessarily indicative of our results for future periods.

 

		Three months ended March 31,
(in thousands)		2015				2014
Revenues:
Advertising and sponsorship revenues		$	36,338			$	32,692
Premium services revenues			4,836				4,813
Total revenues			41,174				37,505
Operating expenses:
Cost of revenues			14,076				11,421
Sales and marketing			12,725				10,220
Product development			12,602				10,762
General and administrative			9,804				6,595
Total operating expenses			49,207				38,998
Loss from operations			(8,033	)			(1,493	)
Interest expense, net			(953	)			(1,863	)
Other expense			—				(4,114	)
Loss from operations before benefit (provision) for income taxes			(8,986	)			(7,470	)
Benefit (provision) for income taxes			918				(289	)
Net loss		$	(8,068	)		$	(7,759	)

 

Comparison of Three Months Ended March 31, 2015 and 2014

 

Revenues

 

Our total revenues increased 9.8% to $41.2 million during the three months ended March 31, 2015 from $37.5 million during the three months ended March 31, 2014. The $3.7 million increase in total revenues resulted from an increase in advertising and sponsorship revenues. For the three months ended March 31, 2015 and 2014, no advertiser accounted for 10% or more of total revenues.

 

Advertising and sponsorship revenues increased 11.2% to $36.3 million during the three months ended March 31, 2015 from $32.7 million during the three months ended March 31, 2014. The $3.7 million increase in advertising and sponsorship revenues was primarily driven by an increase in our professional revenues, particularly professional revenues attributable to DD, which was acquired in November 2014, offset primarily by a decline in consumer revenues due to commencement delays for certain marketing campaigns in the three months ended March 31, 2015.

 

Premium services revenues remained consistent at $4.8 million during the three months ended March 31, 2015 and 2014. While subscription fee revenues for certain of our brands decreased due to the general decline in the popularity of such brands, the decrease was offset by an increase in subscription fee revenue from a new subscription brand which launched in June 2014.

 

Costs and Expenses

 

Cost of Revenues. Cost of revenues increased 23.2% to $14.1 million during the three months ended March 31, 2015 from $11.4 million during the three months ended March 31, 2014. The $2.7 million increase in cost of revenues was primarily attributable to cost of revenue related to the acquired DD business, as well as an increase in royalties to our portfolio partners and higher media spend during the three months ended March 31, 2015. Cost of revenues as a percentage of total revenues increased to 34.2% during the three months ended March 31, 2015 from 30.5% during the three months ended March 31, 2014.

 

Sales and Marketing. Sales and marketing expenses increased 24.5% to $12.7 million during the three months ended March 31, 2015 from $10.2 million during the three months ended March 31, 2014. The $2.5 million increase was primarily due to higher levels of compensation expense, including increased staffing and related cash and non-cash stock compensation expense for the sales development, sales operations and data analytics teams in the three months ended March 31, 2015 compared to the three months ended March 31, 2014, including compensation expense related to the acquired DD business. Sales and marketing expenses as a percentage of total revenues increased to 30.9% during the three months ended March 31, 2015, as compared to 27.2% during the three months ended March 31, 2014.

 

Product Development. Product development expenses increased 17.1% to $12.6 million during the three months ended March 31, 2015 from $10.8 million during the three months ended March 31, 2014. This $1.8 million increase was primarily due to an increase in product development expense related to the acquired DD business. Product development expenses as a percentage of total revenues increased to 30.6% during the three months ended March 31, 2015, as compared to 28.7% during the three months ended March 31, 2014.

 

General and Administrative. General and administrative expenses increased 48.7% to $9.8 million during the three months ended March 31, 2015 from $6.6 million during the three months ended March 31, 2014. This $3.2 million increase was primarily due to increases in cash and non-cash stock compensation expense, including executive transition charges incurred during the first quarter of 2015, as well as higher amortization expense on intangible assets related to DD. General and administrative expenses as a percentage of total revenues increased to 23.8% during the three months ended March 31, 2015, as compared to 17.6% during the three months ended March 31, 2014.

Interest Expense, Net. Interest expense, net, decreased 48.8% to $1.0 million during the three months ended March 31, 2015, compared to $1.9 million during the three months ended March 31, 2014. The $0.9 million decrease in interest expense was primarily due to the refinancing of our credit facility in March 2014 at a lower interest rate compared to the prior credit facilities, partially offset by a net increase in the weighted-average outstanding borrowings under our credit facilities during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014.

 

Other Expense. Other expense during the three months ended March 31, 2014 consisted of the write-off of unamortized deferred financing costs totaling $2.8 million and prepayment penalties totaling $1.0 million related to the March 2014 credit facility refinancing, and $0.3 million expense relating to a mark-to-market adjustment on certain preferred stock warrants. There were no such expenses during the three months ended March 31, 2015.

 

Benefit (Provision) for Income Taxes. The benefit (provision) for income taxes was approximately $0.9 million and $(0.3) million for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015, as a result of using an estimated annual effective tax rate, we recorded a benefit for the quarter, which is expected to reverse over the remaining quarters due to seasonality of our business. For the three months ended March 31, 2014, the provision for income taxes was based upon the estimated deferred and current tax provision for the year rather than the estimated annual effective tax rate, as the annual results were expected to be at or near breakeven and we believed that using an annual effective tax rate would result in significant variances in the customary relationship between income tax expense (benefit) and pretax income or loss in interim periods.

 

Supplemental Financial Information

 

The following discussion provides information regarding Adjusted EBITDA, a performance measure that is not determined in accordance with U.S. generally accepted accounting principles, or GAAP, as well as information regarding certain non-cash operating expenses that are reflected in the Adjusted EBITDA calculation. We use Adjusted EBITDA in conjunction with GAAP operating performance measures as part of our overall assessment of our performance, for planning purposes, including the preparation of our annual operating budget, to evaluate the effectiveness of our business strategies and to communicate with our Board of Directors concerning our financial performance.

 

We define Adjusted EBITDA as net loss plus: interest expense, net; income tax (benefit) provision; depreciation and amortization expense; stock-based compensation expense; compensation expense related to acquisition earnout arrangements; write-offs of unamortized deferred financing and other debt extinguishment costs; reduction in force severance charges and executive transition charges; loss from discontinued operations; and certain other non-cash charges such as asset impairment charges and preferred stock warrant mark-to-market adjustments. We believe that Adjusted EBITDA is useful to investors and other users of our financial statements in evaluating our operating performance because it provides them with an additional tool to compare business performance across companies and across periods. Furthermore, we believe that:

 

·

Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and comparisons with our peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

·

It is useful to exclude certain non-cash charges, such as depreciation and amortization and stock-based compensation and non-core operational charges, such as asset impairment charges and write-off of debt extinguishment costs, from Adjusted EBITDA because the amount of such expenses in any specific period may not be directly correlated to the underlying performance of our business operations and these expenses can vary significantly between periods.

 

We do not place undue reliance on Adjusted EBITDA as our only measure of operating performance. Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do, that they do not reflect our capital expenditures or future requirements for capital expenditures and that they do not reflect changes in, or cash requirements for, our working capital.

 

As Adjusted EBITDA is a non-GAAP measure, the following table presents a reconciliation of net loss to Adjusted EBITDA.

 

		Three months ended March 31,
(in thousands)		2015				2014
Net loss		$	(8,068	)		$	(7,759	)
Add (deduct):
Interest expense, net			953				1,863
Income tax (benefit) provision			(918	)			289
Depreciation and amortization expense			4,662				3,558
Stock-based compensation expense			2,491				1,069
Warrant mark-to-market adjustment			—				252
Compensation expense related to acquisition earnout			—				84
Write-off of unamortized deferred financing costs			—				3,861
Executive transition charges			1,150				—
Adjusted EBITDA		$	270			$	3,217

 

The following table summarizes our depreciation and amortization and stock compensation expenses included in the Adjusted EBITDA reconciliation table above and details the breakdown of such expenses in the respective statements of operations line-items.

		Three months ended March 31,
		Depreciation / amortization								Stock compensation (1)
(in thousands)		2015				2014				2015				2014
Sales and marketing		$	223			$	299			$	946			$	274
Product development			3,135				2,829				520				437
General and administrative			1,304				430				1,025				358
Total expense		$	4,662			$	3,558			$	2,491			$	1,069

 

(1)

Stock compensation expense includes charges related to our 2014 Employee Stock Purchase Plan beginning in the second quarter of 2014. Refer to “Note 7—Stock-Based Compensation” in the notes to the consolidated financial statements (unaudited) included in Part I, Item 1 of this Form 10-Q.

 

Liquidity and Capital Resources

 

Working Capital

 

As of March 31, 2015, we had cash and cash equivalents of $48.5 million and working capital of $70.7 million.

 

Sources of Liquidity and Long-Term Debt

 

Our primary sources of cash have historically been proceeds from the issuance of convertible redeemable preferred stock, bank borrowings and our IPO. Since the beginning of 2003, we have issued convertible redeemable preferred stock for aggregate net proceeds of $82.0 million. Our IPO resulted in net proceeds of $70.6 million after deducting underwriting discounts and commissions and other offering costs. As of March 31, 2015, we had $112.8 million of borrowings outstanding under our credit facility.

 

On March 31, 2015, we refinanced our debt. Under our existing credit facility, or the Credit Facility, with Silicon Valley Bank and certain other lenders, we maintain a revolver, with a maximum borrowing limit of $82.25 million, and also have a $67.75 million term loan. As of March 31, 2015, there was $67.75 million outstanding on the term loan and $45.0 million outstanding on the revolver. The repayment terms for any balance outstanding on the revolver provide for quarterly interest payments, with the principal being due in full in November 2019. The repayment terms for the term loan provide for quarterly interest and principal payments, with a maturity date of November 2019. The interest rate on the revolver and the term loan is equal to the London Inter-Bank Offered Rate, or LIBOR, plus a variable rate ranging from 2.75% to 4.0% depending on our consolidated leverage ratio, as defined in the Credit Facility agreement, and we are charged a commitment fee of 0.50% on the unused portion of the revolver. As of March 31, 2015, the interest rate on our Credit Facility was 3.52%. The Credit Facility contains certain financial and operational covenants with which we must comply, whether or not there are any borrowings outstanding. Such covenants include requirements to maintain a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio, each as defined in the Credit Facility, as well as restrictions on certain types of dispositions, mergers and acquisitions, indebtedness, investments, liens and capital expenditures, issuance of capital stock and our ability to pay dividends and make other distributions. We were in compliance with the financial and operational covenants of the Credit Facility as of March 31, 2015. The Credit Facility is secured by a first priority security interest in substantially all of our existing and future assets.

 

Operating and Capital Expenditure Requirements

 

Our principal uses of cash historically have been to fund operating losses, finance business acquisitions and capital expenditures relating to purchases of property and equipment to support our infrastructure and capitalized product development costs. We currently expect that our existing cash and cash equivalents, together with anticipated cash flows from operations, will be sufficient to fund our anticipated cash needs for at least the next twelve months. Our liquidity could be negatively affected by a decrease in demand for our marketing solutions, including the impact of changes in advertiser spending behavior, and by other factors outside of our control, including general economic conditions, as well as the other risks to our business discussed in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014. Our cash requirements going forward may require us to raise additional funds through borrowing or the issuance of additional equity or equity-linked securities. Any increase in the amount of our borrowings will result in an increase in our interest expense. Future issuance of equity or equity-linked securities will result in dilution to the holders of our common stock. In addition, if the banking system or the financial markets are volatile, our ability to raise additional debt or equity capital could be adversely affected. Additional financing may not be available on commercially reasonable terms or at all.

 

Components of Liquidity and Capital Resources

 

		Three months ended March 31,
(in thousands)		2015				2014
Net cash provided by operating activities		$	3,205			$	2,080
Net cash used in investing activities			(27,712	)			(3,319	)
Net cash provided by (used in) financing activities			22,308				(233	)
Net decrease in cash and cash equivalents		$	(2,199	)		$	(1,472	)

 

Operating Activities

 

For the quarter ended March 31, 2015, net cash provided by operating activities was $3.2 million, consisting of a net loss of $8.1 million, adjusted for non-cash expenses of $7.5 million, including depreciation and amortization and non-cash stock-based compensation expense. Additionally, changes in operating assets and liabilities provided $3.8 million of cash, which was primarily due to a decrease in accounts receivable of $14.8 million from higher collections and an increase in deferred revenue of $1.9 million, partially offset by a decrease of $9.3 million in accounts payable and accrued expenses due to the timing of vendor payments as well as an increase of $3.6 million in prepaid expenses and other current assets.

Net cash provided by operating activities was $1.1 million higher in the quarter ended March 31, 2015 compared to the quarter ended March 31, 2014, resulting primarily from an increase in depreciation and amortization of $1.1 million, an increase in non-cash stock based compensation expense of $1.4 million, a decrease in deferred revenue of $1.3 million and a $3.9 million decrease in accounts receivable. These increases were partially offset by a $4.1 million decrease in non-cash amortization of deferred financing costs, a $1.0 million decrease in prepaid expenses and other current assets and an $0.7 million decrease in accounts payable and accrued expenses for the quarter ended March 31, 2015 compared to the same period in 2014.

 

For the quarter ended March 31, 2014, net cash provided by operating activities was $2.1 million, consisting of a net loss of $7.8 million, adjusted for non-cash expenses of $9.3 million, including depreciation and amortization, non-cash stock-based compensation expense and amortization and write-off of deferred financing costs. Additionally, changes in operating assets and liabilities provided $0.6 million of cash, which was primarily due to a decrease in accounts receivable of $10.9 million from higher collections and an increase in deferred revenue of $0.6 million, partially offset by an $8.6 million decrease in accounts payable and accrued expenses due to the timing of vendor payments and a $2.6 million increase in prepaid expense and other current assets primarily related to the costs associated with our IPO.

 

Investing Activities

 

Our primary investing activities have historically consisted of additions to property and equipment, including computer hardware and software, leasehold improvements and capitalized product development costs. Additionally, our investing activities included payments made to acquire businesses.

 

We used $27.7 million of net cash in investing activities during the quarter ended March 31, 2015, consisting of $3.0 million of additions to property and equipment and $24.7 million for purchase price payments, primarily relating to the Cambridge acquisition. Net cash used in investing activities was $24.4 million higher than in the quarter ended March 31, 2014.

 

We used $3.3 million of net cash in investing activities during the quarter ended March 31, 2014, primarily for additions to property and equipment.

 

Financing Activities

 

Our financing activities have historically consisted primarily of borrowings and repayments under our revolver and term loan credit facilities, and related financing costs, and proceeds from the exercise of stock options. In addition to such activities, upon closing our IPO in April 2014, we received proceeds from our IPO, net of underwriting discounts and commissions and related offering costs.

 

We generated $22.3 million of net cash in financing activities during the quarter ended March 31, 2015, primarily from $22.8 million of additional net borrowings under our revolver and term loan credit facilities and $0.5 million proceeds from the exercise of stock options, partially offset by the payment of $0.7 million of related financing costs. Net cash provided by financing activities was $22.5 million higher than in the quarter ended March 31, 2014.

 

We used $0.2 million of net cash in financing activities during the quarter ended March 31, 2014. This primarily related to the debt refinancing in March 2014, which consisted of $72.3 million in proceeds from our revolver and term loan credit facilities, offset by a $71.3 million repayment of outstanding borrowings under our former credit facilities along with prepayment fees on the former credit facilities of $1.0 million and closing costs on the new facility of $1.2 million. Additionally, we received $1.2 million in proceeds from the exercise of stock options in the quarter ended March 31, 2014.

 

Off-Balance Sheet Arrangements

 

We do not engage in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, as part of our ongoing business. Accordingly, our operating results, financial condition and cash flows are not subject to off-balance sheet risks.

 

Critical Accounting Policies and Estimates

 

Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. These estimates and assumptions are often based on judgments that we believe to be reasonable under the circumstances at the time made, but all such estimates and assumptions are inherently uncertain and unpredictable. Actual results may differ from those estimates and assumptions and it is possible that other professionals, applying their own judgment to the same facts and circumstances, could develop and support alternative estimates and assumptions that would result in material changes to our

operating results and financial condition. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances.

 

We believe the judgments and estimates involved in revenue recognition and deferred revenue, capitalized software and website development cost, goodwill, other long-lived assets and stock-based compensation have the greatest potential impact on our consolidated financial statements, and consider these to be our critical accounting policies and estimates.

 

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K, filed with the SEC on March 5, 2015.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risk related to changes in interest rates, foreign currency exchange rates and inflation. We do not use derivative financial instruments for speculative, hedging or trading purposes, although in the future we may enter into interest rate or exchange rate hedging arrangements to manage the risks described below.

 

Interest Rate Risk. Our interest income is primarily generated from interest earned on highly liquid, short-term money market funds. Our exposure to market risks related to interest expense is limited to borrowings under our credit facility. Based on the $112.8 million of borrowings outstanding under our credit facility as of March 31, 2015 and the interest rates in effect at that date, our annual interest expense would amount to $4.0 million. A hypothetical interest rate increase of 1% on our credit facility would increase annual interest expense by $1.1 million. We do not enter into interest rate swaps, caps or collars or other hedging instruments.

 

Foreign Currency Risk. Substantially all of our revenues and expenses are denominated in U.S. dollars and, therefore, our exposure to market risks related to fluctuations in foreign currency exchange rates is not material.

 

Inflation Risk. We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2015, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not currently subject to any material litigation or other legal proceeding.

 

Item 1A. Risk Factors

 

Please refer to Item 1A-Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 5, 2015, for a description of certain significant risks and uncertainties to which our business, operations and financial condition are subject. During the three months ended March 31, 2015, we did not identify any additional risk factors or any material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

	(a)	Recent Sales of Unregistered Equity Securities

None.

 

	(b)	Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

Item 6. Exhibits

 

	Exhibit Number		Description of Document
	3.1		Amended and Restated Certificate of Incorporation.(1)
	3.2		Amended and Restated Bylaws.(2)
	10.1		First Amendment to Amended and Restated Credit Agreement and Consent, dated as of March 19, 2015, by and among the Registrant, Silicon Valley Bank, as Administrative Agent, certain of the Registrant’s wholly-owned subsidiaries and the other lenders party thereto.
	10.2		Second Amendment to Amended and Restated Credit Agreement, dated as of March 31, 2015, by and among the Registrant, Silicon Valley Bank, as Administrative Agent, certain of the Registrant’s wholly-owned subsidiaries and the other lenders party thereto.
	10.3		Letter Agreement between the Registrant and Michael du Toit, dated January 18, 2015.
	10.4		Transition Agreement between the Registrant and Paul Slavin, dated February 3, 2015.
	31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3)
	32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(3)
	101.INS		XBRL Instance Document
	101.SCH		XBRL Taxonomy Extension Schema
	101.CAL		XBRL Taxonomy Extension Calculation Linkbase
	101.DEF		XBRL Taxonomy Extension Definition Linkbase
	101.LAB		XBRL Taxonomy Extension Label Linkbase
	101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

 

(1)	Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K (File No. 001-36371) filed on April 7, 2014.
(2)	Incorporated herein by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-194097), originally filed on February 24, 2014, as amended.
(3)	These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	EVERYDAY HEALTH, INC.
	By:	/s/ Benjamin Wolin
		Benjamin Wolin
		Chief Executive Officer and Director
		(Principal Executive Officer)
	By:	/s/ Brian Cooper
		Brian Cooper
		Executive Vice President & Chief Financial Officer
		(Principal Financial and Accounting Officer)

 

Date: May 12, 2015