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 September 30, 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 November 11, 2015, was 32,366,501.

 

 

 

EVERYDAY HEALTH, INC.

 

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2015

 

TABLE OF CONTENTS

 

		Page No.
PART I. FINANCIAL INFORMATION		1
ITEM 1. Financial Statements:		1
Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014		1
Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (Unaudited)		2
Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2015 (Unaudited)		3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (Unaudited)		4
Notes to Consolidated Financial Statements (Unaudited)		5
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		26
ITEM 4. Controls and Procedures		26
PART II. OTHER INFORMATION		26
ITEM 1. Legal Proceedings		26
ITEM 1A. Risk Factors		26
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
ITEM 3. Defaults Upon Senior Securities		27
ITEM 4. Mine Safety Disclosures		27
ITEM 5. Other Information		27
ITEM 6. Exhibits		28
SIGNATURES		29

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

EVERYDAY HEALTH, INC.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

		September 30, 2015 (unaudited)				December 31, 2014
Assets
Current assets:
Cash and cash equivalents		$	35,050			$	50,729
Accounts receivable, net of allowance for doubtful accounts of $758 and $637 as of September 30, 2015 and December 31, 2014, respectively			63,315				68,007
Deferred tax asset			656				656
Prepaid expenses and other current assets			6,904				5,529
Total current assets			105,925				124,921
Property and equipment, net			28,104				25,502
Goodwill			165,537				127,115
Intangible assets, net			45,253				30,716
Other assets			5,450				5,237
Total assets		$	350,269			$	313,491
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses		$	32,153			$	31,722
Deferred revenue			9,807				6,740
Current portion of long-term debt			5,928				3,000
Other current liabilities			13,669				965
Total current liabilities			61,557				42,427
Long-term debt			105,975				87,000
Deferred tax liabilities			7,713				6,673
Other long-term liabilities			5,610				4,105
Stockholders’ equity:
Preferred stock, $0.01 par value: 10,000,000 shares authorized at September 30, 2015 and December 31, 2014; no shares issued and outstanding at September 30, 2015 and December 31, 2014			-				-
Common stock, $0.01 par value: 90,000,000 shares authorized at September 30, 2015 and December 31, 2014; 32,295,614 and 31,489,196 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			322				314
Treasury stock			(55	)			(55	)
Additional paid-in capital			307,329				292,117
Accumulated deficit			(138,182	)			(119,090	)
Total stockholders’ equity			169,414				173,286
Total liabilities and stockholders’ equity		$	350,269			$	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 September 30,								Nine months ended September 30,
		2015				2014				2015				2014
Revenues:
Advertising and sponsorship revenues		$	49,630			$	37,910			$	136,193			$	107,484
Premium services revenues			4,684				4,414				14,100				13,792
Total revenues			54,314				42,324				150,293				121,276
Operating expenses:
Cost of revenues			15,637				11,006				43,639				33,388
Sales and marketing			18,531				12,213				52,289				34,649
Product development			14,163				10,886				38,952				32,453
General and administrative			10,010				7,504				29,887				21,225
Total operating expenses			58,341				41,609				164,767				121,715
Income (loss) from operations			(4,027	)			715				(14,474	)			(439	)
Interest expense, net			(1,429	)			(500	)			(3,808	)			(2,948	)
Other expense			-				-				-				(4,114	)
Income (loss) from operations before provision for income taxes			(5,456	)			215				(18,282	)			(7,501	)
Provision for income taxes			(7,262	)			(365	)			(810	)			(1,003	)
Net loss			(12,718	)			(150	)			(19,092	)			(8,504	)
Series G preferred stock deemed dividend			-				-				-				(8,079	)
Net loss attributable to common stockholders		$	(12,718	)		$	(150	)		$	(19,092	)		$	(16,583	)
Net loss attributable to common stockholders per common share – basic and diluted		$	(0.40	)		$	(0.00	)		$	(0.60	)		$	(0.76	)
Weighted-average common shares outstanding – basic and diluted			32,138,214				30,404,529				31,807,776				21,962,026

 

See accompanying notes to consolidated financial statements.

 

 

EVERYDAY HEALTH, INC.

Consolidated Statement of Stockholders’ Equity

(in thousands, except share data, unaudited)

 

		Common Stock																Additional								Total
										Preferred				Treasury				Paid-in				Accumulated				Stockholders’
		Shares				Amount				Stock				Stock				Capital				Deficit				Equity
Balance at December 31, 2014			31,489,196			$	314			$	-			$	(55	)		$	292,117			$	(119,090	)		$	173,286
Exercise of stock options			268,273				3				-				-				1,970				-				1,973
Common stock issued for settlement of restricted stock units, net of 747 shares withheld to satisfy income tax withholding obligations			1,176				-				-				-				(10	)			-				(10	)
Exercise of warrants			99,881				1				-				-				(1	)			-				-
Issuance of common stock in connection with employee stock purchase plan			109,304				1				-				-				1,147				-				1,148
Issuance of common stock in connection with acquisitions			327,784				3				-				-				3,890				-				3,893
Stock based compensation expense			-				-				-				-				8,216				-				8,216
Net loss			-				-				-				-				-				(19,092	)			(19,092	)
Balance at September 30, 2015			32,295,614			$	322			$	-			$	(55	)		$	307,329			$	(138,182	)		$	169,414

 

See accompanying notes to consolidated financial statements.

 

 

EVERYDAY HEALTH, INC.

Consolidated Statements of Cash Flows

(in thousands, unaudited)

 

		Nine months ended September 30,
		2015				2014
Cash flows from operating activities
Net loss		$	(19,092	)		$	(8,504	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			15,157				10,829
Provision for doubtful accounts			176				215
Stock-based compensation			8,216				6,748
Amortization and write-off of financing costs			396				4,309
Asset impairment charge			1,416				—
Provision for deferred income taxes			440				722
Changes in operating assets and liabilities:
Accounts receivable			9,700				7,218
Prepaid expenses and other current assets			(1,125	)			316
Accounts payable and accrued expenses			(1,934	)			(11,191	)
Deferred revenue			2,334				1,636
Other current liabilities			1,862				(101	)
Other long-term liabilities			1,724				607
Net cash provided by operating activities			19,270				12,804
Cash flows from investing activities
Additions to property and equipment, net			(10,276	)			(11,326	)
Proceeds from sale of business			—				400
Payments for businesses purchased, net of cash acquired			(47,316	)			—
Payment of security deposits and other assets			125				90
Net cash used in investing activities			(57,467	)			(10,836	)
Cash flows from financing activities
Net proceeds from common stock issuance			—				70,622
Proceeds from the exercise of stock options			1,881				2,896
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	)			(32,300	)
Borrowings under term loan facility			8,500				40,000
Repayment of principal under term loan facility			(1,597	)			(500	)
Principal payments on capital lease obligations			(521	)			(480	)
Tax withholdings related to net share settlements of restricted stock units			(10	)			—
Payments of credit facility financing costs			(735	)			(2,234	)
Net cash provided by financing activities			22,518				38,971
Net increase (decrease) in cash and cash equivalents			(15,679	)			40,939
Cash and cash equivalents, beginning of period			50,729				16,242
Cash and cash equivalents, end of period		$	35,050			$	57,181
Supplemental disclosure of cash flow information
Interest paid		$	2,563			$	3,027
Income taxes paid		$	176			$	166
Supplemental disclosure of non-cash investing and financing activities
Issuance of common stock for acquired business		$	3,893			$	919
Due to sellers of acquired business		$	11,000			$	—
Warrants issued in connection with website partner agreement		$	—			$	1,131
Capital lease obligations incurred		$	—			$	466
Reclassification of liability warrants to equity warrants		$	—			$	1,140

 

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”) is a leading provider of digital health marketing and communications solutions. 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 unaudited interim 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 September 30, 2015 and 2014. The results of operations for the three and nine months ended September 30, 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 September 30, 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, and 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 physician honoraria fees, 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 nine months ended September 30, 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 nine months ended September 30, 2014.

 

Comprehensive Income

 

The Company has no items of other comprehensive income, and accordingly net income (loss) is equal to comprehensive income (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, and 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. During the three and nine months ended September 30, 2015, an impairment charge of $1,416 was recorded related to certain software development projects which the Company has decided not to move forward with. The $1,416 charge is included in product development expense in the accompanying consolidated statements of operations. There were no indicators of impairment of the Company’s property and equipment during the nine months ended September 30, 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 Financial Accounting Standards Board (“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. This amendment was originally to be effective for annual and interim periods beginning after December 15, 2016. In August 2015, the FASB approved a one year deferral of the effective date to December 15, 2017 and early adoption is permitted, but not before the original effective date of December 15, 2016. 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.

 

In September 2015, the FASB issued updated guidance on business combinations accounting requiring the acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Previously, such adjustments were required to be retrospectively recorded in prior period financial information. The amended guidance will be effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The standard is to be applied prospectively, with early adoption permitted. The Company does not expect the impact of the adoption of this guidance to be material to the consolidated financial statements.

 

3. Acquisitions

 

Tea Leaves

 

In August 2015, the Company acquired 100% of the limited liability company membership interests of Tea Leaves Health, LLC (“Tea Leaves”), a provider of a SaaS-based marketing and analytics platform for hospital systems to identify and engage consumers and physicians. The purchase price was valued at $29,893, consisting of (i) $15,000 in cash paid at closing, (ii) 327,784 shares of the Company’s common stock valued at $3,893, issued at closing and held in escrow for potential post-closing working capital and/or indemnification claims, and (iii) $11,000 to be paid within six months of closing in cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, in the Company’s sole discretion. In addition to the purchase price, the former members of Tea Leaves are eligible to receive an additional $20,000 (50% in cash and 50% in shares of the Company’s common stock) based on the achievement of a specified Tea Leaves financial target as of December 31, 2016, as set forth in the Membership Interest Purchase Agreement between the Company, Tea Leaves and the other parties thereto. This earn-out payment is contingent upon the continued employment with the Company of certain former members of Tea Leaves through December 31, 2016, and, if earned, is due to be paid in the first quarter of 2017. In the three months ended September 30, 2015, there was no earn-out accrual recorded with respect to the December 31, 2016 financial target. The Company expects that the Tea Leaves acquisition will enable the Company to offer an integrated suite of solutions that will allow hospital systems to target both consumers and physicians and to provide measurable return on investment for their strategic planning and marketing efforts.

 

 

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, subject to change for any working capital adjustment that may arise. The results of operations of Tea Leaves, which are not material to the consolidated operating results for the three months ended September 30, 2015, have been included in the accompanying consolidated financial statements from August 6, 2015, the closing date of the acquisition.

 

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.

 

Cash and cash equivalents		$	296
Accounts receivable			778
Other current assets			19
Property and equipment			3,404
Intangible assets			3,410
Goodwill			23,514
Deferred revenue			(535	)
Accounts payable and accrued expenses			(993	)
Total consideration		$	29,893

 

Cambridge

 

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 at closing was comprised of convertible notes that could either convert into shares of the Company’s common stock or be paid in cash at the discretion of the Company. The Company paid the $8,000 obligation in cash in May 2015. As a result of a $134 working capital adjustment, the fair value of the total consideration amounts to $32,139. 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. During the three and nine months ended September 30, 2015, the Company accrued $1,360 and $3,630, respectively, in compensation expense for this earn-out, which is included in sales and marketing expense in the accompanying consolidated statements of operations. 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. The consolidated statements of operations for the three and nine months ended September 30, 2015 include revenue of $6,574 and $12,618, respectively, and pretax income of $2,164 and $4,151, respectively, attributable to Cambridge. Additionally, for the three and nine months ended September 30, 2015, acquisition-related costs of $0 and $186, respectively, are included in general and administrative expenses in the accompanying consolidated statements 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
Intangible assets			14,280
Goodwill			15,442
Accounts payable and accrued expenses			(2,659	)
Deferred revenue			(197	)
Other current liabilities			(53	)
Total consideration		$	32,139

 

Pro Forma Information

 

In accordance with Accounting Standards Codification (“ASC”) Topic 805, presented below are unaudited pro forma results for the three and nine months ended September 30, 2015 and 2014 to show the effect on the Company’s consolidated results of operations as if the Cambridge acquisition had been consummated on January 1, 2014.

 

		Unaudited Pro Forma Results
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2015				2014				2015				2014
Revenue		$	54,314			$	46,655			$	154,560			$	132,694
Income (loss) from operations before provision for income taxes		$	(5,456	)		$	747			$	(17,580	)		$	(6,899	)

 

The unaudited pro forma results give effect to pro forma events that are directly attributable to the assumed acquisition, factually supportable, and expected to have a continuing impact on the combined results. The unaudited pro forma results include adjustments primarily related to amortization expense associated with acquired intangible assets and incremental interest expense related to additional borrowings on the Company’s Credit Facility (as defined below) used to fund the Cambridge acquisition. The unaudited pro forma results are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the date indicated or that may be achieved in future periods.

 

4. Goodwill and Other Intangible Assets

 

During the nine months ended September 30, 2015, goodwill of $38,956 and definite-lived intangible assets of $17,690 were recorded in connection with the Cambridge and Tea Leaves acquisitions (see Note 3). The preliminary value of the intangible assets acquired in connection with the Cambridge acquisition consists of customer relationships of $8,810 and trade names of $5,470, each of which has an estimated useful life of 10 years. The preliminary value of the intangible assets acquired in connection with the Tea Leaves acquisition consists of customer relationships of $2,510 and trade names of $900, which have estimated useful lives of 10 years and 3 years, respectively. Additionally, goodwill decreased by $534 and definite-lived intangible assets increased by $1,470 during the nine months ended September 30, 2015 from working capital adjustments and a revision to the preliminary fair value allocation of assets acquired and liabilities assumed related to a November 2014 acquisition.

 

The carrying value of the Company’s goodwill was $165,537 as of September 30, 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 $45,253 at September 30, 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 nine months ended September 30, 2015 and 2014.

 

Definite-lived intangible assets consist of the following:

 

		September 30, 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		$	40,090			$	(13,463	)		$	26,627				9.2			$	27,300			$	(11,247	)		$	16,053				9.5
Trade names			24,985				(6,359	)			18,626				6.6				18,615				(4,370	)			14,245				6.5
Other intangibles			3,900				(3,900	)			—				0.0				3,900				(3,482	)			418				0.7
Total		$	68,975			$	(23,722	)		$	45,253							$	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 $1,695 and $545 for the three months ended September 30, 2015 and 2014, respectively, and $4,623 and $1,636 for the nine months ended September 30, 2015 and 2014, respectively, and is included in general and administrative expenses 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 (October 1st to December 31st)		$	1,507
2016			6,071
2017			6,063
2018			5,755
2019			5,574
Thereafter			20,283
Total		$	45,253

 

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 an acquisition, 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 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 maturity dates, remained unchanged by the March 2015 amendments. In August 2015, the Company entered into a third amendment to the amended and restated credit facility (as amended, the “Credit Facility”) to modify a certain defined term; however, all other material terms and conditions of the Credit Facility remained unchanged by the August 2015 amendment.

 

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 September 30, 2015, the interest rate on the Credit Facility was 4.28%. As of September 30, 2015, there was $66,903 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 September 30, 2015.

 

In connection with the March 2014 refinancing and the November 2014 amendment, the Company incurred financing costs totaling $2,899 and, in connection with the amendments during the nine months ended September 30, 2015, the Company incurred financing costs of $735, each of which has been deferred and is being 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 September 30, 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”), and 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 September 30, 2015, 285,753 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 nine months ended September 30, 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			929,265				12.09
Exercised			(268,273	)			7.35
Cancelled			(274,474	)			12.47
Outstanding at September 30, 2015			6,280,216			$	10.27				5.57			$	5,734
Exercisable at September 30, 2015			4,141,403			$	8.89				4.29			$	5,505

 

Proceeds from the exercise of options and the total intrinsic value of the options exercised were $112 and $112, respectively, for the three months ended September 30, 2015, and $745 and $1,129, respectively, for the three months ended September 30, 2014. Proceeds from the exercise of options and the total intrinsic value of the options exercised were $1,881 and $1,388, respectively, for the nine months ended September 30, 2015, and $2,896 and $4,354, respectively, for the nine months ended September 30, 2014.

 

The weighted-average fair value per share at date of grant for options granted was $5.36 and $7.73 during the nine months ended September 30, 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 nine months ended September 30, 2015 and 2014:

 

 

 

		2015				2014
Volatility			43.40	%			49.42	%
Expected life (years)			6.25				6.25
Risk-free interest rate			1.73	%			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 $1,471 and $2,331 for the three months ended September 30, 2015 and 2014, respectively, and $4,940 and $5,942 for the nine months ended September 30, 2015 and 2014, respectively.

 

At September 30, 2015, there was approximately $5,381 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.32 years. The total fair value of stock options vested during the nine months ended September 30, 2015 and 2014 was $5,183 and $2,800, 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 unvested RSU activity for the nine months ended September 30, 2015:

 

		Number of RSUs				Weighted Average Grant Date Fair Value
Outstanding at December 31, 2014			—			$	-
Granted (1)			691,538				12.01
Vested			(1,923	)			11.99
Cancelled			(24,397	)			11.99
Outstanding at September 30, 2015			665,218			$	12.01

 

(1)

RSUs granted during the nine months ended September 30, 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 $1,343 and $2,867 for the three and nine months ended September 30, 2015, respectively. As RSUs were issued for the first time in March 2015, there was no stock-based compensation expense related to RSUs in 2014.

 

At September 30, 2015, there was approximately $4,611 of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted-average period of 1.24 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, authorized 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.

 

 

The Company’s second purchase period commenced in November 2014 and ended in May 2015. During the nine months ended September 30, 2015, employees purchased 109,304 shares of common stock pursuant to the ESPP at an exercise price of $10.51. As of September 30, 2015, 567,403 shares of common stock were reserved for future issuance under the ESPP.

 

For the three months ended September 30, 2015 and 2014, charges incurred under the ESPP totaled $158 and $399, respectively. For the nine months ended September 30, 2015 and 2014, charges incurred under the ESPP totaled $409 and $806, respectively.

 

There was $207 of total unrecognized compensation cost related to purchase rights under the ESPP as of September 30, 2015. This cost is expected to be recognized over a weighted average period of less than one year.

 

8. Net Loss Attributable to Common Stockholders per Common Share

 

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

 

Diluted net loss attributable to common stockholders per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. 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 and nine months ended September 30, 2015 and 2014, the Company had such potentially dilutive securities outstanding which were not included in the computation of diluted net loss per common share, as the effects would have been anti-dilutive.

 

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

 

		Three months ended								Nine months ended
		September 30,								September 30,
		2015				2014				2015				2014
Warrants to purchase common stock (1)			43,782				217,491				87,738				416,667
Warrants to purchase redeemable convertible preferred stock (1)			—				140,084				—				145,763
Redeemable convertible preferred stock (1)			—				—				—				6,025,555
Stock option awards			6,344,941				6,535,002				6,287,716				6,228,882
Unvested RSU awards			629,432				—				428,260				—
Employee stock purchase plan			66,157				84,751				69,102				35,622
Total weighted-average anti-dilutive securities			7,084,312				6,977,328				6,872,816				12,852,489

 

(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 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. For each of the quarters ended March 31, 2015 and June 30, 2015, a tax benefit was recorded based on pre-tax losses in such quarters and an estimate of the Company’s annual effective tax rate (“AETR”), adjusted for discrete items arising in the quarter. During the three months ended September 30, 2015, the Company has determined its annual results are expected to be at or near breakeven for the year, which results in the Company being unable to make a reliable estimate of its annual effective tax rate. Accordingly, the determined actual effective tax rate for the year-to-date period is the best estimate of the annual effective tax rate, which primarily consists of ratable income taxes it expects for the year ending December 31, 2015. Based on this, the Company recorded an income tax provision of $7,262 and $810 for the three and nine months ended September 30, 2015, respectively. The income tax provision of $810 primarily consists of a deferred and current tax provision offset by a one-time tax benefit of $601 related to the release of a valuation allowance from finalizing the purchase price valuation of a November 2014 acquisition.

  

The Company’s deferred tax assets relate primarily to net operating loss (“NOL”) 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 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. 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 in the consolidated financial statements or disclosure in these related notes thereto.

 

 

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, Item 1A—Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 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 provider of digital health marketing and communications solutions. 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, Tea Leaves Health, 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.

 

We have also recently begun to focus on leveraging our existing assets to generate revenue from new customer channels across the broader healthcare landscape, particularly payers and providers. Specifically, the goal of our new healthcare solutions business is to utilize our large, highly-engaged audience, premium content and tools, and advanced data and analytics capabilities to engage and influence consumers and healthcare professionals on behalf of entities such as health insurers and hospitals. In August 2015, we acquired Tea Leaves Health, LLC, or Tea Leaves, a provider of a SaaS-based marketing and analytics platform for hospital systems to identify and engage consumers and physicians. We believe there is a significant revenue opportunity in providing hospital systems with marketing solutions to target both consumers and physicians and to provide measurable ROI for their strategic planning and marketing efforts.

 

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 September 30, (1)
		2015				2014
Advertising and sponsorship revenues per advertiser (in thousands)		$	212.1			$	214.2

 

(1)

Based on 227 and 177 total advertisers for the three months ended September 30, 2015 and 2014, respectively. 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 September 30, 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 12.8% to $49.5 million in the first nine months of 2015 from $43.9 million in the first nine months of 2014.

 

In addition, by virtue of our acquisition of DD in the fourth quarter of 2014, 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 acquisition of Cambridge in the first quarter of 2015, 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. In addition, by virtue of our acquisition of Tea Leaves in August 2015, premium services revenues include fees generated from the license of Tea Leaves’ SaaS-based marketing and analytics platform to hospital systems.

 

 

Over the last several years, we have intentionally focused more directly on increasing our advertising and sponsorship revenues. As a result, the mix of our total revenues from advertising and sponsorship services and premium services has changed. In the three and nine months ended September 30, 2015, our advertising and sponsorship revenues accounted for 91.4% and 90.6% of total revenues, respectively, compared to 89.6% and 88.6% in the three and nine months ended September 30, 2014, respectively. In the three and nine months ended September 30, 2015, our premium services revenues accounted for 8.6% and 9.4% of total revenues, respectively, compared to 10.4% and 11.4% in the three and nine months ended September 30, 2014. Our recent acquisition of Tea Leaves may alter these trends in the future.

 

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 thereafter with the highest advertising and sponsorship revenues in the fourth quarter 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 thereafter. 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, physician honoraria fees, 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 and nine months ended September 30, 2015, compared to the prior year periods, as shown in the table below.

 

		Three months ended September 30,								Nine months ended September 30,
(dollars in thousands)		2015				2014				2015				2014
Revenues		$	54,314			$	42,324			$	150,293			$	121,276
Revenue growth			28.3	%			20.7	%			23.9	%			18.0	%
Cost of revenues		$	15,637			$	11,006			$	43,639			$	33,388
Gross profit		$	38,677			$	31,318			$	106,654			$	87,888
Gross margin			71.2	%			74.0	%			71.0	%			72.5	%

 

 

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 on a year-over-year basis.

 

 

Operating Expenses

 

Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs, including commissions and non-cash stock compensation, for our sales and account management, research, marketing, 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, marketing 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 resources, and as we enhance our product offerings by creating and licensing content, tools and applications, including new offerings for payers, 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 September 30,								Nine months ended September 30,
(in thousands)		2015				2014				2015				2014
Revenues:
Advertising and sponsorship revenues		$	49,630			$	37,910			$	136,193			$	107,484
Premium services revenues			4,684				4,414				14,100				13,792
Total revenues			54,314				42,324				150,293				121,276
Operating expenses:
Cost of revenues			15,637				11,006				43,639				33,388
Sales and marketing			18,531				12,213				52,289				34,649
Product development			14,163				10,886				38,952				32,453
General and administrative			10,010				7,504				29,887				21,225
Total operating expenses			58,341				41,609				164,767				121,715
Income (loss) from operations			(4,027	)			715				(14,474	)			(439	)
Interest expense, net			(1,429	)			(500	)			(3,808	)			(2,948	)
Other expense			-				-				-				(4,114	)
Income (loss) from operations before provision for income taxes			(5,456	)			215				(18,282	)			(7,501	)
Provision for income taxes			(7,262	)			(365	)			(810	)			(1,003	)
Net loss		$	(12,718	)		$	(150	)		$	(19,092	)		$	(8,504	)

 

 

Comparison of Three and Nine Months Ended September 30, 2015 and 2014

 

Revenues

 

Our total revenues increased 28.3% to $54.3 million during the three months ended September 30, 2015 from $42.3 million during the three months ended September 30, 2014. The $12.0 million increase in total revenues consisted of a $11.7 million increase in advertising and sponsorship revenues and a $0.3 million increase in premium services revenues. For the three months ended September 30, 2015 and 2014, no advertiser accounted for 10% or more of total revenues.

 

Advertising and sponsorship revenues increased 30.9% to $49.6 million during the three months ended September 30, 2015 from $37.9 million during the three months ended September 30, 2014. The $11.7 million increase in advertising and sponsorship revenues was primarily attributable to an increase in revenue from our professional business, which includes DD and Cambridge, which were acquired subsequent to the September 30, 2014 period.

 

Premium services revenues increased 6.1% to $4.7 million during the three months ended September 30, 2015 from $4.4 million during the three months ended September 30, 2014. The $0.3 million increase in premium services revenues resulted from an increase in revenue from our payer/provider business, which includes Tea Leaves, which was acquired subsequent to the September 30, 2014 period.

 

Our total revenues increased 23.9% to $150.3 million during the nine months ended September 30, 2015 from $121.3 million during the nine months ended September 30, 2014. The $29.0 million increase in total revenues consisted of an increase in advertising and sponsorship revenues of $28.7 million and a $0.3 million increase in premium services revenues. For the nine months ended September 30, 2015 and 2014, no advertiser accounted for 10% or more of total revenues.

 

Advertising and sponsorship revenues increased 26.7% to $136.2 million during the nine months ended September 30, 2015 from $107.5 million during the nine months ended September 30, 2014. The $28.7 million increase in advertising and sponsorship revenues was primarily attributable to an increase in revenue from our professional business, which includes DD and Cambridge, which were acquired subsequent to the September 30, 2014 period.

 

Premium services revenues increased 2.2% to $14.1 million during the nine months ended September 30, 2015 from $13.8 million during the nine months ended September 30, 2014. The $0.3 million increase in premium services revenues resulted from an increase in revenue from our payer/provider business, which includes Tea Leaves, which was acquired subsequent to the September 30, 2014 period.

 

Costs and Expenses

 

Cost of Revenues.  Cost of revenues increased 42.1% to $15.6 million during the three months ended September 30, 2015 from $11.0 million during the three months ended September 30, 2014. The $4.6 million increase in cost of revenues was primarily attributable to an increase in royalties to our portfolio partners commensurate with the increase in advertising and sponsorship revenues, as well as an increase in media expense from increased marketing activities in the three months ended September 30, 2015 compared to the three months ended September 30, 2014. Cost of revenues also increased in part due to the DD acquisition which occurred subsequent to the September 30, 2014 period. Cost of revenues as a percentage of total revenues increased by 1.9% to 27.9% during the three months ended September 30, 2015 from 26.0% for the three months ended September 30, 2014.

 

  

Cost of revenues increased 30.7% to $43.6 million during the nine months ended September 30, 2015 from $33.4 million during the nine months ended September 30, 2014. The $10.2 million increase in cost of revenues was primarily attributable to an increase in royalties to our portfolio partners commensurate with the increase in advertising and sponsorship revenues, as well as an increase in media expense from increased marketing activities in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. Cost of revenues also increased in part due to the DD acquisition which occurred subsequent to the September 30, 2014 period. Cost of revenues as a percentage of total revenues increased by 1.2% to 28.7% during the nine months ended September 30, 2015 from 27.5% for the nine months ended September 30, 2014.

 

Sales and Marketing. Sales and marketing expenses increased 51.7% to $18.5 million during the three months ended September 30, 2015 from $12.2 million during the three months ended September 30, 2014. This $6.3 million increase was attributable to several factors including: (i) higher levels of compensation expense, including increased compensation for the sales development, sales operations and data analytics teams associated with generating and supporting increased advertising and sponsorship revenues, as well as increased compensation expense relating to the DD and Cambridge acquisitions which occurred subsequent to the September 30, 2014 period, and (ii) accrued earn-out and retention bonuses totaling $1.6 million related to the DD and Cambridge acquisitions. As a result of these factors, sales and marketing expenses as a percentage of total revenues increased to 33.1% during the three months ended September 30, 2015, as compared to 28.9% during the three months ended September 30, 2014.

 

Sales and marketing expenses increased 50.9% to $52.3 million during the nine months ended September 30, 2015 from $34.7 million during the nine months ended September 30, 2014. This $17.6 million increase was attributable to several factors including: (i) higher levels of compensation expense, including increased compensation for the sales development, sales operations and data analytics teams associated with generating and supporting increased advertising and sponsorship revenues, as well as increased compensation expense relating to the DD and Cambridge acquisitions which occurred subsequent to the September 30, 2014 period, (ii) accrued earn-out and retention bonuses totaling $4.6 million related to the DD and Cambridge acquisitions, and (iii) accrued executive transition charges totaling $1.6 million for the separation of an executive from the Company at the end of the second quarter of 2015. As a result of these factors, sales and marketing expenses as a percentage of total revenues increased to 34.4% during the nine months ended September 30, 2015, as compared to 28.6% during the nine months ended September 30, 2014.

 

Product Development. Product development expenses increased 30.1% to $14.2 million during the three months ended September 30, 2015 from $10.9 million during the three months ended September 30, 2014. This $3.3 million increase was primarily due to a $1.4 million asset impairment charge recorded during the third quarter of 2015 related to certain software development projects which the Company has decided not to move forward with, as well as increased staffing and related compensation expense, and increased depreciation expense on product development related assets, in part from the DD acquisition. Product development expenses as a percentage of total revenues decreased to 25.3% during the three months ended September 30, 2015, as compared to 25.7% during the three months ended September 30, 2014.

 

Product development expenses increased 20.0% to $39.0 million during the nine months ended September 30, 2015 from $32.5 million during the nine months ended September 30, 2014. This $6.5 million increase was primarily due to a $1.4 million asset impairment charge recorded during the third quarter of 2015 related to certain software development projects which the Company has decided not to move forward with, as well as increased staffing and related compensation expense, and increased depreciation expense on product development related assets, in part from the DD acquisition. Product development expenses as a percentage of total revenues decreased to 25.6% during the nine months ended September 30, 2015, as compared to 26.8% during the nine months ended September 30, 2014.

 

General and Administrative. General and administrative expenses increased 33.4% to $10.0 million during the three months ended September 30, 2015 from $7.5 million during the three months ended September 30, 2014. This $2.5 million increase was primarily due to an increase in intangibles amortization expense of definite-lived intangible assets relating to the DD and Cambridge acquisitions, as well as additional compensation expense relating to these acquisitions which occurred subsequent to the September 30, 2014 period. General and administrative expenses as a percentage of total revenues increased to 17.9% during the three months ended September 30, 2015, as compared to 17.7% during the three months ended September 30, 2014.

 

General and administrative expenses increased 40.8% to $29.9 million during the nine months ended September 30, 2015 from $21.2 million during the nine months ended September 30, 2014. This $8.7 million increase was attributable to several factors, including: (i) an increase in intangibles amortization expense of definite-lived intangible assets relating to the DD and Cambridge acquisitions, (ii) higher levels of compensation and non-cash stock compensation expense, including additional compensation expense relating to acquisitions which occurred subsequent to the September 30, 2014 period, and (iii) accrued executive transition charges totaling $1.3 million for the separation of certain executives from the Company in the first and second quarters of 2015. General and administrative expenses as a percentage of total revenues increased to 19.7% during the nine months ended September 30, 2015, as compared to 17.5% during the nine months ended September 30, 2014.

 

Interest Expense, Net. Interest expense, net, increased 185.8% to $1.4 million during the three months ended September 30, 2015, compared to $0.5 million during the three months ended September 30, 2014. The $0.9 million increase in interest expense was primarily due to the higher level of debt outstanding during the three months ended September 30, 2015 compared to the three months ended September 30, 2014, primarily related to additional borrowings for the DD and Cambridge acquisitions.

 

Interest expense, net, increased 29.2% to $3.8 million during the nine months ended September 30, 2015, compared to $2.9 million during the nine months ended September 30, 2014. The $0.9 million increase in interest expense was primarily to the higher levels of outstanding debt during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily related to the additional borrowings for the DD and Cambridge acquisitions.

 

  

Other Expense. Other expense during the nine months ended September 30, 2014 consists of certain non-operating expense charges recorded in the first quarter of 2014 totaling $4.1 million, consisting of the write-off of unamortized deferred financing costs of $2.8 million and prepayment fees of $1.0 million in connection with the refinancing of our credit facilities in March 2014, and $0.3 million expense relating to the mark-to-market adjustment on certain preferred stock warrants. There were no similar charges during the three and nine months ended September 30, 2015.

 

Provision for Income Taxes. The provision for income taxes was $7.3 million and $0.4 million during the three months ended September 30, 2015 and 2014, respectively. For each of the quarters ended March 31, 2015 and June 30, 2015, a tax benefit was recorded based on pre-tax losses in such quarters and an estimate of the Company’s annual effective tax rate, adjusted for discrete items during the quarter. During the three months ended September 30, 2015, it was determined that the Company’s annual results were expected to be at or near breakeven for the year, which results in the Company using the actual effective tax rate for the year-to-date period. As such, the Company reversed $5.9 million of tax benefit recognized during the first six months of the year during the three months ended September 30, 2015, calculated using the estimated annual effective tax rate. The increase in provision for income taxes is attributable to the fact that the Company calculated the prior quarter tax provision using the estimated annual effective tax rate, which was reversed during the three months ended September 30, 2015, compared to one quarter of estimated income taxes recorded in the same 2014 period, and an increase in the estimated deferred and current tax provision as a result of acquisitions during 2015.

 

Provision for income taxes remained relatively consistent at $0.8 million and $1.0 million during the nine months ended September 30, 2015 and 2014, respectively.

  

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 income (loss) plus: interest expense, net; income tax (benefit) provision; depreciation and amortization expense; stock-based compensation expense; compensation expense related to acquisition earnout and retention bonus arrangements; write-offs of unamortized deferred financing and other debt extinguishment costs; reduction in force severance charges and executive transition charges; contract settlement 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 September 30,								Nine months ended September 30,
(in thousands)		2015				2014				2015				2014
Net loss		$	(12,718	)		$	(150	)		$	(19,092	)		$	(8,504	)
Add:
Interest expense, net			1,429				500				3,808				2,948
Income tax provision			7,262				365				810				1,003
Depreciation and amortization expense			5,286				3,679				15,157				10,829
Stock-based compensation expense			2,972				2,729				8,216				6,748
Warrant mark-to-market adjustment			-				-				-				252
Compensation expense related to acquisition earnout and retention bonuses			1,628				-				4,587				135
Write-off of unamortized deferred financing costs			-				-				-				3,861
Executive transition charges			-				-				2,886				-
Contract settlement charge			1,725				-				1,725				-
Asset impairment charge			1,416				-				1,416				-
Adjusted EBITDA		$	9,000			$	7,123			$	19,513			$	17,272

 

 

 

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 September 30,																Nine months ended September 30,
		Depreciation /								Stock								Depreciation /								Stock
		amortization								compensation (1)								amortization								compensation (1)
(in thousands)		2015				2014				2015				2014				2015				2014				2015				2014
Sales and marketing		$	268			$	329			$	954			$	753			$	763			$	940			$	2,783			$	1,846
Product development			3,248				2,734				526				599				9,534				8,045				1,525				1,781
General and administrative			1,770				616				1,492				1,377				4,860				1,844				3,908				3,121
Total expense		$	5,286			$	3,679			$	2,972			$	2,729			$	15,157			$	10,829			$	8,216			$	6,748

 

 

(1)

Stock compensation expense includes charges related to the Company’s ESPP 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 September 30, 2015, we had cash and cash equivalents of $35.1 million and working capital of $44.4 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 September 30, 2015, we had $111.9 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 $82.3 million, and also have a term loan. As of September 30, 2015, there was $66.9 million outstanding on the term loan and $45.0 million outstanding on the revolver, with $37.3 million available to be drawn. 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 September 30, 2015, the interest rate on our Credit Facility was 4.28%. 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 September 30, 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 and Item 1A-Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. 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

 

		Nine months ended September 30,
(in thousands)		2015				2014
Net cash provided by operating activities		$	19,270			$	12,804
Net cash used in investing activities			(57,467	)			(10,836	)
Net cash provided by financing activities			22,518				38,971
Net increase (decrease) in cash and cash equivalents		$	(15,679	)		$	40,939

 

 

Operating Activities

 

For the nine months ended September 30, 2015, net cash provided by operating activities was $19.3 million, consisting of a net loss of $19.1 million, adjusted for non-cash expenses of $25.8 million, including depreciation and amortization, non-cash stock-based compensation expense and the asset impairment charge recognized in the third quarter of 2015. Additionally, changes in operating assets and liabilities provided $12.6 million of cash, which was primarily due to a decrease in accounts receivable of $9.7 million from higher collections, an increase in deferred revenue of $2.3 million and an increase in other current liabilities of $1.9 million, partially offset by a $1.9 million increase in accounts payable and accrued expenses due to the timing of vendor payments.

 

For the nine months ended September 30, 2014, net cash provided by operating activities was $12.8 million, consisting of a net loss of $8.5 million, adjusted for non-cash expenses of $22.8 million, including depreciation and amortization, non-cash stock-based compensation expense and amortization and write-off of financing costs. Additionally, changes in operating assets and liabilities resulted in the use of $1.5 million of cash, which was primarily due to a $11.2 million decrease in accounts payable and accrued expenses due to the timing of vendor payments, partially offset by a decrease in accounts receivable of $7.2 million from higher collections and an increase in deferred revenue of $1.6 million.

 

Investing Activities

 

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

 

We used $57.5 million of net cash in investing activities during the nine months ended September 30, 2015, consisting of $10.3 million for additions to property and equipment and $47.3 million for purchase price payments relating to the Cambridge and Tea Leaves acquisitions. Net cash used in investing activities was $46.6 million higher than in the nine months ended September 30, 2014.

 

We used $10.8 million of net cash in investing activities during the nine months ended September 30, 2014, primarily for additions to property and equipment of $11.3 million, partially offset by $0.4 million of proceeds from the sale of a business.

 

 

Financing Activities

 

Our financing activities have historically consisted of borrowings and repayments under our 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.

 

For the nine months ended September 30, 2015, net cash provided by financing activities was $22.5 million. This primarily related to $15.0 million in net borrowings on the revolver portion of our credit facility, and $8.5 million of borrowings on the term loan portion of the facility offset by $1.6 million in principal payments. Additionally, we received $1.9 million in proceeds from the exercise of stock options, which was partially offset by $0.7 million of financing costs paid in connection with amendments to our credit facility and $0.5 million in capital lease payments.

 

For the nine months ended September 30, 2014, net cash provided by financing activities was $39.0 million. This primarily related to net proceeds from the IPO of $70.6 million, partially offset by repayment of the full $32.3 million outstanding on the revolver portion of our credit facility. Additionally, we received $2.9 million in proceeds from the exercise of stock options, which was offset by $2.2 million of financing costs paid in connection with our credit facility refinancing.

 

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 $111.9 million of borrowings outstanding under our credit facility as of September 30, 2015 and the interest rates in effect at that date, our annual interest expense, including the 0.50% commitment fee on the unused portion of the revolver, would amount to $5.0 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 September 30, 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 September 30, 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, and Item 1A-Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on August 12, 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 September 30, 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 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015.

 

 

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

 

	(a)	Recent Sales of Unregistered Equity Securities

 

  Pursuant to an agreement entered into on August 6, 2015, we issued an aggregate of 327,784 shares of common stock to be held in escrow on behalf of five accredited investors in connection with an acquisition of all the outstanding limited liability company membership interests of a company. As a result of a post-closing working capital adjustment, 18,251 of such shares were subsequently cancelled on November 4, 2015.

 

All shares of common stock issued or issuable as part of the foregoing acquisition were issued, or will be issued, in a private placement and without registration under the Securities Act, pursuant to Section 4(a)(2) of the Securities Act and Regulation D promulgated pursuant thereto (“Regulation D”). The exemption from registration pursuant to Regulation D is based on, among other things, representations from each of the members of the acquired company to the effect that such person is an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

(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
2.1		Membership Interest Purchase Agreement, dated as of August 6, 2015, by and among Everyday Health, Inc., Tea Leaves Health, LLC, Reuben Kennedy, as the Sellers’ Representative, and the Sellers named therein. (1)
3.1		Amended and Restated Certificate of Incorporation. (2)
3.2		Amended and Restated Bylaws. (3)
10.1		Third Amendment to Amended and Restated Credit Agreement, dated as of August 21, 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.
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. (4)
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. (4)
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 2.1 to the Registrant’s Form 8-K (File No. 001-36371) filed on August 11, 2015.
(2)	Incorporated herein by reference to Exhibit 3.1 to the Registrant’s Form 8-K (File No. 001-36371) filed on April 7, 2014.
(3)	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.
(4)	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: November 12, 2015