424B4 1 c74554_424b4.htm 3B2 EDGAR HTML -- c74554_424b4.htm

Filed pursuant to Rule 424(b)(4)
Registration No. 333-194097

7,150,000 shares

Common stock

This is an initial public offering of shares of common stock of Everyday Health, Inc.

Everyday Health is offering 5,360,000 of the shares to be sold in this offering. The selling stockholders identified in this prospectus are offering 1,790,000 shares. Everyday Health will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price is $14.00 per share. Our common stock has been authorized for listing on the New York Stock Exchange under the symbol “EVDY.”

Mayo Clinic has indicated an interest in purchasing in this offering, at the initial public offering price, up to that number of shares of our common stock having an aggregate value of $10 million. Because this indication of interest is not a binding agreement or commitment to purchase, Mayo Clinic may elect not to purchase shares in this offering. The underwriters will receive the same discounts and commissions from any shares of our common stock purchased by Mayo Clinic as they will from any other shares of our common stock sold to the public in this offering.

We are an “emerging growth company” as defined under the U.S. federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements for this and future filings.

See “Risk factors” beginning on page 13 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

 

 

 

Per Share

 

Total

 

Initial public offering price

 

 

$

 

14.00

 

 

 

$

 

100,100,000

 

Underwriting discounts and commissions(1)

 

 

$

 

0.98

 

 

 

$

 

7,007,000

 

Proceeds, before expenses, to Everyday Health

 

 

$

 

13.02

 

 

 

$

 

69,787,200

 

Proceeds, before expenses, to the selling stockholders

 

 

$

 

13.02

 

 

 

$

 

23,305,800

 

 

 

(1)

 

 

 

We refer you to “Underwriting” on page 147 for additional information regarding underwriting compensation.

To the extent that the underwriters sell more than 7,150,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,072,500 shares from Everyday Health at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the shares of common stock on or about April 2, 2014.

 

 

 

 

 

J.P. Morgan

 

Credit Suisse

 

Citigroup

Stifel

 

SunTrust Robinson Humphrey

Prospectus dated March 27, 2014.


We empower & inspire people to live their healthiest lives every day.

 

Leading digital health and wellness solutions “MedPage Today is a great resource for the on-the-go health care provider.” -Jorge F. MD “Healthy recipes, tips and advice make Everyday Health my go-to site for living a healthier life.” -Sanjra L.

 

2011 2012 50.4 MILLION 55.6 MILLION 60.7 MILLION 2013 2011 2012 2013 47.5 MILLION 61.2 MILLION 69.0 MILLION 2011 14 MILLION 25 MILLION 37 MILLION Average Monthly Mobile Visits to Operated Properties 2.4 Billion Personalized Emails Sent in 2013 60+ Million Cumulative Registrations 15+ Million Mobile App Downloads to Date “I love the weekly updates on What to Expect - they keep me in tune with the little one in my belly!” -Amanda S. 2011-2013 CAGR 63% Dr. Sanjay Gupta 2011 2012 2013

 

Table of contents

 

 

 

 

 

Page

Prospectus summary

 

 

 

1

 

Summary consolidated financial data

 

 

 

8

 

Risk factors

 

 

 

13

 

Special note regarding forward-looking statements

 

 

 

42

 

Industry and market data

 

 

 

44

 

Use of proceeds

 

 

 

45

 

Dividend policy

 

 

 

46

 

Capitalization

 

 

 

47

 

Dilution

 

 

 

49

 

Selected consolidated financial data

 

 

 

51

 

Management’s discussion and analysis of financial condition and results of operations

 

 

 

53

 

Business

 

 

 

80

 

Management

 

 

 

105

 

Executive compensation

 

 

 

115

 

Certain relationships and related party transactions

 

 

 

127

 

Principal and selling stockholders

 

 

 

130

 

Description of capital stock

 

 

 

135

 

Shares available for future sale

 

 

 

141

 

Material U.S. federal income tax considerations

 

 

 

143

 

Underwriting

 

 

 

147

 

Legal matters

 

 

 

151

 

Experts

 

 

 

151

 

Where you can find additional information

 

 

 

151

 

Index to consolidated financial statements

 

 

 

F-1

 


Until April 21, 2014 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


Neither we, the selling stockholders nor the underwriters have authorized anyone to give any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholders nor the underwriters take responsibility for, or can provide any assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Persons who come into possession of this prospectus and any applicable free writing prospectus we have prepared in jurisdictions outside the U.S. are required to inform themselves about and to observe any restrictions in this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.


Prospectus summary

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes and the information set forth under the section titled “Risk factors,” included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Everyday Health,” “company,” “our,” “us,” and “we” in this prospectus to refer to Everyday Health, Inc. and, where appropriate, our subsidiaries.

Everyday Health, Inc.

Overview

We are a leading provider of digital health and wellness solutions. We combine premier digital content from leading health brands with sophisticated data and analytics technology to provide a highly personalized and differentiated content experience to our users. During 2013, we estimate an average of 43 million consumers and 500,000 healthcare professionals, including one-third of all U.S. physicians, engaged with our health and wellness properties each month across multiple channels, including the web, mobile devices, video and social media. Our content portfolio and data and analytics expertise provide marketers with a compelling platform to promote their products and services in a highly targeted and measurable manner, influence purchase decisions and drive better health compliance. We believe that we are well positioned to capitalize on new revenue opportunities presented by the growing importance of consumer engagement, data and analytics and digital technologies in the rapidly evolving health and wellness industries. We are beginning to utilize our existing content, large audience and sophisticated technology platform to enable healthcare payors, providers and employers to drive consumer engagement, improve health outcomes and reduce healthcare costs.

We provide consumers and healthcare professionals with a multi-brand, multi-channel content experience that can be accessed anytime and anywhere a health-related decision is made. Consumers use our content, interactive tools and mobile applications to manage a broad array of health and wellness needs on a daily basis, including weight loss, exercise, healthy pregnancy, diet and nutrition and medical conditions. We also provide healthcare professionals with news, tools and information needed to stay abreast of industry, legislative and regulatory developments in major medical specialties. Our consumers and healthcare professionals increasingly access our content through mobile devices. Accordingly, we have optimized our platform for mobile access, including the development of 26 mobile applications that have been downloaded over 15 million times. Our portfolio of properties includes leading brands such as Everyday Health, MedPage Today, What To Expect, Mayo Clinic, Jillian Michaels and The South Beach Diet, and incorporates content from highly respected health authorities such as Dr. Sanjay Gupta.

Our premium content has enabled us to aggregate a large and engaged audience of consumers and healthcare professionals. In each of the past three years, over five million consumers have registered with us and voluntarily provided us with valuable data, including demographic information and health related interests. We augment our user profiles by collecting behavioral data through engagement with our properties and appending data from third party sources. Our proprietary technology utilizes the data we collect to provide a highly personalized experience for our users, including customized content, drive better health outcomes and connect users looking for support.

We derive a significant majority of our revenues from the sale of advertising, sponsorships and other marketing solutions that engage consumers and healthcare professionals. We have developed strong relationships with marketers across a variety of health and wellness categories, including pharmaceuticals, over-the-counter products, food, retail and lifestyle. For example, during 2013, our customers included ten of

1


the top 25 global advertisers in 2012, as compiled by Advertising Age, and 23 of the top 25 global pharmaceutical companies ranked by 2012 revenue. We specialize in providing these marketers with highly-customized, data-driven marketing solutions that can precisely target niche health audiences, and which are designed to be effective on a desktop or mobile device. Our innovative programs, which utilize sophisticated campaign analytics to measure and maximize a marketer’s return on investment, or ROI, have been instrumental in significantly growing our revenue among our largest customers.

Industry dynamics

The U.S. healthcare industry is undergoing a profound transformation whereby consumers will likely be more directly engaged in managing their health and making health-related purchase decisions. At the same time, digital technology is providing new avenues for consumers to manage their health, healthcare professionals to stay informed and treat patients, marketers to reach and influence customers, and payors to improve care and lower cost.

Consumers. Consumer engagement in health and wellness has significantly increased as a result of the growth of digital content and tools and the shift towards consumers being forced to bear more of their healthcare costs. Consumers are increasingly using digital media to obtain critical information, participate in online health communities, make daily health and wellness decisions and manage serious medical conditions. During 2013, on average, approximately 132 million unique visitors accessed health-related websites per month in the U.S., an increase from approximately 94 million on average in 2009, according to comScore. Moreover, the widespread adoption of mobile devices is allowing consumers to directly manage and monitor their health in unprecedented ways.

Healthcare Professionals. Healthcare professionals seek to keep current on medical developments, utilize new tools to acquire patients and develop different ways to engage their patients in directly managing their health. Recent industry changes, such as the introduction of healthcare exchanges and reforms to the healthcare payment model that increasingly base payments to physicians on health outcomes, will accelerate the need for healthcare professionals to stay informed and improve the quality of care. As a result, we believe that physicians will increasingly utilize digital and mobile solutions to better manage these challenges.

Marketers. As more consumers and healthcare professionals utilize the Internet and digital solutions in their daily lives, marketers increasingly view digital marketing as a more effective means for engaging a targeted audience, as compared to traditional marketing channels. Pharmaceutical marketers, in particular, are facing a number of key challenges, including a shift from mass-market drugs to specialty medications, dramatically-reduced sales forces and other restrictions on interacting directly with physicians, which we believe will significantly increase the need for these companies to interact with consumers and physicians more directly through digital channels. Moreover, the ability to measure and maximize a campaign’s ROI in a digital marketing environment has resulted in marketers shifting a greater portion of their advertising spending online and demanding more data-driven analysis of the ROI on their expenditures.

Payors, Providers and Employers. The rapidly changing healthcare environment, including the enactment of The Patient Protection and Affordable Care Act, or the Affordable Care Act, increased availability of healthcare data and new reimbursement models, will require payors, providers and employers to increasingly focus their business models around consumer engagement. For example, payors will need to market health insurance products directly to consumers through the recently introduced healthcare exchanges. Likewise, providers will seek to develop long-term relationships with consumers in order to retain them and improve their long-term health. Lastly, employers will need to more directly engage their employees in managing their health in order to lower the employers’ long-term healthcare costs and improve productivity. We believe that digital strategies, which can be utilized for innovative, efficient and high-impact consumer targeting, acquisition and

2


engagement programs, will become a critical tool for these constituencies as they seek to transform their business models to orient around the consumer.

The Everyday Health solution

We have attracted a large and engaged audience to our premium health and wellness properties and utilize our data and analytics expertise to deliver highly personalized user experiences and efficient and effective marketing and engagement solutions.

Benefits to consumers

Premier Portfolio of Personalized Content; Multi-Channel Approach. The Everyday Health portfolio includes premier brands and digital properties that provide engaging content, interactive tools and community features that help consumers easily manage their health and wellness on a daily basis. Our content is distributed across multiple channels, including 24 consumer mobile applications that provide a broad array of features, such as customized exercise programs, tailored meal recommendations, video tutorials and tools to track daily performance against goals. We utilize the information provided by our users, as well as predictive modeling, to provide consumers with tailored content, features and tools. Since our inception, over 60 million consumers have voluntarily registered with us, and we have separately developed over 200 million anonymous health consumer profiles that have been used to personalize content for our unregistered consumers. We believe our data-driven approach to delivering a more personalized user experience is a key differentiator between us and our competitors.

Benefits to healthcare professionals

Premier Content and Tools; Multiple Distribution Channels. We provide premier content that enables healthcare professionals to stay abreast of clinical, industry, legislative and regulatory developments across all major medical specialties. MedPage Today delivers breaking medical news in over 30 specialties, major public policy developments at the state and federal levels and research reported at approximately 100 medical conferences per year around the world. We have designed our content offerings to be utilized by healthcare professionals at the point-of-care and offer two mobile applications, which include drug and reference databases, treatment guidelines and regulatory alerts and announcements. We facilitate access to our high quality news content through various channels, including partnerships with premier medical associations, including the American College of Cardiology, the American Heart Association, the American Academy of Neurology and The Endocrine Society.

Benefits to marketers

Trusted Platform, Large Audience and Targeted Solutions. The Everyday Health portfolio provides marketers with a trusted platform to promote their offerings, including a suite of customized marketing solutions that utilize our database to target their desired audience. We believe that the overall size, scale and composition of the Everyday Health portfolio, as well as the discrete categories within the portfolio that engage our audience around specific consumer health topics, provide advertisers with significant flexibility to undertake multiple advertising strategies through a single platform, whether focused on a national, regional or local audience or targeting specific interests, issues or user communities. We also utilize our data assets and predictive modeling expertise to design marketing campaigns that retarget our audience beyond the Everyday Health portfolio. We believe a key differentiator of our business is our ability to use our extensive data assets to provide marketers with more significant and measurable ROI relative to offline and other online channels. We provide our marketers with detailed post-campaign reporting that allows them to measure and evaluate the effectiveness of their campaigns.

3


Benefits to payors, providers and employers

Innovative Consumer Engagement Platform; Efficient Consumer Acquisition Vehicle. Our personalized content, interactive tools and trackers and community features promote high levels of engagement focused on improving consumers’ health and managing chronic conditions. We believe payors, providers and employers can utilize our scaled and targeted database of consumers and customized engagement solutions to achieve their health outcome goals, thereby leading to lower overall cost of care, higher employee productivity and greater member and employee satisfaction. For example, in 2013, we partnered with the Mayo Clinic to develop a digital health management platform that provides health assessment tools, lifestyle education, health coaching and wellness information to employers and payors. In addition, we believe payors will view our large and engaged audience as an attractive vehicle for recruiting consumers for their products and services, including health insurance being offered on new public exchanges.

Competitive advantages

The combination of our large and registered user base, premier health and wellness brands, content and tools, and proprietary data assets and personalization technology, creates a unique health engagement platform that we can monetize to address the varied business needs of constituencies across the health and wellness landscape. Our key competitive advantages include the following:

 

 

 

 

Portfolio Management. Our ability to curate and cross-promote a broad array of premier content across the Everyday Health portfolio has allowed us to aggregate a highly engaged audience of consumers and healthcare professionals through online and mobile channels.

 

 

 

 

Proprietary Data and Analytics Expertise. Our sophisticated data and analytics capabilities allow us to provide a superior user experience with personalized content offerings, optimize advertising performance in real time and provide marketers with targeted solutions for their campaigns.

 

 

 

 

Measurable ROI for Marketers. We have developed a differentiated process to prove ROI for our clients by working closely with third party vendors, such as IMS and Crossix, to independently measure the impact of our programs, including measuring increases in brand awareness and sales. This research allows us to optimize our campaigns and demonstrate a positive ROI for our customers.

 

 

 

 

Strategic Relationships with Brand Advertisers. We have built deep relationships with many leading brand advertisers and advertising agencies that view us as a strategic and trusted partner for complex digital marketing initiatives that target specific population sets with personalized content and messaging.

 

 

 

 

Powerful Network Effects. Our content personalization capabilities and ability to develop sophisticated marketing programs continuously improve as our database expands. This self-reinforcing network effect helps enhance our brand, improves user engagement and attracts new users to our properties.

Our growth strategy

We intend to utilize our premier content, data assets and large and engaged user base to continue to grow our business. Key elements of our growth strategy include:

 

 

 

 

increasing our advertising and sponsorship revenues and customer base;

 

 

 

 

growing our healthcare professional business;

 

 

 

 

expanding our multi-channel content and data and analytics capabilities;

 

 

 

 

utilizing our existing assets to generate significant revenue from a broader set of healthcare constituencies;

 

 

 

 

enhancing the Everyday Health brand; and

 

 

 

 

acquiring complementary businesses.

4


Risks related to our business

Our business is subject to a number of risks which you should consider before making an investment decision. These risks are discussed more fully in the section of this prospectus titled “Risk factors.” These risks include, among others:

 

 

 

 

if we are unable to provide content and services that attract users to the Everyday Health portfolio on a consistent basis, our advertising and sponsorship revenues could be reduced;

 

 

 

 

if we are unable to prove that our advertising and sponsorship offerings provide a good ROI for our customers, our financial results could be harmed;

 

 

 

 

failure to maintain and enhance our brands could have a material adverse effect on our business;

 

 

 

 

our ability to deliver personalized content depends on our ability to collect and use data, and any limitations on the collection and use of this data could significantly diminish the value of our solutions;

 

 

 

 

our possession and use of personal information presents risks that could harm our business, and any unauthorized disclosure or manipulation of such data could expose us to costly litigation and damage our reputation;

 

 

 

 

changes in regulations impacting healthcare, data privacy, intellectual property rights or marketing practices could hurt our business and financial results;

 

 

 

 

our history of net losses since inception and expectation that such losses will continue for the foreseeable future; and

 

 

 

 

if we are unable to generate sufficient cash flow from our operations, we may be unable to meet our fixed payment obligations, including required interest and principal payments on our long-term debt.

Corporate history and information

We were incorporated in Delaware in January 2002 as Agora Media Inc. We changed our name to Waterfront Media Inc. in January 2004. In January 2010, to better align our corporate identity with the Everyday Health brand, we changed our name to Everyday Health, Inc.

Our principal executive office is located at 345 Hudson Street, 16th Floor, New York, NY 10014, and our telephone number is (646) 728-9500. Our Internet website address is www.EverydayHealth.com. The information on, or that can be accessed through, any property in the Everyday Health portfolio is not part of this prospectus, and you should not consider any information on, or that can be accessed through, any property in the Everyday Health portfolio as part of this prospectus.

The names Everyday Health and MedPage Today and our logos are trademarks, service marks or trade names owned by us. All other trademarks, service marks or trade names appearing in this prospectus are owned by their respective holders.

Additionally, we are an “emerging growth company” as defined in the recently enacted Jumpstart Our Business Startups Act, or the JOBS Act, and therefore, we may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal control over financial reporting audited by our independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions until we are no longer an “emerging growth company.” In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until such time as those standards apply to private companies.

5


The offering

 

 

 

Common stock offered by Everyday Health

 

5,360,000 shares

Common stock offered by the selling stockholders

 

1,790,000 shares

Common stock to be outstanding immediately after this offering

 

29,678,020 shares

Use of proceeds

 

We estimate that we will receive net proceeds from this offering of approximately $66.8 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering for working capital and general corporate purposes, including funding capital expenditures and operating losses. We may also use a portion of the net proceeds to repay borrowings under our credit facility or acquire complementary businesses, products or technologies. However, we do not have agreements or commitments for any specific repayments or acquisitions at this time. We will not receive any proceeds from the sale of shares by the selling stockholders in this offering. See section titled “Use of proceeds” for additional information.

NYSE symbol

 

“EVDY”

Risk factors

 

You should read the “Risk factors” section beginning on page 13 and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

The number of shares of common stock that will be outstanding after this offering is based on 24,055,334 shares of common stock outstanding as of March 15, 2014 after giving effect to the assumptions in the following paragraph and includes an additional 262,686 shares of common stock to be issued upon exercise of stock options and warrants by certain of the selling stockholders in connection with the sale of these shares in the offering. The number of shares that will be outstanding after the offering excludes:

 

 

 

 

6,532,679 shares of common stock issuable upon exercise of outstanding options with a weighted-average exercise price of $9.30 per share;

 

 

 

 

641,177 shares of common stock issuable upon the exercise of certain outstanding warrants with a weighted-average exercise price of $1.91 per share; and

 

 

 

 

1,053,742 shares of common stock reserved for future issuance under our equity incentive plans, consisting of (a) 353,742 shares of common stock reserved for issuance under our 2003 Stock Option Plan, (b) 200,000 shares of common stock reserved for issuance under our 2014 Equity Incentive Plan, and (c) 500,000 shares of common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for issuance under our 2014 Equity Incentive Plan and our 2014 Employee Stock Purchase Plan. On the date of this prospectus, any remaining shares of common stock available for issuance under our 2003 Stock Option Plan will be added to the shares of common stock reserved under our 2014 Equity Incentive Plan, and no additional grants will be awarded under our 2003 Stock Option Plan. Additional shares may be added to the shares of common stock reserved for issuance under our 2014 Equity Incentive Plan upon the expiration, termination, forfeiture or other

6


 

 

 

 

reacquisition of shares of common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Option Plan. See “Executive compensation—Equity incentive plans” for additional information.

Except as otherwise indicated herein, all information in this prospectus, including the number of shares that will be outstanding after this offering, assumes or gives effect to:

 

 

 

 

a 1-for-1.5 reverse stock split effected on March 14, 2014;

 

 

 

 

the conversion of all outstanding shares of our redeemable convertible preferred stock into an aggregate of 18,457,235 shares of common stock, which will occur automatically upon completion of this offering, which we refer to as the automatic preferred stock conversion;

 

 

 

 

the automatic net exercise of a warrant to purchase 150,000 shares of our common stock at an exercise price of $0.015 per share as described elsewhere in the prospectus in the section titled “Description of capital stock—Warrants,” which we refer to as the automatic warrant exercise;

 

 

 

 

no exercise by the underwriters of their option to purchase up to 1,072,500 additional shares from us; and

 

 

 

 

the adoption of our amended and restated certificate of incorporation and our amended and restated bylaws that will occur upon consummation of this offering.

7


Summary consolidated financial data

The following tables summarize our consolidated financial data for the periods presented. The consolidated statement of operations data for the three years ended December 31, 2013 have been derived from our audited consolidated financial statements for the three years ended December 31, 2013 included elsewhere in this prospectus. The consolidated statement of operations data for the three months ended December 31, 2012 and 2013 have been derived from our unaudited consolidated financial statements that are not included in this prospectus, which have been prepared on the same basis as the audited consolidated financial statements and notes thereto and, in the opinion of our management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair statement of the information for the interim periods. Our historical results for any prior periods are not necessarily indicative of results to be expected for a full year or for any future period.

The pro forma balance sheet data as of December 31, 2013 give effect to the automatic preferred stock conversion, the automatic net warrant exercise and the reclassification of our preferred stock warrant liability to additional paid-in capital upon the automatic conversion of our preferred stock warrants into warrants exercisable for common stock. The pro forma balance sheet data does not reflect the refinancing of our long-term debt, which occurred on March 6, 2014, as the effect of the refinancing on our outstanding debt balance as of December 31, 2013 was immaterial. The pro forma as adjusted balance sheet data as of December 31, 2013 give further effect to our issuance and sale of 5,360,000 shares of common stock in this offering at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds therefrom as described in “Use of proceeds.”

The pro forma weighted-average shares outstanding used in computing the pro forma net loss per common share reflects the conversion of our redeemable convertible preferred stock (using the if-converted method) into an aggregate of 18,457,235 shares of common stock as though the conversion had occurred on the original dates of issuance, and also reflects the issuance of 149,839 shares of common stock pursuant to the automatic net exercise of a warrant. The pro forma net loss available to common shareholders reflects a deemed dividend on the Series G preferred stock of $8.1 million.

You should read this information together with our consolidated financial statements and related notes included elsewhere in this prospectus and the information under “Selected consolidated financial data” and “Management’s discussion and analysis of financial condition and results of operations.”

8


 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and per share data)

 

Year ended December 31,

 

Three months ended December 31,

 

2011

 

2012

 

2013

 

2012

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Advertising and sponsorship revenues

 

 

$

 

96,191

   

 

$

 

109,956

   

 

$

 

134,893

   

 

$

 

39,208

   

 

$

 

48,032

 

Premium services revenues

 

 

 

29,582

   

 

 

23,536

   

 

 

20,957

   

 

 

4,872

   

 

 

5,062

 

Video production fees

 

 

 

   

 

 

5,000

   

 

 

   

 

 

   

 

 

 

 

 

 

Total revenues

 

 

 

125,773

   

 

 

138,492

   

 

 

155,850

   

 

 

44,080

   

 

 

53,094

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

40,985

   

 

 

40,543

   

 

 

43,338

   

 

 

11,145

   

 

 

13,057

 

Sales and marketing

 

 

 

36,266

   

 

 

38,603

   

 

 

44,385

   

 

 

11,988

   

 

 

12,650

 

Product development

 

 

 

36,960

   

 

 

45,676

   

 

 

44,496

   

 

 

13,070

   

 

 

12,427

 

General and administrative

 

 

 

23,199

   

 

 

25,874

   

 

 

26,725

   

 

 

7,276

   

 

 

8,086

 

 

 

 

Total operating expenses

 

 

 

137,410

   

 

 

150,696

   

 

 

158,944

   

 

 

43,479

   

 

 

46,220

 

 

 

 

(Loss) income from operations

 

 

 

(11,637

)

 

 

 

 

(12,204

)

 

 

 

 

(3,094

)

 

 

 

 

601

   

 

 

6,874

 

Interest expense, net

 

 

 

(1,589

)

 

 

 

 

(4,898

)

 

 

 

 

(8,442

)

 

 

 

 

(1,936

)

 

 

 

 

(2,173

)

 

Other expense

 

 

 

   

 

 

(1,069

)

 

 

 

 

(359

)

 

 

 

 

(1,069

)

 

 

 

 

(359

)

 

 

 

 

(Loss) income from continuing operations before provision for income taxes

 

 

 

(13,226

)

 

 

 

 

(18,171

)

 

 

 

 

(11,895

)

 

 

 

 

(2,404

)

 

 

 

 

4,342

 

Benefit (provision) for income taxes

 

 

 

615

   

 

 

(1,026

)

 

 

 

 

(1,102

)

 

 

 

 

(231

)

 

 

 

 

(280

)

 

 

 

 

(Loss) income from continuing operations

 

 

 

(12,611

)

 

 

 

 

(19,197

)

 

 

 

 

(12,997

)

 

 

 

 

(2,635

)

 

 

 

 

4,062

 

Loss from discontinued operations, net of tax

 

 

 

(2,590

)

 

 

 

 

(3,257

)

 

 

 

 

(5,239

)

 

 

 

 

(1,253

)

 

 

 

 

(1,501

)

 

 

 

 

Net (loss) income

 

 

$

 

(15,201

)

 

 

 

$

 

(22,454

)

 

 

 

$

 

(18,236

)

 

 

 

$

 

(3,888

)

 

 

 

$

 

2,561

 

Net (loss) income from continuing operations per common share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

(2.74

)

 

 

 

$

 

(4.01

)

 

 

 

$

 

(2.55

)

 

 

 

$

 

(0.55

)

 

 

 

$

 

0.78

 

 

 

 

Diluted

 

 

$

 

(2.74

)

 

 

 

$

 

(4.01

)

 

 

 

$

 

(2.55

)

 

 

 

$

 

(0.55

)

 

 

 

$

 

0.16

 

 

 

 

Net loss from discontinued operations per common share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

(0.56

)

 

 

 

$

 

(0.68

)

 

 

 

$

 

(1.03

)

 

 

 

$

 

(0.26

)

 

 

 

$

 

(0.29

)

 

 

 

 

Diluted

 

 

$

 

(0.56

)

 

 

 

$

 

(0.68

)

 

 

 

$

 

(1.03

)

 

 

 

$

 

(0.26

)

 

 

 

$

 

(0.29

)

 

 

 

 

Net (loss) income per common share:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

 

(3.30

)

 

 

 

$

 

(4.69

)

 

 

 

$

 

(3.57

)

 

 

 

$

 

(0.80

)

 

 

 

$

 

0.49

 

 

 

 

Diluted

 

 

$

 

(3.30

)

 

 

 

$

 

(4.69

)

 

 

 

$

 

(3.57

)

 

 

 

$

 

(0.80

)

 

 

 

$

 

0.10

 

 

 

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

4,607,675

   

 

 

4,791,474

   

 

 

5,103,351

   

 

 

4,832,958

   

 

 

5,239,463

 

 

 

 

Diluted

 

 

 

4,607,675

   

 

 

4,791,474

   

 

 

5,103,351

   

 

 

4,832,958

   

 

 

25,975,627

 

 

 

 

Pro forma net loss per common share (unaudited):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

$

 

(1.11

)

 

 

 

 

 

$

 

(0.23

)

 

 

 

 

Diluted

 

 

 

 

 

 

$

 

(1.11

)

 

 

 

 

 

$

 

(0.23

)

 

 

 

 

Pro forma weighted-average shares outstanding (unaudited):

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

23,710,425

   

 

 

 

 

23,846,537

 

 

 

 

Diluted

 

 

 

 

 

 

 

23,710,425

   

 

 

 

 

23,846,537

 

 

 

 

9


 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Year ended December 31,

 

Three months ended
December 31,

 

2011

 

2012

 

2013

 

2012

 

2013

 

Other financial data:

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

$

 

8,027

   

 

$

 

7,430

   

 

$

 

21,742

   

 

$

 

5,905

   

 

$

 

14,216

 

 

 

 

Stock-based compensation expense included in:

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

$

 

662

   

 

$

 

553

   

 

$

 

602

   

 

$

 

124

   

 

$

 

185

 

Product development

 

 

 

505

   

 

 

791

   

 

 

1,091

   

 

 

211

   

 

 

410

 

General and administrative

 

 

 

2,374

   

 

 

2,188

   

 

 

1,276

   

 

 

587

   

 

 

536

 

 

 

 

Total stock-based compensation expense

 

 

$

 

3,541

   

 

$

 

3,532

   

 

$

 

2,969

   

 

$

 

922

   

 

$

 

1,131

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013
(in thousands)

 

Actual

 

Pro forma

 

Pro forma
as adjusted

 

Consolidated balance sheet data:

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

16,242

   

 

$

 

16,242

   

 

$

 

83,903

 

Total assets

 

 

 

192,282

   

 

 

192,282

   

 

 

259,943

 

Deferred revenue

 

 

 

6,808

   

 

 

6,808

   

 

 

6,808

 

Other long-term liabilities

 

 

 

4,937

   

 

 

4,049

   

 

 

4,049

 

Long-term debt (including current portion)

 

 

 

71,333

   

 

 

71,333

   

 

 

71,333

 

Total liabilities

 

 

 

123,485

   

 

 

122,597

   

 

 

122,597

 

Redeemable convertible preferred stock

 

 

 

158,766

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

 

 

 

(89,969

)

 

 

 

 

69,685

   

 

 

137,346

 

 

Definition and discussion of other financial data

The following table presents a reconciliation of Adjusted EBITDA to income (loss) from continuing operations, the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles, or GAAP, for each of the periods indicated:

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Year ended December 31,

 

Three months ended December 31,

 

2011

 

2012

 

2013

 

2012

 

2013

 

Reconciliation of Adjusted EBITDA to Income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

$

 

(12,611

)

 

 

 

$

 

(19,197

)

 

 

 

 

(12,997

)

 

 

 

$

 

(2,635

)

 

 

 

$

 

4,062

 

Interest expense, net

 

 

 

1,589

   

 

 

4,898

   

 

 

8,442

   

 

 

1,936

   

 

 

2,173

 

Income tax expense (benefit)

 

 

 

(615

)

 

 

 

 

1,026

   

 

 

1,102

   

 

 

231

   

 

 

280

 

Depreciation and amortization expense

 

 

 

13,822

   

 

 

14,602

   

 

 

15,450

   

 

 

4,054

   

 

 

3,575

 

Stock-based compensation expense

 

 

 

3,541

   

 

 

3,532

   

 

 

2,969

   

 

 

922

   

 

 

1,131

 

Compensation expense related to acquisition earnout

 

 

 

1,375

   

 

 

1,428

   

 

 

2,211

   

 

 

278

   

 

 

86

 

Deferred revenue adjustment related to acquisitions

 

 

 

926

   

 

 

72

   

 

 

   

 

 

50

   

 

 

 

Write-off of unamortized deferred financing costs

 

 

 

   

 

 

1,069

   

 

 

   

 

 

1,069

   

 

 

 

Reduction in force severance charges

 

 

 

   

 

 

   

 

 

3,188

   

 

 

   

 

 

1,679

 

Asset impairment and related charges

 

 

 

   

 

 

   

 

 

1,377

   

 

 

   

 

 

1,230

 

 

 

 

Adjusted EBITDA

 

 

$

 

8,027

   

 

$

 

7,430

   

 

$

 

21,742

   

 

$

 

5,905

   

 

$

 

14,216

 

 

10


Definition of Adjusted EBITDA

We define Adjusted EBITDA as income (loss) from continuing operations plus: interest expense, net; income tax expense; depreciation and amortization expense; stock-based compensation expense; compensation expense related to acquisition earnout arrangements; deferred revenue adjustment related to acquisitions; write-offs of unamortized deferred financing costs; reduction in force severance charges; and asset impairment and related charges.

Discussion of Adjusted EBITDA

Adjusted EBITDA is a measure of operating performance that is not calculated in accordance with GAAP. The table above provides a reconciliation of Adjusted EBITDA to income (loss) from continuing operations. Adjusted EBITDA should not be considered as an alternative to net loss, income (loss) from operations or any other measure of financial performance calculated and presented in accordance with GAAP. Our Adjusted EBITDA may not be comparable to similarly titled measures of other companies because other companies may not calculate similarly titled measures in the same manner as we do. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures and the manner in which we compensate for those limitations set forth at the end of this discussion.

Our management uses Adjusted EBITDA for the following purposes, among others:

 

 

 

 

as a measure of operating performance;

 

 

 

 

to allocate resources to enhance the financial performance of our business;

 

 

 

 

to evaluate the effectiveness of our business strategies;

 

 

 

 

in communications with our board of directors concerning our financial performance;

 

 

 

 

for planning purposes, including the preparation of our annual operating budget; and

 

 

 

 

as a factor when determining management’s incentive compensation.

Management believes that the use of Adjusted EBITDA provides consistency and comparability with our past financial performance, facilitates period to period comparisons of operations, and also facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. Management believes that it is useful to exclude non-cash charges such as (i) depreciation and amortization and (ii) stock-based compensation expense from Adjusted EBITDA because:

 

 

 

 

the amount of such non-cash expenses in any specific period may not directly correlate to the underlying performance of our business operations; and

 

 

 

 

such expenses can vary significantly between periods as a result of new acquisitions, or the timing of new stock-based awards, as the case may be.

More specifically, we believe it is appropriate to exclude stock-based compensation expense from Adjusted EBITDA because non-cash equity grants made at a certain price and point in time do not reflect how our business is performing at any particular time. Because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies may use under the authoritative accounting guidance for stock-based compensation, as well as the impact of non-operational factors, such as our share price, on the magnitude of this expense, management believes that providing a non-GAAP financial measure that excludes this stock-based compensation expense allows investors and analysts to make meaningful comparisons between our operating results and those of other companies. Stock-based compensation expense will recur in future periods for GAAP purposes.

11


We believe it is appropriate to exclude depreciation and amortization expense from Adjusted EBITDA because depreciation is a function of our capital expenditures which are included in our statements of cash flows, while amortization reflects other asset acquisitions made at a point in time and their associated costs. While these matters do affect the overall financial health of our company, they are separately evaluated and relate to historic decisions that do not affect current operations of our business on a cash flow basis. Further, depreciation and amortization do not result in ongoing cash expenditures. This depreciation and amortization expense will recur in future periods for GAAP purposes.

Management believes it is appropriate to exclude other charges related to acquisitions and financings from Adjusted EBITDA as such activities are not part of our regular operations. These charges include: (i) compensation expense associated with acquisition earnout arrangements; (ii) adjustments to deferred revenue balances existing at the time of acquisitions; and (iii) write-off of unamortized deferred financing costs upon the refinancing of our credit facilities. Additionally, we believe it is appropriate to exclude reduction in force severance charges and asset impairment and related charges from Adjusted EBITDA as such charges are non-recurring.

We believe Adjusted EBITDA is useful to investors in evaluating our operating performance because securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies. We anticipate that our investor and analyst presentations after we are public will include Adjusted EBITDA.

Material limitations of non-GAAP measures

Although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluations of companies, these measures, including Adjusted EBITDA, have limitations as an analytical tool, and you should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results of operations as reported under GAAP.

Some of these limitations are:

 

 

 

 

Adjusted EBITDA does not reflect our future requirements for contractual commitments or our cash expenditures or future requirements for capital expenditures;

 

 

 

 

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital;

 

 

 

 

Adjusted EBITDA does not reflect interest income or interest expense;

 

 

 

 

Adjusted EBITDA does not reflect cash requirements for income taxes;

 

 

 

 

Adjusted EBITDA does not reflect the non-cash component of employee compensation;

 

 

 

 

although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements; and

 

 

 

 

other companies in our industry may calculate similarly titled measures differently than we do, limiting their usefulness as comparative measures.

Management compensates for the inherent limitations associated with using the Adjusted EBITDA measure through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, income (loss) from continuing operations. Further, management also reviews GAAP measures, and evaluates individual measures that are not included in Adjusted EBITDA, such as our level of capital expenditures, equity issuance and interest expense, among other measures.

12


Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks. The trading price of our common stock could decline as a result of any of these risks, and you could lose part or all of your investment in our common stock. When deciding whether to invest in our common stock, you should also refer to the other information in this prospectus, including our consolidated financial statements and related notes and the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus. You should read the section titled “Special note regarding forward-looking statements” immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.

Risks related to our business

We have incurred significant losses since our inception and expect to incur losses in the future.

We have accumulated significant losses since our inception. We generated revenues of $155.9 million and recorded net losses of $18.2 million in the year ended December 31, 2013. As of December 31, 2013, our accumulated deficit was $123.7 million. We expect to continue to incur significant operating expenses and, as a result, we will need to generate significant revenues to achieve or sustain profitability. We may not be able to achieve or sustain profitability on a quarterly or annual basis in the future.

If we are unable to provide content and services that attract users to the Everyday Health portfolio on a consistent basis, our advertising and sponsorship revenues could be reduced.

Our users have numerous other online and offline sources of health and wellness related information and product offerings. Our ability to compete for user traffic depends upon our ability to provide compelling and trusted health and wellness content, tools, mobile applications and other services that meet the needs of a variety of types of users, including consumers, physicians and other healthcare professionals. Our ability to do so depends, in turn, on:

 

 

 

 

our ability to develop innovative tools and mobile applications, as well as implement new and updated features and services for existing tools and applications;

 

 

 

 

our ability to hire and retain qualified authors, journalists and independent writers;

 

 

 

 

our ability to license quality content from third parties; and

 

 

 

 

our ability to monitor and respond to increases and decreases in user interest in specific topics.

If users do not perceive our content, mobile applications and tools to be useful, reliable and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their visits to our portfolio. We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our content, applications and tools. We cannot assure you that we will be able to continue to develop or acquire needed content, applications and tools at a reasonable cost or on a timely basis. The revenue opportunities generated from these efforts may fail to justify the amounts spent.

In addition, since users may be attracted to properties within the Everyday Health portfolio as a result of a specific condition or for a specific purpose, it is difficult for us to predict the rate at which such users will return to these properties. Because we generate revenues by, among other things, selling sponsorships in the

13


Everyday Health portfolio, a decline in user traffic levels or a reduction in the number of pages viewed by users could cause our revenues to decrease and could have a material adverse effect on our results of operations.

A significant portion of the traffic to the Everyday Health portfolio is directed to us through algorithmic search results on Internet search engines and, if we are listed less prominently in search result listings, our business and operating results could be harmed.

A significant portion of the traffic to the Everyday Health portfolio is directed to us through the algorithmic search results on Internet search engines such as Google. Algorithms are used by search engines to determine search result listings, and the order of such listings, displayed in response to specific searches. Accordingly, in addition to providing quality content and tools, we seek to design our properties to deliver that content and tools in ways that will cause them to rank well in algorithmic search engine results, which makes it more likely that search engine users will visit our properties. This is commonly referred to as search engine optimization, or SEO. However, there can be no assurance that our SEO efforts will succeed in improving the ranking of our content or, even if they do result in such improvement, that the improved ranking will result in increased numbers of users and page views for our properties. In addition, search engines frequently change the criteria that determine site rankings in their search results, and our SEO efforts will not be successful if we do not respond to those changes appropriately and on a timely basis. Search engine providers may also prioritize search results generated by certain types of queries, including health queries, based on criteria they select or may otherwise intermediate in the search results generated, which could, in some circumstances, reduce the ranking that would otherwise be provided to our properties and increase the ranking of other properties. If we are unable to respond effectively to changes made by search engine providers in their algorithms and other processes, a substantial decrease in traffic to the Everyday Health portfolio could occur, which could cause our revenues to decrease and have a material adverse effect on our results of operations.

The properties in our portfolio may also become listed less prominently in unpaid search results for other reasons, such as search engine technical difficulties, search engine technical changes and changes we make to our properties. In addition, search engines have deemed the practices of some companies to be inconsistent with search engine guidelines and have decided not to list their websites in search result listings at all. If listed less prominently or not at all in search result listings for any reason, the traffic to the Everyday Health portfolio would likely decline, which could harm our operating results. If we decide to attempt to replace this traffic, we may be required to increase our marketing expenditures, which could also harm our operating results.

Our failure to attract and retain users in a cost-effective manner could compromise our ability to grow our revenues and become profitable.

Our continued success is highly dependent on our ability to attract and retain consumers, physicians and other healthcare professionals in a cost-effective manner. In order to attract users to the Everyday Health portfolio, we must expend considerable amounts of money and resources for advertising and marketing. We use a diverse mix of marketing and advertising programs to promote our portfolio, and we have spent, and expect to continue to spend, significant amounts of money on these initiatives. Significant increases in the pricing of one or more of these initiatives will result in higher marketing costs. Our failure to attract and acquire new, and retain existing, users in a cost-effective manner would make it more difficult to maintain and grow our revenues and ultimately to achieve profitability.

14


Increasingly, individuals are using mobile devices to access online content, applications and services and, if we fail to capture a significant share of this growing market opportunity or fail to generate revenues from it, our business could be adversely affected.

The number of individuals, including physicians and other healthcare professionals, who access online content, applications and services through smartphones, tablets and other mobile devices has increased dramatically in the past few years. Accordingly, the portion of our page views from mobile devices has increased rapidly and is expected to continue to increase in the foreseeable future. To compete in this area, we must develop content, applications and tools for mobile devices that:

 

 

 

 

users find engaging;

 

 

 

 

work with a variety of mobile operating systems and networks; and

 

 

 

 

achieve a high level of market acceptance.

If we fail to capture a significant share of this increasingly important portion of the market, it could adversely affect our business. As mobile technology continues to evolve, it is difficult to predict the problems we may encounter in developing and maintaining a robust mobile offering and we may need to devote additional resources to the creation, maintenance and support of our mobile offerings. Even if demand for our mobile applications continues to grow and we achieve a significant share of this market, we cannot assure you that we will be able to achieve significant revenues or profits from these efforts. If we are unable to successfully implement monetization strategies for our mobile offerings, our revenues and financial results may be negatively affected.

If we are unable to prove that our advertising and sponsorship offerings provide a good return on investment for our customers, our financial results could be harmed.

Our ability to grow our advertising and sponsorship revenues will be dependent on our ability to demonstrate to marketers that their marketing campaigns in the Everyday Health portfolio provide a meaningful return on investment, or ROI, relative to offline and other online opportunities. We have invested significant resources in developing our research, analytics and campaign effectiveness capabilities and expect to continue to do so in the future. Our ability, however, to demonstrate the value of advertising and sponsorship in the Everyday Health portfolio will depend, in part, on the sophistication of our analytics and measurement capabilities, the actions taken by our competitors to enhance their offerings, whether we meet the ROI expectations of our customers and a number of other factors. If we are unable to maintain sophisticated advertising offerings that provide value to our customers or demonstrate our ability to provide such value to our customers, our financial results will be harmed.

Our advertising and sponsorship revenues are primarily derived from short-term contracts that may not be renewed.

Many of our advertising and sponsorship contracts are short-term commitments and are subject to termination by the customer. Despite the short-term nature of these commitments, we typically expend significant resources over a lengthy sales cycle to obtain these contracts. Moreover, the time between the execution of a contract with the advertiser or sponsor for a program and the delivery of our services may be longer than expected, especially for larger contracts, and may be subject to delays over which we have little or no control. Our current customers may not fulfill their obligations under their existing contracts or continue to advertise with us beyond the terms of their existing contracts. If a significant number of advertisers, or a few large advertisers, decide to reduce their expenditures with us or to discontinue advertising with us, we could experience a material decline in our revenues.

15


Our advertising and sponsorship revenues are subject to fluctuations due to a number of factors that are beyond our control, including the timing and amount of expenditures by our customers.

Advertising and sponsorship revenues comprise a significant component of our revenues. Our advertising and sponsorship revenues accounted for approximately 86.6% of our total revenues for the year ended December 31, 2013. Advertising spending in the markets in which we compete can fluctuate significantly as a result of a variety of factors, many of which are outside of our control. These factors include:

 

 

 

 

variations in expenditures by advertisers due to budgetary constraints;

 

 

 

 

the cancellation, non-renewal or delay of campaigns;

 

 

 

 

advertisers’ internal review process;

 

 

 

 

the cyclical and discretionary nature of advertising spending;

 

 

 

 

the timing of FDA approvals of prescription drugs and medical devices;

 

 

 

 

regulatory changes affecting advertising and promotion of prescription drugs and medical devices;

 

 

 

 

seasonal factors relating to the prevalence of specific health conditions and other seasonal factors that affect the promotion of specific products; and

 

 

 

 

general economic conditions, including those specific to the Internet and media industries.

Failure to maintain and enhance our brands could have a material adverse effect on our business.

We believe that our brand identity is critical to the success of our business and in maintaining our reputation as a trusted source of health and wellness information. We also believe that maintaining and enhancing our brands are vital to expanding our user base and growing our relationships with advertisers. We believe that the importance of brand recognition and user loyalty will only increase in light of increasing competition in our markets. Some of our existing and potential competitors, including search engines, media companies and other online content providers, have well established brands with greater recognition and market penetration. We have expended considerable resources on establishing and enhancing the Everyday Health brand and the other brands in the Everyday Health portfolio. We have developed policies and procedures that are intended to preserve and enhance these brands, including editorial procedures designed to control the quality of our content. We expect to continue to devote significant additional resources and efforts to enhance our brands. However, we may not be able to successfully maintain or enhance awareness of our brands, and events outside of our control may have a negative effect on our brands.

Our quarterly revenues and operating results are subject to significant fluctuations, and these fluctuations may adversely affect the trading price of our common stock.

We have experienced, and expect to continue to experience, significant fluctuations in our quarterly revenues and operating results. Our quarterly revenues and operating results may fluctuate significantly due to a number of factors, many of which are outside of our control. These factors include:

 

 

 

 

traffic levels to the properties in our portfolio;

 

 

 

 

our ability to introduce new and appealing content, applications and tools that will drive the growth of our user base;

 

 

 

 

the spending priorities and advertising budget cycles of specific advertisers;

 

 

 

 

the addition or loss of advertisers;

16


 

 

 

 

the addition of new websites, mobile applications and services by us or our competitors;

 

 

 

 

changes in our pricing policies or those of our competitors;

 

 

 

 

costs relating to our ongoing efforts to improve our content and advertising-based service offerings; and

 

 

 

 

seasonal fluctuations in advertising spending.

In addition, seasonal factors, including those relating to the prevalence of specific health conditions, can also affect our operating results. For example, we have historically experienced an increase in new subscriptions in the first calendar quarter. This increase typically coincides with the general trend towards making healthy lifestyle choices at the beginning of the new year.

As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our quarterly results of operations are not necessarily meaningful and that these comparisons are not reliable as indicators of our future performance. In addition, these fluctuations could result in volatility in our operating results and may adversely affect our cash flows. As our business grows, these seasonal fluctuations may become more pronounced. Any seasonal or quarterly fluctuations that we report in the future may differ from the expectations of securities analysts and investors. This could cause the price of our common stock to decline.

Our inability to sustain or grow our advertising rates could adversely affect our operating results.

The rates charged for advertising on the Internet, particularly in the consumer health sector, have fluctuated over the past few years due to a variety of factors, including the growth in use of search engines, automated advertising buying networks, growth of the mobile advertising market, general economic conditions and competitive offerings. We have committed significant resources to delivering content and advertising-based services designed to appeal to our customers by engaging users in a more interactive and personalized manner and seeking to provide a higher return on our customers’ advertising expenditures. However, our customers may not perceive our content offerings and advertising-based services as sufficiently valuable to justify the payment of our rates. Moreover, given the inherent difficulties in delivering a rich advertisement on mobile channels and the increasing reliance of our customers on automated advertising buying networks, we may encounter difficulties in obtaining the prices that we seek for our advertising solutions. If we are unable to maintain our historical, or grow to anticipated, pricing levels for advertising, we will experience difficulties in maintaining or growing our revenues.

Our inability to enter into new, or otherwise extend our existing, partnership arrangements or the decline in the popularity of our partners would adversely affect our ability to grow our business and revenues.

We depend on partnership arrangements under which we license content from third parties, including The South Beach Diet, Jillian Michaels and What to Expect, to attract and retain consumers to the Everyday Health portfolio. We believe that such content is an important element of our business and helps to differentiate us from our competitors. We have also entered into partnership arrangements with entities such as the Mayo Clinic and Drugstore.com to monetize their properties by selling advertising and sponsorships. Our partnership arrangements have varying duration, renewal terms and termination rights. Our inability to renew our existing partnership arrangements, or to otherwise enter into new arrangements, in each case on commercially favorable terms, could adversely affect the appeal of our portfolio to our users, advertisers and partners.

In addition, we rely on the popularity and credibility of partners that are associated with certain properties in the Everyday Health portfolio. These partners may not retain their current appeal or may become subject to negative publicity. The popularity and credibility of the properties associated with these partners also depend on the quality and acceptance of competing content released into the marketplace at or near the same time, the availability of alternative sources for the information, general economic conditions and other tangible and

17


intangible factors, all of which are difficult to predict. Consumer preferences change frequently, and it is a challenge to anticipate what offerings will be successful at a certain point in time. Any decline in the popularity of the content offerings, or any negative publicity, whether individually or with respect to the content offerings associated with the properties associated with these partners, may have an adverse impact on our business and revenues.

Significant declines in our premium subscription-based business could adversely affect our operating results.

Our premium services consist primarily of subscriptions sold to users who purchase access to one or more of the properties in our portfolio or to a specific interactive service or application, including www.JillianMichaels.com or www.SouthBeachDiet.com. As our growth strategy has evolved to focus primarily on advertising and sponsorship services, we have experienced a decline in the number of paid subscribers to our premium services in recent years and a decline in our overall subscription revenues. Subscribers may choose not to renew their subscriptions for many reasons at any time prior to the renewal date, including:

 

 

 

 

a desire to reduce discretionary spending;

 

 

 

 

a perception that they do not use the service sufficiently;

 

 

 

 

a belief that the service is a poor value or that competitive services provide a better value or experience; or

 

 

 

 

a feeling that subscriber service issues are not satisfactorily resolved.

We expect the decline in our subscription revenues to continue. However, if we are unable to add a sufficient number of new subscribers or if our existing subscribers cancel at a more rapid rate than anticipated, our financial results could be negatively impacted.

If we are unsuccessful at pursuing adjacent opportunities in the broader health and wellness sectors, we may not be able to achieve our growth and business objectives.

To date, we have principally focused on providing health and wellness content to consumers and healthcare professionals and providing marketing solutions to our customers. However, an important component of our growth strategy involves leveraging our core assets to pursue adjacent opportunities in the broader health and wellness sectors. We believe that our large audience, sophisticated interactive tools and our ability to drive better health outcomes will open up new revenue opportunities for us in the broader health and wellness industries. For example, we have recently begun exploring the utilization of our existing core assets to target payors, providers and employers. However, our experience in marketing to new potential customers in these areas is limited. In the future, we may explore other opportunities to leverage our core assets, although we have not yet developed specific target offerings to address them. Therefore, we will need to make additional investments in product development and sales and marketing in order to effectively pursue such opportunities. If we are unable to successfully develop new offerings to pursue such opportunities or we are unable to successfully market our offerings to these potential customers in adjacent markets, we may not be able to achieve our growth and business objectives.

We face significant competition in attracting both users and advertising customers.

The markets for healthcare information products and services are intensely competitive, continually evolving and, in some cases, subject to rapid change. Our properties face competition from numerous other companies, both in attracting users and in generating revenue from advertisers. We compete for users and advertisers with the following:

18


 

 

 

 

websites, mobile applications and other products and services that provide online health and wellness information directed at consumers and/or healthcare professionals, including both commercial websites and non-profit and governmental websites;

 

 

 

 

general interest consumer websites that offer specialized health sub-channels or functions;

 

 

 

 

search engines that provide specialized health search;

 

 

 

 

other high-traffic websites that include both health-related and non-health-related content and services, including social media websites;

 

 

 

 

advertising networks that aggregate traffic from multiple websites; and

 

 

 

 

offline publications and information services.

We believe that the depth and breadth of our content offerings and advertising-based services across the consumer and professional health spectrum differentiate us from our competitors. However, since there are no meaningful barriers to entry into the markets in which we participate, we anticipate that competition for users will continue to intensify, particularly as our competitors broaden their product offerings. As we continue to diversify the breadth of our content offerings and advertising-based services and expand internationally, we expect our competitors to further expand as well. Our current and future competitors may offer new categories of content, products or services before we do, which may give them a competitive advantage when trying to attract consumers or advertisers. Moreover, both existing and potential users may perceive our competitors’ offerings to be superior to ours.

We also compete for advertisers with the information sources mentioned above. Advertising customers seek to allocate expenditures in a way that will enable them to reach the broadest audience in the most targeted and cost-efficient manner. Advertisers may choose to work with our competitors due to a variety of factors, including:

 

 

 

 

preference for our competitors’ online content and print offerings;

 

 

 

 

desire to utilize other forms of advertising offered by our competitors that are not offered by us; and

 

 

 

 

price and reach.

Moreover, we are increasingly seeking to deploy our assets to service the consumer engagement needs of payors, providers and employers. Because this area is rapidly evolving, the competitive landscape is still developing, and we may be unsuccessful in competing in this market.

Many of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. As a result, we could lose market share to our competitors, and our revenues could decline.

Future acquisitions could disrupt our business and harm our financial condition and operating results.

During the last several years, we have acquired a number of complementary businesses, products and technologies. We intend to continue to seek other complementary acquisitions in the future. Following the closing of this offering, we expect that as a result of our access to the public markets, we will have enhanced opportunities to pursue acquisitions and investments. Acquisitions and investments involve numerous risks, including:

 

 

 

 

potential negative impact on our financial results because they may require us to incur charges and substantial debt or liabilities, may require us to amortize, write down or record impairment of amounts

19


 

 

 

 

related to deferred compensation, goodwill and other intangible assets, or may cause adverse tax consequences, substantial depreciation or deferred compensation charges;

 

 

 

 

difficulty in assimilating the operations and personnel of acquired businesses and/or unexpected expenses in connection therewith;

 

 

 

 

potential disruption of our ongoing businesses and distraction of our management and the management of acquired companies;

 

 

 

 

potential loss of key personnel, customers or users from either our current business or an acquired company’s business;

 

 

 

 

unanticipated expenses relating to implementing or improving internal controls, procedures and policies appropriate for a public company of a business that prior to the acquisition lacked these controls, procedures and policies;

 

 

 

 

potential litigation resulting from our business combinations or acquisition activities; and

 

 

 

 

potential unknown liabilities associated with the acquired businesses.

Our inability to integrate any acquired business successfully or the failure to achieve any expected synergies could result in increased expenses and a reduction in expected revenues or revenue growth. In addition, we may not be able to identify or consummate any future acquisition on favorable terms, or at all. If we do pursue an acquisition, it is possible that we may not realize the anticipated benefits from the acquisition or that the financial markets or investors will negatively view the acquisition. As a result, our stock price could fluctuate or decline.

The costs associated with potential acquisitions or strategic partnerships could dilute your investment or adversely affect our results of operations.

In order to finance acquisitions, investments or strategic partnerships, we may use equity securities, debt, cash or a combination of the foregoing. Any issuance of equity securities or securities convertible into equity may result in substantial dilution to our existing stockholders, reduce the market price of our common stock or both. Any debt financing is likely to increase our interest expense and include financial and other covenants that could have an adverse impact on our business. In addition, an acquisition may involve non-recurring charges, including write-downs of significant amounts of intangible assets or goodwill. The related increases in expenses could adversely affect our results of operations. Any such acquisitions or strategic alliances may require us to obtain additional equity or debt financing, which may not be available on commercially acceptable terms, if at all. We do not intend to seek security holder approval for any such acquisition or security issuance unless required by applicable law, regulation or the terms of our existing securities.

There are a number of risks associated with expansion of our business internationally.

Although currently our international operations are not material, expansion into international markets is one of the key elements of our growth strategy. In addition to facing many of the same challenges we face domestically, there are additional risks and costs inherent in expanding our business in international markets. These include:

 

 

 

 

strong local competitors that are better attuned to the local culture and preferences;

 

 

 

 

the need to adapt the content and advertising programs on our properties to meet local needs and to comply with local legal and regulatory requirements;

20


 

 

 

 

varied, unfamiliar and unclear legal and regulatory restrictions, including intellectual property laws, as well as unforeseen changes in legal and regulatory requirements;

 

 

 

 

limitations on our activities in foreign countries;

 

 

 

 

more restrictive data protection regulation, which may vary by country;

 

 

 

 

difficulties in staffing and managing multinational operations;

 

 

 

 

difficulties in finding appropriate foreign licensees or joint venture partners;

 

 

 

 

distance, language and cultural differences;

 

 

 

 

foreign political and economic uncertainty;

 

 

 

 

currency exchange-rate fluctuations; and

 

 

 

 

potential adverse tax requirements.

We have limited experience in managing international operations. As a result, we may face difficulties and unforeseen expenses in expanding our business internationally, and even if we attempt to do so, we may be unsuccessful.

We may not be able to attract, hire and retain qualified personnel in a cost-effective manner, which could impact the quality of our content offerings and advertising-based services and the effectiveness and efficiency of our management, resulting in increased costs and lower revenues.

Our success depends on our ability to attract, hire and retain, at commercially reasonable rates, qualified editorial, sales and marketing, data sciences, customer support, technical, financial and accounting, legal and other managerial personnel. The competition for personnel in the industries in which we operate is intense and our personnel are often presented with compelling new opportunities. Our personnel may terminate their employment at any time for any reason, and in the recent past, a number of our talented personnel have terminated their employment with us to seek other opportunities. Loss of personnel may result in increased costs for replacement hiring and training. If we fail to attract and hire new personnel, or retain and motivate our current personnel, we may not be able to operate our businesses effectively or efficiently, serve our users and customers properly or maintain the quality of our content offerings and advertising-based services.

Our growth could strain our personnel, technology and infrastructure resources. If we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

Our growth in our business and operations, including the integration of a number of acquisitions, has placed a significant strain on our management, administrative, technological, operational and financial infrastructure. Anticipated future growth, including growth related to the broadening of our content offerings and advertising- based services and our expansion into new product offerings and geographic areas, will continue to place similar strains on our management, technology and infrastructure. Our success will depend in part upon our ability to manage our growth. To manage the expected growth of our business and operations, we will need to continue to improve our operational, financial, technological and management controls and our reporting systems and procedures. The resulting additional capital investments will increase our costs, which will make it more difficult for us to offset any future revenue shortfalls by offsetting cost reductions in the short term.

21


Our business has undergone significant changes in recent years, which may make it difficult for you to evaluate our business and future prospects.

We operate in new markets that are changing rapidly. Our business has undergone significant changes in recent years as a result of:

 

 

 

 

changes in the content offerings that we make available to our users, particularly our entry into the healthcare professional market in 2010;

 

 

 

 

changes in the type of advertising-based services we offer, particularly the growth in our sponsorship revenues;

 

 

 

 

changes in the revenue mix derived from our offerings, including an increasing reliance on advertising and sponsorship revenues;

 

 

 

 

acquisitions;

 

 

 

 

technological changes; and

 

 

 

 

changes in the markets in which we compete.

We expect our business to undergo further changes, including as we explore ways to address the consumer engagement needs of payors, providers and employers. These changes in our business may make it difficult to forecast our future operating and financial performance. Many companies seeking to provide digital health and wellness solutions have failed to become profitable, and some have ceased operations. We cannot assure you that our current strategy will be successful or that our business and revenues will continue to grow.

Given the tenure and experience of our Chief Executive Officer, and his guiding role in developing our business and growth strategy since our inception, our growth may be inhibited, or our operations may be impaired, if we were to lose his services.

Our growth and success depends to a significant extent on our ability to retain Benjamin Wolin, our Chief Executive Officer, who co-founded our company and has led the growth and management of our business since its inception. The loss of the services of Mr. Wolin could result in our inability to manage our operations effectively and to implement our business strategy. This may cause our stock price to fluctuate or decline. Further, we cannot assure you that we would be able to successfully integrate a newly-hired chief executive officer with our existing management team.

Risks related to our intellectual property and technology platform

If our intellectual property and technologies are not adequately protected to prevent use or misappropriation by our competitors, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

Our future success and competitive position depend in part on our ability to protect our proprietary technologies and intellectual property both in the U.S. and in foreign countries. We rely, and expect to continue to rely, on a combination of confidentiality and licensing agreements with our employees, consultants and third parties with whom we have relationships, along with trademark, copyright, patent and trade secret protection laws, to protect our proprietary technologies and intellectual property. We rely on our trademarks, trade names and brand names to distinguish our products and services from the products and services of our competitors, and have registered or applied to register many of these trademarks. We cannot assure you that our trademark applications will be approved. Many of our trademarks contain words or terms having a common usage and, as a result, may not be protectable under applicable law. Competitors may adopt service marks or trademarks similar to ours or use identical or similar terms as keywords in Internet search engine

22


advertising programs, thereby impeding our ability to build brand identity and possibly leading to confusion by our users and customers. Third parties may also oppose our trademark applications, or otherwise challenge our use of the trademarks. In the event that our trademarks are successfully challenged, we may be forced to rebrand our products and services, which could result in a loss of brand recognition, and could require us to devote resources to advertising and marketing new brands.

We also possess intellectual property rights in aspects of our content, search technology, software products and other processes. However, we do not register copyrights in most of our content. Copyrights of U.S. origin must be registered before the copyright owner may bring an infringement suit in the U.S. Furthermore, if a copyright of U.S. origin is not registered within three months of publication of the underlying work, the copyright owner is precluded from seeking statutory damages or attorneys fees in any U.S. enforcement action, and is limited to seeking actual damages and lost profits. Accordingly, if one of our unregistered copyrights of U.S. origin is infringed by a third party, we will need to register the copyright before we can file an infringement suit in the U.S., and our remedies in any such infringement suit may be limited. Typically, our content is primarily protected by user agreements that limit access to and use of our content. Compliance with use restrictions is difficult to monitor, and our copyright rights may be more difficult to enforce than other forms of intellectual property rights.

We have applied for patent protection in the U.S. and abroad relating to certain products, processes and services. We may also rely on unpatented proprietary technology. We cannot assure you that the steps we take will be adequate to protect our technologies and intellectual property, that our patent applications will lead to issued patents, that others will not develop or patent similar or superior technologies, products or services, that our patents and other intellectual property will not be challenged, invalidated or circumvented by others or that the patents that we own will be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Furthermore, the intellectual property laws of other countries where our websites are directed or can be accessed may not protect our products and intellectual property rights to the same extent as the laws of the U.S. The legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in Internet-related industries are uncertain and still evolving, both in the U.S. and in other countries. If the protection of our technologies and intellectual property is inadequate to prevent use or appropriation by third parties, the value of our brand and other intangible assets may diminish.

In addition, third parties may knowingly or unknowingly infringe our patents, copyrights, trademarks and other intellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. Any such litigation could be costly and divert management’s attention and resources away from our business. We also expect that the more successful we are, the more likely that competitors will claim that we infringe on their intellectual property or proprietary rights. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims.

Our ability to deliver personalized content and to measure the performance of advertising campaigns depends on our ability to collect and use data, and any limitations on the collection and use of this data could significantly diminish the value of our solutions.

Our ability to deliver personalized content and measure and optimize the performance of marketing campaigns depends on our ability to utilize the data we collect directly from our users, data we collect from user engagement with the Everyday Health portfolio and data we obtain from third parties. Our users voluntarily provide us with demographic and other information when they register for one of our websites or mobile applications. We also employ cookies and other personal identifiers to personalize content and advertising. Cookies are small files placed on an Internet user’s computer that are used to collect information related to the user, such as the history of the user’s interactions with our properties or third-party websites.

23


Lastly, we purchase data from third party sources to augment our user profiles so we are better able to personalize content and better target our marketing programs.

If changes in user sentiment regarding the sharing of information results in a significant number of visitors to our websites and applications refusing to provide us with demographic information or information about their specific health interests, our ability to personalize content for our users and provide targeted marketing solutions would be impaired. Likewise, if our users choose to opt-out of having their data used for behavioral targeting, it would be more difficult for us to offer targeted marketing programs to our customers. For example, users can currently limit their receipt of online targeted advertising by deleting or disabling cookies on their browsers, visiting websites that allow consumers to place an opt-out cookie on their browsers or by downloading browser plug-ins and other tools that can block the delivery of online advertisements. In some cases, the default settings of consumer devices and software, including web browsers, may also be set to prevent the placement of cookies. In addition, network carriers, providers of mobile device operating systems and device manufacturers may offer users features that may impair or disable the collection of data on devices. A material increase in the number of users who either opt out of accepting cookies or who use browsers, devices or applications that limit the use of cookies or other tracking technologies could negatively impact our ability to collect valuable data and provide advertising solutions to our clients.

We append data from third party sources to augment our user profiles. If we are unable to acquire data from third party sources for whatever reason, or if there is a marked increase in the cost of obtaining such data, our ability to personalize content and provide targeted marketing solutions could be negatively impacted.

Our possession and use of personal information presents risks that could harm our business. Unauthorized disclosure or manipulation of such data, whether through breach of our network security or otherwise, could expose us to costly litigation and damage our reputation.

Our operations are dependent in part on our ability, and that of our hosting providers, to maintain our computer and telecommunications systems in effective working order and to protect our systems against damage from fire, theft, natural disaster, power loss, telecommunications failure, hacker attacks, computer viruses and other events beyond our control. Maintaining our network security is of critical importance because we use and store confidential user, employee and other sensitive data, such as names, addresses, credit card numbers and other personal information, including information about a user’s health interests.

We and our vendors use commercially available encryption technology when transmitting sensitive personal information over public networks. We also use security and business controls to limit access to, and use of, personal information. Third parties may be able to circumvent these security and business measures by developing and deploying viruses, worms and other malicious software programs that are designed to attack or infiltrate our systems and networks. In addition, employee error, malfeasance or other errors in the storage, use or transmission of personal information could result in a breach of registered user or employee privacy.

If third parties improperly obtain and use the personal information of our registered users or employees, we may be required to expend significant resources to resolve these problems. A major breach of our network security and systems could have serious negative consequences for our businesses, including:

 

 

 

 

possible fines, penalties and damages;

 

 

 

 

class action lawsuits;

 

 

 

 

reduced demand for our content offerings and advertising-based services;

 

 

 

 

an unwillingness of users to provide us with their credit card or payment information;

24


 

 

 

 

an unwillingness of registered users to provide us with personal information; and

 

 

 

 

harm to our reputation and brand.

Similarly, if a well-publicized breach of data security at any other major website were to occur, there could be a general public loss of confidence in the use of the Internet for commercial transactions.

Furthermore, a substantial majority of our consumers who subscribe to a premium service use credit and debit cards to pay for those subscriptions. If we or our payment processing vendors were to have problems with our billing software, our consumers could encounter difficulties in accessing properties within our portfolio or otherwise have a dissatisfying experience. In addition, if our billing software fails to work properly and, as a result, we do not automatically charge our consumers’ credit cards on a timely basis or at all, our ability to generate revenue would be compromised.

Finally, privacy concerns in general may cause visitors to avoid online websites that collect information and may indirectly inhibit market acceptance of our products and services. In addition, if our privacy practices are deemed unacceptable by watchdog groups or privacy advocates, such groups may attempt to block access to our properties or disparage our reputation and business.

As a creator and a distributor of content over the Internet, we face potential liability for legal claims based on the nature and content of the materials that we create or distribute.

Users access health-related content through our portfolio, including information regarding particular medical conditions, diagnosis and treatment and possible adverse reactions or side effects from medications. If our content, or content we obtain from third parties, contains inaccuracies, it is possible that consumers who rely on that content or others may make claims against us with various causes of action. Although the properties in our portfolio contain terms and conditions, including disclaimers of liability, that are intended to reduce or eliminate our liability, the law governing the validity and enforceability of online agreements is still evolving and subject to uncertainty. Moreover, many of these terms and conditions relate to properties that are operated by our partners and are not under our control. Third parties may claim that these online agreements are unenforceable. A finding by a court that these agreements are invalid and that we are subject to liability could harm our business and require us to make costly changes to our properties and related content policies.

We have editorial procedures in place to control the quality of our content offerings. However, our editorial and other quality control procedures may not be sufficient to ensure that there are no errors or omissions in our content offerings or to prevent such errors and omissions in content that is controlled by our partners. Even if potential claims do not result in liability to us, investigating and defending against these claims could be expensive and time consuming and could divert management’s attention away from our operations.

In addition, we could be exposed to liability in connection with material posted to the properties in our portfolio and on social media websites by our employees and our users. Many of the properties in our portfolio offer consumers an opportunity to post comments and opinions and we may share such content on social media websites. Some of this user-provided content may infringe on third-party intellectual property rights or privacy rights or may otherwise be subject to challenge under copyright laws. Moreover, we could face claims for making such user-provided content available on our properties if users rely on such information to their detriment, particularly if the information relates to medical diagnosis and treatment. Such claims could divert management’s time and attention away from our business and result in significant costs to us, regardless of the merit of these claims. The law governing fair use of content online and the validity and enforceability of online agreements and other electronic transactions is evolving. We could be subject to claims by third parties that the online terms and conditions for use of our properties, including disclaimers or limitations of liability, are unenforceable. A finding by a court that these terms and conditions or other online agreements are invalid could harm our business.

25


If we become subject to these types of claims and are not successful in our defense, we may be forced to pay substantial damages. Our insurance may not adequately protect us against these claims. The filing of these claims may result in negative publicity and also damage our reputation as a high quality and trusted provider of health and wellness content and services.

Intellectual property claims against us could be costly and result in the loss of significant rights related to, among other things, our properties and advertising and marketing activities.

From time to time, third parties may allege that we have violated their intellectual property rights. If we are forced to defend ourselves against intellectual property infringement claims, regardless of the merit or ultimate result of such claims, we may face costly litigation, diversion of technical and management personnel, limitations on our ability to use our current properties or inability to market or provide our content offerings or advertising-based services. As a result of any such dispute, we may have to:

 

 

 

 

develop new non-infringing technology;

 

 

 

 

pay damages;

 

 

 

 

enter into royalty or licensing agreements;

 

 

 

 

cease providing certain content or advertising-based services; or

 

 

 

 

take other actions to resolve the claims.

These actions, if required, may be costly, time-consuming or unavailable on terms acceptable to us, if at all. In addition, many of our partnering agreements require us to indemnify our partners for third-party intellectual property infringement claims, which could increase the cost to us of an adverse ruling in such an action.

In addition, we face potential suits and liability for negligence, copyright, patent or trademark infringement or other claims based on the nature of our content. These claims could potentially arise with respect to owned, licensed or user-provided content. Litigation to defend these claims could be costly, and any other liabilities we incur in connection with the claims could be significant.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information. Failure to protect our proprietary information could make it easier for third parties to compete with our products and harm our business.

In order to protect our proprietary rights, we rely in part on security measures, as well as confidentiality agreements with our employees, licensees, independent contractors and other advisors. These measures and agreements may not effectively prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. We could potentially lose future trade secret protection if any unauthorized disclosure of such information occurs. In addition, others may independently discover our trade secrets and proprietary information. In such cases we could not assert any trade secret rights against such parties. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could adversely affect our business, revenue, reputation and competitive position.

26


If we cannot protect our domain names, our ability to successfully promote our brands will be impaired.

We currently own various web domain names, including www.EverydayHealth.com and www.MedPageToday.com, that are critical to the operation of our business. The acquisition and maintenance of domain names, or Internet addresses, is generally regulated by governmental agencies and domain name registrars. The regulation of domain names in the U.S. and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, it is unclear whether laws protecting trademarks and similar proprietary rights will be extended to protect domain names. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. We may not be able to successfully implement our business strategy of establishing a strong brand for Everyday Health if we cannot prevent others from using similar domain names. This failure could impair our ability to increase market share and revenues.

We rely on Internet bandwidth and data center providers and other third parties for key aspects of our operations, and any failure or interruption in the services and products provided by these third parties could harm our business.

We rely on third-party vendors, including data center and Internet bandwidth providers. Any disruption in the network access or co-location services provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. We may not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with our users. In addition, system failures may result in loss of data, including user registration data, business intelligence data, content, and other data critical to the operation of our online services, which could cause significant harm to our business and our reputation. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We license technology and related databases from third parties to facilitate analysis, storage of data and delivery of offerings. We have experienced interruptions and delays in service and availability for data centers, bandwidth and other technologies in the past. Any future errors, failures, interruptions or delays experienced in connection with these third-party technologies and services could adversely affect our business.

Interruption or failure of our information technology and communications systems could impair our ability to effectively deliver our services, which could negatively impact our operating results.

Our business depends on the continuing operation of our technology infrastructure and systems. Any damage to or failure of our systems could result in interruptions in our ability to deliver offerings quickly and accurately and/or process visitors’ responses emanating from our various properties. Interruptions in our service could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, reduce our revenues and profits, and damage our reputation if people believe our systems are unreliable. Our systems and operations are vulnerable to damage or interruption from earthquakes, terrorist and/or cyber attacks, floods, fires, power loss, break-ins, security breaches, hardware or software failures, telecommunications failures, computer viruses or other attempts to harm our systems and similar events.

In addition, as the number of properties in our portfolio and users who access our portfolio increases, our technology infrastructure may not be able to meet the increased demand. A sudden and unexpected increase in the volume of usage could strain the capacity of our technology infrastructure. Any capacity constraints we

27


experience could lead to slower response times or system failures and adversely affect the availability of properties and the level of consumer usage, which could result in the loss of customers or revenue or harm to our business and results of operations.

We lease or maintain server space in various locations. Our facilities are also subject to break-ins, sabotage, intentional acts of vandalism and potential disruptions if the operators of these facilities have financial difficulties. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice or other unanticipated problems at our facilities could result in lengthy interruptions in our service.

Any unscheduled interruption in our service would result in an immediate loss of revenue. Frequent or persistent system failures that result in the unavailability of any of the properties in our portfolio or slower response times could reduce the number of users accessing our properties, impair our delivery of advertisements and harm the perception of our portfolio as reliable, trustworthy and consistent sources of information. Our insurance policies provide only limited coverage for service interruptions and may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems.

Risks related to regulation of our industry

Laws and standards relating to data collection and use practices and the privacy of Internet users and other individuals could impair our efforts to maintain and grow our audience, thereby decreasing our advertising and sponsorship revenues.

We collect information from users who register to access certain content on our portfolio, as well as from third party sources of data. Subject to the ability of our users to decline, we may use this information to provide our users content and advertising that may be of interest to them. We may also share information about registered users who have elected to receive additional promotional information with our advertisers. Internet user privacy and the use of our users’ information to track online activities are issues that are subject to rigorous regulatory discussions and analysis both in the U.S. and abroad. We have privacy policies posted on our properties that we believe comply with laws applicable to us requiring notice about our information collection, use and disclosure practices. The U.S. federal and various state governments have adopted or proposed limitations on the collection, distribution and use of personal information of Internet users. Several foreign jurisdictions, including the European Union and Canada, have adopted legislation, including directives or regulations, that may limit our collection and use of information from Internet users in these jurisdictions. Enforcement by regulators, including the FTC, requires us to provide consumers with notice, choice, security and access with respect to such information. The standards are subject to interpretation by courts and other governmental authorities. In addition, some of our services are offered in the United Kingdom and Australia and most of our services may be accessible worldwide. European data protection laws in particular can be more restrictive regarding the collection, use and disclosure of data as compared to the U.S. Because many of the proposed laws or regulations are in early stages, we cannot yet determine the impact these regulations may have on our business over time. We cannot assure you that the privacy policies and other statements we provide to users of properties in our portfolio, or our practices with respect to these matters, will be found sufficient to protect us from liability or adverse publicity in this area. A determination by a government agency, court or other governmental authority that any of our practices do not meet applicable standards or regulations, or the implementation of new standards or requirements, could result in liability and adversely affect our business. In addition, inquiries or proceedings involving foreign or U.S. data protection authorities may be expensive or time consuming, and their outcome is uncertain. Furthermore, we cannot assure you that our advertisers are currently in compliance, or will remain in compliance, with their own privacy policies, regulations governing consumer privacy or other applicable legal requirements. A number of U.S. state and federal bills have been proposed and are under consideration that contain provisions that would regulate how companies can use cookies and other tracking technologies to collect and use information about individuals

28


and their online behaviors. The European Union, or EU, and some EU member states have already implemented legislation and regulations requiring advertisers to provide specific types of notice and obtain consent from individuals before using cookies or other technologies to track individuals and their online behavior and deliver targeted advertisements. We may be held liable if these parties advertise on one of the properties in our portfolio or use the data we collect on their behalf in a manner that is not in compliance with applicable laws or regulations or posted privacy standards.

In addition, growing public concern about privacy, data security and the collection, distribution and use of personal information has led to self-regulation of these practices by the Internet advertising and direct marketing industry and increased federal and state regulation. We participate in the Digital Advertising Alliance, or DAA, self- regulatory program under which we provide consumers with notice about our use of cookies and our collection and use of data in connection with the delivery of targeted advertising. Ensuring compliance with these industry standards could negatively impact our revenues or result in increased costs. Failure to comply with current or new industry standards could create liability for us, damage our reputation and result in a loss of users and advertisers.

We also may be subject to the Children’s Online Privacy Protection Act, or COPPA, which applies to operators of commercial websites and online services directed to U.S. children under the age of 13 that collect personal information from children, and to operators of general audience websites with actual knowledge that they are collecting information from U.S. children under the age of 13. Our properties are not directed at children under the age of 13, and our registration process utilizes age screening in order to prevent under-age registrations. We believe that we are in compliance with COPPA. COPPA, however, is subject to interpretation by courts and other governmental authorities. The failure to accurately anticipate the application, interpretation or legislative expansion of this law could create liability for us, result in adverse publicity and negatively affect our business.

Additionally, more burdensome laws or regulations, including consumer privacy and data security laws, could be enacted or applied to us or our advertising customers. Such laws or regulations could impair our ability to collect user information that helps us to provide more targeted advertising to our users, thereby impairing our ability to maintain and grow our audience and maximize advertising and sponsorship revenues from our customers. Users may also choose to opt-out of receiving targeted advertising or use browser settings or third-party technology to prohibit the delivery of advertising and thereby negatively impact our advertising and sponsorship revenues.

We face potential liability related to the privacy and security of health-related information we collect from or on behalf of our consumers.

The privacy and security of information about the past, present, or future physical or mental health or condition of an individual is an area of significant focus in the U.S. because of heightened privacy concerns and the potential for significant consumer harm from the misuse of such sensitive data. We have procedures and technology in place intended to safeguard the information we receive from users of our services from unauthorized access or use.

The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, establish a set of basic national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and certain healthcare providers, referred to as covered entities, and the business associates with whom such covered entities contract for services. Notably, whereas HIPAA previously directly regulated only these covered entities, the Health Information for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the stimulus package in February 2009, makes certain of HIPAA’s Privacy and Security Standards also directly applicable to covered entities’ business associates. As a result, business associates are now subject to

29


significant civil and criminal penalties for failure to comply with applicable Privacy and Security Standards. Moreover, HITECH creates a new requirement to report certain breaches of unsecured, individually identifiable health information and imposes penalties on entities that fail to do so. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.

We have developed products and services in partnership with the Mayo Clinic that provide health assessment tools, lifestyle education, health coaching and wellness information to employers and healthcare providers. Some of these clients may qualify as covered entities under HIPAA and provide us with individually identifiable health information. We also have contractual arrangements with some HIPAA covered entities to make our CarePages social support website service available to patients and their friends and families. As part of those arrangements, we do not receive, process, or store any information from the covered entities about a patient. Instead, we only receive and store information from our users. Accordingly, we believe that we do not receive protected health information on behalf of our CarePages clients. However, we have signed business associate agreements with certain covered entities to make our CarePages service available to their patients and their families and friends, and may sign such business associate agreements in connection with the provision of the products and services developed in partnership with the Mayo Clinic, as discussed above. If our data practices do not comply with the requirements of HIPAA or HITECH, we may be directly subject to liability. In addition, if our security practices do not comply with our contractual obligations, we may be subject to liability for breach of those obligations. HITECH also creates obligations for us to report any unauthorized use or disclosure of protected health information to our covered entity clients. The 2013 final HITECH omnibus rule modifies the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. Any liability from a failure to comply with the requirements of HIPAA or HITECH, to the extent such requirements are deemed to apply to our operations, or contractual obligations, could adversely affect our financial condition. The costs of complying with privacy and security related legal and regulatory requirements are burdensome and could have a material adverse effect on our results of operations. These new provisions, as modified, will be subject to interpretation by various courts and other governmental authorities, thus creating potentially complex compliance issues for us, as well as our clients and strategic partners. In addition, we are unable to predict what changes to the HIPAA Privacy Standards and Security Standards might be made in the future or how those changes could affect our business. Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations.

Developments in the healthcare industry could adversely affect our business.

A significant portion of our advertising and sponsorship revenues is derived from the healthcare industry, including pharmaceutical, over-the-counter and consumer-packaged-goods companies, and could be affected by changes affecting healthcare spending. General reductions in expenditures by healthcare industry participants could result from, among other things:

 

 

 

 

government regulation or private initiatives that affect the manner in which healthcare industry participants interact with consumers and the general public;

 

 

 

 

consolidation of healthcare industry participants;

 

 

 

 

reductions in governmental funding for healthcare; and

 

 

 

 

adverse changes in business or economic conditions affecting pharmaceutical companies or other healthcare industry participants.

Even if general expenditures by industry participants remain the same or increase, developments in the healthcare industry may result in reduced spending in some or all of the specific market segments that we

30


serve now or in the future. For example, use of our content offerings and advertising-based services could be affected by:

 

 

 

 

changes in the design and provision of health insurance plans, including any new regulations that may stem from health reform initiatives that are pending before Congress;

 

 

 

 

a decrease in the number of new drugs or pharmaceutical products coming to market; and

 

 

 

 

decreases in marketing expenditures by pharmaceutical companies as a result of governmental regulation or private initiatives that discourage or prohibit advertising or sponsorship activities by pharmaceutical companies.

In addition, our advertising customers’ expectations regarding pending or potential industry developments may also affect their budgeting processes and spending plans with us.

The healthcare industry has changed significantly in recent years. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or, collectively, PPACA, was signed into law in March 2010 and makes extensive changes to the system of healthcare insurance and benefits in the U.S. In general, PPACA seeks to reduce healthcare costs and decrease the number of uninsured legal U.S. residents by, among other things, requiring individuals to carry, and certain employers to offer, health insurance or be subject to penalties. PPACA also imposes new regulations on health insurers, including guaranteed coverage requirements, prohibitions on certain annual and all lifetime limits on amounts paid on behalf of or to plan members, increased restrictions on rescinding coverage, establishment of minimum medical loss ratio requirements, a requirement to cover certain preventive services on a first dollar basis, the establishment of state insurance exchanges and essential benefit packages, and greater limitations on how health insurers price certain of their products. PPACA also enhances remedies against fraud and abuse and contains provisions that will affect the revenues and profits of pharmaceutical and medical device companies, including new taxes on certain sales of their products.

In addition, other legislative changes have been proposed and adopted since PPACA was enacted. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations. We expect that significant changes to the healthcare industry will continue to occur. However, the timing and impact of developments in the healthcare industry are difficult to predict. We cannot assure you that the demand for our offerings will continue to exist at current levels or that we will have adequate technical, financial and marketing resources to react to changes in the healthcare industry.

We are unable to predict what the indirect impacts of PPACA and other health care reform initiatives will be on our company’s business through their effects on other healthcare industry participants, including hospital, pharmaceutical and medical device customers that generate revenues for our company, including as advertisers or as sponsors of certain of our business activities. Healthcare industry participants may respond to PPACA and other health care reform initiatives or to uncertainties created by PPACA and other health care reform initiatives by reducing their expenditures or postponing expenditure decisions, including expenditures for our services, which could have a material adverse effect on our business. However, we believe that certain aspects of PPACA and future implementing regulations and other health care reform initiatives that seek to reduce healthcare costs may create opportunities for our company, including with respect to our health tools and, more generally, with respect to our capabilities in providing health and wellness information and education. However, we cannot yet determine the scope of any such opportunities or what competition we may face in our efforts to pursue such opportunities.

31


Government regulation of healthcare creates risks and challenges with respect to our compliance efforts and our business strategies.

The healthcare industry is highly regulated and subject to changing political, legislative, regulatory and other influences. Existing and future laws and regulations affecting the healthcare industry could create unexpected liabilities for us, cause us to incur additional costs and restrict our operations. Many healthcare laws are complex, and their application may not be clear. Our failure to accurately anticipate the application of these laws and regulations, or other failure to comply with such laws and regulations, could create liability for us. Even in areas where we are not subject to healthcare regulation directly, we may become involved in governmental actions or investigations through our relationships with customers that are regulated, and participation in such actions or investigations, even if we are not a party and not the subject of an investigation, may cause us to incur significant expenses.

For example, there are federal and state laws that govern patient referrals, physician financial relationships and inducements to healthcare providers and patients. The federal healthcare programs’ anti-kickback law prohibits any person or entity from willingly offering, paying, soliciting or receiving anything of value, directly or indirectly, to induce or reward, or in return for either the referral of patients covered by Medicare, Medicaid and other federal healthcare programs or the leasing, purchasing, ordering or arranging for or recommending the lease, purchase or order of any item, good, facility or service covered by these programs. Many states also have similar anti-kickback laws that are not necessarily limited to items or services for which payment is made by a federal healthcare program. Our sale of advertising and sponsorships to healthcare providers implicates these laws. However, we review our practices to ensure that we comply with all applicable laws. The laws in this area are broad and we cannot determine precisely how the laws will be applied to our business practices. Any determination by a state or federal regulatory agency that any of our practices violate any of these laws could subject us to liability and require us to change or terminate some portions of our business.

Further, we derive revenues from the sale of advertising and promotion of prescription and over-the-counter drugs. If the FDA or the FTC finds that any of the information provided on our portfolio of websites violates FDA or FTC regulations, they may take regulatory or judicial action against us and/or the advertiser of that information. State attorneys general may also take similar action based on their state’s consumer protection statutes. Any increase or change in regulation of advertising and promotion in the healthcare industry could make it more difficult for us to generate and grow our advertising and sponsorship revenues. Members of Congress, physician groups and others have criticized the FDA’s current policies and have called for more stringent regulation of prescription drug advertising that is directed at consumers and have urged the FDA to become more active in enforcing its current policies. We cannot predict what actions the FDA or industry participants may take in response to these criticisms. It is also possible that new laws, regulations or FDA policies could be promulgated that would impose additional restrictions on such advertising. In November 2009, the FDA convened a public meeting to seek guidance on the marketing of prescription drugs on the Internet and in social media, and subsequently solicited comments from the public on the issue. It is not clear what steps, if any, the FDA will take in response to the public meeting and the comments it subsequently received from the public or whether it will seek specific regulation of Internet advertising of prescription drugs. Our advertising and sponsorship revenues could be materially reduced by additional restrictions on the advertising of prescription drugs and medical devices to consumers, whether imposed by law or regulation or required under policies adopted by industry members.

In addition, the practice of most healthcare professions requires licensing under applicable state law and state laws may further prohibit business entities from practicing medicine, which is referred to as the prohibition against the corporate practice of medicine. Similar state prohibitions may exist with respect to other licensed professions. We believe that we do not engage in the practice of medicine or any other licensed healthcare

32


profession, or provide, through our portfolio of websites, professional medical advice, diagnosis, treatment or other advice that is tailored in such a way as to implicate state licensing or professional practice laws. We employ and contract with physicians, nutritionists and fitness instructors who provide only medical, nutrition and fitness information to consumers. However, a state may determine that some portion of our business violates these laws and may seek to have us discontinue those portions or subject us to penalties or licensure requirements. Any determination that we are a healthcare provider and acted improperly as a healthcare provider may result in liability to us.

We believe that none of our existing online services and mobile applications is subject to regulation as a medical device under applicable FDA regulations. However, it is possible that products and services that we may offer in the future could subject us to such regulation or that current rules could change or be interpreted to apply to some of our existing online services or mobile applications. Complying with such regulations could be burdensome and costly and could delay our introduction or new services or applications.

Lastly, the Federal False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. In addition, various states have enacted false claim laws analogous to the Federal False Claims Act. It is not clear whether there is a basis for the application of the False Claims Act to the types of services that we provide. However, we are aware that plaintiffs in the past have named a similar online health information provider in a complaint relating to the alleged off-label promotion of prescription drugs by a pharmaceutical manufacturer. Any action against us for violation of these laws could cause us to incur significant legal expenses and may adversely affect our ability to operate our business.

Changes in regulations could hurt our business and financial results.

It is possible that new laws and regulations or new interpretations of existing laws and regulations in the U.S. and elsewhere will be adopted covering issues affecting our business, including:

 

 

 

 

privacy, data security and use of personally identifiable information;

 

 

 

 

copyrights, trademarks and domain names; and

 

 

 

 

marketing practices, such as e-mail or direct marketing.

Increased government regulation, or the application of existing laws to online activities, could:

 

 

 

 

decrease the growth rate of the Internet;

 

 

 

 

negatively impact our ability to generate revenues;

 

 

 

 

increase our operating expenses; or

 

 

 

 

expose us to significant liabilities.

For example, Internet user privacy and the use of consumer information to track online activities are debated issues both in the U.S. and abroad. In February 2009, the FTC published Self-Regulatory Principles to govern the tracking of consumers’ activities online in order to deliver advertising targeted to the interests of individual consumers, sometimes referred to as behavioral advertising. These principles serve as industry guidelines. In addition, there is the possibility of proposed legislation and enforcement relating to behavioral advertising. We have privacy policies posted throughout our portfolio that we believe comply with applicable laws requiring notice to users about our information collection, use and disclosure practices. We also notify users about our information collection, use and disclosure practices relating to data we receive from our consumers. We cannot assure you that the privacy policies and other statements we provide to our users or our practices will be sufficient to protect us from liability or adverse publicity in this area. A determination by

33


a state or federal agency or court or foreign jurisdiction that any of our practices do not meet applicable standards, or the implementation of new standards or requirements, could adversely affect our business.

Our business could be harmed if we are unable to correspond with existing and potential consumers by e-mail.

We use e-mail as a significant means of communicating with our existing and potential consumers and healthcare professionals. The laws and regulations governing the use of e-mail for marketing purposes continue to evolve, and the growth and development of the market for commerce over the Internet may lead to the adoption of additional legislation or changes to existing laws. Such laws may impose additional restrictions on our ability to send e-mail to our users or potential users.

Notably, the CAN-SPAM Act regulates commercial e-mails, provides a right on the part of the recipient to request the sender to stop sending messages, and establishes penalties for the sending of e-mail messages that are intended to deceive the recipient as to source or content. An action alleging our failure to comply with CAN-SPAM and the adverse publicity associated with any such action could result in less user participation and lead to reduced revenues from advertisers. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of e-mail, whether as a result of violations by our partners or if we were deemed to be directly subject to and in violation of these requirements, we could be exposed to damages or penalties. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to market our goods and services or increase our operating costs.

In addition to legal restrictions on the use of e-mail, Internet service providers and others typically attempt to block the transmission of unsolicited e-mail, commonly known as spam. If an Internet service provider or software program identifies e-mail from us as spam, we could be placed on a restricted list that would block our e- mail to consumers or potential consumers who maintain e-mail accounts with these Internet service providers or who use these software programs.

Failure to maintain CME accreditation could adversely affect our ability to provide online CME as part of our MedPage Today offering.

Physicians utilize www.MedPageToday.com to fulfill their continuing medical education, or CME, obligations. Our CME activities, which are conducted as part of our MedPage Today offering, are planned and implemented in accordance with the current Essential Areas and Elements and the Policies of the Accreditation Council for Continuing Medical Education, or ACCME, which oversees providers of CME credit, and other applicable accreditation standards. We currently rely on the University of Pennsylvania as our ACCME-accredited provider in connection with our CME offering. ACCME’s standards for commercial support of CME are intended to assure, among other things, that CME activities of ACCME-accredited providers, such as the University of Pennsylvania, are independent of “commercial interests,” which are defined as entities that produce, market, re-sell or distribute healthcare goods and services, excluding certain organizations. “Commercial interests,” and entities owned or controlled by “commercial interests,” are ineligible for accreditation by the ACCME.

CME activities may be subject to government oversight or regulation by Congress, the FDA, HHS, and state regulatory agencies. During the past several years, educational activities, including CME, directed at physicians have been subject to increased governmental scrutiny to ensure that sponsors do not influence or control the content of the activities. In the event that these regulatory challenges inhibit our ability to provide CME, or if the University of Pennsylvania, our ACCME-accredited partner, elects to terminate its relationship with us and we are unable to identify a suitable replacement partner, our ability to continue to attract physicians to www.MedPageToday.com may suffer.

34


Risks related to this offering and ownership of our common stock

An active, liquid and orderly trading market for our common stock may not develop, our share price may be volatile, and you may be unable to sell your shares at or above the offering price.

Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which a trading market will develop or how liquid that market might become. The initial public offering price for our shares will be determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the trading market. The market price of shares of our common stock may be subject to wide fluctuations in response to the many risk factors listed in this section and other factors beyond our control, including:

 

 

 

 

actual or anticipated fluctuations in our key operating metrics, financial condition and operating results;

 

 

 

 

issuance of new or updated research or reports by securities analysts;

 

 

 

 

our announcement of actual results for a fiscal period that are higher or lower than projected or expected results, or our announcement of revenues or earnings guidance that is higher or lower than expected;

 

 

 

 

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

 

 

 

share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;

 

 

 

 

sales or expected sales of additional common stock;

 

 

 

 

announcements from, or operating results of, our competitors; or

 

 

 

 

general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause our common stock price to decline. If our common stock price after this offering does not exceed the initial public offering price, you will not realize any return on your investment in our common stock and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns.

If we fail to maintain proper and effective internal and disclosure controls, our ability to produce accurate financial statements and other disclosures on a timely basis could be impaired.

The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Commencing with the fiscal year ending December 31, 2015, the fiscal year after our registration statement is expected to go effective, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting in our Form 10-K for that year, as required by Section 404 of the Sarbanes-Oxley Act. As an “emerging growth company” under the Jumpstart Our Business Startups, or JOBS Act, we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting; however, we may no longer avail ourselves of this exemption when we cease to be an “emerging growth company.” This will require that we incur

35


substantial additional professional fees and internal costs to expand our accounting and finance functions and that we expend significant management efforts. Prior to this offering, we were never required to test our internal controls within a specified period, and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner. Moreover, if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the Securities and Exchange Commission, or SEC, or other regulatory authorities, which would require additional financial and management resources.

We may in the future discover areas of our internal control over financial reporting that need improvement. Our internal control over financial reporting will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective disclosure controls and procedures or proper and effective internal control over our financial reporting, we may not be able to produce timely and accurate financial statements and other disclosures, and we may conclude that our internal control over financial reporting is not effective. If that were to happen, the market price of our stock could decline and we could be subject to sanctions or investigations by the New York Stock Exchange, the SEC or other regulatory authorities.

We will incur increased costs and demands upon management as a result of being a public company.

As a public company listed in the U.S., we will incur significant additional legal, accounting and other costs. These additional costs could negatively affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by the SEC and stock exchanges, may increase legal and financial compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

Failure to comply with these rules might also make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior management.

As an “emerging growth company” under the JOBS Act we are permitted to, and intend to, rely on exemptions from certain disclosure requirements.

We are an “emerging growth company” and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy

36


statements, and not being required to hold a nonbinding advisory vote on executive compensation or obtain stockholder approval of “golden parachute” payments. We could be an “emerging growth company” for up to five years following the completion of this offering, although, if we have more than $1.0 billion in annual revenue, the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an “emerging growth company” as of the December 31 following such occurrence. Investors may find our common stock less attractive if we choose to rely on these exemptions, in which case the price of our common stock may suffer or there may be a less active trading market for our common stock and our stock price may be more volatile.

Our reported financial results may be adversely affected by changes in accounting principles applicable to us.

Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.

Our ability to raise capital in the future may be limited.

Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms, or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders will experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.

Covenants in our credit facility restrict our operational flexibility.

The agreement governing our credit facility contains usual and customary restrictive covenants relating to our management and the operation of our business, including the following:

 

 

 

 

incurring additional indebtedness;

 

 

 

 

making certain investments;

 

 

 

 

disposing of assets;

 

 

 

 

paying dividends and making other distributions to our stockholders;

 

 

 

 

engaging in mergers and acquisitions; and

 

 

 

 

granting liens on our assets.

37


Our credit facility also requires us to maintain specified financial ratios. Our ability to meet the financial covenants could be affected by events beyond our control. Failure to comply with any of the operational or financial covenants under our credit facility could result in a default, which could cause our lenders to accelerate the timing of payments and exercise their liens on substantially all of our assets, which would have a material adverse effect on our business, operating results and financial condition.

We have significant debt service obligations as a result of our outstanding long-term indebtedness.

As of March 15, 2014, we had $72.3 million of outstanding borrowings pursuant to our credit facility. Under the terms of this credit facility, we are required to make principal and interest payments on these borrowings through the maturity date of this facility in March 2019. As a result, we must use a significant portion of cash generated by our operations to satisfy our ongoing debt service obligations. Additionally, we will be required to repay, extend or refinance these borrowings when they become due, and there is no guarantee that we will be able to do so on reasonable terms or at all. If we are unable to meet our debt service obligations or to satisfy our obligations when they mature, our creditors could among other things, declare a default and accelerate the timing of payments and exercise their liens on substantially all of our assets, which would have a material adverse effect on our business, operating results and financial condition.

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have any, and may never obtain, research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Provisions of our certificate of incorporation, bylaws and Delaware law could deter takeover attempts.

Various provisions in our certificate of incorporation and bylaws, as they will be in effect following this offering, could delay, prevent or make more difficult a merger, tender offer, proxy contest or other attempt to acquire control of our company. Our stockholders might view any transaction of this type as being in their best interest since the transaction could result in a higher stock price than the then-current market price for our common stock. Among other things, our certificate of incorporation and bylaws:

 

 

 

 

authorize our board of directors to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

 

 

 

divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year;

 

 

 

 

permit directors to be removed only for cause and then only by a two-thirds vote;

 

 

 

 

prohibit stockholders from calling a special meeting of stockholders;

 

 

 

 

prohibit action by written consent of our stockholders; and

 

 

 

 

specify advance notice requirements for stockholder proposals and director nominations.

38


In addition, following this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers and which has an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for shares of our common stock. In general, those provisions prohibit a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless:

 

 

 

 

the transaction is approved by the board of directors before the date the interested stockholder attained that status;

 

 

 

 

upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

 

 

 

 

on or after the date the business combination is approved by the board of directors and authorized at a meeting of stockholders, and not by written consent, by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

In general, Section 203 defines a business combination to include the following:

 

 

 

 

any merger or consolidation involving the corporation and the interested stockholder;

 

 

 

 

any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

 

 

 

 

subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

 

 

 

any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or

 

 

 

 

the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any such entity or person.

A Delaware corporation may opt out of this provision by express provision in its original certificate of incorporation or by amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of, and do not currently intend to opt out of, this provision.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

Pursuant to our amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation will further provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provision. The forum selection clause in our amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.

39


Future sales of shares of our common stock by existing stockholders could depress the market price of our common stock.

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market following this offering, the trading price of our common stock could decline significantly, even below the initial public offering price. Based on shares outstanding as of March 15, 2014, upon completion of this offering, we will have outstanding approximately 29,678,020 shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares. Our officers, directors and certain of our stockholders have entered into lock-up agreements with the underwriters prohibiting them from selling any of their shares for a period of 180 days following the date of this prospectus. J.P. Morgan Securities LLC may, in its sole discretion, permit our officers, directors and certain of our stockholders to sell shares prior to the expiration of the lock-up agreements.

After the lock-up agreements expire, and based on shares outstanding as of March 15, 2014, an additional 22,419,392 shares will be eligible for sale in the public market, 12,481,597 of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. Holders of approximately 22.1 million shares of common stock, including shares underlying certain of our existing warrants, will be entitled to rights with respect to the registration of these shares under the Securities Act. See “Description of capital stock—Registration rights.” If we register the resale of their shares following the expiration of the lock-up agreements described in “Shares available for future sale,” these stockholders could sell those shares in the public market without being subject to the volume and other restrictions of Rules 144 and 701. In addition, the shares subject to outstanding options under our 2003 Stock Option Plan, the shares reserved for future issuance under our 2003 Stock Option Plan and 2014 Equity Incentive Plan and shares issuable upon exercise of warrants will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline substantially.

A limited number of stockholders will have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

Immediately after this offering, our directors, executive officers and their affiliated entities will beneficially own 33.1% percent of our outstanding common stock. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the election of directors, the amendment of our certificate of incorporation and bylaws and the approval of mergers or other business combination transactions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and may reduce our stock price. These actions may be taken even if they are opposed by other stockholders, including those who purchase shares in this offering.

Our management will have broad discretion over the use of the proceeds we receive in this offering and may not apply the proceeds in ways that increase the value of your investment.

Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management may not apply the net proceeds of this offering in ways that increase the value of your investment. We intend to use the net proceeds from this offering for working capital and general corporate purposes, which may include funding capital expenditures and operating losses. We may use a portion of the net proceeds from this offering to repay borrowings under our credit facility or acquire complementary businesses. Until we use the net proceeds from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

40


You will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the pro forma net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase our common stock in this offering, you will suffer immediate and substantial dilution. If previously granted warrants or options are exercised, you will experience additional dilution. Upon the completion of this offering, (i) warrants to purchase 641,177 shares of our common stock at a weighted-average exercise price of $1.91 per share will be outstanding and (ii) options to purchase 6,532,679 shares of common stock at a weighted-average exercise price of $9.30 per share will be outstanding. For more information refer to the section of this prospectus entitled “Dilution.”

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend solely on appreciation in the price of our common stock.

We have never declared or paid any cash dividends on our common stock and do not intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. In addition, the provisions of our credit facility prohibit us from paying cash dividends, without first obtaining the consent of our lenders. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future, and the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which you purchase your shares.

41


Special note regarding forward-looking statements

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections of this prospectus titled “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain. Forward-looking statements include statements about:

 

 

 

 

our financial performance, including our revenues, cost of revenues, operating expenses and ability to achieve and sustain profitability;

 

 

 

 

our rate of revenue growth and our ability to generate additional revenues in a cost-effective manner;

 

 

 

 

our ability to effectively manage our growth and scale and adapt our business;

 

 

 

 

our ability to attract and maintain users, advertising customers and partners in a cost-effective manner;

 

 

 

 

our ability to produce and acquire content that attracts and maintains consumers;

 

 

 

 

our ability to maintain and enhance our brands;

 

 

 

 

the volatile and competitive nature of the Internet and the advertising industry;

 

 

 

 

the effect of regulatory developments and industry standards on our business;

 

 

 

 

our success with respect to any future acquisitions;

 

 

 

 

our ability to adequately protect our intellectual property;

 

 

 

 

any disruptions in our services;

 

 

 

 

our future capital requirements and estimates regarding the sufficiency of our cash resources; and

 

 

 

 

our ability to retain and hire necessary employees and appropriately staff our operations.

You should refer to the “Risk factors” section of this prospectus for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

42


You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward- looking statements by these cautionary statements.

43


Industry and market data

We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications and surveys and studies conducted by third parties. Industry and general publications, studies and surveys generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurances as to the accuracy or completeness of such information. While we believe that these publications, studies and surveys are reliable, we have not independently verified the data contained in them. In addition, while we believe that the results and estimates from our internal research are reliable, such results and estimates have not been verified by any independent source. Moreover, these third parties may, in the future, alter the manner in which they conduct surveys and studies regarding the markets in which we operate our business. As a result, you should carefully consider the inherent risks and uncertainties associated with the industry and market data contained in this prospectus, including those discussed under the heading “Risk factors.” Additionally, where we express our beliefs regarding our market position and other matters concerning our industry in this prospectus, these beliefs are based on our management team’s experience in our industry.

44


Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $66.8 million, or $80.8 million if the underwriters exercise their option to purchase additional shares in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders.

We intend to use the net proceeds from this offering for working capital and general corporate purposes, including funding capital expenditures and operating losses. We may also use a portion of the net proceeds to repay borrowings under our credit facility or acquire complementary businesses, products or technologies. However, we do not have agreements or commitments for any specific repayments or acquisitions at this time, and cannot assure you that we will make any acquisitions in the future. See the section titled “Management’s discussion and analysis of financial condition and results of operations—Long-term debt” for a description of our credit facility which we may choose to repay with the net proceeds of this offering.

In addition, the other principal purposes for this offering are to:

 

 

 

 

increase our visibility in the markets we serve;

 

 

 

 

strengthen our balance sheet;

 

 

 

 

create a public market for our common stock;

 

 

 

 

facilitate our future access to the public capital markets;

 

 

 

 

provide liquidity for our existing stockholders;

 

 

 

 

improve the effectiveness of our equity compensation plans in attracting and retaining key employees; and

 

 

 

 

enhance our ability to acquire complementary businesses or technologies.

We have not yet determined with any certainty the manner in which we will allocate our net proceeds from this offering. Our management will retain broad discretion in the allocation and use of our net proceeds of this offering. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments, and the rate of growth, if any, of our business.

Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term investment grade and U.S. government securities.

45


Dividend policy

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our common stock in the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. In addition, our credit facility prohibits us from paying dividends on our common stock, without first obtaining the consent of our lenders. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.

46


Capitalization

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2013:

 

 

 

 

on an actual basis;

 

 

 

 

on a pro forma basis to reflect the automatic preferred stock conversion, the automatic net exercise of a warrant to purchase 150,000 shares of common stock, the reclassification of our preferred stock warrant liability to additional paid-in capital upon the automatic conversion of our preferred stock warrants into warrants exercisable for common stock and a deemed dividend on Series G preferred stock of $8.1 million; and

 

 

 

 

on a pro forma as adjusted basis to further reflect the filing of our amended and restated certificate of incorporation upon the consummation of this offering and our issuance and sale of 5,360,000 shares of common stock in this offering at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds therefrom as described in “Use of proceeds,” and the exercise of stock options and warrants for an aggregate of 262,686 shares by certain of the selling stockholders in connection with the sale of these shares in the offering.

You should read this table together with our financial statements and the related notes appearing elsewhere in this prospectus and the “Use of proceeds” and “Management’s discussion and analysis of financial condition and results of operations” sections of this prospectus.

 

 

 

 

 

 

 

 

As of December 31, 2013
(in thousands, except share and per share data)

 

Actual

 

Pro forma

 

Pro forma
as adjusted

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

16,242

   

 

$

 

16,242

   

 

$

 

83,903

 

 

 

 

Long-term debt, including current portion

 

 

$

 

71,333

   

 

$

 

71,333

   

 

$

 

71,333

 

Warrants for purchase of redeemable convertible preferred stock, included in other long-term liabilities

 

 

 

888

   

 

 

   

 

 

 

 

 

 

Redeemable convertible preferred stock, $0.01 par value; 27,204,144 shares authorized, 26,820,270 shares issued and outstanding actual; no shares authorized and no shares issued and outstanding, pro forma; no shares authorized and no shares issued and outstanding, pro forma as adjusted

 

 

 

158,766

   

 

 

   

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

Preferred stock, $0.01 par value, no shares authorized and no shares issued and outstanding, actual; no shares authorized and no shares issued and outstanding, pro forma; 10,000,000 shares authorized and no shares issued and outstanding, pro forma as adjusted

 

 

 

   

 

 

   

 

 

 

Common stock, $0.01 par value; 45,000,000 shares authorized, actual and pro forma; 5,366,478 shares issued and outstanding, actual; 23,973,552 shares issued and outstanding, pro forma; 90,000,000 shares authorized and 29,596,238 shares issued and outstanding, pro forma as adjusted

 

 

 

54

   

 

 

240

   

 

 

296

 

Treasury Stock

 

 

 

(55

)

 

 

 

 

(55

)

 

 

 

 

(55

)

 

Additional paid-in capital

 

 

 

33,726

   

 

 

201,273

   

 

 

268,878

 

Accumulated (deficit)

 

 

 

(123,694

)

 

 

 

 

(131,773

)

 

 

 

 

(131,773

)

 

 

 

 

Total stockholders’ equity (deficit)

 

 

 

(89,969

)

 

 

 

 

69,685

   

 

 

137,346

 

 

 

 

Total capitalization

 

 

$

 

141,018

   

 

$

 

141,018

   

 

$

 

208,679

 

 

47


The information set forth in the table excludes:

 

 

 

 

5,245,025 shares of common stock issuable upon exercise of outstanding options as of December 31, 2013 with a weighted-average exercise price of $7.75 per share, and 112,500 shares relating to performance-based awards where future performance was defined in the first quarter of 2014, with a weighted-average exercise price of $8.87 per share;

 

 

 

 

541,177 shares of common stock issuable upon the exercise of certain outstanding warrants as of December 31, 2013 with a weighted-average exercise price of $2.27 per share, and an additional 100,000 shares of common stock issuable upon the exercise of a warrant issued in March 2014 with an exercise price of $0.015 per share;

 

 

 

 

2,423,176 shares of common stock reserved for issuance after December 31, 2013 under our equity incentive plans, consisting of (a) 389,843 shares of common stock reserved for issuance under our 2003 Stock Option Plan as of December 31, 2013, (b) 1,333,333 shares of common stock added to our 2003 Stock Option Plan share reserve in March 2014, (c) 200,000 shares of common stock reserved for issuance under our 2014 Equity Incentive Plan, and (c) 500,000 shares of common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for issuance under our 2014 Equity Incentive Plan and our 2014 Employee Stock Purchase Plan. Of the shares reserved for issuance after December 31, 2013, we issued options to purchase an aggregate of 1,359,601 shares under our 2003 Stock Option Plan with a weighted-average exercise price of $15.00 per share in March 2014. On the date of this prospectus, any remaining shares of common stock available for issuance under our 2003 Stock Option Plan will be added to the shares of common stock reserved under our 2014 Equity Incentive Plan, and no additional grants will be awarded under our 2003 Stock Option Plan. Additional shares may be added to the shares of common stock reserved for issuance under our 2014 Equity Incentive Plan upon the expiration, termination, forfeiture or other reacquisition of shares of common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Option Plan. See “Executive compensation—Equity incentive plans” for additional information; and

 

 

 

 

the effects of the refinancing of our long-term debt, which occurred on March 6, 2014, as the effect of the refinancing on the outstanding debt balance as of December 31, 2013 was immaterial.

48


Dilution

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Net tangible book value per share represents our total tangible assets less total liabilities and redeemable convertible preferred stock, divided by the number of shares of our common stock outstanding.

As of December 31, 2013, our deficit in net tangible book value was $(181.9) million, or $(33.89) per share of common stock. On a pro forma basis, after giving effect to the automatic preferred stock conversion, the automatic warrant exercise and the reclassification of our preferred stock warrant liability to additional paid-in capital, our deficit in net tangible book value would have been $(22.2) million, or $(0.93) per share of common stock. After giving further effect to our issuance and sale of 5,360,000 shares of common stock in this offering at the initial public offering price of $14.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the exercise of stock options and warrants by certain selling stockholders in connection with the sale of these shares in this offering, the pro forma as adjusted net tangible book value as of December 31, 2013 would have been $45.5 million, or $1.54 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $2.47 per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $12.46 per share.

The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering:

 

 

 

 

 

 

Initial public offering price per share

 

 

 

 

$

 

14.00

 

Net tangible book value per share at December 31, 2013, before giving effect to this offering

 

 

$

 

(33.89

)

 

 

 

Increase in pro forma net tangible book value per share attributable to the automatic preferred stock conversion and the automatic warrant exercise

 

 

 

32.96

 

 

 

 

 

 

 

 

Pro forma net tangible book value per share as of December 31, 2013, before giving effect to this offering

 

 

 

(0.93

)

 

 

 

Increase in net tangible book value per share attributable to this offering

 

 

 

2.47

 

 

 

Pro forma as adjusted net tangible book value per share after giving effect to this offering

 

 

 

 

 

1.54

 
   

 

Dilution per share to new investors in this offering

 

 

 

 

$

 

12.46

 
   

 

 

If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value will increase to $2.01 per share, representing an immediate increase in pro forma net tangible book value to existing stockholders of $2.93 per share and an immediate dilution in net tangible book value of $11.99 per share to new investors.

The following table summarizes, on the pro forma basis described above as of December 31, 2013, the differences between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering at the initial public offering price of $14.00 per share, before the deduction of underwriting discounts and commissions and estimated offering expenses payable by us:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares purchased

 

Total consideration

 

Average
price per
share

 

Number

 

Percent

 

Amount

 

Percent

 

Existing stockholders

 

 

 

24,236,238

   

 

 

82

%

 

 

 

$

 

167,682,913

   

 

 

69

%

 

 

 

$

 

6.92

 

New investors

 

 

 

5,360,000

   

 

 

18

   

 

 

75,040,000

   

 

 

31

   

 

 

14.00

 

 

 

 

Total

 

 

 

29,596,238

   

 

 

100

%

 

 

 

$

 

242,722,913

   

 

 

100

%

 

 

 

$

 

8.20

 

 

49


The foregoing table and calculations are based on the number of shares of our common stock outstanding as of December 31, 2013, after giving effect to the automatic preferred stock conversion, the automatic warrant exercise and the exercise of options and warrants by certain selling stockholders in connection with the offering, and excludes:

 

 

 

 

5,245,025 shares of common stock issuable upon exercise of outstanding options as of December 31, 2013 with a weighted-average exercise price of $7.75 per share, and 112,500 shares relating to performance-based awards where future performance was defined in the first quarter of 2014, with a weighted-average exercise price of $8.87 per share;

 

 

 

 

541,177 shares of common stock issuable upon the exercise of certain outstanding warrants as of December 31, 2013 with a weighted-average exercise price of $2.27 per share, and an additional 100,000 shares of common stock issuable upon the exercise of a warrant issued in March 2014 with an exercise price of $0.015 per share; and

 

 

 

 

2,423,176 shares of common stock reserved for issuance after December 31, 2013 under our equity incentive plans, consisting of (a) 389,843 shares of common stock reserved for issuance under our 2003 Stock Option Plan as of December 31, 2013, (b) 1,333,333 shares of common stock added to our 2003 Stock Option Plan share reserve in March 2014, (c) 200,000 shares of common stock reserved for issuance under our 2014 Equity Incentive Plan, and (c) 500,000 shares of common stock reserved for issuance under our 2014 Employee Stock Purchase Plan, as well as any automatic increases in the number of shares of common stock reserved for issuance under our 2014 Equity Incentive Plan and our 2014 Employee Stock Purchase Plan. Of the shares reserved for issuance after December 31, 2013, we issued options to purchase an aggregate of 1,359,601 shares under our 2003 Stock Option Plan with a weighted-average exercise price of $15.00 per share in March 2014. On the date of this prospectus, any remaining shares of common stock available for issuance under our 2003 Stock Option Plan will be added to the shares of common stock reserved under our 2014 Equity Incentive Plan, and no additional grants will be awarded under our 2003 Stock Option Plan. Additional shares may be added to the shares of common stock reserved for issuance under our 2014 Equity Incentive Plan upon the expiration, termination, forfeiture or other reacquisition of shares of common stock issuable upon the exercise of stock options outstanding under our 2003 Stock Option Plan. See “Executive compensation—Equity incentive plans” for additional information.

The foregoing table does not reflect proceeds to be realized by existing stockholders in connection with sales made in this offering. The sale of 1,790,000 shares of common stock to be sold by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to 22,446,238, or 76% of the total shares outstanding after this offering, and will increase the number of shares held by new investors to 7,150,000, or 24% of the total shares outstanding after this offering. In addition, if the underwriters exercise their option to purchase additional shares in full, the shares held by existing stockholders will further decrease to 72% of the total shares outstanding after this offering, and the number of shares held by new investors will further increase to 8,222,500, or 28% of the total shares outstanding after this offering.

To the extent that options or warrants are exercised, new options are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

50


Selected consolidated financial data

The following tables summarize our consolidated financial data for the periods presented. You should read the following selected consolidated financial data in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this prospectus and the “Management’s discussion and analysis of financial condition and results of operations” section of this prospectus.

We derived the consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 2009 and 2010 and the consolidated balance sheet data as of December 31, 2009, 2010 and 2011 from our audited consolidated financial statements, which are not included in this prospectus. Our historical results for any prior periods are not necessarily indicative of results to be expected for any future period.

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except share and per share data)

 

Year ended December 31,

 

2009

 

2010

 

2011

 

2012

 

2013

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Advertising and sponsorship revenues

 

 

$

 

58,100

   

 

$

 

75,657

   

 

$

 

96,191

   

 

$

 

109,956

   

 

$

 

134,893

 

Premium services revenues

 

 

 

32,011

   

 

 

35,564

   

 

 

29,582

   

 

 

23,536

   

 

 

20,957

 

Video production fees

 

 

 

   

 

 

   

 

 

   

 

 

5,000

   

 

 

 

 

 

 

Total revenues

 

 

 

90,111

   

 

 

111,221

   

 

 

125,773

   

 

 

138,492

   

 

 

155,850

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

39,453

   

 

 

45,039

   

 

 

40,985

   

 

 

40,543

   

 

 

43,338

 

Sales and marketing

 

 

 

22,028

   

 

 

26,972

   

 

 

36,266

   

 

 

38,603

   

 

 

44,385

 

Product development

 

 

 

25,871

   

 

 

26,172

   

 

 

36,960

   

 

 

45,676

   

 

 

44,496

 

General and administrative

 

 

 

19,135

   

 

 

19,922

   

 

 

23,199

   

 

 

25,874

   

 

 

26,725

 

 

 

 

Total operating expenses

 

 

 

106,487

   

 

 

118,105

   

 

 

137,410

   

 

 

150,696

   

 

 

158,944

 

Loss from operations

 

 

 

(16,376

)

 

 

 

 

(6,884

)

 

 

 

 

(11,637

)

 

 

 

 

(12,204

)

 

 

 

 

(3,094

)

 

Interest expense, net

 

 

 

(1,102

)

 

 

 

 

(1,572

)

 

 

 

 

(1,589

)

 

 

 

 

(4,898

)

 

 

 

 

(8,442

)

 

Other expense

 

 

 

(212

)

 

 

 

 

(2,881

)

 

 

 

 

   

 

 

(1,069

)

 

 

 

 

(359

)

 

 

 

 

Loss from continuing operations before provision for income taxes

 

 

 

(17,690

)

 

 

 

 

(11,337

)

 

 

 

 

(13,226

)

 

 

 

 

(18,171

)

 

 

 

 

(11,895

)

 

Benefit (provision) for income taxes

 

 

 

(1,331

)

 

 

 

 

1,771

   

 

 

615

   

 

 

(1,026

)

 

 

 

 

(1,102

)

 

 

 

 

Loss from continuing operations

 

 

 

(19,021

)

 

 

 

 

(9,566

)

 

 

 

 

(12,611

)

 

 

 

 

(19,197

)

 

 

 

 

(12,997

)

 

Loss from discontinued operations, net of tax

 

 

 

   

 

 

   

 

 

(2,590

)

 

 

 

 

(3,257

)

 

 

 

 

(5,239

)

 

 

 

 

Net loss

 

 

$

 

(19,021

)

 

 

 

$

 

(9,566

)

 

 

 

$

 

(15,201

)

 

 

 

$

 

(22,454

)

 

 

 

$

 

(18,236

)

 

 

 

 

Net loss from continuing operations per common share-basic and diluted

 

 

$

 

(4.33

)

 

 

 

$

 

(2.16

)

 

 

 

$

 

(2.74

)

 

 

 

$

 

(4.01

)

 

 

 

$

 

(2.55

)

 

Net loss from discontinued operations per common share-basic and diluted

 

 

$

 

   

 

$

 

   

 

$

 

(0.56

)

 

 

 

$

 

(0.68

)

 

 

 

$

 

(1.03

)

 

Net loss per common share-basic and diluted

 

 

$

 

(4.33

)

 

 

 

$

 

(2.16

)

 

 

 

$

 

(3.30

)

 

 

 

$

 

(4.69

)

 

 

 

$

 

(3.57

)

 

 

 

 

Pro forma net loss per common share from continuing operations-basic and diluted (unaudited)(1)(2)

 

 

 

 

 

 

 

 

 

 

$

 

(0.89

)

 

Pro forma net loss per common share from discontinued operations-basic and diluted (unaudited)(1)

 

 

 

 

 

 

 

 

 

 

$

 

(0.22

)

 

Pro forma net loss per common share-basic and diluted (unaudited)(1)(2)

 

 

 

 

 

 

 

 

 

 

$

 

(1.11

)

 

Weighted-average common shares outstanding–basic and diluted

 

 

 

4,387,958

   

 

 

4,428,478

   

 

 

4,607,675

   

 

 

4,791,474

   

 

 

5,103,351

 

 

 

 

Pro forma weighted-average common shares outstanding-basic and diluted (unaudited)(1)

 

 

 

 

 

 

 

 

 

 

 

23,710,425

 

 

 

(1)

 

 

 

Pro forma weighted-average shares outstanding reflects the conversion of our redeemable convertible preferred stock (using the if-converted method) into an aggregate of 18,457,235 shares of common stock as though the conversion had occurred on the original dates of issuance, and also reflects the issuance of 149,839 shares of common stock pursuant to the automatic net exercise of a warrant.

 

(2)

 

 

 

Pro forma net loss reflects a deemed dividend on Series G preferred stock of $8.1 million.

51


 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Year ended December 31,

 

2009

 

2010

 

2011

 

2012

 

2013

 

Other financial data:

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

 

($2,664

)

 

 

 

$

 

7,573

   

 

$

 

8,027

   

 

$

 

7,430

   

 

$

 

21,742

 

 

 

 

Stock-based compensation expense included in:

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

 

815

   

 

 

888

   

 

 

662

   

 

 

553

   

 

 

602

 

Product development

 

 

 

548

   

 

 

287

   

 

 

505

   

 

 

791

   

 

 

1,091

 

General and administrative

 

 

 

1,662

   

 

 

1,782

   

 

 

2,374

   

 

 

2,188

   

 

 

1,276

 

 

 

 

Total stock-based compensation expense

 

 

$

 

3,025

   

 

$

 

2,957

   

 

$

 

3,541

   

 

$

 

3,532

   

 

$

 

2,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

As of December 31,

 

2009

 

2010

 

2011

 

2012

 

2013

 

Consolidated balance sheet data:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

16,360

   

 

$

 

15,405

   

 

$

 

27,238

   

 

$

 

23,888

   

 

$

 

16,242

 

Total assets

 

 

 

129,389

   

 

 

154,575

   

 

 

181,817

   

 

 

195,660

   

 

 

192,282

 

Deferred revenue

 

 

 

6,930

   

 

 

8,361

   

 

 

11,297

   

 

 

6,018

   

 

 

6,808

 

Long-term debt (including current portion)

 

 

 

17,000

   

 

 

18,235

   

 

 

40,440

   

 

 

62,666

   

 

 

71,333

 

Total liabilities

 

 

 

46,919

   

 

 

54,991

   

 

 

87,177

   

 

 

115,544

   

 

 

123,485

 

Redeemable convertible preferred stock

 

 

 

130,420

   

 

 

153,781

   

 

 

158,766

   

 

 

158,766

   

 

 

158,766

 

Total stockholders’ deficit

 

 

 

(47,950

)

 

 

 

 

(54,197

)

 

 

 

 

(64,126

)

 

 

 

 

(78,650

)

 

 

 

 

(89,969

)

 

 

The following table presents a reconciliation of Adjusted EBITDA to loss from continuing operations, the most comparable GAAP measure, for each of the periods identified. For additional information, please see “Summary consolidated financial data—Definition and discussion of other financial data.”

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Year ended December 31,

 

2009

 

2010

 

2011

 

2012

 

2013

 

Reconciliation of Adjusted EBITDA to loss from continuing operations:

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

 

($19,021

)

 

 

 

 

($9,566

)

 

 

 

 

($12,611

)

 

 

 

 

($19,197

)

 

 

 

 

($12,997

)

 

Interest expense, net

 

 

 

1,102

   

 

 

1,572

   

 

 

1,589

   

 

 

4,898

   

 

 

8,442

 

Income tax expense (benefit)

 

 

 

1,331

   

 

 

(1,771

)

 

 

 

 

(615

)

 

 

 

 

1,026

   

 

 

1,102

 

Depreciation and amortization expense

 

 

 

9,787

   

 

 

11,125

   

 

 

13,822

   

 

 

14,602

   

 

 

15,450

 

Stock-based compensation expense

 

 

 

3,025

   

 

 

2,957

   

 

 

3,541

   

 

 

3,532

   

 

 

2,969

 

Compensation expense related to acquisition earnout

 

 

 

900

   

 

 

375

   

 

 

1,375

   

 

 

1,428

   

 

 

2,211

 

Deferred revenue adjustment related to acquisitions

 

 

 

   

 

 

   

 

 

926

   

 

 

72

   

 

 

 

Write-off of unamortized deferred financing costs

 

 

 

212

   

 

 

631

   

 

 

   

 

 

1,069

   

 

 

 

Write-off of costs related to prior IPO filing

 

 

 

   

 

 

2,250

   

 

 

   

 

 

   

 

 

 

Reduction in force severance charges

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

3,188

 

Asset impairment charges

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

1,377

 

 

 

 

Adjusted EBITDA

 

 

 

($2,664

)

 

 

 

$

 

7,573

   

 

$

 

8,027

   

 

$

 

7,430

   

 

$

 

21,742

 

 

52


Management’s discussion and analysis of financial condition and results of operations

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk factors” and elsewhere in the prospectus. See “Special note regarding forward-looking statements.”

Overview

We are a leading digital health and wellness company. By combining premium health and wellness content with our sophisticated proprietary data assets and analytics tools, we enable consumers to manage their health, healthcare professionals to stay informed and make better decisions for their patients, and marketers to communicate and engage with consumers and healthcare professionals. Our brands include Everyday Health, What To Expect, Dr. Sanjay Gupta, Jillian Michaels, Mayo Clinic, Physicians’ Desk Reference and numerous other leading industry experts. 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.

During 2013, we estimate an average of 43 million consumers and 500,000 healthcare professionals interacted with our health and wellness properties on a monthly basis. 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. We generated total revenues of $125.8 million, $138.5 million and $155.9 million in 2011, 2012 and 2013, respectively.

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. The purchase price for MPT, which operated the MedPage Today website and related mobile applications, was $17.8 million. 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 enables us to offer marketers the ability to target both healthcare professionals and consumers with a single marketing solution. Since we acquired MPT, we have grown the MPT audience of physicians and other healthcare professionals and increased user engagement through various editorial enhancements and expanded mobile offerings. For example, the number of visits to MPT properties has increased from approximately 2.7 million in the first quarter of 2011, the first full calendar quarter after the acquisition, to approximately 10.2 million in the fourth quarter of 2013.

53


In late 2010, we also made a strategic decision to make significant investments in product development, technology, sales and data and analytics in order to build the foundation for the next stage of our growth across both our consumer and professional operations. These investments included:

 

 

 

 

increasing our headcount in key departments, including sales, product, technology and data sciences;

 

 

 

 

expanding our online video capabilities, as well as our launch of an Everyday Health YouTube channel and the production of two broadcast television shows;

 

 

 

 

significant product and technology enhancements to our mobile offerings;

 

 

 

 

expanding our data collection and research capabilities in order to provide more sophisticated campaign analytics and effectiveness reporting to our advertising customers;

 

 

 

 

enhancing our social media offerings and capabilities; and

 

 

 

 

acquiring two companies in order to expand our consumer platform. Specifically, we acquired DDC Internet, Inc., an online directory for healthcare professionals, in April 2011 and EQAL, Inc., a video production and social media company, in September 2012. These acquisitions are discussed in greater detail in our audited consolidated financial statements for the three years ended December 31, 2013 included elsewhere in this prospectus.

The investments in our business between late 2010 and the end of 2012 increased our operating expenses and capital expenditures and reduced our Adjusted EBITDA. We believe, however, that these investments have positioned us for revenue growth in the future by broadening our revenue opportunities and improving our operating leverage. For example, we have recently begun exploring ways to utilize our existing core assets to create revenue opportunities through targeting payors, providers and employers. We expect our operating expenses to increase in 2014 and 2015, but to decrease as a percentage of revenues. As a result, we expect that our Adjusted EBITDA will improve in 2014 and 2015, and expect that our capital expenditures will decline as a percentage of revenues over the same period.

Background Information

Key trends affecting our business

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

 

 

 

 

Marketers are allocating an increasing proportion of their advertising spending to online advertising and are seeking solutions that better target their audience and maximize return on investment, or 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-

54


 

 

 

 

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 a 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended
December 31,

 

Three months ended
December 31,

 

2011

 

2012

 

2013

 

 

 

2013

 

Advertising and sponsorship revenues per advertiser ($ in thousands)(1)

 

 

 

275.6

   

 

 

324.4

   

 

 

420.2

   

 

 

187.6

   

 

 

263.9

 

 

 

(1)

 

 

 

Based on 349, 339 and 321 total advertisers for the years ended December 31, 2011, 2012 and 2013, respectively, and 209 and 182 total advertisers for the three months ended December 31, 2012 and 2013, respectively.

Revenues

We generate revenues from advertising and sponsorships, premium services, including subscriptions and licensing fees, and, to a lesser extent, video production fees.

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

 

 

 

 

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;

 

 

 

 

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;

 

 

 

 

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

55


 

 

 

 

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.

Increasing our advertising and sponsorship revenues attributable to interactive brand sponsorships has been an important focus for us in the past few years. Interactive brand sponsorships represented approximately 50% of our advertising and sponsorship revenues in 2013 and we expect that to be the case in 2014.

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. Our advertising and sponsorship revenue delivered via mobile channels was $35.6 million in 2013, an increase from $22.0 million in 2012 and $14.7 million in 2011. Our advertising and sponsorship revenue delivered via mobile channels increased 76.9% to $13.0 million in the fourth quarter of 2013 from $7.3 million in the fourth quarter of 2012.

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

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

Over the last several years, we have intentionally focused more directly on increasing our advertising and sponsorship revenues, which represents a much larger revenue opportunity than premium services. As a result, the mix of our total revenues from advertising and sponsorship services and premium services has changed. In the years ended December 31, 2011, 2012 and 2013, our advertising and sponsorship revenues accounted for 76.5%, 79.4% and 86.6% of total revenues, respectively, and our premium services revenues accounted for 23.5%, 17.0% and 13.4% of total revenues, respectively. In 2012, we generated $5 million in revenue from video production fees paid to us by YouTube in connection with the launch of the Everyday Health YouTube channel. These video production fee revenues, which did not recur in 2013, represented 3.6% of total revenues in 2012. We anticipate that revenues derived from advertising and sponsorship services will continue to grow in the future as a percentage of total revenues. Our premium services, however, generate a significant portion of our registered users and the valuable data that is voluntarily provided to us, including demographic information and health-related interests, enables us to grow our advertising and sponsorship revenues. As a result, while we expect that premium services revenues will continue to decrease as a percentage of total revenues, our subscription products will continue to serve as an important source for registered users that will drive our advertising and sponsorship revenues and potentially offset any decline in our direct revenue from premium services. Although to date, revenues from payors, providers and employers have been immaterial, we expect that these revenues will likely increase as we seek to utilize our existing assets to address the consumer engagement needs of these entities. To the extent that our revenues from these sources increase in the future, this may alter the trends described above.

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:

56


 

 

 

 

media costs;

 

 

 

 

royalty payments to the Everyday Health portfolio partners; and

 

 

 

 

to a lesser extent, transaction processing costs associated with subscription fees for our premium services, merchandise inventory and fulfillment costs, 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, please refer to “Summary consolidated financial data—Definition and discussion of other financial data” above).

Both our gross profit and gross margin have improved over the past several years as shown in the table below:

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Year ended
December 31,

 

2011

 

2012

 

2013

 

Revenues

 

 

$

 

125,773

   

 

$

 

138,492

   

 

$

 

155,850

 

Revenue growth

 

 

 

13.1

%

 

 

 

 

10.1

%

 

 

 

 

12.5

%

 

Cost of revenues

 

 

$

 

40,985

   

 

$

 

40,543

   

 

$

 

43,338

 

Gross profit

 

 

$

 

84,788

   

 

$

 

97,949

   

 

$

 

112,512

 

Gross margin

 

 

 

67.4

%

 

 

 

 

70.7

%

 

 

 

 

72.2

%

 

 

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.

57


As further described in the section titled “—Seasonality and fluctuations in unaudited quarterly results of operations” below, our gross margin is traditionally lowest in the first quarter of the year compared to the remaining quarters as our advertising and sponsorship revenues are lowest and our marketing expenditures are highest in the first quarter of the year. These seasonal factors typically contribute to quarterly improvements in gross margin after the first quarter of the year.

Operating expenses

Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs, including commissions and non-cash stock compensation, for our account management, research, marketing, sales and data sciences 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 a data sciences team that analyzes traffic and advertising ROI data to determine the effectiveness of advertising and marketing campaigns. We expect our sales and marketing expenses to increase in absolute dollars as we increase the number of sales, sales support and analytical personnel, but expect sales and marketing expenses to decrease as a percentage of revenues.

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, capitalized software and website development costs and video and television production costs. We expect our investment in product development to increase in absolute dollars as we continue to increase our editorial, product development and technology personnel, and as we enhance our product offerings by creating and licensing content, tools and applications, including new offerings for payors, providers and employers. However, we expect product development expenses to decrease as a percentage of revenues.

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 when we become a public company, but expect general and administrative expenses to decrease as a percentage of revenues.

Interest (expense) income, net

These amounts consist principally of interest expense partially offset by interest income. Interest expense is primarily related to our credit facilities. The outstanding balance of our debt was $71.3 million as of December 31, 2013. Our interest expense will decline in future periods as we anticipate using a portion of the proceeds from this offering to repay a portion of our indebtedness.

Other Expense

Other expense consists of certain non-operating expenses, primarily the write-off of unamortized deferred financing costs in connection with refinancing our credit facilities in 2012.

58


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, 2013, we had approximately $108 million of net operating loss, or NOL, carryforwards available to offset future taxable income, which 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, or the Code. 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 have completed an analysis to determine the impact that past ownership changes may have on our ability to use our NOL carryforwards and have determined that approximately $0.5 million of the $108 million in NOL carryforwards will be limited by Section 382. In addition, future changes in our stock ownership, including as a result of this offering or other potential future transactions, could result in additional ownership changes under Section 382. Our NOLs may also be impaired under similar provisions of state law. The NOL carryforwards at December 31, 2013 include approximately $3.3 million in income tax deductions related to stock options, which will be reflected as a credit to additional paid-in-capital as realized.

As of December 31, 2013, we had gross deferred tax assets of approximately $59.6 million, related primarily to NOL carryforwards, and deferred tax liabilities of approximately $7.5 million, of which approximately $5.1 million relates to basis differences in indefinite-lived intangible assets that cannot be offset by deferred tax assets. We have provided a valuation allowance against the net deferred tax assets to the extent we have determined that it is more likely than not that such net deferred tax assets will not be realizable. If we achieve profitability, the net deferred tax assets may be available to offset future income tax liabilities.

Loss from discontinued operations

In November 2013, the board of directors approved a plan to sell our Doctor Solutions business, which provided online directories and other marketing services to healthcare professionals. By the end of 2013, we identified a buyer and completed the sale, at a price of $1.0 million. The sale represented a disposal of a component of an entity whose operations and cash flows were eliminated from our ongoing business after the sale. As such, the operating results of this business, along with the loss on sale, have been reported as discontinued operations in our consolidated statements of operations for 2011, 2012 and 2013.

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.

59


 

 

 

 

 

 

 

 

(In thousands)

 

Year ended December 31,

 

2011

 

2012

 

2013

 

Consolidated statement of operations data:

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

Advertising and sponsorship revenues

 

 

$

 

96,191

   

 

$

 

109,956

   

 

$

 

134,893

 

Premium services revenues

 

 

 

29,582

   

 

 

23,536

   

 

 

20,957

 

Video production fees

 

 

 

   

 

 

5,000

   

 

 

 

 

 

 

Total revenues

 

 

 

125,773

   

 

 

138,492

   

 

 

155,850

 

Operating expenses:

 

 

 

 

 

 

Cost of revenues

 

 

 

40,985

   

 

 

40,543

   

 

 

43,338

 

Sales and marketing

 

 

 

36,266

   

 

 

38,603

   

 

 

44,385

 

Product development

 

 

 

36,960

   

 

 

45,676

   

 

 

44,496

 

General and administrative

 

 

 

23,199

   

 

 

25,874

   

 

 

26,725

 

 

 

 

Total operating expenses

 

 

 

137,410

   

 

 

150,696

   

 

 

158,944

 

Loss from operations

 

 

 

(11,637

)

 

 

 

 

(12,204

)

 

 

 

 

(3,094

)

 

Interest expense, net

 

 

 

(1,589

)

 

 

 

 

(4,898

)

 

 

 

 

(8,442

)

 

Other expense

 

 

 

   

 

 

(1,069

)

 

 

 

 

(359

)

 

 

 

 

Loss from continuing operations before provision for income taxes

 

 

 

(13,226

)

 

 

 

 

(18,171

)

 

 

 

 

(11,895

)

 

Benefit (provision) for income taxes

 

 

 

615

   

 

 

(1,026

)

 

 

 

 

(1,102

)

 

 

 

 

Loss from continuing operations

 

 

 

(12,611

)

 

 

 

 

(19,197

)

 

 

 

 

(12,997

)

 

Loss from discontinued operations, net of tax

 

 

 

(2,590

)

 

 

 

 

(3,257

)

 

 

 

 

(5,239

)

 

 

 

 

Net loss

 

 

$

 

(15,201

)

 

 

 

$

 

(22,454

)

 

 

 

$

 

(18,236

)

 

 

Comparison of years ended December 31, 2013 and 2012

Revenues

Our total revenues increased 12.5% to $155.9 million in 2013 from $138.5 million in 2012. The $17.4 million increase in total revenues consisted of a $24.9 million increase in advertising and sponsorship revenues partially offset by a $2.6 million decrease in premium services revenues. Our 2012 revenues also included $5.0 million in non-recurring video production fee revenues in connection with the launch of the Everyday Health YouTube channel. In 2013, one advertiser accounted for approximately 12% of total revenues. No advertiser accounted for 10% or more of total revenues in 2012.

Advertising and sponsorship revenues increased 22.7% to $134.9 million in 2013 from $110.0 million in 2012. The $24.9 million increase in advertising and sponsorship revenues was attributable to an increase in the number of consumer advertisers that marketed their products and services on the Everyday Health portfolio, driven by an increased focus from our sales team on generating new client relationships. The increase in advertising and sponsorship revenues was also driven by an increase in revenue per advertiser, as compared to 2012, due to expanded relationships with existing advertisers.

Premium services revenues decreased 10.9% to $21.0 million in 2013 from $23.5 million in 2012. The decrease was primarily attributable to a $2.7 million decrease in subscription fee revenues to $17.0 million in 2013 from $19.7 million in 2012. The decrease in subscription fee revenues was primarily due to a decrease in our average paid subscribers per month, which resulted from a general decline in the popularity of certain of our brands. This decrease was partially offset by higher average revenue per paid subscriber per month, due to slightly increased billing plans and higher renewal rates.

60


Costs and expenses

Cost of Revenues. Cost of revenues increased 6.9% to $43.3 million in 2013 from $40.5 million in 2012. The $2.8 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. Cost of revenues as a percentage of total revenues decreased to 27.8% in 2013 from 29.3% in 2012.

Sales and Marketing. Sales and marketing expenses increased 15.0% to $44.4 million in 2013 from $38.6 million in 2012. This $5.8 million increase was primarily due to higher levels of compensation expense, including increased staffing and related compensation for the sales development, sales operations and data sciences teams associated with generating and supporting increased advertising and sponsorship revenues in 2013 compared to 2012. The increase in sales and marketing expenses in 2013 is attributable in part to our September 2012 EQAL acquisition, and includes a $0.8 million increase in accrued acquisition earnout expense. Sales and marketing expenses as a percentage of total revenues increased to 28.5% in 2013, as compared to 27.9% in 2012.

Product Development. Product development expenses decreased 2.6% to $44.5 million in 2013 from $45.7 million in 2012. This $1.2 million decrease in product development expenses was primarily due to a decrease in video and television production cost amortization expense of $5.8 million related to our Everyday Health YouTube channel, partially offset by increases in compensation expense of $2.3 million, a $1.2 million impairment charge pertaining to website content and tools and depreciation and amortization of $1.5 million. Product development expenses as a percentage of total revenues decreased to 28.5% in 2013, as compared to 33.0% in 2012.

General and Administrative. General and administrative expenses increased 3.3% to $26.7 million in 2013 from $25.9 million in 2012. This $0.8 million increase was primarily due to increases in compensation and facilities expenses, including facilities expenses attributable in part to our September 2012 EQAL acquisition. General and administrative expenses as a percentage of total revenues decreased to 17.1% in 2013, as compared to 18.7% in 2012.

Interest Expense, Net. Interest expense, net, increased 72.4% to $8.4 million in 2013, compared to $4.9 million in 2012. The $3.5 million increase in interest expense was primarily due to an approximate $18.0 million net increase in average outstanding borrowings under our credit facilities in 2013 compared with 2012, and to a lesser extent, a $0.9 million increase in amortization of deferred financing costs relating to our credit facilities borrowings.

Other Expense. Other expense in 2013 consisted of certain non-operating expense charges totaling $0.4 million, compared with the write-off of unamortized deferred financing costs totaling $1.1 million in 2012.

Provision for Income Taxes. The provision for income taxes was approximately $1.1 million and $1.0 million during the years 2013 and 2012, respectively. The provision pertains primarily to deferred income taxes related to basis differences in indefinite lived intangible assets that could not be offset by current year deferred tax assets, as well as minimum state income taxes.

Loss from discontinued operations

Loss from discontinued operations increased 60.9% from $3.3 million in 2012 to $5.2 million in 2013. The $1.9 million increase was primarily due to the $1.3 million loss on sale, and to a lesser extent a $0.6 million greater operating loss for the Doctor Solutions business in 2013 as compared to 2012. The business was sold in November 2013.

61


Comparison of years ended December 31, 2012 and 2011

Revenues

Our total revenues increased 10.1% to $138.5 million in 2012 from $125.8 million in 2011. The $12.7 million increase in total revenues consisted of a $13.8 million increase in advertising and sponsorship revenues partially offset by a $6.1 million decrease in premium services revenues. Our 2012 revenues also included $5.0 million in video production fee revenues in connection with the launch of the Everyday Health YouTube channel. In 2012 and 2011, no advertiser accounted for 10% or more of total revenues.

Advertising and sponsorship revenues increased 14.3% to $110.0 million in 2012 from $96.2 million in 2011. The $13.8 million increase in advertising and sponsorship revenues was attributable to an increase in the number of advertisers that marketed their products on the professional properties in the Everyday Health portfolio, driven by the continued expansion of advertising solutions offered via our professional property, MedPage Today. The increase in advertising and sponsorship revenues was also driven by an increase in revenue per advertiser, as compared to 2011, due to expanded relationships with existing advertisers.

Premium services revenues decreased 20.4% to $23.5 million in 2012 from $29.6 million in 2011. This $6.1 million decrease was primarily attributable to a $5.2 million decrease in subscription fee revenues to $19.7 million in 2012 from $24.9 million in 2011. The decrease in subscription fee revenues was primarily due to a decrease in our average paid subscribers per month, which resulted from a general decline in the popularity of certain of our brands.

Costs and expenses

Cost of Revenues. Cost of revenues decreased 1.1% to $40.5 million in 2012 from $41.0 million in 2011. The $0.5 million decrease was primarily due to a decrease in royalties to our partners of $2.1 million consistent with the decrease in subscription revenues and fewer portfolio partners, partially offset by an increase in media expense of $1.6 million from increased marketing activities in 2012. Cost of revenues as a percentage of total revenues decreased to 29.3% in 2012, as compared to 32.6% in 2011.

Sales and Marketing. Sales and marketing expenses increased 6.4% to $38.6 million in 2012 from $36.3 million in 2011. The $2.3 million increase in sales and marketing expenses was primarily attributable to our investment in a larger sales team to support advertising and sponsorship revenue growth, personnel and other costs to service our growing number of advertisers, increased commissions and other compensation to our sales force, including the sales development, sales operations and data sciences teams, in connection with the increase in advertising and sponsorship revenues. Sales and marketing expenses as a percentage of total revenues decreased to 27.9% in 2012, as compared to 28.8% in 2011.

Product Development. Product development expenses increased 23.6% to $45.7 million in 2012 from $37.0 million in 2011. The $8.7 million increase in product development expenses was primarily due to the $5.0 million video and television production cost amortization expense of our Everyday Health YouTube channel, as well as staffing increases in our editorial, product management and technology departments to support additions and enhancements across our portfolio of properties. Product development expenses as a percentage of total revenues increased to 33.0% in 2012, as compared to 29.4% in 2011.

General and Administrative. General and administrative expenses increased 11.5% to $25.9 million in 2012 from $23.2 million in 2011. This $2.7 million increase was primarily due to increases in personnel and related compensation expense, facilities expenses and other corporate support costs. General and administrative expenses as a percentage of total revenues remained relatively consistent at 18.7% in 2012, as compared to 18.4% in 2011.

62


Interest Expense. Interest expense, net, increased 208.2% to $4.9 million in 2012, compared to $1.6 million in 2011. The $3.3 million increase in net interest expense was primarily due to additional borrowings under our credit facilities during 2012 and, to a lesser extent, an increase in amortization of deferred financing costs relating to our credit facility borrowings.

Other Expense. Other expense in 2012 totaled $1.1 million and represents the write-off of unamortized deferred financing costs relating to our subordinated facility refinancing in October 2012. There were no similar expenses incurred in 2011.

Benefit (Provision) for Income Taxes. Provision for income taxes in 2012 totaled $1.0 million, compared to a $0.6 million benefit in 2011. The $1.6 million increase in the income tax provision was primarily due to a tax benefit of $1.0 million recorded in 2011 associated with the release of our valuation allowance in connection with the DDC acquisition and a change in treatment of certain trade names of $0.6 million.

Loss from discontinued operations

Loss from discontinued operations increased 25.8% from $2.6 million in 2011 to $3.3 million in 2012. The $0.7 million increase was due to a greater operating loss for the Doctor Solutions business in 2012 as compared to 2011.

Seasonality and fluctuations in unaudited quarterly results of operations

The following table presents our unaudited quarterly consolidated results of operations for the eight quarters ended December 31, 2013. This unaudited quarterly consolidated information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of management, the consolidated statements of operations data includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. You should read this table in conjunction with our financial statements and the related notes located elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of the results of operations for any future periods.

63


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
(in thousands)

 

March 31,
2012

 

June 30,
2012

 

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

 

December 31,
2013

 

Consolidated statement of operations data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advertising and sponsorship revenues

 

 

$

 

21,468

 

 

 

$

 

24,910

 

 

 

$

 

24,370

 

 

 

$

 

39,208

 

 

 

$

 

25,380

 

 

 

$

 

31,819

 

 

 

$

 

29,662

 

 

 

$

 

48,032

 

Premium services revenues

 

 

 

6,324

 

 

 

 

6,449

 

 

 

 

5,891

 

 

 

 

4,872

 

 

 

 

5,124

 

 

 

 

5,379

 

 

 

 

5,392

 

 

 

 

5,062

 

Video production fees

 

 

 

750

 

 

 

 

2,768

 

 

 

 

1,482

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

28,542

 

 

 

 

34,127

 

 

 

 

31,743

 

 

 

 

44,080

 

 

 

 

30,504

 

 

 

 

37,198

 

 

 

 

35,054

 

 

 

 

53,094

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

 

9,924

 

 

 

 

9,923

 

 

 

 

9,551

 

 

 

 

11,145

 

 

 

 

9,835

 

 

 

 

10,826

 

 

 

 

9,620

 

 

 

 

13,057

 

Sales and marketing

 

 

 

8,526

 

 

 

 

9,103

 

 

 

 

8,986

 

 

 

 

11,988

 

 

 

 

9,061

 

 

 

 

11,860

 

 

 

 

10,814

 

 

 

 

12,650

 

Product development

 

 

 

10,118

 

 

 

 

11,883

 

 

 

 

10,605

 

 

 

 

13,070

 

 

 

 

10,344

 

 

 

 

10,884

 

 

 

 

10,841

 

 

 

 

12,427

 

General and administrative

 

 

 

5,727

 

 

 

 

6,472

 

 

 

 

6,399

 

 

 

 

7,276

 

 

 

 

6,355

 

 

 

 

6,007

 

 

 

 

6,277

 

 

 

 

8,086

 

 

 

 

Total operating expenses

 

 

 

34,295

 

 

 

 

37,381

 

 

 

 

35,541

 

 

 

 

43,479

 

 

 

 

35,595

 

 

 

 

39,577

 

 

 

 

37,552

 

 

 

 

46,220

 

(Loss) income from operations

 

 

 

(5,753

)

 

 

 

 

(3,254

)

 

 

 

 

(3,798

)

 

 

 

 

601

 

 

 

 

(5,091

)

 

 

 

 

(2,379

)

 

 

 

 

(2,498

)

 

 

 

 

6,874

 

Interest expense, net

 

 

 

(995

)

 

 

 

 

(971

)

 

 

 

 

(996

)

 

 

 

 

(1,936

)

 

 

 

 

(2,129

)

 

 

 

 

(2,015

)

 

 

 

 

(2,125

)

 

 

 

 

(2,173

)

 

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,069

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(359

)

 

 

 

 

(Loss) income from continuing operations before provision for income taxes

 

 

 

(6,748

)

 

 

 

 

(4,225

)

 

 

 

 

(4,794

)

 

 

 

 

(2,404

)

 

 

 

 

(7,220

)

 

 

 

 

(4,394

)

 

 

 

 

(4,623

)

 

 

 

 

4,342

 

Provision for income taxes

 

 

 

(248

)

 

 

 

 

(271

)

 

 

 

 

(276

)

 

 

 

 

(231

)

 

 

 

 

(264

)

 

 

 

 

(247

)

 

 

 

 

(311

)

 

 

 

 

(280

)

 

 

 

 

(Loss) income from continuing operations

 

 

 

(6,996

)

 

 

 

 

(4,496

)

 

 

 

 

(5,070

)

 

 

 

 

(2,635

)

 

 

 

 

(7,484

)

 

 

 

 

(4,641

)

 

 

 

 

(4,934

)

 

 

 

 

4,062

 

Loss from discontinued operations, net of tax

 

 

 

(505

)

 

 

 

 

(1,103

)

 

 

 

 

(396

)

 

 

 

 

(1,253

)

 

 

 

 

(1,745

)

 

 

 

 

(1,596

)

 

 

 

 

(397

)

 

 

 

 

(1,501

)

 

 

 

 

Net (loss) income

 

 

$

 

(7,501

)

 

 

 

$

 

(5,599

)

 

 

 

$

 

(5,466

)

 

 

 

$

 

(3,888

)

 

 

 

$

 

(9,229

)

 

 

 

$

 

(6,237

)

 

 

 

$

 

(5,331

)

 

 

 

$

 

2,561

 

 

64


The following table presents certain unaudited other financial data for each of the periods indicated. For additional information, please see the discussion of Adjusted EBITDA in the section titled “Summary consolidated financial data—Definition and discussion of other financial data.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
(in thousands)

 

March 31,
2012

 

June 30,
2012

 

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

 

December 31,
2013

 

Other financial data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

$

 

(1,467

)

 

 

 

$

 

1,759

 

 

 

$

 

1,233

 

 

 

$

 

5,905

 

 

 

$

 

166

 

 

 

$

 

4,030

 

 

 

$

 

3,330

 

 

 

$

 

14,216

 

 

 

 

Stock-based compensation expense included in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

 

89

 

 

 

 

177

 

 

 

 

163

 

 

 

 

124

 

 

 

 

146

 

 

 

 

111

 

 

 

 

160

 

 

 

 

185

 

Product development

 

 

 

197

 

 

 

 

201

 

 

 

 

182

 

 

 

 

211

 

 

 

 

157

 

 

 

 

119

 

 

 

 

405

 

 

 

 

410

 

General and administrative

 

 

 

341

 

 

 

 

666

 

 

 

 

594

 

 

 

 

587

 

 

 

 

149

 

 

 

 

287

 

 

 

 

304

 

 

 

 

536

 

 

 

 

Total stock-based compensation expense

 

 

$

 

627

 

 

 

$

 

1,044

 

 

 

$

 

939

 

 

 

$

 

922

 

 

 

$

 

452

 

 

 

$

 

517

 

 

 

$

 

869

 

 

 

$

 

1,131

 

 

The following table presents a reconciliation of Adjusted EBITDA to income (loss) from continuing operations, the most comparable GAAP measure, for each of the periods indicated. For additional information, please see the discussion of Adjusted EBITDA in the section titled “Summary consolidated financial data—Definition and discussion of other financial data.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
(in thousands)

 

March 31,
2012

 

June 30,
2012

 

September 30,
2012

 

December 31,
2012

 

March 31,
2013

 

June 30,
2013

 

September 30,
2013

 

December 31,
2013

 

Reconciliation of Adjusted EBITDA to income (loss) from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

$

 

(6,996

)

 

 

 

$

 

(4,496

)

 

 

 

$

 

(5,070

)

 

 

 

$

 

(2,635

)

 

 

 

$

 

(7,484

)

 

 

 

$

 

(4,641

)

 

 

 

$

 

(4,934

)

 

 

 

$

 

4,062

 

Interest expense, net

 

 

 

995

 

 

 

 

971

 

 

 

 

996

 

 

 

 

1,936

 

 

 

 

2,129

 

 

 

 

2,015

 

 

 

 

2,125

 

 

 

 

2,173

 

Income tax expense

 

 

 

248

 

 

 

 

271

 

 

 

 

276

 

 

 

 

231

 

 

 

 

264

 

 

 

 

247

 

 

 

 

311

 

 

 

 

280

 

Depreciation and amortization expense

 

 

 

3,345

 

 

 

 

3,561

 

 

 

 

3,642

 

 

 

 

4,054

 

 

 

 

3,920

 

 

 

 

3,897

 

 

 

 

4,058

 

 

 

 

3,575

 

Stock-based compensation expense

 

 

 

627

 

 

 

 

1,044

 

 

 

 

939

 

 

 

 

922

 

 

 

 

452

 

 

 

 

517

 

 

 

 

869

 

 

 

 

1,131

 

Compensation expense related to acquisition earnout

 

 

 

300

 

 

 

 

400

 

 

 

 

450

 

 

 

 

278

 

 

 

 

200

 

 

 

 

1,175

 

 

 

 

750

 

 

 

 

86

 

Deferred revenue adjustment related to acquisitions

 

 

 

14

 

 

 

 

8

 

 

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write-off of unamortized deferred financing costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reduction in force severance charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

685

 

 

 

 

673

 

 

 

 

151

 

 

 

 

1,679

 

Asset impairment charges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

 

 

 

1,230

 

 

 

 

Adjusted EBITDA

 

 

$

 

(1,467

)

 

 

 

$

 

1,759

 

 

 

$

 

1,233

 

 

 

$

 

5,905

 

 

 

$

 

166

 

 

 

$

 

4,030

 

 

 

$

 

3,330

 

 

 

$

 

14,216

 

 

The timing of our revenues is affected by certain seasonal factors. Our advertising and sponsorship revenues are traditionally the lowest in the first quarter of the year, due primarily to the seasonal spend patterns of our advertising customers, and increases throughout the remainder of the year. Conversely, due to high consumer demand for diet and fitness programs at the start of each year associated with annual resolutions to live healthier lifestyles, we traditionally increase our media expenditures in the first calendar quarter to promote properties in the Everyday Health portfolio that focus on diet and fitness. As a result of these trends, our gross margin tends to be lowest in the first quarter of each calendar year, typically increasing with each

65


consecutive quarter. We anticipate that, as our revenues increase, our gross profit will continue to increase while our period-over-period gross margin may not increase commensurately.

Liquidity and capital resources

At December 31, 2013, our principal sources of liquidity consisted of cash and cash equivalents of $16.2 million and accounts receivable of $49.4 million. We currently expect that our existing cash and cash equivalents, together with anticipated cash flows from operations and the proceeds from this offering, will be sufficient to fund our currently 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 under the caption “Risk factors.”

Our primary sources of cash historically have been advertising and sponsorship revenues, payments for our premium services, borrowings under our credit facilities and proceeds from the issuance of convertible redeemable preferred stock. Since the beginning of 2003, we have issued convertible redeemable preferred stock for aggregate net proceeds of $82.0 million. As of December 31, 2013, we had $71.3 million of borrowings outstanding under our credit facilities. Pursuant to a new credit facility we entered into in March 2014 and the simultaneous repayment of all outstanding borrowings under our former credit facilities, as of March 15, 2014, we had $72.3 million of borrowings outstanding. For a description of our long-term debt obligations, see “—Long-term debt” below.

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 and video/television content development.

Our future capital requirements will be a function of the extent of our future operating losses and capital expenditures, which will depend on many factors, including:

 

 

 

 

the cost of developing new content and marketing solutions;

 

 

 

 

the timing and extent of market acceptance of our content offerings and marketing solutions;

 

 

 

 

the level of advertising and promotion required to retain and acquire our audience;

 

 

 

 

the expansion of our sales and marketing organizations;

 

 

 

 

the establishment of additional offices in the U.S. and worldwide and the building of infrastructure necessary to support our growth; and

 

 

 

 

our relationships with our vendors and customers.

In addition, future acquisitions and licensing arrangements may increase our need for capital.

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.

66


 

 

 

 

 

 

 

 

(in thousands)

 

Year ended December 31,

 

2011

 

2012

 

2013

 

Net cash provided by (used in) operating activities

 

 

$

 

643

   

 

$

 

(8,782

)

 

 

 

$

 

1,672

 

Net cash used in investing activities

 

 

 

(16,222

)

 

 

 

 

(15,532

)

 

 

 

 

(17,507

)

 

Net cash provided by (used in) financing activities

 

 

 

27,412

   

 

 

20,964

   

 

 

8,189

 

Net (decrease) increase in cash and cash equivalents

 

 

$

 

11,833

   

 

$

 

(3,350

)

 

 

 

$

 

(7,646

)

 

 

Cash and cash equivalents decreased by $7.6 million to $16.2 million in the year ended December 31, 2013, compared to a decrease of $3.4 million in the year ended December 31, 2012.

Cash and cash equivalents decreased by $3.4 million to $23.9 million in the year ended December 31, 2012, compared to an increase of $11.8 million in the year ended December 31, 2011.

Operating activities

For the year ended December 31, 2013, net cash provided by operating activities was $1.7 million, consisting of cash provided by operating activities from continuing operations of $5.9 million offset by cash used in operating activities from discontinued operations of $4.2 million. Net cash provided by operating activities from continuing operations of $5.9 million consisted of a loss from continuing operations of $13.0 million, adjusted for non-cash expenses of $23.0 million, including depreciation and amortization and non-cash stock-based compensation expense. Additionally, changes in operating assets and liabilities used $4.1 million of cash, which was primarily due to increases in accounts receivable due to higher advertising and sponsorship revenues and in prepaid expenses and other current assets, partially offset by an increase in (i) accounts payable and accrued expenses due to the timing of vendor payments and (ii) deferred revenue related to certain marketing campaigns and premium services billed in advance of the services being provided. Net cash used in operating activities from discontinued operations of $4.2 million consisted of a loss from discontinued operations of $5.2 million adjusted for non-cash items, primarily the write-off of certain assets in connection with the sale.

Net cash provided by operating activities was $10.5 million higher in the year ended December 31, 2013 compared to the year ended December 31, 2012, resulting primarily from a $5.4 million decrease in video and television costs after completion of the Everyday Health YouTube channel in 2012, a $7.6 million increase in accounts payable and accrued expenses due to the timing of vendor invoice payments and a $6.9 million increase in deferred revenue, partially offset by a $7.3 million increase in accounts receivable due to higher advertising and sponsorship revenues and a $2.5 million increase in prepaid expenses and other current assets for the year ended December 31, 2013 compared to the same period in 2012.

For the year ended December 31, 2012, net cash used in operating activities was $8.8 million, consisting of cash used in operating activities from continuing operations of $5.9 million and cash used in operating activities from discontinued operations of $2.9 million. Net cash used in operating activities from continuing operations of $5.9 million consisted of a loss from continuing operations of $19.2 million, adjusted for non-cash expenses of $27.3 million, including depreciation and amortization and non-cash stock-based compensation expense. Additionally, changes in operating assets and liabilities used $14.0 million of cash, which was primarily due to additions of video and television production costs relating to the Everyday Health YouTube channel, and a decrease in deferred revenue primarily related to the timing of advertising billings in relation to services rendered in advance of the services being provided and a decrease in accounts receivable. Net cash used in operating activities from discontinued operations of $2.9 million consisted of the $3.2 million operating loss from discontinued operations, adjusted for non-cash items, for the year ended December 31, 2012. Net cash used in operating activities was $9.4 million higher in the year ended December 31, 2012,

67


compared to the year ended December 31, 2011, resulting primarily from our higher losses from continuing and discontinued operations in 2012 compared to 2011.

For the year ended December 31, 2011, net cash provided by operating activities was $0.6 million, consisting of cash provided by operating activities from continuing operations of $1.6 million offset by cash used in operating activities from discontinued operations of $1.0 million. Net cash provided by operating activities from continuing operations of $1.6 million consisted of a loss from continuing operations of $12.6 million, adjusted for non-cash expenses of $18.1 million, including depreciation and amortization and non-cash stock-based compensation expense. Additionally, changes in operating assets and liabilities resulted in a use of cash of $3.9 million, which was primarily the result of an increase in accounts receivable resulting from higher advertising and sponsorship revenues and additions to video and television production costs, partially offset by an increase in deferred revenue related to certain advertising and sponsorship and premium services billed in advance of the services being provided and an increase in other current liabilities.

Investing activities

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

We used $17.5 million of net cash in investing activities during the year ended December 31, 2013, consisting of $10.7 million of additions to property and equipment, $6.7 million for payments relating to the EQAL acquisition, and $0.7 million in security deposits for additional office space. Net cash used in investing activities was $2.0 million higher than in the year ended December 31, 2012.

We used $15.5 million of net cash in investing activities during the year ended December 31, 2012, primarily for purchases of property and equipment and, to a lesser extent, for a deferred purchase price payment related to the 2011 DDC acquisition. Net cash used in investing activities was $0.7 million less than in the year ended December 31, 2011.

We used $16.2 million of net cash in investing activities during the year ended December 31, 2011, primarily for purchases of property and equipment and, to a lesser extent, for the initial payment related to the 2011 DDC acquisition.

Financing activities

We generated $8.2 million of net cash in financing activities during the year ended December 31, 2013, primarily from $11.5 million of additional borrowings under our credit facility partially offset by $2.8 million of principal repayments under our term loan credit facility. Net cash used in financing activities was $12.8 million lower than in the year ended December 31, 2012.

We generated $21.0 million of net cash from financing activities during the year ended December 31, 2012, primarily as a result of the refinancing of our credit facilities during 2012, including the receipt of $35.0 million under a new subordinated facility, repayment of the $15.0 million balance from a former subordinated credit facility, and the payment of $1.3 million in closing costs relating to such refinancing. We also borrowed a net amount of $5.1 million under our revolver facility and repaid $2.8 million under the term loan portion of our credit facility.

We generated $27.4 million of net cash from financing activities during the year ended December 31, 2011, primarily from $17.5 million of borrowings under our term loan credit facility, $6.2 million of net borrowings

68


under our revolver facility, and the issuance and sale of $5.0 million, net of issuance costs, of redeemable convertible preferred stock.

Long-term debt

We have the following outstanding long-term debt as of March 15, 2014:

Under our current credit facility with Silicon Valley Bank, SunTrust Bank and Stifel Bank & Trust, which we refer to as the Credit Facility, we maintain a revolver, which we refer to as the Revolver, with a maximum borrowing limit of $35 million. Under this Credit Facility, we also have a $40 million term loan, which we refer to as the Term Loan. As of March 15, 2014, the outstanding balance on the Revolver and Term Loan was $32.3 million and $40 million, respectively.

The repayment terms of the Revolver provide for quarterly interest payments, with the principal being due in full in March 2019. The repayment terms for the Term Loan provide for quarterly interest and principal payments, with a maturity date of March 2019.

The interest rate on the Revolver and the Term Loan as of March 15, 2014 was equal to the London Inter-Bank Offered Rate, or LIBOR, plus 4.0%, or 4.23%.

The Credit Facility contains certain financial and operational covenants with which we must comply, whether or not there are any borrowings outstanding. Such covenants include requirements to maintain a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio, each as defined in the Credit Facility, as well as restrictions on certain types of dispositions, mergers and acquisitions, indebtedness, investments, liens and capital expenditures, issuance of capital stock and our ability to pay dividends and make other distributions. We were in compliance with the financial and operational covenants of the Credit Facility as of March 15, 2014. The Credit Facility is secured by a first priority security interest in substantially all of our existing and future assets.

As part of the closing of the Credit Facility, we repaid all outstanding borrowings under our former senior credit facility and former subordinated credit facility, which are described below, and such credit facilities were terminated.

Under our former senior credit facility with Silicon Valley Bank, we maintained (i) an accounts receivable-backed revolver, with a maximum borrowing limit equal to the lesser of $30 million and 80% of eligible accounts receivable, and (ii) an $8.5 million term loan. As of the closing of the Credit Facility, the interest rates on the former revolver and former term loan were 5.25% and 6.50%, respectively. The principal under the former revolver was due in full in September 2015. The maturity date of the former term loan was December 2014.

Under our former subordinated credit facility with Silicon Valley Bank and Silver Lake Waterman Fund, L.P., we maintained a $40 million term loan. The interest rate on the former subordinated credit facility was 14.0%. The maturity date of the former subordinated credit facility was October 2015 with respect to $35 million and November 2016 with respect to $5 million.

Please refer to the notes to our audited consolidated financial statements included elsewhere in this prospectus for further discussion of our current and former credit facilities including related amendments and refinancings.

69


Contractual obligations and commitments

The following table summarizes our principal contractual obligations as of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Payments due by period

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

More than
5 years

 

Long-term debt obligations(1)

 

 

$

 

71,333

   

 

$

 

1,333

   

 

$

 

70,000

   

 

 

   

 

 

 

Operating lease obligations

 

 

 

35,802

   

 

 

3,543

   

 

 

7,176

   

 

$

 

6,753

   

 

$

 

18,330

 

Minimum guarantees under royalty agreements(2)

 

 

 

72,745

   

 

 

15,337

   

 

 

27,301

   

 

 

15,732

   

 

 

14,375

 

Purchase obligations(3)

 

 

 

33,776

   

 

 

15,958

   

 

 

16,300

   

 

 

1,518

   

 

 

 

Total

 

 

$

 

213,656

   

 

$

 

36,171

   

 

$

 

120,777

   

 

$

 

24,003

   

 

$

 

32,705

 

 

 

(1)

 

 

 

Amounts represent outstanding principal obligations under our former credit facilities as of December 31, 2013. In March 2014, we refinanced our credit facilities and repaid all outstanding borrowings under the former credit facilities shown above. Borrowings under the new credit facility of $72.3 million will result in principal and interest payments of $2.8 million in less than 1 year, $12.9 million in 1-3 years, $13.2 million in 3-5 years and $57.3 million in more than 5 years when the credit facility matures in March 2019. For a description of our long-term debt obligations, see “—Long-term debt” above.

 

(2)

 

 

 

Some of the minimum guaranteed payments are subject to reductions if specified performance metrics are not achieved by our partners with respect to the non-operated properties in the Everyday Health portfolio.

 

(3)

 

 

 

Purchase obligations pertain primarily to fees for third-party content, technology and other services.

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 U.S. generally accepted accounting principles, or 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 following reflects our critical accounting policies and our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue recognition and deferred revenue

We generate revenues primarily through advertising and sponsorships, and premium services, including subscriptions, and, to a lesser extent, licensing fees and merchandise sales.

70


We recognize advertising revenues in the period in which the advertisement is delivered. Our revenues from sponsorship services is recognized over the period in which we substantially satisfy our contractual obligations set forth in the relevant 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 our best estimate of selling price. Advertising and sponsorship revenues accounted for 76.5%, 79.4% and 86.6% of total revenues for the years ended December 31, 2011, 2012 and 2013, respectively.

We recognize subscription revenues ratably over the relevant subscription periods, which are predominantly quarterly, after deducting refunds and charge-backs. We typically charge each subscriber’s credit card for the full price for their subscription at the commencement of the subscription period and at each subscription renewal date, unless the consumer cancels the subscription prior to the renewal date. When consumers sign up for free-trial subscriptions, we automatically charge their credit card for a subscription at the end of the free-trial period unless they cancel before the trial period ends. Once billed, the revenue is recognized on a straight line basis, ratably over the subscription period. No revenue is recognized or allocated to the free-trial period.

We generally recognize licensing revenue ratably over the term of the contract. We recognize video production fee revenue as the video content is completed and delivered to the customer.

Deferred revenue consists primarily of (i) subscription fees that we have collected from consumers but for which revenue has not been recognized, and (ii) revenues from advertising and sponsorship services and licensing fees that we have billed in advance of when the revenue is to be earned.

Capitalized software and website development cost

We incur costs to develop software for internal use and for our website applications. In accordance with authoritative accounting guidance, we capitalize costs, consisting principally of payroll and related benefits, third-party consultants and related charges, incurred during the application development stage of a project as well as the costs of content developed for our properties by third-party consultants which is deemed to be reference material in nature and to provide a future economic benefit. Upon completion of a project, the capitalized costs are amortized using the straight-line method over their estimated useful lives, which is typically three years.

Software and website development costs that do not meet the criteria for capitalization are expensed as incurred and are included in product development expenses in the consolidated statements of operations.

Video and television production costs

We incur video and television production costs, including the creation and production of the Everyday Health television series, the Recipe Rehab television series and the Everyday Health YouTube channel. These video and television production costs are stated at the lower of cost, less accumulated amortization, or fair value in the consolidated balance sheets. The amount of capitalized video and television production costs recognized in operating expenses for a given period is determined using the film forecast computation method. Under this method, the amortization of capitalized costs is based on the proportion of the production’s revenues recognized for such period to the production’s estimated remaining ultimate revenues and is included in product development expenses in the consolidated statements of operations.

71


Goodwill

Goodwill resulting from our acquisitions represents the excess cost over fair value of the identifiable net tangible and intangible assets of acquired businesses.

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.

We perform an initial qualitative analysis to evaluate whether any events and circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on this analysis, indicators deem it not more likely than not that the fair value of the reporting unit is less than its carrying amount, no quantitative impairment test is performed. However, if the results determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, a two-step quantitative impairment test is performed.

If and when needed to complete the two-step quantitative assessment, the fair value of goodwill is estimated using a combination of an income approach based on the present value of estimated future cash flows, and a market approach examining transactions in the marketplace involving the sale of stocks of similar but publicly traded companies, or the sale of entire companies engaged in operations similar to ours. As we have one operating segment and one reporting unit, the first step of the impairment test requires a comparison of the fair value of the reporting unit, or business enterprise value as a whole, to the carrying value of our invested capital. If the carrying amount is higher than the fair value, there is indication that an impairment may exist, and a second step must be performed. If the carrying amount is less than the fair value, no indication of impairment exists, and a second step is not performed.

The evaluation of our goodwill annually on October 1 indicated that the carrying value of the asset was less than the fair value and, accordingly, there was no impairment loss recognized for the years ended December 31, 2011, 2012 and 2013.

Other long-lived assets

Our long-lived assets, in addition to goodwill discussed above, consist of property and equipment and intangible assets with definite lives. These intangible assets resulted from our business acquisitions, and consist of trade names, customer relationships and advertising representation agreements with certain of our partners.

The amount assigned to our definite-lived intangible assets is a subjective analysis based on our estimates of the future benefit of these assets using acceptable valuation techniques. The estimated fair values assigned to our trade names and other definite-lived intangible assets are computed based on discounted cash flows using the Relief From Royalty Method and Excess Earnings Method, respectively, which applies various assumptions developed by management, including projected revenues, operating margins, attrition rates, royalty rates and discount rates.

Our property and equipment and definite-lived intangible assets are depreciated and amortized over their estimated useful lives, generally three to five years for property and equipment and three to ten years for definite-lived intangible assets, which are determined based on several factors, primarily the period of time the asset is expected to remain in service and provide benefit to us. We review these definite-lived assets 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 these definite-lived assets during the years

72


ended December 31, 2011 and 2012. During the year ended December 31, 2013, we recorded impairment charges of $1.2 million related to certain website costs included in property and equipment.

Stock-based compensation

We account for stock-based compensation expense in accordance with the current authoritative accounting guidance, under which stock-based awards, including stock options, are measured at fair value as of the grant date and recognized as compensation expense over the requisite service period (generally the vesting period), which we have elected to amortize using the graded attribution method. We use the Black-Scholes option pricing model to estimate the fair value of the stock option awards.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted, for the periods presented:

 

 

 

 

 

 

 

 

   

Year ended
December 31,

 

2011

 

2012

 

2013

 

Volatility

 

 

 

51.20

%

 

 

 

 

49.50

%

 

 

 

 

50.32

%

 

Expected life (years)

 

 

 

6.25

   

 

 

6.25

   

 

 

6.25

 

Risk-free interest rate

 

 

 

1.59

%

 

 

 

 

1.23

%

 

 

 

 

1.54

%

 

Dividend yield

 

 

 

   

 

 

   

 

 

 

 

As there has been no public market for our common stock prior to this offering, and therefore a lack of company-specific historical and implied volatility data, we have determined the share price volatility for options granted based on an analysis of reported data for a peer group of companies that granted options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical realized volatility measures of this peer group of companies for a period of time commensurate with the expected term of the option. We intend to continue to consistently apply this process using the same or similar entities until a sufficient amount of historical information regarding the volatility of our own share price becomes available, or unless circumstances change such that the identified entities are no longer similar to us. In this latter case, more suitable entities whose share prices are publicly available would be utilized in the calculation.

The expected life of options granted has been determined utilizing the simplified method for determining the expected life for options qualifying for treatment due to the limited history we have with option exercise activity. The risk-free interest rate is based on a U.S. Treasury yield curve rate for periods equal to the expected term of the stock options. We have not paid, and do not anticipate paying, cash dividends on our shares of common stock, and the expected dividend yield is, therefore, assumed to be zero.

In addition, forfeitures are estimated at the time of grant, based on our historical forfeiture experience, and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The assumptions used in calculating the fair value of stock-based awards represent our best estimates. These estimates involve inherent uncertainties and the application of management judgment. The assumptions we used in the Black-Scholes pricing model are based on subjective future expectations combined with management judgment. If any of the assumptions used in this pricing model change significantly, stock-based compensation for future awards may differ materially from the awards granted previously. Additionally, the pricing model fair value of the awards is based upon the fair value of our underlying common stock, determined as described below.

73


The following table summarizes our stock option grants to our employees, consultants and non-employee members of our board of directors since January 1, 2012:

 

 

 

 

 

 

 

 

 

 

Grant date

 

Number of
shares subject
to options
granted

 

Exercise price
per share

 

Common stock
fair value per
share at grant
date

 

Intrinsic value per
share at grant
date

 

3/27/2012

 

 

 

1,187,975

   

 

$

 

6.345

   

 

$

 

6.345

   

 

$

 

 

8/28/2012

 

 

 

130,659

   

 

 

8.085

   

 

 

8.085

   

 

 

 

12/10/2012

 

 

 

135,327

   

 

 

9.075

   

 

 

9.075

   

 

 

 

5/8/2013

 

 

 

79,999

   

 

 

8.865

   

 

 

8.865

   

 

 

 

6/11/2013(1)

 

 

 

703,318

   

 

 

8.865

   

 

 

8.865

   

 

 

 

9/17/2013

 

 

 

53,998

   

 

 

9.975

   

 

 

9.975

   

 

 

 

12/10/2013

 

 

 

176,661

   

 

 

11.265

   

 

 

11.265

   

 

 

 

3/13/2014

 

 

 

1,359,601

   

 

 

15.00

   

 

 

15.00

   

 

 

 

 

 

(1)

 

 

 

Of the options granted on June 11, 2013, options to purchase 150,000 shares were performance-based awards where the performance vesting criteria were to be defined at a future date. Of these 150,000 performance-based awards, options to purchase 37,500 shares were granted to Michael Keriakos and the vesting of such options was accelerated in full on December 31, 2013 prior to the performance criteria being defined. The common stock fair value per share of these options to purchase 37,500 shares was $11.265 at December 31, 2013. With respect to the remaining 112,500 performance-based awards, the criteria for future performance were defined in March 2014, and the common stock fair value per share of these options on such date was $15.00. In accordance with GAAP, these awards were not considered granted for accounting purposes until such time that the performance criteria were defined. We began recognizing stock-based compensation expense based on the fair value of the performance-based awards on the date the performance criteria were defined and deemed probable of achievement.

We have historically granted stock options at exercise prices equal to or greater than the fair value as determined by our compensation committee on the date of grant, with input from management. In making this determination, the compensation committee considered a number of factors, including:

 

 

 

 

our financial performance;

 

 

 

 

our acquisitions and debt financings, as well as any material transaction;

 

 

 

 

the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; and

 

 

 

 

general economic and financial conditions, and the trends specific to the markets in which we operate.

In addition, the compensation committee considered the independent valuations completed by a third party valuation consultant performed as of the end of certain calendar quarters. In performing these valuations, the independent valuation consultant typically considered a variety of relevant factors including, but not limited to, the following:

 

 

 

 

the nature and history of our company;

 

 

 

 

the financial and economic conditions affecting the general economy, our company and our industry;

 

 

 

 

our past results, current operations and our future prospects;

 

 

 

 

our earnings capacity and dividend-paying capacity;

 

 

 

 

the economic benefit to us of both our tangible and intangible assets;

 

 

 

 

the market prices of actively traded interests in public entities engaged in the same or similar lines of business to us, as well as sales of ownership interests in entities similar to us;

 

 

 

 

the prices, terms and conditions of past sales of our ownership interests; and

 

 

 

 

the impact on the value of ownership interests in us resulting from the existence of buy-sell and option agreements, investment letter stock restrictions, restrictive shareholders agreements or other such agreements.

74


In valuing our common stock, the independent valuation consultant estimated our firm value by utilizing a blend of the market and income approaches. The market-based approach considers multiples of financial metrics based on trading multiples of a selected peer group of companies in similar lines of business. The income approach estimates value based on the expectation of future cash flows that the company will generate derived from an analysis of our income statement projections provided by management. These future cash flows are then discounted to their present values using a discount rate based on a perpetuity growth model where it is assumed that free cash flows grow into perpetuity at varying declining rates over a set period before stabilizing at a long-term growth rate. Financial statistics from a selected peer group of companies are used to check the reasonableness of the assumptions, as well as to provide guidance in developing our appropriate discount rate. In each valuation approach, the independent valuation consultant allocates the firm value across the capital structure using an option pricing model, which recognizes the economic characteristics of each security and assigns value to each class based on those characteristics. A lack of marketability discount has been applied to the common stock in each valuation in order to recognize the inherent illiquidity in holding stock of a privately held company.

Since 2012, the independent valuation consultant has considered two scenarios for estimating our firm value. The first scenario, which assumes that we will complete an initial public offering, or IPO, utilizes a market-based approach. The second scenario, which assumes that we will remain a private company or experience a liquidation event other than an IPO, utilizes the discounted cash flow method. In estimating the common stock value, the independent consultant has assigned a probability to each of the income and market-based approaches based on an analysis of prevailing IPO market conditions and input from management.

The selected peer group of companies has been consistently used in both the market and income approaches. Since the beginning of 2012, the size of the peer group has remained at four companies. Two of the companies in the peer group were replaced in early 2012 to ensure that the peer group is an appropriate sampling of similar companies as we continue to grow and evolve. The current set of peer group companies has not been modified since early 2012. The changes to the peer group did not have a material impact on the valuation of our common stock for the applicable periods.

A brief narrative of estimated fair value as of the date of each grant, and the related option exercise prices, are set forth below:

March 2012. The independent valuation consultant estimated the fair value of our common stock as of December 31, 2011 to be $6.345 per share. As noted above, the independent valuation consultant utilized two methods for estimating the fair value of our common stock as of December 31, 2011. In connection with the December 31, 2011 valuation, the independent valuation consultant recognized our potential for an IPO in the valuation by assigning it a 50% probability based on an analysis of market trends and input from management. In addition to the probability ratio related to an IPO being completed, the independent valuation consultant also considered internal and external factors in estimating the fair value of our common stock, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the companies in the peer group had experienced share price changes ranging from a loss of approximately 76% to a gain of approximately 25% in the fourth quarter of 2011, while the S&P 500 and Nasdaq indices had experienced increases of approximately 11% and 8%, respectively, in the same period. On March 27, 2012, we granted 1,187,975 options at an exercise price of $6.345 per share. The board of directors and the compensation committee determined that, based in part on the independent valuation as of December 31, 2011, our financial performance and a review of the factors cited above, as well as the fact that there was significant uncertainty in the financial markets, the fair value of our common stock as of March 27, 2012 was $6.345 per share.

August 2012. The independent valuation consultant estimated the fair value of our common stock as of June 30, 2012 to be $8.085 per share. In connection with the June 30, 2012 valuation, the independent valuation consultant assigned a 50% probability to our potential for an IPO based on an analysis of market trends and input from management. In addition to the probability ratio being completed, the independent valuation

75


consultant also considered internal and external factors in estimating the fair value of our common stock as of June 30, 2012, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the peer group had experienced share price changes ranging from a loss of approximately 45% to a gain of approximately 86% during the first half of 2012. As noted above, two of the companies in the peer group were replaced for the June 30, 2012 valuation from the December 31, 2011 valuation to better align the set of peer group companies with the evolving nature of our business. Likewise, the independent valuation consultant noted that the S&P 500 and Nasdaq indices had experienced increases of approximately 8% and 13%, respectively, in the first half of 2012. On August 28, 2012, we granted 130,659 options at an exercise price of $8.085 per share. The compensation committee determined that, based in part on the independent valuation as of June 30, 2012, our financial performance and a review of the factors cited above, as well as the fact that there continued to be significant uncertainty in the financial markets, the fair value of our common stock as of August 28, 2012 was $8.085 per share.

December 2012. The independent valuation consultant estimated the fair value of our common stock as of September 30, 2012 to be $9.075 per share. In connection with the September 30, 2012 valuation, the independent valuation consultant assigned a 50% probability to our potential for an IPO based on an analysis of market trends and input from management. In addition to the probability ratio being completed, the independent valuation consultant also considered internal and external factors in estimating the fair value of our common stock as of September 30, 2012, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the peer group had experienced share price changes ranging from a loss of approximately 32% to a gain of approximately 25% during the third quarter of 2012. Likewise, the independent valuation consultant noted that the S&P 500 and Nasdaq indices had each experienced increases of approximately 6% in the same period. The increase in fair value from $8.085 per share at June 30, 2012 to $9.075 per share at September 30, 2012 also reflected our acquisition of EQAL in September 2012. On December 10, 2012, we granted 135,327 options at an exercise price of $9.075 per share. The compensation committee determined that, based in part on the independent valuation as of September 30, 2012, our financial performance and a review of the factors cited above, as well as the fact that there continued to be significant uncertainty in the financial markets, the fair value of our common stock as of December 10, 2012 was $9.075 per share.

May 2013 and June 2013. The independent valuation consultant estimated the fair value of our common stock as of March 31, 2013 to be $8.865 per share. In connection with the March 31, 2013 valuation, the independent valuation consultant increased the probability for an IPO being completed from 50% to 75% based on an analysis of market trends, including recent IPO activity, and input from management. In addition to determining the probability ratio, the independent valuation consultant also considered internal and external factors in estimating the fair value of our common stock as of March 31, 2013, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the peer group had experienced share price changes ranging from a loss of approximately 21% to a gain of approximately 73% during the fourth quarter of 2012 and the first quarter of 2013, collectively. Likewise, the independent valuation consultant noted that the S&P 500 and Nasdaq indices had experienced increases of approximately 9% and 5%, respectively, in the same period. On May 8, 2013, we issued 79,999 options at an exercise price of $8.865 per share. On June 11, 2013, we granted 703,318 options at an exercise price of $8.865 per share. The board of directors and the compensation committee determined that, based in part on the independent valuation as of March 31, 2013, our financial performance and a review of the factors cited above, as well as the fact that there continued to be significant uncertainty in the financial markets, the fair value of our common stock as of each of May 8, 2013 and June 11, 2013 was $8.865 per share.

September 2013. The independent valuation consultant estimated the fair value of our common stock as of June 30, 2013 to be $9.975 per share. In connection with the June 30, 2013 valuation, the independent valuation consultant assigned a 50% probability to our potential for an IPO based on an analysis of market trends and input from management. In addition to the probability ratio being completed, the independent

76


valuation consultant also considered internal and external factors in estimating the fair value of our common stock as of June 30, 2013, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the peer group had experienced share price changes ranging from a loss of approximately 30% to a gain of approximately 21% during the second quarter of 2013. Likewise, the independent valuation consultant noted that the S&P 500 and Nasdaq indices had experienced increases of approximately 2% and 4%, respectively, in the same period. On September 17, 2013, we granted 53,998 options at an exercise price of $9.975 per share. The compensation committee determined that, based in part on the independent valuation as of June 30, 2013, our financial performance and a review of the factors cited above, as well as the fact that there continued to be significant uncertainty in the financial markets, the fair value of our common stock as of June 30, 2013 was $9.975 per share.

December 2013. The independent valuation consultant estimated the fair value of our common stock as of September 30, 2013 to be $11.265 per share. In connection with the September 30, 2013 valuation, the independent valuation consultant increased the probability for an IPO being completed from 50% to 75% based on input from management. In addition to determining the probability ratio, the independent valuation consultant also considered internal and external factors in estimating the fair value of our common stock as of September 30, 2013, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the peer group had experienced share price changes ranging from a loss of approximately 5% to a gain of approximately 15% during the third quarter of 2013. Likewise, the independent valuation consultant noted that the S&P 500 and Nasdaq indices had experienced increases of approximately 5% and 11%, respectively, in the same period. On December 10, 2013, we granted 176,661 options at an exercise price of $11.265 per share. The compensation committee determined that, based in part on the independent valuation as of September 30, 2013, our financial performance and a review of the factors cited above, as well as the fact that there continued to be significant uncertainty in the financial markets, the fair value of our common stock as of September 30, 2013 was $11.265 per share.

March 2014. The independent valuation consultant estimated the fair value of our common stock as of December 31, 2013 to be $11.31 per share. In connection with the December 31, 2013 valuation, the independent valuation consultant assigned a 75% probability for an IPO based on input from management. In addition to determining the probability ratio, the independent valuation consultant also considered internal and external factors in estimating the fair value of our common stock as of December 31, 2013, including our revenue and Adjusted EBITDA performance relative to budget. The independent valuation consultant noted that the peer group had experienced share price changes ranging from a loss of approximately 9% to a gain of approximately 38% during the fourth quarter of 2013. In arriving at a per share value of $11.31 as of December 31, 2013, the independent valuation consultant estimated the value of our common stock under the IPO scenario to be $14.88 per share (before giving effect to any discount for the lack of marketability or time value of money). On March 13, 2014, we granted 1,359,601 options at an exercise price of $15.00 per share. In establishing the exercise price of these options, our compensation committee estimated the fair value of our common stock as of the grant date to be $15.00 per share, taking into account the increased likelihood of, and shortened expected timeline to, an IPO. Additionally, the compensation committee noted that the $15.00 per share exercise price was consistent with the estimated public offering price range, as set forth on the cover page of our preliminary prospectus dated March 17, 2014.

Determination of Estimated Offering Price. In March 2014, we determined the estimated initial public offering price per share of this offering to be between $13.00 and $15.00 per share. We note that, as is typical in IPOs, the preliminary range was not derived using a formal determination of fair value, but was determined based upon discussions between us and the underwriters. Among the factors considered in setting the estimated price range were prevailing market conditions and estimates of our business potential. In addition to this difference in purpose and methodology, we believe that the difference in value between the midpoint of the estimated price range set forth on the cover page of our preliminary prospectus dated March 17, 2014 and the fair value of our common stock, as estimated by our independent valuation consultant, as of December 31,

77


2013 of $11.31 per share, was primarily the result of the fact that our December 31, 2013 valuation assumed only a 75% probability of an IPO scenario. In addition, the December 31, 2013 valuation included a discount of approximately 6% to reflect the time value of money for the period from the assumed IPO date back to the valuation date, as well as a 10% discount for lack of marketability of our common stock. If we had considered only a single scenario with 100% probability of an IPO and without applying a discount for lack of marketability or the time value of money, the independent valuation as of December 31, 2013 would have been $14.88 per share.

Quantitative and qualitative disclosures about market risk

Interest Rate Risk. Our interest income is primarily generated from interest earned on short-term investments in U.S. Treasury securities and other money market funds. Our exposure to market risks related to interest expense is limited to borrowings under our credit facilities. Based on the $71.3 million of borrowings outstanding under our credit facilities as of December 31, 2013, and the interest rates in effect at that date, our annual interest expense would amount to $7.3 million. A hypothetical interest rate increase of 1% on our credit facilities would increase annual interest expense by $0.7 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.

Recent accounting pronouncements

In 2012, we adopted guidance that provides companies with an option to use a qualitative assessment to test goodwill for impairment. If it is not more likely than not that the fair value of a reporting unit is less than its carrying value, no further assessment of that reporting unit’s goodwill is necessary. If it is more likely than not that the fair value of the reporting unit is less than its carrying value, then the goodwill must be tested using a two-step process based on prior accounting guidance, and if the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the excess is recorded. There are no impairment charges recorded in 2010, 2011 and 2012.

In 2013, we adopted guidance requiring entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety from accumulated other comprehensive income to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendment is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2012. As we do not have other comprehensive income, the adoption of this standard did not have any effect on our consolidated financial statements.

In 2013, authoritative guidance was issued in regards to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment states that an unrecognized tax benefit or a portion of the unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryfoward, a similar tax loss, or a tax credit carryforward. The amendment is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect the adoption of this guidance to have a material impact to its consolidated financial condition, results of operations or cash flows.

78


Emerging growth company status

Section 107 of the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision t