Item
2
. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. All statements other than statements of historical fact are, or may be, forward-looking statements. These forward-looking statements are not historical facts, but rather are based on current expectations, estimate, assumptions and projections about our industry, business and future financial results. We use words such as “anticipates”, “believes”, “suggests”, “targets”, “projects”, “plans”, “expects”, “future”, “intends”, “estimates”, “predicts”, “potential”, “may”, “will”, “should”, “could”, “would”, “likely”, “foresee”, “forecast”, “continue” and other similar words or phrases, as well as statements in the future tense to identify these forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of important factors, including those set forth below.
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ongoing legal challenges to or new state actions against our business model;
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our dependence on our relationships with affiliated professional entities;
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evolving government regulations and our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business;
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our ability to operate in the heavily regulated healthcare industry;
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our history of net losses and accumulated deficit;
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the impact of recent healthcare reform legislation and other changes in the healthcare industry;
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risk of the loss of any of our significant Clients;
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risks associated with a decrease in the number of individuals offered benefits by our Clients or the number of products and services to which they subscribe;
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our ability to establish and maintain strategic relationships with third parties;
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our ability to recruit and retain a network of qualified Providers;
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risk that the insurance we maintain may not fully cover all potential exposures;
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rapid technological change in the telehealth market;
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any statements of belief and any statements of assumptions underlying any of the foregoing;
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other factors disclosed in this Form 10-Q; and
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other factors beyond our control.
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The foregoing list of factors is not exhaustive, and does not necessarily include all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. The information in this Quarterly Report should be read carefully in conjunction with other uncertainties and potential events described in our Form 10-K in the Annual Report for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) and our other filings with the SEC. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this Quarterly Report. Except as required by law or regulation, we do not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances.
Overview
We are the nation’s first and largest telehealth platform, delivering on-demand healthcare anytime, anywhere, via mobile devices, the internet, video and phone. Our solution connects consumers, or our Members, with our over 3,000 board-certified physicians and behavioral health professionals who treat a wide range of conditions and cases from acute diagnoses such as upper respiratory infection, urinary tract infection and sinusitis to dermatological conditions, anxiety and smoking cessation. Over 20 million unique Members now benefit from access to Teladoc 24 hours a day, seven days a week, 365 days a year. Our solution is delivered with a median response time of less than ten minutes from the time a Member requests a telehealth visit to the time they speak with a Teladoc physician. We completed approximately 694,000 telehealth visits in the first six months of 2017 and approximately 952,000 telehealth visits for the full year of 2016. Membership increased by approximately 5.0 million members from June 30, 2016 through June 30, 2017.
The Teladoc solution is transforming the access, cost and quality dynamics of healthcare delivery for all of our market participants. Our Members rely on Teladoc to remotely access affordable, on-demand healthcare whenever and wherever they choose. Employers, health plans and consumers (our “Clients”) purchase our solution to reduce their healthcare spending while at the same time offering convenient, affordable, high-quality healthcare to their employees or beneficiaries. Our network of physicians and other healthcare professionals (our “Providers”) have the ability to generate meaningful income and deliver their services more efficiently with no administrative burden. We believe the value proposition of our solution is evidenced by our overall Member satisfaction rate, which has exceeded 90% over the last eight years. We further believe any consumer, employer or health plan or practitioner interested in a better approach to healthcare is a potential Teladoc Member, Client or Provider.
We generate revenue from our Clients on a contractually recurring, per-Member-per-month, subscription access fee basis, which provides us with significant revenue visibility. In addition, under the majority of our Client contracts, we generate additional revenue on a per-telehealth visit basis, through a visit fee. Subscription access fees are paid by our Clients on behalf of their employees, dependents, beneficiaries or themselves, while visit fees are paid by either Clients or Members. We generated $44.6 million and $26.5 million in revenue for the quarters ended June 30, 2017 and 2016, respectively, representing 68% year-over-year growth and $87.5 million and $53.4 million in revenue for the six months ended June 30, 2017 and 2016, respectively, representing 64% year-over-year growth. We had net losses of $15.4 million and $14.9 million for the quarters ended June 30, 2017 and 2016, respectively and $31.1 million and $30.2 million for the six months ended June 30, 2017 and 2016, respectively. For the quarter ended June 30, 2017, 84% and 16% of our revenue was derived from subscription access fees and visit fees, respectively and for the six months ended June 30, 2017, 82% and 18% of our revenue was derived from subscription access fees and visit fees, respectively. For the quarter ended June 30, 2016, 81% and 19% of our revenue was derived from subscription access fees and visit fees, respectively and for the six months ended June 30, 2016, 79% and 21% of our revenue was derived from subscription access fees and visit fees, respectively.
In January 2017, we successfully closed on our Follow-On Offering in which the Company issued and sold 7,887,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares, at an issuance price of $16.75 per share. We received net proceeds of $123.9 million after deducting underwriting discounts and commissions of $7.6 million as well as other offering expenses of $0.6 million.
Acquisition History
We have scaled and intend to continue to scale our platform through the pursuit of selective acquisitions. We completed multiple acquisitions since our inception, which we believe have expanded our distribution capabilities and broadened our service offering.
On July 14, 2017, the Company acquired Best Doctors, the world’s leading expert medical consultation company focused on improving health outcomes for the most complex, critical and costly medical issues. The purchase price was $440 million consisting of $375 million of cash and 1.9 million shares of Teladoc’s common stock valued at approximately $65 million on July 14, 2017. The Company is in the process of assessing the associated purchase accounting which will be recorded in the Company’s third quarter 2017 financial statements.
On July 1, 2016, we completed our acquisition of HY Holdings, Inc. d/b/a HealthiestYou Corporation, or HealthiestYou, for aggregate consideration of $151.5 million, comprised of $43.2 million of cash and $108.3 million of our common stock (or 6,955,796 shares), net of cash acquired. HealthiestYou is a telehealth consumer engagement
technology platform for the small to mid-sized employer market. Solutions provided by HealthiestYou include 24/7 access to telephone and video conferencing with doctors as well as the convenience of procedure price comparisons, prescription medicine price comparisons, health plan information and benefits eligibility and location information for wellness service providers.
Key Factors Affecting Our Performance
Number of Members.
Our revenue growth rate and long-term profitability are affected by our ability to increase our number of Members because we derive a substantial portion of our revenue from subscription access fees via Client contracts that provide Members access to our professional Provider network in exchange for a contractual based monthly fee. Revenue is driven primarily by the number of Clients, the number of Members in a Client’s population, the number of services contracted for by a Client and the contractually negotiated prices of our services and the negotiated pricing that is specific to that particular Client. We believe that increasing our membership is an integral objective that will provide us with the ability to continually innovate our services and support initiatives that will enhance Member experiences. Membership increased by approximately 5.0 million members from June 30, 2016 through June 30, 2017.
Number of Visits.
We also realize revenue in connection with the completion of a visit for the majority of our contracts. Accordingly, our visit revenue, or visit fees, generally increase as the number of visits increase. Visit fee revenue is driven primarily by the number of Clients, the number of Members in a Client’s population, Member utilization of our Provider network services and the contractually negotiated prices of our services. We believe that increasing our current Member utilization rate is a key objective in order for our Clients to realize tangible healthcare savings with our service. Visits increased by approximately 110,000 for the quarter ended June 30, 2017 compared to the same period in 2016.
Seasonality.
We typically experience the strongest increases in consecutive quarterly revenue during the fourth and first quarters of each year, which coincides with traditional annual benefit enrollment seasons. In particular, as a result of many Clients’ introduction of new services at the very end of the current year, or the start of each year, the majority of our new Client contracts have an effective date of January 1. Additionally, as a result of national seasonal cold and flu trends, we experience our highest level of visit fees during the first and fourth quarters of each year when compared to other quarters of the year. Conversely, the second quarter of the year has historically been the period of lowest utilization of our Provider network services relative to the other quarters of the year. See “Risk Factors—Risks Related to Our Business—Our quarterly results may fluctuate significantly, which could adversely impact the value of our common stock.” included in our Form 10-K for the year ended December 31, 2016 filed with the SEC.
Components of Results of Operations
Revenue
We generate our revenue from our Clients who purchase access to our professional Provider network for their employees, dependents and other beneficiaries. Our Client contracts include a per-Member-per-month subscription access fee as well as a visit fee for each completed visit, which is either paid to us by the Client, the Member or both parties. Accordingly, we generate subscription access revenue from our subscription access fees and visit revenue from our visit fees.
Subscription access revenue accounted for approximately 84% and 81% of our total revenue during the quarters ended June 30, 2017 and 2016, respectively and 82% and 79% of our total revenue during the six months ended June 30, 2017 and 2016, respectively. Subscription access revenue is driven primarily by the number of Clients, the number of Members in a Client’s population, the number of services contracted for by a Client and the contractually negotiated prices of our services. Visit fee revenue is driven primarily by the number of Clients, the number of Members in a Client’s population, Member utilization of our professional Provider network services and the contractually negotiated prices of our services.
We recognize subscription access fees monthly when the following criteria are met: (i) there is an executed subscription agreement, (ii) the Member has access to the service, (iii) collection of the fees is reasonably assured and (iv) the amount of fees to be paid by the Client and Member is fixed and determinable. Our agreements generally have a term of one year. The majority of Clients renew their contracts with us following their first year of services. We generally invoice our Members in advance on a monthly basis. Visit fees are recognized as incurred and billed in arrears.
Warranties and Indemnification
Our arrangements generally include certain provisions for indemnifying Clients against liabilities if there is a breach of a Client’s data or if our service infringes a third party’s intellectual property rights. To date, we have not incurred any material costs as a result of such indemnifications.
We have also agreed to indemnify our directors and executive officers for costs associated with any fees, expenses, judgments, fines and settlement amounts incurred by any of these persons in any action or proceeding to which any of those persons is, or is threatened to be, made a party by reason of the person’s service as a director or officer, including any action by us, arising out of that person’s services as our director or officer or that person’s services provided to any other company or enterprise at our request. We maintain director and officer liability insurance coverage that would generally enable us to recover a portion of any future amounts paid. We may also be subject to indemnification obligations by law with respect to the actions of our employees under certain circumstances and in certain jurisdictions.
Concentrations of Risk and Significant Clients
Our financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents, short-term marketable securities and accounts receivable. Although we deposit our cash with multiple financial institutions, our deposits, at times, may exceed federally insured limits. Our short-term marketable securities are comprised of a portfolio of diverse high credit rating instruments with maturity durations of 1 year or less.
During the quarters and six months ended June 30, 2017 and 2016, substantially all of our revenue was generated by Clients located in the United States. No Client represented over 10% of revenues for the quarters and six months ended June 30, 2017 and 2016.
One client represented 12% and 11% of accounts receivable at June 30, 2017 and December 31, 2016, respectively.
Cost of Revenue
Cost of revenue primarily consists of fees paid to our Providers, costs incurred in connection with our Provider network operations, which include employee-related expenses (including salaries and benefits), costs related to our Provider network operations center activities and insurance, which includes coverage for medical malpractice claims. Cost of revenue is driven primarily by the number of visits completed in each period. Many of the elements of the cost of revenue are relatively variable and semi-variable, and can be reduced in the near-term to offset any decline in our revenue. Our business and operational models are designed to be highly scalable and leverage variable costs to support revenue-generating activities. While we currently expect to continue to enhance our Provider network operations center as well as our sales and technology capabilities and support business growth, we believe our increased investment in automation and integration capabilities and economies of scale in our Provider network operations center operating model, will position us to grow our revenue at a greater rate than our cost of revenue.
Gross Profit
Our gross profit is our total revenue minus our total cost of revenue, and we also express our gross profit as a percentage of our total revenue. Our gross profit has been and will continue to be affected by a number of factors, including the fees we charge our Clients, the number of visits we complete the costs paid to Providers and the costs of our Provider network operations center. We expect our annual gross profit to remain relatively steady over the near term, although our quarterly gross profit is expected to fluctuate from period to period depending on the interplay of these aforementioned factors.
Advertising and Marketing Expenses
Advertising and marketing expenses consist primarily of personnel and related expenses for our marketing staff, including costs of digital advertisements, communications materials that are produced to generate greater awareness and utilization among our Clients and Members. Marketing costs also include third-party independent research, trade shows and brand messages, public relations costs and stock-based compensation for our advertising and marketing employees.
Our advertising and marketing expenses exclude certain allocations of occupancy expense as well as depreciation and amortization.
We expect our advertising and marketing expenses to increase for the foreseeable future as we continue to increase the size of our advertising and marketing operations including member engagement activities and expand into new products and markets. Our advertising and marketing expenses will fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our advertising campaigns and marketing expenses. We will continue to invest in advertising and marketing by promoting our brand through a variety of marketing and public relations activities.
Sales Expenses
Sales expenses consist primarily of employee-related expenses, including salaries, benefits, commissions, employment taxes, travel and stock-based compensation costs for our employees engaged in sales, account management and sales support. Our sales expenses exclude certain allocations of occupancy expense as well as depreciation and amortization. We expect our sales expenses to increase in the short-to-medium-term as we strategically invest to expand our business and to capture an increasing amount of our market opportunity.
Technology and Development Expenses
Technology and development expenses include personnel and related expenses for software engineering, information technology infrastructure, security and compliance and product development. Technology and development expenses also include outsourced software engineering services, the costs of operating our on-demand technology infrastructure and stock-based compensation for our technology and development employees. Our technology and development expenses exclude certain allocations of occupancy expense as well as depreciation and amortization.
We expect our technology and development expenses to increase for the foreseeable future as we continue to invest in the development of our technology platform. Our technology and development expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our technology and development expenses. Historically, the majority of our technology and development costs have been expensed.
Legal and Regulatory Expenses
Legal and regulatory expenses include professional fees incurred. Our legal and regulatory expenses exclude certain allocations of personnel and related expenses, occupancy expense as well as depreciation and amortization.
Acquisition Related Costs
Acquisition related costs include legal, accounting, consultancy and certain non-recurring transaction costs related to mergers and acquisitions.
General and Administrative Expenses
General and administrative expenses include personnel and related expenses of, and professional fees incurred by our executive, finance, product development, business development, operations and human resources departments. They also include stock-based compensation and most of the facilities costs including utilities and facilities maintenance. Our general and administrative expenses exclude any allocation of depreciation and amortization.
We expect our general and administrative expenses to increase for the foreseeable future as we continue to grow our business. However, we expect our general and administrative expenses to decrease as a percentage of our total revenue over the next several years. Our general and administrative expenses may fluctuate as a percentage of our total revenue from period to period due to the seasonality of our total revenue and the timing and extent of our general and administrative expenses.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of fixed assets, amortization of capitalized software development costs and amortization of acquisition-related intangible assets.
Interest Expense, Net
Interest expense, net consists of interest costs associated with our bank and other debt, net of interest earned on short-term marketable securities.
Income Tax Provision
We account for income taxes using the liability method, under which deferred tax assets and liabilities are determined based on the future tax consequences attributable to differences between the financial reporting carrying amounts of existing assets and liabilities and their respective tax bases and tax credit and NOLs. Deferred tax assets and liabilities are measured using the enacted tax rates that are expected to be in effect when the differences are expected to reverse. We assess the likelihood that deferred tax assets will be recovered from future taxable income, and a valuation allowance is established when necessary to reduce deferred tax assets to the amounts more likely than not expected to be realized. We have also recorded deferred tax liabilities arising principally from the difference between the treatment of goodwill between tax and financial accounting book purposes. We have provided a full valuation allowance for our deferred tax assets at June 30, 2017 and December 31, 2016, due to the uncertainty surrounding the future realization of such assets.
Consolidated Results of Operations
The following table sets forth our consolidated statement of operations data for the quarters and six months ended June 30, 2017 and 2016 and the dollar and percentage change between the respective periods:
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Quarters Ended June 30,
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Six Months Ended June 30,
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2017
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2016
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2017
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2016
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$
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$
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Variance
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%(a)
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$
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$
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Variance
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%(a)
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Revenue
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$
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44,591
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$
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26,488
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$
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18,103
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68
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%
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$
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87,489
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$
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53,376
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$
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34,113
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64
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%
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Cost of revenue
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10,026
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6,891
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3,135
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45
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%
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22,165
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14,834
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7,331
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49
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%
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Gross profit
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34,565
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19,597
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14,968
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76
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%
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65,324
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38,542
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26,782
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69
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%
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Operating expenses:
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Advertising and marketing
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12,278
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7,804
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4,474
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57
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%
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24,894
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15,854
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9,040
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57
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%
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Sales
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7,324
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5,860
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1,464
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25
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%
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15,312
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11,130
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4,182
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38
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%
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Technology and development
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7,537
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4,829
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2,708
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56
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%
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14,049
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10,054
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3,995
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40
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%
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Legal
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277
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1,193
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(916)
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-77
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%
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620
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2,315
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(1,695)
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-73
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%
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Regulatory
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987
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772
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215
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28
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%
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1,994
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1,620
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374
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23
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%
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Acquisition related costs
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2,113
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763
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1,350
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177
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%
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2,113
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763
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1,350
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177
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%
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General and administrative
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15,873
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11,280
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4,593
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41
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%
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30,361
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22,917
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7,444
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32
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%
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Depreciation and amortization
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2,668
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1,558
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1,110
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71
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%
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5,275
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3,066
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2,209
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72
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%
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Loss from operations
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(14,492)
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(14,462)
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(30)
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0
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%
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(29,294)
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(29,177)
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(117)
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0
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%
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Interest expense, net
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774
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407
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367
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90
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%
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1,476
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834
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642
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77
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%
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Net loss before taxes
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(15,266)
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(14,869)
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(397)
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3
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%
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(30,770)
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(30,011)
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(759)
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3
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%
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Income tax provision
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149
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10
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139
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1336
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%
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|
299
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|
172
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|
127
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74
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%
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Net loss
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$
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(15,415)
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$
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(14,879)
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$
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(536)
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4
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%
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$
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(31,069)
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$
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(30,183)
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$
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(886)
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3
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%
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EBITDA and Adjusted EBITDA
The following table reconciles net loss to EBTIDA and Adjusted EBITDA for the quarters and six months ended June 30, 2017 and 2016:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2017
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2016
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2017
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2016
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Net loss
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$
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(15,415)
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$
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(14,879)
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$
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(31,069)
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$
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(30,183)
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Add:
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Interest expense, net
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774
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|
407
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1,476
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|
834
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Income tax provision
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149
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10
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299
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|
172
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Depreciation expense
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696
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|
490
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1,354
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|
936
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Amortization expense
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1,972
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|
1,069
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|
|
3,921
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|
2,130
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EBITDA(1)
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(11,824)
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(12,903)
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(24,019)
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(26,111)
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Stock-based compensation
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4,565
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1,633
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|
7,662
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|
|
2,922
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|
Acquisition related costs
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|
|
2,113
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|
|
763
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|
|
2,113
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|
|
763
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|
Adjusted EBITDA(1)
|
|
$
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(5,146)
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|
$
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(10,507)
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|
$
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(14,244)
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$
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(22,426)
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|
|
(1)
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Non-GAAP Financial Measures:
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To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use EBITDA and Adjusted EBITDA, which are non-U.S. GAAP financial measures to clarify and enhance an understanding of past performance. We believe that the presentation of these financial measures enhances an investor’s understanding of our financial performance. We further believe that these financial measures are useful financial metrics to assess our operating performance from period-to-period by excluding certain items that we believe are not representative of our core business. We use certain financial measures for business planning purposes and in measuring our performance relative to that of our competitors. We utilize Adjusted EBITDA as the primary measure of our performance.
EBITDA consists of net loss before interest, taxes, depreciation and amortization. We believe that making such adjustment provides investors meaningful information to understand our results of operations and the ability to analyze financial and business trends on a period-to-period basis.
Adjusted EBITDA consists of net loss before interest, taxes, depreciation, amortization, stock-based compensation and acquisition related costs. We believe that making such adjustment provides investors meaningful information to understand our results of operations and the ability to analyze financial and business trends on a period-to-period basis.
We believe both financial measures are commonly used by investors to evaluate our performance and that of our competitors. However, our use of the term EBITDA and Adjusted EBITDA may vary from that of others in our industry. Neither EBITDA nor Adjusted EBITDA should be considered as an alternative to net loss before taxes, net loss, loss per share or any other performance measures derived in accordance with U.S. GAAP as measures of performance.
EBITDA and Adjusted EBITDA have important limitation as analytical tools and you should not consider them in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
EBTIDA and Adjusted EBITDA:
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·
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does not reflect the significant interest expense on our debt; and
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·
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eliminates the impact of income taxes on our results of operations; and
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·
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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and both measures do not reflect any expenditures for such replacements; and
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·
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does not reflect the significant transaction costs related to mergers and acquisitions; and
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·
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does not reflect the significant non cash stock compensation expense which should be viewed as a component of recurring operating costs; and
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·
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other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting the usefulness of EBITDA and Adjusted EBITDA as comparative measures.
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We compensate for these limitations by using EBITDA and Adjusted EBITDA along with other comparative tools, together with U.S. GAAP measurements, to assist in the evaluation of operating performance. Such U.S. GAAP measurements include gross profit, net loss, net loss per share and other performance measures.
In evaluating these financial measures, you should be aware that in the future we may incur expenses similar to those eliminated in this presentation. Our presentation of EBITDA and Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.
Consolidated Results of Operations Discussion
We completed our acquisition of HealthiestYou on July 1, 2016. The results of operations of HealthiestYou have been included in our unaudited consolidated financial statements included in this Quarterly Report since completion of the acquisition.
Revenue.
Total revenue was $44.6 million for the quarter ended June 30, 2017, compared to $26.5 million during the quarter ended June 30, 2016, an increase of $18.1 million, or 68%. Total revenue was $87.5 million for the six months ended June 30, 2017, compared to $53.4 million during the six months ended June 30, 2016, an increase of $34.1 million, or 64%. The increase in revenue for both periods was substantially driven by an increase in new Clients and the number of new Members generating additional subscription access fees in addition to the acquisition of HealthiestYou. The increase in subscription access fees was due to the addition of new Clients, as the number of Members increased by 33% from June 30, 2016 to June 30, 2017. We completed approximately 309,000 visits, representing $7.1 million of visit fees for the quarter ended June 30, 2017, compared to approximately 199,000 visits, representing $4.9 million of visit fees during the quarter ended June 30, 2016, an increase of $2.2 million, or 44%. We also completed approximately 694,000 visits, representing $15.7 million of visit fees for the six months ended June 30, 2017, compared to approximately 439,000 visits, representing $11.1 million of visit fees during the six months ended June 30, 2016, an increase of $4.6 million, or 41%.
Cost of Revenue.
Cost of revenue was $10.0 million for the quarter ended June 30, 2017 compared to $6.9 million for the quarter ended June 30, 2016, an increase of $3.1 million, or 45%. Cost of revenue was $22.2 million for the six months ended June 30, 2017 compared to $14.8 million for the six months ended June 30, 2016, an increase of $7.4 million, or 49%. The increase in both periods was primarily due to increased telehealth visits resulting in increased provider fees and increased physician network operation center costs.
Gross Profit.
Gross profit was $34.6 million, or 77% as a percentage of revenue, for the quarter ended June 30, 2017 compared to $19.6 million, or 74%, as a percentage of revenue, for the quarter ended June 30, 2016, an increase of $15.0 million, or 76%. Gross profit was $65.3 million, or 75% as a percentage of revenue, for the six months ended June 30, 2017 compared to $38.5 million, or 72%, as a percentage of revenue, for the six months ended June 30, 2016, an increase of $26.8 million, or 69%. The increase in both periods reflects the aforementioned revenue and cost of revenue growth.
Advertising and Marketing Expenses.
Advertising and marketing expenses were $12.3 million for the quarter ended June 30, 2017 compared to $7.8 million for the quarter ended June 30, 2016, an increase of $4.5 million, or 57%. This increase primarily consisted of increased digital advertising, member engagement initiatives, sponsorship of professional organizations and trade shows of $3.7 million, increased staffing of $0.7 million and other expenses of $0.1 million. Advertising and marketing expenses were $24.9 million for the six months ended June 30, 2017 compared to $15.9 million for the six months ended June 30, 2016, an increase of $9.0 million, or 57%. This increase primarily consisted of increased digital advertising, member engagement initiatives, sponsorship of professional organizations and trade shows of $7.5 million, increased staffing of $1.2 million and other expenses of $0.3 million.
Sales Expenses.
Sales expenses were $7.3 million for the quarter ended June 30, 2017 compared to $5.9 million for the quarter ended June 30, 2016, an increase of $1.4 million, or 25%. This increase primarily consisted of increased staffing and sales commissions of $1.4 million and an increase to other sales expenses of $0.1 million. Sales expenses were $15.3 million for the six months ended June 30, 2017 compared to $11.1 million for the six months ended
June 30, 2016, an increase of $4.2 million, or 38%. This increase primarily consisted of increased staffing and sales commissions of $4.0 million and an increase to other sales expenses of $0.2 million.
Technology and Development Expenses.
Technology and development expenses were $7.5 million for the quarter ended June 30, 2017 compared to $4.8 million for the quarter ended June 30, 2016, an increase of $2.7 million, or 56%. This increase resulted primarily from hiring additional personnel totaling $2.1 million and technology and development expense of $0.6 million. Technology and development expenses were $14.1 million for the six months ended June 30, 2017 compared to $10.1 million for the six months ended June 30, 2016, an increase of $4.0 million, or 40%. This increase resulted primarily from hiring additional personnel totaling $3.1 million and technology and development expense of $0.9 million.
Legal Expenses.
Legal expenses were $0.3 million for the quarter ended June 30, 2017 compared to $1.2 million for the quarter ended June 30, 2016, a decrease of $0.9 million, or 77%. Legal expenses were $0.6 million for the six months ended June 30, 2017 compared to $2.3 million for the six months ended June 30, 2016, a decrease of $1.7 million, or 73%. The decrease in both periods resulted primarily from lower legal fees incurred in connection with the Company’s legal actions in Texas.
Regulatory Expenses.
Regulatory expenses were $1.0 million for the quarter ended June 30, 2017 compared to $0.8 million for the quarter ended June 30, 2016, an increase of $0.2 million, or 28%. Regulatory expenses were $2.0 million for the six months ended June 30, 2017 compared to $1.6 million for the six months ended June 30, 2016, an increase of $0.4 million, or 23%. This increase resulted primarily from the increased activities required in connection with the Company’s legal efforts in Texas and certain other states.
Acquisition Related Costs.
Acquisition related costs were $2.1 million for the quarter ended June 30, 2017 compared to $0.8 million for the quarter ended June 30, 2016, an increase of $1.3 million. Acquisition related costs were $2.1 million for the six months ended June 30, 2017 compared to $0.8 million for the six months ended June 30, 2016, an increase of $1.3 million. The increase for both 2017 periods resulted from activities incurred in connection with the July 2017 acquisition of Best Doctors.
General and Administrative Expenses.
General and administrative expenses were $15.9 million for the quarter ended June 30, 2017 compared to $11.3 million for the quarter ended June 30, 2016, an increase of $4.6 million, or 41%. This increase was driven primarily by an increase in employee-related expenses of approximately $2.7 million resulting from growth in total employee headcount to 672 at June 30, 2017 as compared to 577 at June 30, 2016. Other expenses, which include office-related charges and bank charges, increased by $1.9 million for the quarter ended June 30, 2017 as compared to June 30, 2016, to support the growth of our business. General and administrative expenses were $30.4 million for the six months ended June 30, 2017 compared to $22.9 million for the six months ended June 30, 2016, an increase of $7.4 million, or 32%. This increase was driven primarily by an increase in employee-related expenses of approximately $4.9 million resulting from growth in total employee headcount to 672 at June 30, 2017 as compared to 577 at June 30, 2016. Other expenses, which include office-related charges and bank charges, increased by $2.5 million for the six months ended June 30, 2017 as compared to June 30, 2016 to support the growth of our business.
Depreciation and Amortization.
Depreciation and amortization was $2.7 million for the quarter ended June 30, 2017 compared to $1.6 million for the quarter ended June 30, 2016, an increase of $1.1 million, or 71%. Depreciation and amortization was $5.3 million for the six months ended June 30, 2017 compared to $3.1 million for the six months ended June 30, 2016, an increase of $2.2 million, or 72%. The increase in both periods was due to additional amortization expenses primarily related to acquisition-related intangible assets that grew from $21.5 million at June 30, 2016 to $36.8 million at June 30, 2017 and an increase of depreciation expense on an increased base of depreciable fixed assets that grew from $9.1 million at June 30, 2016 to $13.0 million at June 30, 2017.
Interest Expense, Net.
Interest expense, net consists of interest costs associated with our bank and other debt and interest income from short-term marketable securities. Interest expense, net was $0.8 million for the quarter ended June 30, 2017 compared to $0.4 million for the quarter ended June 30, 2016. Interest expense, net was $1.5 million for the six months ended June 30, 2017 compared to $0.8 million for the six months ended June 30, 2016. The increase in net interest expense in both periods reflects higher outstanding debt and costs associated with the July 2016 re-financing.
Liquidity and Capital Resources
The following table presents a summary of our cash flow activity for the periods set forth below:
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Six Months Ended
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June 30,
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2017
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2016
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|
Consolidated Statements of Cash Flows Data
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|
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|
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Net cash used in operating activities
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$
|
(15,421)
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|
$
|
(28,934)
|
|
Net cash (used in) provided by investing activities
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|
|
(16,861)
|
|
|
24,125
|
|
Net cash provided by financing activities
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|
|
391,491
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|
|
5,524
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|
Total
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|
$
|
359,209
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|
$
|
715
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|
Since our inception, we have financed our operations primarily through public and private sales of equity securities, debt issuance and bank borrowings.
In June 2017, the Company issued, at par value, $275 million aggregate principal amount of 3% convertible senior notes due 2022. The 2022 Notes bear cash interest at a rate of 3% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2017. The 2022 Notes will mature on December 15, 2022. The net proceeds to the Company from the offering were $263.7 million after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by the Company.
In January 2017, we received $123.9 million of net cash proceeds associated with the issuance of 7,887,500 shares of common stock in conjunction with our Follow-On Offering, after deducting underwriting discounts and commissions of $7.6 million as well as other offering expenses of $0.6 million.
In July 2015, we received $163.1 million of net cash proceeds associated with the issuance of 9,487,500 shares of common stock in conjunction with our IPO, after deducting underwriting discounts and commissions of $12.6 million as well as other offering expenses of $4.5 million.
Our principal sources of liquidity are cash and cash equivalents totaling $409.2 million as of June 30, 2017. A portion of the cash and cash equivalents was utilized for the July 2017 acquisition of Best Doctors and the payments of SVB indebtedness and the remaining was for working capital purposes. Our cash and cash equivalents are comprised of money market funds and marketable securities.
Cash Used in Operating Activities
For the six months ended June 30, 2017, cash used in operating activities was $15.4 million. The negative cash flows resulted primarily from our net loss of $31.1 million, partially offset by depreciation and amortization of $5.3 million, allowance for doubtful accounts of $0.8 million, stock-based compensation of $7.7 million, deferred income tax of $0.3 million as well as the effect of changes in working capital and other balance sheet accounts resulting in cash outflows of approximately $1.6 million, all of which was used to support the growth of the business.
For the six months ended June 30, 2016, cash used in operating activities was $28.9 million. The negative cash flows resulted primarily from our net loss of $30.2 million, partially offset by depreciation and amortization of $3.1 million, allowance for doubtful accounts of $1.4 million, stock-based compensation of $2.9 million, deferred income tax of $0.2 million as well as the effect of changes in working capital and other balance sheet accounts resulting in cash outflows of approximately $6.3 million, all of which was used to support the growth of the business.
The decrease in cash used in operating activities was primarily the result of increased gross profit resulting from the growth in revenue offset by additional headcount, increased advertising and marketing expenses, costs incurred to improve and optimize our technology platform, increases in our provider network operations center and office-related charges to support the growth of our business.
Cash (Used in) Provided by Investing Activities
Cash used in investing activities was $16.9 million for the six months ended June 30, 2017. Cash used in investing activities consisted of purchases and maturities of short-term marketable securities of $15.3 million, net of sales as well as purchases of property and equipment totaling $1.3 million and investments in internally developed capitalized software of $0.3 million.
Cash provided by investing activities was $24.1 million for the six months ended June 30, 2016. Cash provided by investing activities consisted of maturities and purchases of short-term marketable securities of $25.6 million, net of sales, offset by purchases of property and equipment totaling $0.8 million and investments in internally developed capitalized software of $0.7 million.
Cash Provided by Financing Activities
Cash provided by financing activities for the six months ended June 30, 2017 was $391.5 million. Cash provided by financing activities consisted of $263.7 million of net cash proceeds from the issuance of convertible senior notes, $123.9 million of net cash proceeds from our Follow-Up Offering in January 2017, $4.3 million of proceeds from the exercise of employee stock options, $1.3 million of proceeds from employee stock purchase plan and $0.3 million of tax withholding for options exercised, offset by the repayment of $2.0 million under the Amended and Restated Subordinated Promissory Note.
Cash provided by financing activities for the six months ended June 30, 2016 was $5.5 million. Cash provided by financing activities consisted of proceeds from the exercise of employee stock options of $0.6 million and $5.5 million borrowed under the Revolving Advance Facility, offset by the repayment of $0.6 million under the Amended Term Loan Facility.
Looking Forward
As a result of our January 2017 Follow-On Offering, we received $123.9 million of net cash proceeds. Additionally in June 2017, we issued Convertible Senior Notes with net proceeds of $263.7 million and in July 2017, we entered into New Senior Secured Credit Facilities with net proceeds of $166.8 million. In July 2017, we acquired Best Doctors for approximately $375 million in cash and we paid down the entire SVB Facilities plus other deal related costs amounting to approximately $60 million. We expect cash and cash equivalents to over $150 million at July 31, 2017. Currently, we anticipate negative Adjusted EBITDA results for 2017.
We believe that our existing cash and cash equivalents will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, contract renewal activity, number of visits, the timing and extent of spending to support product development efforts, our expansion of sales and marketing activities, the introduction of new and enhanced service offerings and the continuing market acceptance of telehealth. We may in the future enter into arrangements to acquire or invest in complementary businesses, services and technologies and intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations would be adversely affected.
2016 Shelf Registration Statement
We filed a shelf registration statement on Form S-3 under the Securities Act on September 30, 2016, which was declared effective October 5, 2016, the “ 2016 Shelf”. Under the 2016 Shelf at the time of effectiveness, we had the ability to raise up to $300 million by selling common stock in addition to 2,000,000 shares of common stock eligible for resale by certain existing shareholders.
In January 2017, we successfully closed on our Follow-On Offering in which the Company issued and sold 7,885,500 shares of common stock, including the exercise of an underwriter option to purchase additional shares and 1,600,000 shares offered by certain stockholders of the Company, at an issuance price of $16.75 per share. We received net proceeds of $123.9 million after deducting underwriting discounts and commissions of $7.6 million as well as other offering expenses of $0.6 million.
Indebtedness
In June 2017, the Company issued, at par value, $275 million aggregate principal amount of 3% convertible senior notes due 2022 (the “2022 Notes”). The 2022 Notes bear cash interest at a rate of 3% per year, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2017. The 2022 Notes will mature on December 15, 2022. The net proceeds to the Company from the offering were $263.7 million after deducting offering costs of approximately $11.3 million.
The 2022 Notes are senior unsecured obligations of the Company and rank senior in right of payment to the Company’s indebtedness that is expressly subordinated in right of payment to the 2022 Notes; equal in right of payment to the Company’s liabilities that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the Company’s subsidiaries.
Holders may convert all or any portion of their 2022 Notes in integral multiples of $1,000 principal amount, at their option, at any time prior to the close of business on the business day immediately preceding June 15, 2022 only under the following circumstances:
•
during any calendar quarter commencing after the calendar quarter ending on September 30, 2017 (and only during such calendar quarter), if the last reported sale price of the shares of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
•
during the five business day period after any ten consecutive trading day period (the ‘‘measurement period’’) in which the trading price (as defined in the 2022 Notes Indenture) per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;
•
upon the occurrence of specified corporate events described under the 2022 Notes Indenture; or
•
if the Company calls the 2022 Notes for redemption, at any time until the close of business on the second business day immediately preceding the redemption date as described under the 2022 Notes Indenture.
•
on or after June 15, 2022, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2022 Notes, in integral multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.
The conversion rate for the 2022 Notes was initially, and remains, 22.7247 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $44.00 per share of the Company’s common stock. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s election. If the Company elects (or are deemed to have elected) to satisfy the conversion obligation solely in cash or through payment and delivery, as the case may be, of a combination of cash and shares of the Company’s common stock, the amount of cash and shares of the Company’s common stock, if any, due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 25 trading day observation period (as defined in the 2022 Notes Indenture).
The Company may redeem for cash all or any portion of the 2022 Notes, at its option, on or after December 22, 2020 if the last reported sale price of its common stock exceeds 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading days ending on, and including the trading day immediately preceding the date on which the Company provides notice of the redemption. The redemption price will be the principal amount of the 2022 Notes to be redeemed, plus accrued and unpaid interest, if any. In addition, calling any 2022 Note for redemption on or after December 22, 2020 will constitute a make-whole fundamental change with respect to that 2022 Note, in which case the conversion rate applicable to the conversion of that Note, if it is converted in connection with the redemption, will be increased in certain circumstances as described in the 2022 Notes Indenture.
In accounting for the issuance of the 2022 Notes, the Company separated the 2022 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2022 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the five-year term of the 2022 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2022 Notes is $62.4 million, net of debt issuance costs and is recorded in additional paid-in
capital on the accompanying condensed consolidated balance sheet. 8.1 million shares of common stock are reserved for the 2022 Notes.
The fair value of the 2022 Notes was approximately $290 million as of June 30, 2017. The Company estimates the fair value of its 2022 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2022 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities, which are classified as Level 2 measurements within the fair value hierarchy. See Note 7, “Fair Value Measurements,” for definitions of hierarchy levels. As of June 30, 2017, the remaining contractual life of the 2022 Notes is approximately 5.5 years.
In July 2016, the Company entered into an Amended and Restated Loan and Security Agreement with SVB, that provided for a $25 million Mezzanine Term Loan and a $25 million Line of Credit Facility. The Mezzanine Term Loan carries interest at a rate of 6.25% above the WSJ Prime Rate with a WSJ Prime Rate floor of 3.75% and matures in July 2019. Interest payments are payable monthly in arrears. The Company incurred a $250,000 loan origination fee and will be liable for a final payment fee of $750,000 payable at maturity or upon prepayment of the Mezzanine Term Loan. In connection with entry into the Mezzanine Term Loan, the Company granted two affiliates of SVB warrants to purchase an aggregate of 798,694 shares of common stock of the Company at an exercise price of $13.50 per share. The warrants are immediately exercisable and have a 10-year term. The fair value of the common stock warrants on the date of issue was approximately $7.7 million. The Company also granted SVB a security interest in significantly all of the Company’s assets. The Mezzanine Term Loan has been used to fund the expansion of the Company’s business.
The amended Line of Credit Facility provides for borrowings up to $25 million based on 300% of the Company’s monthly recurring revenue, as defined. In addition, there is an additional $25 million Uncommitted Incremental Facility permitted under the Line of Credit Facility. The Line of Credit Facility carries interest at a rate of 0.50% above the WSJ Prime Rate and matures in July 2019. The Company incurred an initial $75,000 loan origination fee and is responsible for additional $75,000 in annual fees on the anniversary of the Line of Credit Facility. The Company will also be liable for a $50,000 loan arrangement fee if and when the Company utilizes the Uncommitted Incremental Facility.
The Company determined that the original Amended Term Loan Facility and Revolving Advance Facility were modified as part of the refinancing and as a result, less than $0.1 million of previous deferred loan costs will continue to be amortized to interest expense through July 2019.
On July 14, 2017 and concurrent with the consummation of the Best Doctors acquisition, the Company entered into New Senior Secured Credit Facilities with a $10.0 million New Revolving Credit Facility and a $175.0 million New Term Loan Facility.
Effective with the purchase of AmeriDoc in 2014, the Company executed a Subordinated Promissory Note in the amount of $3.5 million payable to the seller of AmeriDoc on April 30, 2015. The Subordinated Promissory Note carried interest at a rate of 10.00% annual interest and is subordinated to the SVB Facilities. In March 2015, the Company, the seller of AmeriDoc and SVB executed an Amended and Restated Subordinated Promissory Note that extended the maturity of the Amended and Restated Subordinated Promissory Note to April 30, 2017. In November 2015, the Company executed the Second Amended and Restated Subordinated Promissory Note with a revised annual interest rate of 7% commencing on January 1, 2016 and extended the maturity of the Second Amended and Restated Subordinated Promissory Note to April 30, 2018 with a seller put option effective on April 30, 2017. The Company repaid $1.0 million during 2016 and the remaining outstanding amount of $2.0 million was paid during the first quarter of 2017.
The Company was in compliance with all debt covenants at June 30, 2017 and December 31, 2016.
Contractual Obligations and Commitments
The following summarizes our contractual obligations as of June 30, 2017:
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Payment Due by Period
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Less than
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1 to 3
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4 to 5
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More than
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Total
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1 Year
|
|
Years
|
|
Years
|
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5 Years
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|
Operating leases
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$
|
12,768
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|
$
|
2,314
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|
$
|
3,382
|
|
$
|
3,188
|
|
$
|
3,884
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|
Obligations under SVB Facilities
|
|
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42,490
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|
|
—
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|
|
42,490
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|
|
—
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|
|
—
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|
Interest associated with SVB Facilities
|
|
|
7,016
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|
|
3,456
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|
|
3,560
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—
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—
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Total
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|
$
|
62,274
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|
$
|
5,770
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|
$
|
49,432
|
|
$
|
3,188
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|
$
|
3,884
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|
Our existing office and hosting co-location facilities lease agreements provide us with the option to renew and generally provide for rental payments on a graduated basis. Our future operating lease obligations would change if we entered into additional operating lease agreements as we expand our operations and if we exercised the office and hosting co-location facilities lease options. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used, fixed, minimum or variable price provisions and the approximate timing of the transaction. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market or credit risk that could arise if we had engaged in those types of relationships.
Item 3. Quantitative and Qualitative Disclosures About Market Ris
k
Interest Rate Risk
We have floating rate debt with our Term Loan facility and Revolving Advance facility, and cash equivalents that are subject to interest rate volatility, which is our principal market risk. A 25 basis point change in the weighted average interest rate relating to the Term Loan facility and Revolving Advance facility as of June 30, 2017, which are subject to variable interest rates based on the prime rate, would yield a change of approximately $106,000 in annual interest expense. We do not expect cash flows to be affected to any significant degree by a sudden change in market interest rates.
Item 4. Controls and Procedure
s
Management’s Report on Internal Control over Financial Reporting
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2017.
No changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.