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EX-32.2 - EX-32.2 - LEAF GROUP LTD.dmd-20160930ex32251bb72.htm
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EX-31.2 - EX-31.2 - LEAF GROUP LTD.dmd-20160930ex3125c53ee.htm
EX-31.1 - EX-31.1 - LEAF GROUP LTD.dmd-20160930ex311fe4690.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

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

 

For the quarterly period ended September 30, 2016

 

OR

 

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

 

For the transition period from                    to                    

 

Commission file number 001-35048

 


 

DEMAND MEDIA, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

 

Delaware

 

20-4731239

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

1655 26th Street
Santa Monica, CA

 

90404

(Address of principal executive offices)

 

(Zip Code)

 

(310) 656-6253

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company’ in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

☐  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

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

As of October 31, 2016, there were 19,761,455 shares of the registrant’s common stock, $0.0001 par value, outstanding.

 

 

 


 

DEMAND MEDIA, INC.

INDEX TO FORM 10-Q

 

 

 

 

 

 

 

  

 

  

Page

Part I 

Financial Information

  

 

 

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

  

 

 

  

Condensed Consolidated Balance Sheets

  

 

 

  

Condensed Consolidated Statements of Operations

  

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss)

  

 

 

  

Condensed Consolidated Statements of Stockholders’ Equity

  

 

 

  

Condensed Consolidated Statements of Cash Flows

  

 

 

  

Notes to the Condensed Consolidated Financial Statements

  

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

18 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

33 

 

Item 4.

  

Controls and Procedures

  

34 

 

 

 

 

Part II 

Other Information

 

 

 

Item 1.

  

Legal Proceedings

  

35 

 

Item 1A.

  

Risk Factors

  

35 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

35 

 

Item 3.

  

Defaults Upon Senior Securities

  

36 

 

Item 4.

  

Mine Safety Disclosures

  

36 

 

Item 5.

  

Other Information

  

36 

 

Item 6.

  

Exhibits

  

36 

 

 

  

Signatures

  

37 

 

 

 

2


 

Part I.       FINANCIAL INFORMATION

 

Item 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

Demand Media, Inc. and Subsidiaries 

Condensed Consolidated Balance Sheets  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,692

 

$

38,570

 

Accounts receivable, net

 

 

7,206

 

 

10,469

 

Prepaid expenses and other current assets

 

 

8,180

 

 

4,989

 

Total current assets

 

 

67,078

 

 

54,028

 

Property and equipment, net

 

 

11,929

 

 

14,568

 

Intangible assets, net

 

 

12,970

 

 

21,332

 

Goodwill

 

 

11,180

 

 

10,358

 

Other assets

 

 

1,043

 

 

1,173

 

Total assets

 

$

104,200

 

$

101,459

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

1,496

 

$

1,973

 

Accrued expenses and other current liabilities

 

 

12,397

 

 

15,169

 

Deferred revenue

 

 

3,034

 

 

2,933

 

Total current liabilities

 

 

16,927

 

 

20,075

 

Deferred tax liability

 

 

123

 

 

551

 

Other liabilities

 

 

1,781

 

 

1,713

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 21,309 issued and 19,890 shares outstanding at September 30, 2016 and 20,956 issued and 20,154 shares outstanding at December 31, 2015

 

 

2

 

 

2

 

Additional paid-in capital

 

 

511,157

 

 

505,603

 

Accumulated other comprehensive loss

 

 

(90)

 

 

(91)

 

Treasury stock at cost, 1,419 at September 30, 2016 and 802 at December 31, 2015

 

 

(34,282)

 

 

(30,767)

 

Accumulated deficit

 

 

(391,418)

 

 

(395,627)

 

Total stockholders’ equity

 

 

85,369

 

 

79,120

 

Total liabilities and stockholders’ equity

 

$

104,200

 

$

101,459

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

Demand Media, Inc. and Subsidiaries 

Condensed Consolidated Statements of Operations  

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenue

 

$

12,688

 

$

16,755

 

$

39,623

 

$

60,047

 

Product revenue

 

 

15,371

 

 

11,750

 

 

39,840

 

 

31,436

 

Total revenue

 

 

28,059

 

 

28,505

 

 

79,463

 

 

91,483

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service costs (exclusive of amortization of intangible assets shown separately below)

 

 

5,370

 

 

9,597

 

 

19,887

 

 

29,296

 

Product costs

 

 

9,791

 

 

7,638

 

 

26,588

 

 

21,240

 

Sales and marketing

 

 

6,031

 

 

5,602

 

 

19,610

 

 

15,343

 

Product development

 

 

4,652

 

 

6,936

 

 

15,614

 

 

20,543

 

General and administrative

 

 

7,498

 

 

9,258

 

 

23,450

 

 

27,841

 

Amortization of intangible assets

 

 

3,100

 

 

3,441

 

 

9,246

 

 

15,377

 

Total operating expenses

 

 

36,442

 

 

42,472

 

 

114,395

 

 

129,640

 

Loss from operations

 

 

(8,383)

 

 

(13,967)

 

 

(34,932)

 

 

(38,157)

 

Interest income

 

 

35

 

 

 —

 

 

60

 

 

359

 

Interest expense

 

 

(2)

 

 

(3)

 

 

(2)

 

 

(143)

 

Other (expense) income, net

 

 

(31)

 

 

178

 

 

39,131

 

 

3,024

 

(Loss) income before income taxes

 

 

(8,381)

 

 

(13,792)

 

 

4,257

 

 

(34,917)

 

Income tax benefit (expense)

 

 

32

 

 

(13)

 

 

(48)

 

 

(45)

 

Net (loss) income

 

$

(8,349)

 

$

(13,805)

 

$

4,209

 

$

(34,962)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.41)

 

$

(0.69)

 

$

0.21

 

$

(1.76)

 

Diluted

 

$

(0.41)

 

$

(0.69)

 

$

0.21

 

$

(1.76)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,236

 

 

20,021

 

 

20,279

 

 

19,879

 

Diluted

 

 

20,236

 

 

20,021

 

 

20,511

 

 

19,879

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

Demand Media, Inc. and Subsidiaries 

Condensed Consolidated Statements of Comprehensive Income (Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2016

    

2015

    

2016

    

2015

Net income (loss)

 

$

(8,349)

 

$

(13,805)

 

$

4,209

 

$

(34,962)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

3

 

 

11

 

 

1

 

 

2

Comprehensive income (loss)

 

$

(8,346)

 

$

(13,794)

 

$

4,210

 

$

(34,960)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


 

Demand Media, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

paid-in

 

 

 

 

comprehensive

 

 

 

 

Total

 

 

 

Common stock

 

capital

 

Treasury

 

income

 

Accumulated

 

stockholders’

 

 

    

Shares

    

Amount

    

amount

    

Stock

    

(loss)

    

deficit

    

equity

 

Balance at December 31, 2015

 

20,154

 

$

2

 

$

505,603

 

$

(30,767)

 

$

(91)

 

$

(395,627)

 

$

79,120

 

Issuance of stock under employee stock awards and other

 

354

 

 

 —

 

 

226

 

 

 —

 

 

 —

 

 

 —

 

 

226

 

Repurchases of common stock to be held in treasury

 

(618)

 

 

 —

 

 

 —

 

 

(3,515)

 

 

 —

 

 

 —

 

 

(3,515)

 

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(1,132)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,132)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

6,460

 

 

 —

 

 

 —

 

 

 —

 

 

6,460

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1

 

 

 —

 

 

1

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,209

 

 

4,209

 

Balance at September 30, 2016

 

19,890

 

$

2

 

$

511,157

 

$

(34,282)

 

$

(90)

 

$

(391,418)

 

$

85,369

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


 

Demand Media, Inc. and Subsidiaries 

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2016

    

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

4,209

 

$

(34,962)

 

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

15,035

 

 

24,364

 

Deferred income taxes

 

 

(33)

 

 

 —

 

Stock-based compensation

 

 

6,118

 

 

5,683

 

Gain on disposal of businesses and online properties

 

 

(39,149)

 

 

(3,105)

 

Other

 

 

10

 

 

(76)

 

Change in operating assets and liabilities, net of effect of acquisitions and disposals:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

3,231

 

 

4,712

 

Prepaid expenses and other current assets

 

 

(180)

 

 

550

 

Other long-term assets

 

 

48

 

 

(140)

 

Accounts payable

 

 

(372)

 

 

(3,572)

 

Accrued expenses and other liabilities

 

 

(2,730)

 

 

(3,367)

 

Deferred revenue

 

 

335

 

 

164

 

Net cash used in operating activities

 

 

(13,478)

 

 

(9,749)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,743)

 

 

(3,590)

 

Purchases of intangible assets

 

 

(120)

 

 

(64)

 

Cash received from disposal of businesses and online properties, net of cash disposed

 

 

36,100

 

 

4,766

 

Cash received from early repayment of promissory note

 

 

 —

 

 

5,100

 

Cash received from disposition holdback

 

 

 —

 

 

998

 

Cash paid for acquisitions, net of cash acquired

 

 

(1,413)

 

 

(58)

 

Restricted deposits

 

 

136

 

 

671

 

Other

 

 

78

 

 

76

 

Net cash provided by investing activities

 

 

31,038

 

 

7,899

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from exercises of stock options and purchases under ESPP

 

 

226

 

 

215

 

Repurchases of common stock

 

 

(3,515)

 

 

 —

 

Net taxes paid on restricted stock units and options exercised

 

 

(1,132)

 

 

(563)

 

Cash paid for acquisition holdback

 

 

 —

 

 

(7,561)

 

Other

 

 

(15)

 

 

(121)

 

Net cash used in financing activities

 

 

(4,436)

 

 

(8,030)

 

Effect of foreign currency on cash and cash equivalents

 

 

(2)

 

 

2

 

Change in cash and cash equivalents

 

 

13,122

 

 

(9,878)

 

Cash and cash equivalents, beginning of period

 

 

38,570

 

 

47,820

 

Cash and cash equivalents, end of period

 

$

51,692

 

$

37,942

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


 

Demand Media, Inc. and Subsidiaries 

Notes to Condensed Consolidated Financial Statements  

(Unaudited)

1. Company Background and Overview

Demand Media, Inc. (“Demand Media” and, together with its consolidated subsidiaries, the “Company,” “our,” “we,” or “us”) is a Delaware corporation headquartered in Santa Monica, California. We are a diversified Internet company that builds platforms across our marketplaces and media properties to enable communities of creators to reach passionate audiences in large and growing lifestyle categories. Our business is comprised of two service offerings: Marketplaces and Content & Media.  

Marketplaces

Through our Marketplaces service offering, we operate two leading art and design marketplaces where large communities of artists can market and sell their original artwork or their original designs printed on a wide variety of products. Society6.com (“Society6”) provides artists with an online commerce platform to feature and sell their original designs on an array of consumer and home décor products such as art prints, phone and tablet cases, t-shirts, and throw pillows. SaatchiArt.com (“Saatchi Art”) is an online art gallery featuring a wide selection of original paintings, drawings, sculptures and photography that provides a global community of artists with a curated environment in which to exhibit and sell their work directly to consumers around the world. In addition, our Marketplaces service offering includes The Other Art Fair, a leading London-based art fair for discovering emerging artists that we acquired in July 2016.

Content & Media

Our Content & Media service offering includes our leading owned and operated online properties that publish media content, including text articles, videos, photographs and designed visual formats. This content is published across several key categories on Livestrong.com, a health and healthy living destination; eHow, a do-it-yourself reference destination; and certain other online properties focused on specific categories or interests. During the third quarter of 2016, we launched several category-specific properties utilizing topics and content from eHow, while eHow.com continues to focus on do-it-yourself and home content.  Our Content & Media service offering also includes our content publishing studio, through which we create content for third-party publishers and brands.

2. Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of September 30, 2016, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) for the three and nine month periods ended September 30, 2016 and 2015, the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2016 and 2015 and the condensed consolidated statement of stockholders’ equity for the nine month period ended September 30, 2016 are unaudited.

In the opinion of management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our statement of financial position as of September 30, 2016, our results of operations for the three and nine month periods ended September 30, 2016 and 2015, and our cash flows for the nine month periods ended September 30, 2016 and 2015. The results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2015 has been derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States, for interim financial information and with the instructions from the U.S. Securities and Exchange Commission (“SEC”) for Quarterly Reports on Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

 

During the first quarter of 2016, we reclassified certain personnel costs, including stock-based compensation, primarily relating to individuals serving in management roles for specific businesses, from general and administrative expense to either service costs, sales and marketing or product development, to better reflect the respective functions of these individuals. Certain prior period amounts have been

8


 

reclassified to conform to the current period presentation, resulting in the following changes in our condensed consolidated statement of operations for the three and nine month periods ended September 30, 2015, respectively: (i) decreases of $0.6 million and $2.4 million in general and administrative expense; (ii) increases of $0.4 million and $1.6 million in product development expense; (iii) increases of $0.2 million and $0.5 million in sales and marketing expense; and (iv) increases of less than $0.1 million and $0.2 million in service costs.

 

During the three months ended September 30, 2015, we identified through our internal processes that our property and equipment, net was overstated because certain capitalized internally developed software costs had not been placed into service and certain write offs were not identified on a timely basis. The adjustment is not considered material to our consolidated financial statements. As such, during the three months ended September 30, 2015, we recorded an out of period adjustment which increased depreciation by $0.6 million, decreased “Other income, net” by $0.5 million and decreased “Property and equipment, net” by $1.1 million. The condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2015, the condensed consolidated balance sheet as of September 30, 2015 and the condensed consolidated statement of cash flows for the nine months ended September 30, 2015 reflect the above adjustments.

Principles of Consolidation

The consolidated financial statements include the accounts of Demand Media and its wholly owned subsidiaries. Acquisitions are included in our consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates and assumptions include revenue; allowance for doubtful accounts; the assigned value of acquired assets and assumed liabilities in business combinations; useful lives and impairment of property and equipment, intangible assets, goodwill and other assets; the fair value of equity-based compensation awards; and deferred income tax assets and liabilities. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of our assets and liabilities.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Further, the guidance requires improved disclosures to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. The original effective date for ASU 2014-09 would have required the Company to adopt this standard beginning in the first quarter of fiscal 2017. In July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on the consolidated financial statements and expects to adopt this standard in the first quarter of fiscal 2018 using the modified retrospective method with the cumulative effect recognized as of the date of adoption.

In September 2015, the FASB issued ASU 2015-16, Business Combinations: Simplifying the Accounting Measurement-Period Adjustments. This update simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. Under this update, the adjustments are recognized in the reporting period in which the adjustment amounts are determined. This update is effective for the Company commencing in the first quarter of fiscal 2016 and should be applied prospectively. The Company adopted the standard effective January 1, 2016, and there has been no impact to the consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This amended guidance requires an entity to present deferred tax assets and liabilities as noncurrent in the statement of financial position. The amended guidance is effective for the Company commencing in the first quarter of fiscal 2018. Early adoption is permitted

9


 

and the guidance may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. The Company elected to prospectively adopt the standard effective January 1, 2016 and believes the application of the guidance simplifies and improves the usefulness of deferred tax information for users of the Company’s financial statements. No prior periods were retrospectively adjusted.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This update will require lease assets and lease liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements. This guidance is effective for the Company commencing in the first quarter of fiscal 2019 and must be adopted using a modified retrospective transition, and provides for certain practical expedients. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718 related to the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for the Company commencing in the first quarter of fiscal 2017. Early adoption is permitted. The Company is currently evaluating the impact of this standard on the consolidated financial statements.

3. Property and Equipment

Property and equipment consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2016

 

2015

 

Computers and other related equipment

 

$

8,834

 

$

16,588

 

Purchased and internally developed software

 

 

26,903

 

 

34,868

 

Furniture and fixtures

 

 

1,467

 

 

1,423

 

Leasehold improvements

 

 

6,704

 

 

7,296

 

 

 

 

43,908

 

 

60,175

 

Less accumulated depreciation

 

 

(31,979)

 

 

(45,607)

 

Property and equipment, net

 

$

11,929

 

$

14,568

 

 

Depreciation and software amortization expense, which includes losses on disposal of property and equipment of less than $0.1 million and $1.1 million for the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $1.7 million for the nine months ended September 30, 2016 and 2015, respectively, is shown by classification below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Service costs

 

$

603

 

$

2,041

 

$

2,931

 

$

4,663

 

Sales and marketing

 

 

12

 

 

15

 

 

38

 

 

52

 

Product development

 

 

32

 

 

47

 

 

105

 

 

154

 

General and administrative

 

 

700

 

 

1,611

 

 

2,715

 

 

4,118

 

Total depreciation

 

$

1,347

 

$

3,714

 

$

5,789

 

$

8,987

 

 

 

 

 

4. Goodwill and Intangible Assets

The following table presents the changes in our goodwill balance (in thousands):

 

 

 

 

 

 

Balance at December 31, 2015

    

$

10,358

 

Acquisitions

 

 

822

 

Balance at September 30, 2016

 

$

11,180

 

10


 

The change in goodwill in 2016 is attributable to the acquisition of Other Art Fairs Ltd, which operates as The Other Art Fair, in July 2016.  See Note 11 for additional information. Goodwill is tested at the reporting unit level and as of September 30, 2016, we have two reporting units: marketplaces and content and media. As of September 30, 2016, our goodwill balance related entirely to our marketplaces reporting unit.

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

 

amount

 

amortization

 

amount

 

Customer relationships

 

$

1,628

 

$

(1,347)

 

$

281

 

Artist relationships

 

 

11,927

 

 

(10,278)

 

 

1,649

 

Media content

 

 

93,655

 

 

(88,553)

 

 

5,102

 

Technology

 

 

5,854

 

 

(3,603)

 

 

2,251

 

Non-compete agreements

 

 

25

 

 

(9)

 

 

16

 

Trade names

 

 

7,691

 

 

(4,020)

 

 

3,671

 

 

 

$

120,780

 

$

(107,810)

 

$

12,970

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

 

amount

 

amortization

 

amount

 

Customer relationships

 

$

1,628

 

$

(1,107)

 

$

521

 

Artist relationships

 

 

11,719

 

 

(8,340)

 

 

3,379

 

Media content

 

 

95,785

 

 

(85,018)

 

 

10,767

 

Technology

 

 

5,854

 

 

(2,842)

 

 

3,012

 

Non-compete agreements

 

 

217

 

 

(160)

 

 

57

 

Trade names

 

 

7,150

 

 

(3,554)

 

 

3,596

 

 

 

$

122,353

 

$

(101,021)

 

$

21,332

 

 

Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives commencing on the date that the asset is available for its intended use.

Total amortization expense for the periods shown below includes (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

 

Service costs

 

$

2,424

 

$

1,969

 

$

5,910

 

$

10,683

 

Sales and marketing

 

 

281

 

 

949

 

 

2,178

 

 

2,914

 

Product development

 

 

247

 

 

246

 

 

740

 

 

1,193

 

General and administrative

 

 

148

 

 

277

 

 

418

 

 

587

 

Total amortization

 

$

3,100

 

$

3,441

 

$

9,246

 

$

15,377

 

Service costs include accelerated amortization charges of $1.2 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively, and $1.7 million and $3.3 million for the nine months ended September 30, 2016 and 2015, respectively, as a result of removing certain assets from service.

5. Other Assets

 

As of September 30, 2016, prepaid expenses and other current assets include $3.9 million in cash from the sale of our Cracked business that was placed into escrow to secure certain of our post-closing indemnification obligations. Any remaining portion of the escrow amount that is not subject to then-pending claims will be paid to us in July 2017, on the 15-month anniversary of the closing date of the sale. As of September 30, 2016, we had $1.0  million of cash included in long-term assets, collateralizing a standby letter of credit associated with the lease of our headquarters office.

11


 

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

 

2015

 

Accrued payroll and related items

 

$

4,205

 

$

5,916

 

Artist payables

 

 

2,805

 

 

2,816

 

Other

 

 

5,387

 

 

6,437

 

Accrued expenses and other current liabilities

 

$

12,397

 

$

15,169

 

 

 

During the nine months ended September 30, 2016, we recognized severance costs of $1.7 million in connection with targeted headcount reductions, primarily as a result of actions taken in June 2016 to streamline our content publishing studio (formerly known as our studioD business) and better integrate this business into our broader Content & Media service offering. These severance costs were recognized in the condensed consolidated statements of operations as follows: $0.7 million in sales and marketing costs, $0.6 million in product development costs, $0.3 million in service costs, and $0.1 million in general and administrative costs. Severance amounts related to these actions were fully paid as of September 30, 2016. 

 

Changes to the severance accrual during the nine months ended September 30, 2016 are as follows (in thousands):

 

 

 

 

 

Balance at December 31, 2015

 

$

485

New charges

 

 

1,690

Cash payments

 

 

(2,175)

Balance at September 30, 2016

 

$

 —

 

7. Commitments and Contingencies

Leases

We conduct our operations utilizing leased office facilities in various locations under operating leases, and as of September 30, 2016, these leases have non-cancelable periods ending between February 2018 and February 2020.  

Litigation

 

From time to time, we are a party to various legal matters incidental to the conduct of our business. Certain of our outstanding legal matters include speculative claims for indeterminate amounts of damages. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. Based on our current knowledge, we do not believe that there is a reasonable possibility that the final outcome of the pending or threatened legal proceedings to which we are a party, either individually or in the aggregate, will have a material adverse effect on our future financial results. However, the outcome of such legal matters is subject to significant uncertainties. 

Taxes

From time to time, various federal, state and other jurisdictional tax authorities undertake a  review of us or our filings. In evaluating the exposure associated with various tax filing positions, we accrue charges for possible exposures.

Indemnification

In the normal course of business, we have provided certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions or contractual commitments. These indemnities include intellectual property indemnities to our customers, indemnities to our directors and officers to the maximum extent permitted under the laws of Delaware, indemnifications related to our lease agreements and indemnifications to sellers or buyers in connection with acquisitions and dispositions, respectively. In addition, our advertiser, content creation and distribution partner agreements contain certain indemnification provisions, which are generally consistent with those prevalent in our industry. We have not incurred significant obligations under indemnification provisions historically, and do not expect to incur significant obligations in the future. Accordingly, we have not recorded any liability for these indemnities.  

12


 

8. Income Taxes

Income tax expense for each of the nine month periods ended September 30, 2016 and 2015 was less than $0.1 million.

Our effective tax rate differs from the statutory rate primarily as a result of state taxes, foreign taxes, nondeductible stock option expenses and changes in our valuation allowance. As a result of the sale of the Cracked business, we recognized a book income of $38.1 million, recorded in other income, net, which offsets our current year-to-date operating losses. We expect to utilize our existing federal and state net operating losses, as well as alternative minimum tax losses carryforwards, to offset taxable income, if any. If all or a portion of our net operating loss carryforwards are subject to limitation because it is determined that we had previously experienced an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended, our future cash flows could be adversely impacted due to increased tax liability.

We reduce our deferred tax assets resulting from future tax benefits by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of these deferred taxes will not be realized. The timing of the reversal of deferred tax liabilities associated with tax deductible goodwill is not certain and thus not available to assure the realization of deferred tax assets. Due to the limitation associated with deferred tax liabilities from tax deductible goodwill, we have deferred tax assets in excess of deferred tax liabilities before application of a valuation allowance for the periods presented. As we have insufficient history of generating income, the ultimate future realization of these excess deferred tax assets is not more likely than not and is thus subject to a valuation allowance. Accordingly, we have established a full valuation allowance against our deferred tax assets.

We are subject to the accounting guidance for uncertain income tax positions. We believe it is more likely than not that our income tax positions and deductions will be sustained on audit and do not anticipate any adjustments which could result in a material adverse effect on our financial condition, results of operations, or cash flow.

Our policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a component of income tax expense, and amounts recognized to date are not material. There are no material uncertain tax positions and no uncertain income tax positions were recorded during the nine months ended September  30, 2016 or 2015, and we do not expect our uncertain tax position to change materially during the next twelve months.

We file tax returns in the United States, at both the federal and state level, and in several foreign jurisdictions. The tax years 2008 to 2015 remain subject to examination by the Internal Revenue Service and most tax years since our incorporation are subject to examination by various state authorities.

9. Stock-based Compensation Plans and Awards

Stock-based Compensation Expense

Stock-based compensation expense related to all employee and non-employee stock-based awards recognized in the condensed consolidated statements of operations was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2016

    

2015 (1)

    

2016

    

2015 (1)

 

Service costs

 

$

142

 

$

182

 

$

1,054

 

$

806

 

Sales and marketing

 

 

145

 

 

159

 

 

586

 

 

511

 

Product development

 

 

290

 

 

397

 

 

1,206

 

 

1,576

 

General and administrative

 

 

1,103

 

 

821

 

 

3,272

 

 

2,790

 

Total stock-based compensation

 

$

1,680

 

$

1,559

 

$

6,118

 

$

5,683

 


(1)

Certain 2015 personnel costs, including stock-based compensation, were reclassified out of general and administrative to service costs, sales and marketing and product development to conform to 2016 presentation. See Note 2 for additional information.

During the nine months ended September 30, 2016, we accelerated the vesting of certain stock awards in connection with the sale of our Cracked business, resulting in approximately $0.8 million in stock-based compensation expense.

13


 

Award Activity

Stock Options

Stock option activity is as follows (in thousands):

 

 

 

 

 

 

Number of

 

 

    

options

 

 

 

outstanding

 

Outstanding at December 31, 2015

 

3,199

 

Options granted

 

253

 

Options exercised

 

(50)

 

Options forfeited or cancelled

 

(520)

 

Outstanding at September 30, 2016

 

2,882

 

Restricted Stock Units

Restricted stock unit activity is as follows (in thousands):

 

 

 

 

 

 

Number of

 

 

    

shares

 

Unvested at December 31, 2015

 

977

 

Granted

 

1,885

 

Vested

 

(509)

 

Forfeited

 

(356)

 

Unvested at September 30, 2016

 

1,997

 

Employee Stock Purchase Plan

 

In May 2011, we commenced our first offering under the Employee Stock Purchase Plan (“ESPP”), which allows eligible employees to purchase, through payroll deductions, a limited amount of our common stock at a 15% discount to the lower of market price as of the beginning or ending of each six-month purchase period. Participants can authorize payroll deductions for amounts up to the lesser of 15% of their qualifying wages or the statutory limit under the U.S. Internal Revenue Code. We previously suspended the ESPP after the November 2015 purchase after considering the benefits and participation rates in the ESPP. We restarted offerings under the ESPP in May 2016. The ESPP currently provides for a 12-month offering period which is comprised of two consecutive six-month purchase periods, one from May to November and the other from November to May. A maximum of 500 shares of common stock may be purchased by each participant during each six-month purchase period. The fair value of the ESPP options granted is determined using a Black-Scholes-Merton model and is amortized over the remaining life of the 12-month offering period of the ESPP. The Black-Scholes-Merton model included an assumption for expected volatility of between 41% and 48% for each of the two purchase periods in the current offering period. The expense recognized in relation to the ESPP was not material for each of the nine month periods ended September 30, 2016 and 2015. Approximately 1.7 million shares of common stock remained authorized for issuance under the ESPP at September 30, 2016.

10. Stockholders’ Equity

Stock Repurchases

Under our stock repurchase plan, as amended in February 2012, we are authorized to repurchase up to $50.0 million of our common stock from time to time. During the three months ended September 30, 2016, we re-initiated purchases of our common stock under the stock repurchase plan and repurchased approximately 618,000 shares at an average price of $5.65 per share for an aggregate amount of approximately $3.5 million. As of September 30, 2016, approximately $15.7 million remained available under the repurchase plan. The timing and actual number of shares repurchased will depend on various factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions.

Shares repurchased by us are accounted for when the transaction is settled. As of September 30,  2016, there were approximately 22,000  unsettled share repurchases. The par value of shares repurchased and retired is deducted from common stock and any excess over par value is deducted from additional paid-in capital. Direct costs incurred to repurchase the shares are included in the total cost of the shares.

14


 

11. Acquisitions and Dispositions

Acquisitions

On July 7, 2016, we completed the acquisition of the entire issued share capital of Other Art Fairs Ltd, which operates as The Other Art Fair, for consideration of £1.1 million (approximately $1.5 million) in cash, excluding deferred consideration of up to £315,000 in cash, payable over a three year period. The Other Art Fair is a leading London-based art fair for discovering emerging artists that currently presents fairs in London, Bristol and Sydney.

Purchase Price Allocation

 

The total purchase price of the acquisition was allocated to The Other Art Fair’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of July 7, 2016, the closing date of the acquisition. The excess of the purchase price over the net assets and liabilities acquired was recorded as goodwill. Our preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions and are subject to change pending finalization of the valuation.  

 

The acquisition is included in our condensed consolidated financial statements as of the closing date of the acquisition, which was July 7, 2016. Operating income for The Other Art Fair for the three and nine month periods  ended September 30, 2016 and 2015 was not material to our financial results. 

 

The following table summarizes the allocation of the purchase price for The Other Art Fair, which is preliminary and subject to change pending finalization of the valuation (in thousands):

 

 

 

 

 

 

Goodwill

    

$

822

 

Trademark

 

 

556

 

Artist relationships

 

 

207

 

Other assets and liabilities assumed

 

 

(114)

 

Total

 

$

1,471

 

 

The trademark we acquired has an estimated useful life of five years and the artist relationships we acquired have an estimated useful life of three years. The estimated weighted average useful life of the intangible assets we acquired in total is four years. Goodwill is primarily derived from our ability to generate synergies with its services. The goodwill will be included as part of our marketplaces reporting unit and is not deductible for tax purposes.

Dispositions

 

On April 12, 2016, we completed the sale of substantially all of the assets relating to our Cracked business, including the Cracked.com humor website, to Scripps Media, Inc. for a cash purchase price of $39.0 million. A portion of the purchase price equal to $3.9 million was placed into escrow at closing to secure certain of our post-closing indemnification obligations. Any remaining portion of the escrow amount that is not subject to then-pending claims will be paid to us in July 2017, on the 15-month anniversary of the closing date of the sale. Revenue for the Cracked business for the nine months ended September 30, 2016 (through the sale date of April 12, 2016) was $1.8 million. The Cracked business had a pre-tax loss of $1.9 million for the nine months ended September 30, 2016 (through the sale date of April 12, 2016), excluding allocations for corporate costs and including stock-based compensation expense incurred in connection with the sale. Revenue for the Cracked business for the three and nine month periods ended September 30, 2015 was $2.8 million and $8.2 million, respectively. The Cracked business had pre-tax income of $0.9 million and $2.5 million for the three and nine month periods ended September 30, 2015, respectively, excluding allocations for corporate costs. The sale did not meet the definition of discontinued operations under ASC 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.

 

As a result of the sale of the Cracked business, we recognized a gain of $38.1 million, recorded in other income, net, which included $0.6 million in net assets sold and $0.3 million in transaction costs incurred in connection with the sale. We expect to utilize our existing net operating losses to offset the income tax associated with the gain resulting from the sale of the Cracked business. If all or a portion of our net operating loss carryforwards are subject to limitation because it is determined that we had previously experienced an “ownership change” as defined in section 382 of the Internal Revenue Code of 1986, as amended, our future cash flows could be adversely impacted due to increased tax liability.

 

15


 

In addition, during the nine months ended September 30, 2016, we sold one of our non-core online properties for total consideration of $1.0 million, resulting in a gain of $1.0 million, recorded in other income, net. During the nine months ended September 30, 2015, we sold our Pluck social media business for $3.8 million in cash after working capital adjustments, resulting in a gain of $2.1 million. During the nine months ended September 30, 2015, we also sold certain non-core online properties for a total consideration of $0.9 million.

12. Business Segments

We operate in one operating segment. Our chief operating decision maker (the “CODM”) manages our operations on a consolidated basis for purposes of evaluating financial performance and allocating resources. The CODM reviews separate revenue information for the Marketplaces and Content & Media service offerings. All other financial information is reviewed by the CODM on a consolidated basis. All of our principal operations and assets are located in the United States.

Revenue derived from our Marketplaces and Content & Media service offerings is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

 

2016

    

2015

    

2016

    

2015

 

Marketplaces

 

 

$

16,650

 

$

12,624

 

$

43,521

 

$

33,816

 

Content & Media

 

 

 

11,409

 

 

15,881

 

 

35,942

 

 

57,667

 

Total revenue

 

 

$

28,059

 

$

28,505

 

$

79,463

 

$

91,483

 

 

Revenue by geographic region, as determined based on the location of our customers or anticipated destination of use, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

 

2016

    

2015

    

2016

    

2015

 

Domestic

 

 

$

22,708

 

$

24,621