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EX-32.2 - EX-32.2 - LEAF GROUP LTD.lfgr-20170331ex3225763a4.htm
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EX-31.2 - EX-31.2 - LEAF GROUP LTD.lfgr-20170331ex3123ebbe4.htm
EX-31.1 - EX-31.1 - LEAF GROUP LTD.lfgr-20170331ex311c41d3b.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 March 31, 2017

 

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

 


 

LEAF GROUP LTD.

(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,” “smaller reporting company” and “emerging growth 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

 

 

 

 

 

 

Emerging Growth Company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

 

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 April 27, 2017, there were 20,143,290 shares of the registrant’s common stock, $0.0001 par value, outstanding.

 

 


 

LEAF GROUP LTD.

INDEX TO FORM 10-Q

 

 

 

 

 

 

 

  

 

  

Page

Part I 

Financial Information

  

 

 

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

  

1

 

 

  

Condensed Consolidated Balance Sheets

  

1

 

 

  

Condensed Consolidated Statements of Operations

  

2

 

 

  

Condensed Consolidated Statements of Comprehensive Loss

  

3

 

 

  

Condensed Consolidated Statements of Stockholders’ Equity

  

4

 

 

  

Condensed Consolidated Statements of Cash Flows

  

5

 

 

  

Notes to the Condensed Consolidated Financial Statements

  

6

 

Item 2.

  

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

  

15

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

29

 

Item 4.

  

Controls and Procedures

  

30

 

 

 

 

Part II 

Other Information

 

 

 

Item 1.

  

Legal Proceedings

  

31

 

Item 1A.

  

Risk Factors

  

31

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

32

 

Item 3.

  

Defaults Upon Senior Securities

  

32

 

Item 4.

  

Mine Safety Disclosures

  

32

 

Item 5.

  

Other Information

  

32

 

Item 6.

  

Exhibits

  

32

 

 

  

Signatures

  

33

 

 

 


 

Part I.       FINANCIAL INFORMATION

 

Item 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Balance Sheets  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2017

 

2016

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

41,504

 

$

50,864

 

Accounts receivable, net

 

 

6,713

 

 

6,849

 

Prepaid expenses and other current assets

 

 

6,250

 

 

8,139

 

Total current assets

 

 

54,467

 

 

65,852

 

Property and equipment, net

 

 

11,175

 

 

11,503

 

Intangible assets, net

 

 

9,491

 

 

11,273

 

Goodwill

 

 

11,177

 

 

11,167

 

Other assets

 

 

1,315

 

 

1,457

 

Total assets

 

$

87,625

 

$

101,252

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

2,449

 

$

2,451

 

Accrued expenses and other current liabilities

 

 

11,547

 

 

15,017

 

Deferred revenue

 

 

1,624

 

 

2,180

 

Total current liabilities

 

 

15,620

 

 

19,648

 

Deferred tax liability

 

 

51

 

 

108

 

Other liabilities

 

 

1,593

 

 

1,746

 

Total liabilities

 

 

17,264

 

 

21,502

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 21,786 issued and 20,131 shares outstanding at March 31, 2017 and 21,407 issued and 19,763 shares outstanding at December 31, 2016

 

 

 2

 

 

 2

 

Additional paid-in capital

 

 

513,819

 

 

513,139

 

Treasury stock at cost, 1,655 at March 31, 2017 and 1,644 at December 31, 2016

 

 

(35,706)

 

 

(35,641)

 

Accumulated other comprehensive loss

 

 

(98)

 

 

(112)

 

Accumulated deficit

 

 

(407,656)

 

 

(397,638)

 

Total stockholders’ equity

 

 

70,361

 

 

79,750

 

Total liabilities and stockholders’ equity

 

$

87,625

 

$

101,252

 

 

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


1

 


 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Operations  

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

Product revenue

 

$

14,584

 

$

12,464

 

Service revenue

 

 

12,654

 

 

14,505

 

Total revenue

 

 

27,238

 

 

26,969

 

Operating expenses:

 

 

 

 

 

 

 

Product costs

 

 

10,534

 

 

8,507

 

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

 

 

5,790

 

 

8,039

 

Sales and marketing

 

 

6,724

 

 

6,127

 

Product development

 

 

4,750

 

 

5,614

 

General and administrative

 

 

7,653

 

 

8,530

 

Amortization of intangible assets

 

 

1,837

 

 

3,032

 

Total operating expenses

 

 

37,288

 

 

39,849

 

Loss from operations

 

 

(10,050)

 

 

(12,880)

 

Interest income

 

 

43

 

 

 2

 

Interest expense

 

 

(2)

 

 

 —

 

Other income (expense), net

 

 

 3

 

 

980

 

Loss before income taxes

 

 

(10,006)

 

 

(11,898)

 

Income tax expense

 

 

(12)

 

 

(11)

 

Net loss

 

$

(10,018)

 

$

(11,909)

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.50)

 

$

(0.59)

 

Weighted average number of shares - basic and diluted

 

 

19,942

 

 

20,213

 

 

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


2

 


 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2017

    

2016

    

Net loss

 

$

(10,018)

 

$

(11,909)

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

14

 

 

 1

 

Comprehensive loss

 

$

(10,004)

 

$

(11,908)

 

 

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


3

 


 

Leaf Group Ltd. 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, 2016

 

19,763

 

$

 2

 

$

513,139

 

$

(35,641)

 

$

(112)

 

$

(397,638)

 

$

79,750

 

Issuance of stock under employee stock awards and other

 

378

 

 

 —

 

 

291

 

 

 —

 

 

 —

 

 

 —

 

 

291

 

Repurchases of common stock to be held in treasury

 

(10)

 

 

 —

 

 

 —

 

 

(65)

 

 

 —

 

 

 —

 

 

(65)

 

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(1,774)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,774)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,163

 

 

 —

 

 

 —

 

 

 —

 

 

2,163

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14

 

 

 —

 

 

14

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,018)

 

 

(10,018)

 

Balance at March 31, 2017

 

20,131

 

$

 2

 

$

513,819

 

$

(35,706)

 

$

(98)

 

$

(407,656)

 

$

70,361

 

 

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


4

 


 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2017

    

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(10,018)

 

$

(11,909)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,267

 

 

5,731

 

Deferred income taxes

 

 

(57)

 

 

 —

 

Stock-based compensation

 

 

2,078

 

 

1,919

 

Gain on disposal of businesses and online properties

 

 

 —

 

 

(973)

 

Other

 

 

 1

 

 

(31)

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

 

134

 

 

1,872

 

Prepaid expenses and other current assets

 

 

903

 

 

462

 

Other long-term assets

 

 

 1

 

 

(12)

 

Accounts payable

 

 

40

 

 

(53)

 

Accrued expenses and other liabilities

 

 

(3,493)

 

 

(3,675)

 

Deferred revenue

 

 

(555)

 

 

(231)

 

Net cash used in operating activities

 

 

(7,699)

 

 

(6,900)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,058)

 

 

(1,480)

 

Purchases of intangible assets

 

 

(46)

 

 

(4)

 

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

 

 

385

 

 

650

 

Restricted deposits

 

 

742

 

 

136

 

Other

 

 

 1

 

 

31

 

Net cash provided by (used in) investing activities

 

 

24

 

 

(667)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from exercises of stock options and purchases under ESPP

 

 

309

 

 

 1

 

Repurchases of common stock

 

 

(65)

 

 

 —

 

Taxes paid on net share settlements of restricted stock units

 

 

(1,791)

 

 

(492)

 

Cash paid for acquisition holdback

 

 

(119)

 

 

 —

 

Other

 

 

(16)

 

 

 —

 

Net cash used in financing activities

 

 

(1,682)

 

 

(491)

 

Effect of foreign currency on cash and cash equivalents

 

 

(3)

 

 

 1

 

Change in cash and cash equivalents

 

 

(9,360)

 

 

(8,057)

 

Cash and cash equivalents, beginning of period

 

 

50,864

 

 

38,570

 

Cash and cash equivalents, end of period

 

$

41,504

 

$

30,513

 

 

 

 

 

 

 

 

 

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


5

 


 

Leaf Group Ltd. and Subsidiaries 

Notes to Condensed Consolidated Financial Statements  

(Unaudited)

1. Company Background and Overview

Leaf Group Ltd. (“Leaf Group” 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 Media.

Marketplaces

Through our Marketplaces service offering, we operate 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 products in the home décor, accessories, and apparel categories. 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. Our Marketplaces service offering also includes The Other Art Fair, a leading London-based art fair for discovering emerging artists that complements our Saatchi Art marketplace.

Media

Our Media service offering includes our leading owned and operated media properties that publish content, including videos, articles, and designed visual formats on various category-specific properties with distinct editorial voices. Our media properties include Livestrong.com, a health and healthy living destination; eHow, a do-it-yourself reference destination; and over 40 other media properties focused on specific editorial categories or interests that we either own and operate or host and operate for our partners. During the third quarter of 2016, we began launching several category-specific properties leveraging topics and certain content from eHow and our content library. As we continue this process of migrating categories of content onto new media properties, eHow.com will narrow its focus on informative and entertaining projects for do-it-yourself enthusiasts. Our 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 March 31, 2017, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the three months ended March 31, 2017 and 2016, the condensed consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 and the condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2017 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 March 31, 2017, our results of operations for the three months ended March 31, 2017 and 2016, and our cash flows for the three months ended March 31, 2017 and 2016. The results for the three months ended March 31, 2017 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2016 has been derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016.

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, 2016 filed with the SEC.


6

 


 

Principles of Consolidation

The consolidated financial statements include the accounts of Leaf Group 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 in the United States 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.

Revenue Recognition

Product Revenue

During the three months ended March 31, 2017, we revised the shipping terms for Society6 to reflect the transfer of title and risk of loss upon shipment and began recognizing revenue upon the shipment of fulfilled orders. We recognize product revenue from sales of Society6 products when the title and risk of loss transfers to the customer, net of sales allowances and estimated returns based on historical experience. The impact as a result of this change was an increase in product revenue of approximately $1.1 million for the three months ended March 31, 2017. Such amounts would have been otherwise recorded as deferred revenue at the end of the period.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under 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 guidance is effective for the Company commencing in the first quarter of fiscal year 2018. 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 continuing to evaluate the impact of adopting the new revenue standard on the consolidated financial statements and cannot reasonably estimate the expected financial statement impact at this time. The Company has performed a preliminary assessment by revenue type and is expected to utilize various practical expedients allowed under the guidance, such as the application of the guidance only to contracts that are not completed as of the date of the initial application and certain other practical expedients applicable to contracts with a duration of one year or less. The Company is currently in the process of performing additional detailed contract analysis by revenue stream and expects to adopt this standard in the first quarter of fiscal year 2018 using the modified retrospective method with the cumulative effect recognized as of the date of adoption. Upon adoption of the guidance, the Company expects to expand disclosures regarding its contracts and revenue types.

In February 2016, the FASB issued ASU 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 year 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 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,


7

 


 

classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted the guidance in the first quarter of fiscal year 2017. The Company elected to continue the estimation of forfeitures for its equity instruments. The new guidance requires excess tax benefits and tax deficiencies to be recorded in the income statement when the awards vest or are settled. Due to the Company’s net operating loss carryforwards and full valuation allowance, the adoption of the guidance did not have an impact to the Company’s retained earnings upon adoption. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated cash flows statements as these cash flows have historically been presented as a financing activity. The guidance did not have a material impact to the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). This standard simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment should be applied on a prospective basis. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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):

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2017

 

2016

 

Computers and other related equipment

 

$

8,738

 

$

8,656

 

Purchased and internally developed software

 

 

28,174

 

 

27,601

 

Furniture and fixtures

 

 

1,490

 

 

1,472

 

Leasehold improvements

 

 

6,742

 

 

6,694

 

 

 

 

45,144

 

 

44,423

 

Less accumulated depreciation

 

 

(33,969)

 

 

(32,920)

 

Property and equipment, net

 

$

11,175

 

$

11,503

 

 

Depreciation and software amortization expense, which includes losses on disposal of property and equipment of less than $0.1 million and $0.9 million for the three months ended March 31, 2017 and 2016, respectively, is shown by classification below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

    

2017

    

2016

    

Service costs

 

$

743

 

$

1,464

 

Sales and marketing

 

 

 9

 

 

13

 

Product development

 

 

23

 

 

41

 

General and administrative

 

 

655

 

 

1,181

 

Total depreciation

 

$

1,430

 

$

2,699

 

 

 

 

 


8

 


 

4. Intangible Assets

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

 

amount

 

amortization

 

amount

 

Customer relationships

 

$

1,453

 

$

(1,332)

 

$

121

 

Artist relationships

 

 

11,919

 

 

(10,400)

 

 

1,519

 

Media content

 

 

91,587

 

 

(88,788)

 

 

2,799

 

Technology

 

 

5,654

 

 

(3,896)

 

 

1,758

 

Non-compete agreements

 

 

25

 

 

(14)

 

 

11

 

Trade names

 

 

7,546

 

 

(4,263)

 

 

3,283

 

 

 

$

118,184

 

$

(108,693)

 

$

9,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

1,453

 

$

(1,252)

 

$

201

Artist relationships

 

 

11,916

 

 

(10,337)

 

 

1,579

Media content

 

 

91,616

 

 

(87,604)

 

 

4,012

Technology

 

 

5,654

 

 

(3,649)

 

 

2,005

Non-compete agreements

 

 

25

 

 

(11)

 

 

14

Trade names

 

 

7,539

 

 

(4,077)

 

 

3,462

 

 

$

118,203

 

$

(106,930)

 

$

11,273

 

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 March 31, 

 

 

    

2017

    

2016

    

Service costs

 

$

1,303

 

$

1,700

 

Sales and marketing

 

 

143

 

 

949

 

Product development

 

 

247

 

 

247

 

General and administrative

 

 

144

 

 

136

 

Total amortization

 

$

1,837

 

$

3,032

 

Service costs include accelerated amortization charges of $0.5 million and less than $0.1 million for the three months ended March 31, 2017 and 2016, respectively, as a result of removing certain assets from service.

5. Other Assets

 

As of March 31, 2017, 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 March 31, 2017 and 2016, we had cash collateralizing a standby letter of credit associated with the lease of our headquarters office of approximately $0.8 million and $1.0 million, respectively, included in long-term assets.


9

 


 

6. Accrued Expenses and Other Current Liabilities

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

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

 

2016

 

Accrued payroll and related items

 

$

3,101

 

$

4,239

 

Artist payables

 

 

3,096

 

 

3,982

 

Accrued product costs

 

 

1,087

 

 

1,566

 

Accrued marketing

 

 

1,099

 

 

1,456

 

Other

 

 

3,164

 

 

3,774

 

Accrued expenses and other current liabilities

 

$

11,547

 

$

15,017

 

 

 

7. Commitments and Contingencies

Leases

We conduct our operations utilizing leased office facilities in various locations under operating leases, and as of March 31, 2017, 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 reviews of the Company and its filings. In evaluating the exposure associated with various tax filing positions, we accrue charges for possible exposures. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to our consolidated financial statements.

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 and partners, indemnities to our directors and officers to the maximum extent permitted under the laws of the State 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. 

8. Income Taxes

Income tax expense for each of the three month periods ended March 31, 2017 and 2016 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. 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.


10

 


 

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.

The Company adopted the new accounting guidance that simplifies several aspects of the accounting for share-based payments as of January 1, 2017. The new standard requires income tax benefits and deficiencies to be recognized as income tax expense or benefit in the income statement and the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. Upon adoption, the Company recorded approximately $7.3 million of net deferred tax assets related to net operating losses, along with a corresponding valuation allowance as of January 1, 2017, such that there is no net impact to our deferred tax assets or income tax expense. The adoption of the new standard did not have an impact on the consolidated financial statements.

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 three months ended March 31, 2017 or 2016, 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 2007 to 2016 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 March 31, 

 

 

    

2017

    

2016

    

Service costs

 

$

155

 

$

262

 

Sales and marketing

 

 

201

 

 

208

 

Product development

 

 

396

 

 

399

 

General and administrative

 

 

1,326

 

 

1,050

 

Total stock-based compensation

 

$

2,078

 

$

1,919

 

 

 

 

 

 

 

 

 


11

 


 

Award Activity

Stock Options

Stock option activity is as follows (in thousands):

 

 

 

 

 

 

Number of

 

 

    

options

 

 

 

outstanding

 

Outstanding at December 31, 2016

 

2,856

 

Options granted

 

 —

 

Options exercised

 

(52)

 

Options forfeited or cancelled

 

(50)

 

Outstanding at March 31, 2017

 

2,754

 

Restricted Stock Units

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

 

 

 

 

 

 

Number of

 

 

    

shares

 

Unvested at December 31, 2016

 

1,941

 

Granted

 

1,260

 

Vested

 

(560)

 

Forfeited

 

(47)

 

Unvested at March 31, 2017

 

2,594

 

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. 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 32% 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 three month periods ended March 31, 2017 and 2016. Approximately 1.7 million shares of common stock remained authorized for issuance under the ESPP at March 31, 2017.

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 year ended December 31, 2016, we re-initiated purchases of our common stock under the stock repurchase plan and repurchased approximately 844,000 shares at an average price of $5.74 per share for an aggregate amount of approximately $4.9 million. Repurchases of approximately 10,000 shares were initiated in the fourth quarter of 2016 but settled in the first quarter of 2017 for an aggregate amount of less than $0.1 million. We have not initiated any repurchases of our common stock during the three months ended March 31, 2017 and are not currently making repurchases. As of March 31, 2017, approximately $14.3 million remained available under the repurchase plan, and we may continue to make stock repurchases from time to time in the future. 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.


12

 


 

Shares repurchased by us are accounted for when the transaction is settled. As of March 31, 2017, there were no 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.

11. Dispositions

Dispositions

 

During the three months ended March 31, 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.

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 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 Media service offerings is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2017

    

2016

 

Marketplaces

 

$

15,876

 

$

13,462

 

Media

 

 

11,362

 

 

13,507

 

Total revenue

 

$

27,238

 

$

26,969

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2017

    

2016

 

Domestic

 

$

21,833

 

$

21,980

 

International

 

 

5,405

 

 

4,989

 

Total revenue

 

$

27,238

 

$

26,969

 

 

 

 

 

13. Fair Value

We report certain financial assets and liabilities at their carrying amounts. The carrying amounts of our financial instruments, which include cash and cash equivalents, accounts receivable, restricted cash, accounts payable, and accrued liabilities approximate fair value because of their short maturities. Certain assets, including goodwill, intangible assets and other long-lived assets are also subject to measurement at fair value on a nonrecurring basis, if they are deemed to be impaired as the result of an impairment review.

As of March 31, 2017, we did not have any Level 1 financial assets measured at fair value. As of March 31, 2016, Level 1 financial assets measured at fair value was $5.0 million, consisting of money market funds, which are included in cash and cash equivalents in our consolidated balance sheet. 


13

 


 

14. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per share of common stock (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2017

    

2016

    

Net loss

 

$

(10,018)

 

$

(11,909)

 

Weighted average common shares outstanding—basic and diluted

 

 

19,942

 

 

20,213

 

Net loss per share - basic and diluted

 

 

(0.50)

 

 

(0.59)

 

For the three months ended March 31, 2017 and 2016, we excluded 3.2 million and 4.6 million shares, respectively, from the calculation of diluted weighted average common shares outstanding, as their inclusion would have been antidilutive.

 

15. Subsequent Events

On May 1, 2017, we completed the acquisition of certain assets and the assumption of certain liabilities of Deny Designs, an original home décor brand and manufacturer based in Denver, Colorado, for total consideration of $12.0 million. The purchase price consists of cash of approximately $6.7 million paid at closing, approximately 215,000 shares of Leaf Group common stock valued at approximately $1.7 million issued in a private placement, and deferred consideration of $3.6 million, payable annually in three equal installments on the first through third anniversary date of the closing, subject to reduction in certain circumstances. A portion of the deferred consideration will secure post-closing indemnification obligations of the seller and/or post-closing adjustments to the purchase price. Deny Designs is an artist-driven print-on-demand home décor focused marketplace with in-house manufacturing capacity and both wholesale and direct-to-consumer channels. The business will operate as a part of our Marketplaces service offering, complementing our Society6 business. We are currently in the process of allocating the purchase price to the individual assets and liabilities acquired.


14

 


 

 

Item 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

As used herein, “Leaf Group,” the “Company,” “our,” “we,” “us” and similar terms include Leaf Group Ltd. and its subsidiaries, unless the context indicates otherwise.

“Leaf Group” and other trademarks of ours appearing in this report, such as “eHow” and “Society6”, are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us or our business by such companies, or any relationship with any of these companies.  

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2016 (the “2016 Annual Report”). 

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are so identified. You should not rely upon forward-looking statements as guarantees of future performance. We have based these forward-looking statements largely on our current estimates of our financial results and our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, as well as those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”), including our 2016 Annual Report, which was filed with the SEC on February 23, 2017, and the factors described in the section entitled “Risk Factors” in Part I. Item 1A of the 2016 Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we currently expect.

Overview

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. In addition, our diverse advertising offerings help brands and advertisers find innovative ways to engage with their customers.

Our business is comprised of two service offerings: Marketplaces and Media.


15

 


 

Marketplaces

Through our Marketplaces service offering, we operate 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 products in the home décor, accessories, and apparel categories. 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. Our Marketplaces service offering also includes The Other Art Fair, a leading London-based art fair for discovering emerging artists that complements our Saatchi Art marketplace.

Our Marketplaces service offering primarily generates revenue from the sale of products and services through our art and design marketplaces. On Society6, revenue is generated from the sale of print-on-demand products. Saatchi Art primarily generates revenue through commissions on the final sale price of original works of art sold through the platform. We also generate Marketplaces service revenue from various sources relating to The Other Art Fair, including commissions from the sale of original art, fees paid by artists for leased space at the fairs and sponsorship opportunities at the fairs. Our Marketplaces service offering is principally dependent on the number of transactions and average revenue per transaction generated by products and services sold through our online marketplaces. We believe there are opportunities to increase the number of transactions and the average revenue per transaction by attracting new visitors to our online marketplaces via diverse online and offline marketing, improving conversion of visitors to purchasing customers, continuing to introduce new products, international expansion and offering product bundling and other promotions.

Media

Our Media service offering includes our leading owned and operated media properties that publish content, including videos, articles, and designed visual formats on various category-specific properties with distinct editorial voices. Our media properties include Livestrong.com, a health and healthy living destination; eHow, a do-it-yourself reference destination; and over 40 other media properties focused on specific editorial categories or interests that we either own and operate or host and operate for our partners. During the third quarter of 2016, we began launching several category-specific properties leveraging topics and certain content from eHow and our content library. As we continue this process of migrating categories of content onto new media properties, eHow.com will narrow its focus on informative and entertaining projects for do-it-yourself enthusiasts. Our Media service offering also includes our content publishing studio, through which we create content for third-party publishers and brands.

Our Media service offering generates the majority of its revenue from the sale of advertising on our media properties. Our advertising revenue is principally dependent on the number of visits to our properties and the corresponding ad unit rates. In the past, we have experienced significant declines to the total number of visits to our properties, particularly eHow, due to algorithmic changes implemented by Google, Bing, and Yahoo! and our ongoing strategy to remove low quality and duplicative content from our properties.  We have also experienced lower ad monetization due to industry declines in cost-per-click ad rates and our decision to reduce the number of advertisements per page on certain articles. Visits across our media properties also continue to shift from desktop to mobile, with ad unit rates for mobile generally lower than desktop, and our content is increasingly consumed on social media platforms that do not monetize as well as desktop visits. In addition, ad unit rates on the new category-specific editorial properties using eHow content are currently lower than the rates on eHow.com because ad inventory on less established sites is typically monetized at lower blended rates, in part because the smaller initial audience size and less-established brand makes it difficult to secure direct branded ad sales for these properties. Future changes to search engine algorithms that negatively impact the volume of referral traffic, declines in our ad unit rates, increased consumption of our content on mobile devices and social media platforms, or increased availability of ad blocking software, particularly on mobile devices, could result in a material adverse effect to our business and results of operations.

However, we believe that there are opportunities to increase the number of visits to our media properties from direct visits, social media platforms and search engine referrals by building high-quality products that provide a better user experience and lead to increased engagement across distribution channels. For example, Livestrong.com has seen sustained growth in traffic over the last two years after experiencing a decline in visits following algorithm changes in 2013. We have also seen increases in traffic when we moved certain category-specific content from eHow.com and other content from our content library to new vertically focused media properties, including Cuteness.com, Techwalla.com, LEAF.tv and Sapling.com, and we will continue to consider migrating content to additional category-specific properties to most effectively leverage our content library. In order to improve the quality of our products, we continually redesign and update our websites; refined our content library; rationalized ad unit density; and developed a greater variety of content formats, particularly video content and formats better suited for mobile devices and consumption on other platforms. We are also working with a network of contributors and influencers to create more authoritative and engaging content and we are focused on building strong


16

 


 

followings on various social media platforms such as Facebook and Pinterest, where we also publish our content. Although these changes resulted in certain increased operating expenses and lower revenue initially, we believe that by providing consumers with an improved user and content experience, we will be able to continue to increase the number of visits and revenue in a sustained fashion over the long-term. We also believe that there are opportunities to increase our advertising revenue by continuing to optimize our ad product stack, increasing branded ad sales through direct sellers and offering more innovative products such as native advertisements and sponsored content in order to increase the overall ad unit rates we receive from our advertising partners.

 

Historically, the majority of our advertising revenue has been generated by our relationship with Google. While Google continues to be our primary advertising vendor for advertising monetization, we have been significantly diversifying our monetization partners since 2015 and expect to continue to do so in the future. Google also serves as one of our primary technology platform partners in connection with our programmatic advertising sales offering. Any change in the type of services that Google provides to us, or to the terms of our agreements with Google, could adversely impact our results of operations.

Revenue

For the three months ended March 31, 2017 and 2016, we reported revenue of $27.2 million and $27.0 million, respectively. For the three months ended March 31, 2017 and 2016, Marketplaces revenue accounted for 58% and 50% of our total revenue, respectively, and Media revenue accounted for 42% and 50% of our total revenue, respectively.

The revenue generated by our Marketplaces service offering has higher costs associated with it as compared to our Media service offering due to variable product costs, including outsourced product manufacturing costs, artist royalties, marketing costs, and shipping and handling costs. During the three months ended March 31, 2017, a higher percentage of our total revenue was generated by our Marketplaces service offering as compared to the prior year. If our revenue sources continue to shift from our Media service offering to our Marketplaces service offering, our total costs relative to our revenue will be negatively impacted.

Sale of Cracked Business

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 three months ended March 31, 2016 was $1.6 million. The Cracked business had a pre-tax loss of $0.9 million for the three months ended March 31, 2016, excluding allocations for corporate costs.

Content Studio Realignment 

In June 2016, we took certain actions to streamline our content publishing studio business and better integrate the business into our broader Media service offering. As part of this realignment, we reduced the staffing within this business by 35 fulltime employees and the remaining employees were integrated into our other Media businesses. 

Key Business Metrics

We regularly review a number of business metrics, including the following key metrics, to evaluate our business, measure the performance of our business model, identify trends impacting our business, determine resource allocations, formulate financial projections and make strategic business decisions. Measures which we believe are the primary indicators of our performance are described below. While we believe that the number of transactions, average revenue per transaction, number of visits and revenue per visit are currently the key metrics for understanding our results of operations, in the third quarter of 2016 we also began reporting video views for our media properties and social media followers for all properties as key metrics. We believe that video views and social media followers have become key metrics because we believe that these are key areas of growth in digital media, and that we can expand our audience and grow traffic by increasing our followers on social media platforms and creating highly sharable content such as videos. Furthermore, as users increasingly consume content in video form or on social media platforms, we believe that there will be increasing ability to monetize this content more effectively so it is important that we grow our audiences in these channels. 


17

 


 

Marketplaces Metrics

·

Number of transactions: We define transactions as the total number of Society6 and Saatchi Art transactions successfully completed online by a customer during the applicable period.  

·

Average revenue per transaction: We calculate average revenue per transaction by dividing Marketplaces revenue for a period by the number of transactions initiated in that period (not including revenue or transactions generated by The Other Art Fair).

Media Metrics

·

Visits: We define visits as the total number of times users access our content across (a) one of our owned and operated online properties and/or (b) one of our customers’ online properties, to the extent that the visited customer web pages are hosted by our content services. In each case, breaks of access of at least 30 minutes constitute a unique visit.

·

Revenue per visit (“RPV”): We define RPV as Media revenue per one thousand visits.

·

Video Views: We define video views as the total number of views of all of our media videos on Facebook and YouTube, or on Leaf Group sites or third-party sites via YouTube or any other embedded video player, during the applicable period. We include in this metric (i) views of videos published by any of our media properties, including Livestrong.com, eHow, category-specific sites and international sites; and (ii) videos viewed on multiple YouTube channels affiliated with certain of our properties.

Social Media Metrics

·

Social Media Followers: We define social media followers as the sum of all Facebook, Pinterest, Instagram and Twitter followers, as well as all YouTube subscribers, across our media or marketplaces properties, as applicable, as of the last day of the relevant period. Social Media Followers includes subscribers for multiple YouTube channels affiliated with certain Leaf Group properties. Individuals are counted more than once if they follow multiple properties or the same property on multiple platforms, or if they subscribe to multiple YouTube channels.

 

The following table sets forth our key business metrics for the periods presented:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

 

 

 

 

2017

 

2016

 

% Change

 

Marketplaces Metrics(1)(2):

 

 

 

 

 

 

 

 

 

Number of Transactions

 

 

267,768

 

 

227,202

 

18

%  

Average Revenue per Transaction

 

$

59.28

 

$

59.25

 

 —

%  

Media Metrics(2)(3):

 

 

 

    

 

 

    

 

 

Visits (in thousands)

 

 

695,543

 

 

785,979

 

(12)

%

Revenue per Visit

 

$

16.34

 

$

17.18

 

(5)

%

Video Views (in thousands)

 

 

205,650

 

 

156,521

 

31

%

Social Metrics (in thousands):

 

 

 

 

 

 

 

 

 

Social Media Followers - Marketplaces

 

 

2,222

 

 

N/A (4)

 

N/A

(4)

Social Media Followers - Media

 

 

13,160

 

 

N/A (4)

 

N/A

(4)

(1)

Marketplaces Metrics do not include revenue or transactions related to The Other Art Fair business acquired in July 2016.

(2)

For a discussion of these period-to-period changes in the number of transactions, average revenue per transaction, number of visits and RPV, and how they impacted our financial results, see “Results of Operations” below.

(3)

Media Metrics include visits and revenue generated by Cracked.com and other non-core media properties prior to their respective disposition dates and are not adjusted to be shown on a pro forma basis.

(4)

We did not track Social Media Followers across all platforms prior to the third quarter of 2016. As of March 31, 2016, our Marketplaces properties had 0.8 million total Social Media Followers on Facebook and YouTube and our Media properties had 10.9 million total Social Media Followers on Facebook and YouTube.


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Basis of Presentation

Revenue

Our revenue is primarily derived from products and services sold through our art and design marketplaces and from sales of advertising.  

Product Revenue

We recognize product revenue from sales of Society6 products when the title and risk of loss transfers to the customer, net of sales allowances and estimated returns based on historical experience. During the three months ended March 31, 2017, we revised the terms of sales for Society6 to reflect to the transfer of risk of loss upon shipment and began recognizing revenue upon the shipment of fulfilled orders. The impact to the revenue recognized as a result of this change was an increase in product revenue of approximately $1.1 million for the three months ended March 31, 2017. Such amounts would have been otherwise recorded as deferred revenue at the end of the period.

We recognize product revenue from the sale of prints through Saatchi Art when the prints are delivered and the return period has expired. Payments received in advance of delivery and, with respect to the Saatchi Art prints, prior to completion of the return period are included in deferred revenue in the accompanying consolidated balance sheets.

Product revenue is recorded at the gross amount due to the following factors: we are the primary obligor in a transaction, we have inventory and credit risk, and we have latitude in establishing prices and selecting suppliers. We periodically provide incentive offers to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other offers. Value added taxes (“VAT”), sales tax and other taxes are not included in product revenue because we are a pass-through conduit for collecting and remitting any such taxes.

Service Revenue

Marketplaces

We generate Marketplaces service revenue primarily from commissions we receive from facilitating the sale of original art by artists to customers through Saatchi Art. We also generate Marketplaces service revenue from various sources relating to The Other Art Fair, including commissions from the sale of original art, fees paid by artists for leased space at the fairs and sponsorship opportunities at the fairs. We recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not the primary obligor in the transaction, we do not have inventory risk, and we do not establish the prices for the art sold. We also recognize this service revenue net of any sales allowances. Revenue is recognized after the original art has been delivered and the return period has expired. Payments received in advance of delivery and completion of the return period are included in deferred revenue in the accompanying consolidated balance sheets. We periodically provide incentive offers to Saatchi Art customers to encourage purchases, including percentage discounts off current purchases, free shipping and other offers. VAT, sales tax and other taxes are not included in Marketplaces service revenue because we are a pass-through conduit for collecting and remitting any such taxes.  

Media

We generate Media service revenue primarily from advertisements displayed on our online media properties and on certain webpages of our partners’ media properties that are hosted by our content services. Articles, videos and other forms of content generate advertising revenue from a diverse mix of advertising methods including performance-based cost-per-click advertising, in which an advertiser pays only when a visitor clicks on an advertisement; display advertisements, where revenue is dependent upon the number of advertising impressions delivered; native advertisements, which are advertisements created to match the form and function of the platform on which they appear; sponsored content; or advertising links. At times, we enter into revenue-sharing arrangements with our partners, and if we are considered the primary obligor, we report the underlying revenue on a gross basis in our consolidated statements of operations and record the revenue-sharing payments to our partners in service costs.

We also generate Media service revenue from the sale or license of media content, including the creation and distribution of content for third-party brands and publishers through our content studio. Revenue from the sale or perpetual license of media content is recognized


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when the content has been delivered and the contractual performance obligations have been fulfilled. Revenue from the non-perpetual license of media content is recognized over the period of the license as content is delivered or when other related performance criteria are fulfilled. In circumstances where we distribute our content on third-party properties and our partner acts as the primary obligor, we recognize revenue on a net basis.

Product Costs

Product costs consist of outsourced product manufacturing costs, artist royalties, personnel costs and credit card and other transaction processing fees. In the near term, we expect our product costs to remain relatively flat as a percentage of product revenue.  

Service Costs

Service costs consist of payments relating to our Internet connection and co-location charges and other platform operating expenses, including depreciation of the systems and hardware used to build and operate our content creation and distribution platform; expenses related to creating, rewriting, or auditing certain content units; and personnel costs related to in-house editorial, customer service and information technology. Service costs also include payments to our partners pursuant to revenue-sharing arrangements where we are the primary obligor. In addition, service costs include expenses incurred in connection with art fairs hosted by The Other Art Fair, such as venue-related costs and fair personnel costs. In the near term, we expect service costs to remain flat as a percentage of service revenue.  

Shipping and Handling

Shipping and handling charged to customers are recorded in service revenue or product revenue, as applicable. Associated costs are recorded in service costs or product costs.

Sales and Marketing

Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations, advertising, marketing and general promotional expenditures. Fluctuations in our sales and marketing expenses are generally the result of our efforts to drive growth in our product and service offerings. We currently anticipate that our sales and marketing expenses will remain relatively flat as a percentage of revenue.  

Product Development

Product development expenses consist primarily of expenses incurred in our software engineering, product development and web design activities and related personnel costs. Fluctuations in our product development expenses are generally the result of hiring personnel to support and develop our platforms, including the costs to improve our owned and operated media properties and related mobile applications, as well as the costs to develop future product and service offerings. We currently anticipate that our product development expenses will remain relatively flat in the near term as a percentage of revenue.

General and Administrative

General and administrative expenses consist primarily of personnel costs from our corporate executive, legal, finance, human resources and information technology organizations and facilities-related expenditures, as well as third-party professional fees and insurance. Professional fees are largely comprised of outside legal, audit and information technology consulting. We currently anticipate that general and administrative expenses will decrease in the near term as a percentage of revenue due to managed reduction of expenses.

Amortization of Intangible Assets

We capitalize certain costs (i) allocated to the purchase price of certain identifiable intangible assets acquired in connection with business combinations and (ii) incurred to develop media content that is determined to have a probable economic benefit. We amortize these costs on a straight-line basis over the related expected useful lives of these assets. We determine the appropriate useful life of intangible assets by performing an analysis of expected cash flows based on our historical experience of intangible assets of similar quality and value. In the event of content remediation or removal in future periods, additional accelerated amortization expense may be incurred in the periods such actions occur. We expect amortization expense related to business combinations to decrease in the near term due to fewer


20

 


 

acquisitions as compared to prior years. Amortization as a percentage of revenue will depend upon a variety of factors, such as the amounts and mix of our investments in content and identifiable intangible assets acquired in business combinations.

Stock-based Compensation

Included in operating expenses are expenses associated with stock-based compensation, which are allocated and included in service costs, sales and marketing, product development and general and administrative expenses. Stock-based compensation expense is largely comprised of costs associated with stock options and restricted stock units granted to employees, directors, and expenses relating to our Employee Stock Purchase Plan. We record the fair value of these equity-based awards and expenses at their cost ratably over related vesting periods.

Interest Income (Expense), Net

Interest income consists primarily of interest earned on cash balances and money market deposits, which are included in cash and cash equivalents.

Other Income (Expense), Net

Other income (expense), net consists primarily of transaction gains and losses on foreign currency-denominated assets and liabilities and gains or losses on sales of businesses. We expect that these gains and losses will vary depending upon movements in underlying currency exchange rates and whether we dispose of any businesses.

Provision for Income Taxes

Since our inception, we have been subject to income taxes principally in the United States, and certain other countries where we have or had a legal presence, including the United Kingdom, the Netherlands, Australia, Canada and Argentina. We may in the future become subject to taxation in additional countries based on the foreign statutory rates and our effective tax rate could fluctuate accordingly.

Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

We currently believe that based on the available information, it is more likely than not that our deferred tax assets will not be realized, and accordingly we have taken a full valuation allowance against all of our United States federal and state and certain foreign deferred tax assets. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Code. Currently, we do not expect the utilization of our net operating loss and tax credit carry-forwards in the near term to be materially affected as no significant limitations are expected to be placed on these carry-forwards as a result of our previous ownership changes. However, if all or a portion of our net operating loss carryforwards are subject to limitation because we experience an ownership change, our future cash flows could be adversely impacted due to increased tax liability.

 


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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the estimates and assumptions associated with our revenue recognition, accounts receivable and allowance for doubtful accounts, goodwill, capitalization and useful lives associated with our intangible assets, the recoverability of our long-lived assets including our media content, income taxes, stock-based compensation and discontinued operations have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates and have discussed these in our 2016 Annual Report. Except as set forth below, there have been no material changes to our critical accounting policies and estimates since the date of our 2016 Annual Report.

 

Revenue Recognition

 

We recognize product revenue from sales of Society6 products when the risk of loss and title transfer to the consumers, net of sales allowances and estimated returns based on historical experience. During the three months ended March 31, 2017, we revised the terms of sales for Society6 to reflect to the transfer of title and risk of loss upon shipment and began recognizing revenue upon the shipment of fulfilled orders.

 


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Results of Operations

The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 

 

 

 

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

Product revenue

 

$

14,584

 

$

12,464

 

Service revenue

 

 

12,654

 

 

14,505

 

Total revenue

 

 

27,238