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EX-31.2 - EX-31.2 - LEAF GROUP LTD.lfgr-20170930ex312fcf78a.htm
EX-31.1 - EX-31.1 - LEAF GROUP LTD.lfgr-20170930ex311102e93.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, 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 October 31, 2017, there were 20,840,754 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 Income (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

  

19

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

37

 

Item 4.

  

Controls and Procedures

  

38

 

 

 

 

Part II 

Other Information

 

 

 

Item 1.

  

Legal Proceedings

  

39

 

Item 1A.

  

Risk Factors

  

39

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

39

 

Item 3.

  

Defaults Upon Senior Securities

  

39

 

Item 4.

  

Mine Safety Disclosures

  

39

 

Item 5.

  

Other Information

  

39

 

Item 6.

  

Exhibits

  

39

 

 

  

Signatures

  

41

 

 

 


 

Part I.       FINANCIAL INFORMATION

 

Item 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Balance Sheets  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2017

 

2016

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,039

 

$

50,864

Accounts receivable, net

 

 

7,089

 

 

6,849

Prepaid expenses and other current assets

 

 

2,420

 

 

8,139

Total current assets

 

 

42,548

 

 

65,852

Property and equipment, net

 

 

11,833

 

 

11,503

Intangible assets, net

 

 

11,559

 

 

11,273

Goodwill

 

 

17,146

 

 

11,167

Other assets

 

 

1,308

 

 

1,457

Total assets

 

$

84,394

 

$

101,252

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

2,710

 

$

2,451

Accrued expenses and other current liabilities

 

 

14,764

 

 

15,017

Deferred revenue

 

 

1,971

 

 

2,180

Total current liabilities

 

 

19,445

 

 

19,648

Deferred tax liability

 

 

176

 

 

108

Other liabilities

 

 

3,322

 

 

1,746

Total liabilities

 

 

22,943

 

 

21,502

Commitments and contingencies (Note 7)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 22,473 issued and 20,818 shares outstanding at September 30, 2017 and 21,407 issued and 19,763 shares outstanding at December 31, 2016

 

 

 2

 

 

 2

Additional paid-in capital

 

 

520,620

 

 

513,139

Treasury stock at cost, 1,655 at September 30, 2017 and 1,644 at December 31, 2016

 

 

(35,706)

 

 

(35,641)

Accumulated other comprehensive loss

 

 

(27)

 

 

(112)

Accumulated deficit

 

 

(423,438)

 

 

(397,638)

Total stockholders’ equity

 

 

61,451

 

 

79,750

Total liabilities and stockholders’ equity

 

$

84,394

 

$

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 September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

20,908

 

$

15,371

 

$

50,841

 

$

39,840

Service revenue

 

 

12,552

 

 

12,688

 

 

38,422

 

 

39,623

Total revenue

 

 

33,460

 

 

28,059

 

 

89,263

 

 

79,463

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

15,385

 

 

9,791

 

 

37,456

 

 

26,588

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

 

 

4,993

 

 

5,370

 

 

15,881

 

 

19,887

Sales and marketing

 

 

6,973

 

 

6,031

 

 

20,893

 

 

19,610

Product development

 

 

4,558

 

 

4,652

 

 

14,337

 

 

15,614

General and administrative

 

 

7,056

 

 

7,498

 

 

21,933

 

 

23,450

Amortization of intangible assets

 

 

1,313

 

 

3,100

 

 

4,547

 

 

9,246

Total operating expenses

 

 

40,278

 

 

36,442

 

 

115,047

 

 

114,395

Loss from operations

 

 

(6,818)

 

 

(8,383)

 

 

(25,784)

 

 

(34,932)

Interest income

 

 

66

 

 

35

 

 

148

 

 

60

Interest expense

 

 

(2)

 

 

(2)

 

 

(5)

 

 

(2)

Other (expense) income, net

 

 

(6)

 

 

(31)

 

 

(9)

 

 

39,131

(Loss) income before income taxes

 

 

(6,760)

 

 

(8,381)

 

 

(25,650)

 

 

4,257

Income tax (expense) benefit

 

 

(57)

 

 

32

 

 

(150)

 

 

(48)

Net (loss) income

 

$

(6,817)

 

$

(8,349)

 

$

(25,800)

 

$

4,209

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.33)

 

$

(0.41)

 

$

(1.27)

 

$

0.21

Diluted

 

$

(0.33)

 

$

(0.41)

 

$

(1.27)

 

$

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

20,745

 

 

20,236

 

 

20,363

 

 

20,279

Diluted

 

 

20,745

 

 

20,236

 

 

20,363

 

 

20,511

 

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


2

 


 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Net (loss) income

 

$

(6,817)

 

$

(8,349)

 

$

(25,800)

 

$

4,209

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

26

 

 

 3

 

 

85

 

 

 1

Comprehensive (loss) income

 

$

(6,791)

 

$

(8,346)

 

$

(25,715)

 

$

4,210

 

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

 

850

 

 

 —

 

 

1,941

 

 

 —

 

 

 —

 

 

 —

 

 

1,941

 

Repurchases of common stock to be held in treasury

 

(10)

 

 

 —

 

 

 —

 

 

(65)

 

 

 —

 

 

 —

 

 

(65)

 

Issuance of common stock for acquisition

 

215

 

 

 —

 

 

1,603

 

 

 —

 

 

 —

 

 

 —

 

 

1,603

 

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(2,761)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,761)

 

Stock-based compensation expense

 

 —

 

 

 —

 

 

6,698

 

 

 —

 

 

 —

 

 

 —

 

 

6,698

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

85

 

 

 —

 

 

85

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(25,800)

 

 

(25,800)

 

Balance at September 30, 2017

 

20,818

 

$

 2

 

$

520,620

 

$

(35,706)

 

$

(27)

 

$

(423,438)

 

$

61,451

 

 

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)

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

    

2017

    

2016

Cash flows from operating activities

 

 

 

 

 

 

Net (loss) income

 

$

(25,800)

 

$

4,209

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

 

 

 

 

 

 

Depreciation and amortization

 

 

8,815

 

 

15,035

Deferred income taxes

 

 

68

 

 

(33)

Stock-based compensation

 

 

6,426

 

 

6,118

Gain on disposal of businesses and online properties

 

 

 —

 

 

(39,149)

Other

 

 

(44)

 

 

10

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

 

 

 

 

 

 

Accounts receivable, net

 

 

319

 

 

3,231

Prepaid expenses and other current assets

 

 

1,021

 

 

(180)

Other long-term assets

 

 

25

 

 

48

Accounts payable

 

 

(548)

 

 

(372)

Accrued expenses and other liabilities

 

 

(1,557)

 

 

(2,730)

Deferred revenue

 

 

(236)

 

 

335

Net cash used in operating activities

 

 

(11,511)

 

 

(13,478)

Cash flows from investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,718)

 

 

(3,743)

Purchases of intangible assets

 

 

(235)

 

 

(120)

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

 

 

4,285

 

 

36,100

Cash paid for acquisitions, net of cash acquired

 

 

(6,304)

 

 

(1,413)

Restricted deposits

 

 

742

 

 

136

Other

 

 

 6

 

 

78

Net cash (used in) provided by investing activities

 

 

(5,224)

 

 

31,038

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from exercises of stock options and purchases under ESPP

 

 

1,941

 

 

226

Repurchases of common stock

 

 

(65)

 

 

(3,515)

Taxes paid on net share settlements of restricted stock units

 

 

(2,761)

 

 

(1,132)

Cash paid for acquisition holdback

 

 

(119)

 

 

 —

Other

 

 

(49)

 

 

(15)

Net cash used in financing activities

 

 

(1,053)

 

 

(4,436)

Effect of foreign currency on cash and cash equivalents

 

 

(37)

 

 

(2)

Change in cash and cash equivalents

 

 

(17,825)

 

 

13,122

Cash and cash equivalents, beginning of period

 

 

50,864

 

 

38,570

Cash and cash equivalents, end of period

 

$

33,039

 

$

51,692

 

 

 

 

 

 

 

Supplemental disclosure of cash flows

 

 

 

 

 

 

Stock issued for acquisitions

 

$

1,603

 

$

 —

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 segments: Marketplaces and Media.

Marketplaces

Through our Marketplaces segment, 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. In May 2017, we acquired Deny Designs, a print-on-demand home décor brand with in-house manufacturing capacity, and both wholesale and direct-to-consumer channels, complementing our Society6 business. 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. The Other Art Fair is a leading London-based art fair for discovering emerging artists that complements our Saatchi Art marketplace.  

Media

Our Media segment 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. Beginning in the third quarter of 2016, we launched several category-specific properties, leveraging topics and certain content from eHow and our content library. We have focused on creating new high-quality content and building strong followings for these media brands by working with a curated network of contributors and influencers. Our Media segment 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, 2017, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2017 and 2016, the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 and the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 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 September 30, 2017, our results of operations for the three and nine months ended September 30, 2017 and 2016, and our cash flows for the nine months ended September 30, 2017 and 2016. The results for the three and nine months ended September 30, 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


6

 


 

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.

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 first quarter of 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 not material for the three months ended September 30, 2017. The impact as a result of this change was an increase in product revenue of approximately $0.9 million for the nine months ended September 30, 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 and, at this time, does not believe such adoption will have a material effect on the consolidated financial statements. To date, the Company has performed an initial assessment for each of the Company’s material revenue streams. In addition, the Company has determined it 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 anticipates it will complete its process of adopting this new accounting standard in the fourth quarter of 2017. Although the impact is not expected to be material, the Company expects to record any adoption adjustments associated with 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 also 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


7

 


 

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, 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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. ASU 2016-15 is effective for the Company beginning in fiscal 2018. The Company is evaluating the impact of the adoption of this guidance on the consolidated financial statements and does not expect the impact to be material.

In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which requires amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-18 will be applied using a retrospective transition method to each period presented and early adoption is permitted. ASU 2016-18 is effective for the Company beginning in fiscal 2018. The Company is evaluating the impact of the adoption of this guidance on the consolidated financial statements. As of September 30, 2017, the Company has a restricted cash balance of $1.0 million collateralizing a standby letter of credit associated with the lease of the headquarters office. The Company's practice has historically been to present changes to the account as restricted deposits in the statement of cash flows. Upon adoption of this guidance, the Company expects that the presentation of the beginning and ending amounts of cash on the statement of cash flows will change to include the balance of restricted cash.

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.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions and classification as an equity or liability instrument are the same immediately before and after the change. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. ASU 2017-09 is effective for the Company beginning in fiscal 2018. The Company is evaluating the impact of the adoption of this guidance on the consolidated financial statements but does not expect it to have a material impact.

 


8

 


 

3. Property and Equipment

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

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2017

 

2016

Computers and other related equipment

 

$

9,509

 

$

8,656

Purchased and internally developed software

 

 

28,279

 

 

27,601

Furniture and fixtures

 

 

1,500

 

 

1,472

Leasehold improvements

 

 

6,784

 

 

6,694

Machinery and related equipment

 

 

297

 

 

 —

 

 

 

46,369

 

 

44,423

Less accumulated depreciation

 

 

(34,536)

 

 

(32,920)

Property and equipment, net

 

$

11,833

 

$

11,503

 

Depreciation and software amortization expense, which includes losses on disposal of property and equipment of less than $0.1 million for each of the three months ended September 30, 2017 and 2016, respectively, and less than $0.1 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively, is shown by classification below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Product costs

 

$

16

 

$

 —

 

$

31

 

$

 —

Service costs

 

 

725

 

 

603

 

 

2,174

 

 

2,931

Sales and marketing

 

 

 9

 

 

12

 

 

27

 

 

38

Product development

 

 

22

 

 

32

 

 

68

 

 

105

General and administrative

 

 

664

 

 

700

 

 

1,968

 

 

2,715

Total depreciation

 

$

1,436

 

$

1,347

 

$

4,268

 

$

5,789

 

4. Goodwill and Intangible Assets

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

 

 

 

 

Balance at December 31, 2016

    

$

11,167

Acquisitions

 

 

5,906

Foreign currency impact

 

 

73

Balance at September 30, 2017

 

$

17,146

We recorded $5.9 million of goodwill in connection with the acquisition of Deny Designs in May 2017.  Refer to Note 11 for additional information. As of September 30, 2017, we have two reporting units, marketplaces and media, and our goodwill balance related entirely to our marketplaces reporting unit.

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

2,853

 

$

(1,558)

 

$

1,295

Artist relationships

 

 

12,233

 

 

(10,570)

 

 

1,663

Media content

 

 

91,396

 

 

(89,704)

 

 

1,692

Technology

 

 

6,204

 

 

(4,458)

 

 

1,746

Non-compete agreements

 

 

25

 

 

(18)

 

 

 7

Trade names

 

 

9,885

 

 

(4,729)

 

 

5,156

 

 

$

122,596

 

$

(111,037)

 

$

11,559

 


9

 


 

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 

 

Nine months ended September 30, 

 

    

2017

    

2016

    

2017

    

2016

Service costs

 

$

626

 

$

2,424

 

$

2,685

 

$

5,910

Sales and marketing

 

 

194

 

 

281

 

 

533

 

 

2,178

Product development

 

 

294

 

 

247

 

 

809

 

 

740

General and administrative

 

 

199

 

 

148

 

 

520

 

 

418

Total amortization

 

$

1,313

 

$

3,100

 

$

4,547

 

$

9,246

Service costs include accelerated amortization charges of less than $0.1 million and $1.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.7 million and $1.7 million for the nine months ended September 30, 2017 and 2016, respectively, as a result of removing certain assets from service.

5. Other Assets

 

As of September 30, 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.

6. Accrued Expenses and Other Liabilities

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

 

2016

Accrued payroll and related items

 

$

3,701

 

$

4,239

Artist payables

 

 

4,114

 

 

3,982

Accrued product costs

 

 

1,158

 

 

1,566

Accrued marketing

 

 

1,375

 

 

1,456

Contingent liabilities

 

 

1,071

 

 

 —

Other

 

 

3,345

 

 

3,774

Accrued expenses and other current liabilities

 

$

14,764

 

$

15,017


10

 


 

Other long-term liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

 

2016

Accrued rent

 

$

1,415

 

$

1,503

Contingent liabilities

 

 

1,821

 

 

 —

Other

 

 

86

 

 

243

Other liabilities

 

$

3,322

 

$

1,746

As part of the acquisition of Deny Designs, as described in Note 11, contingent consideration of up to $3.6 million is payable annually in three equal installments on the first through third anniversary of the closing date. The contingent consideration is valued at $2.8 million as of the acquisition date based on time value, discount rate, and the estimated probability of achieving the contingent criteria related to the ongoing development of new products for sale, as specified in the purchase agreement. Such amounts will be adjusted at each subsequent period based on probability of achievement until settlement of such liability. Adjustments to the liability will be recorded to income or expense in our condensed statement of operations. The fair value adjustment to the liability for the three and nine months ended September 30, 2017 was not material. The estimated amount payable upon the first year anniversary is included in accrued expenses and other current liabilities, and estimated amounts payable upon the second and third anniversaries are included in other liabilities in our condensed consolidated balance sheets.

 

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 and better integrate this business into our broader Media segment. These severance costs related to our Media segment and 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.

 

 

7. Commitments and Contingencies

Leases

We conduct our operations utilizing leased office facilities in various locations under operating leases, and as of September 30, 2017, these leases have non-cancelable periods ending between February 2018 and October 2021.

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


11

 


 

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) benefit for each of the three month periods ended September 30, 2017 and 2016 was less than $0.1 million. Income tax expense for the nine month periods ended September 30, 2017 and 2016 was $0.2 million and less than $0.1 million, respectively.

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.

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 nine months ended September 30, 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. Due to net operating loss carryforwards, our tax returns are open to examination by the Internal Revenue Service and state jurisdictions for all years since inception.


12

 


 

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, 

 

    

2017

    

2016

    

2017

    

2016

Service costs

 

$

155

 

$

142

 

$

453

 

$

1,054

Sales and marketing

 

 

209

 

 

145

 

 

586

 

 

586

Product development

 

 

475

 

 

290

 

 

1,352

 

 

1,206

General and administrative

 

 

1,343

 

 

1,103

 

 

4,035

 

 

3,272

Total stock-based compensation

 

$

2,182

 

$

1,680

 

$

6,426

 

$

6,118

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

 

37

Options exercised

 

(315)

Options forfeited or cancelled

 

(300)

Outstanding at September 30, 2017

 

2,278

Restricted Stock Units

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

 

 

 

 

 

Number of

 

    

shares

Unvested at December 31, 2016

 

1,941

Granted

 

1,492

Vested

 

(882)

Forfeited

 

(478)

Unvested at September 30, 2017

 

2,073

 

 


13

 


 

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 nine months ended September 30, 2017 and are not currently making repurchases. As of September 30, 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.

Shares repurchased by us are accounted for when the transaction is settled. As of September 30, 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. Acquisitions and Dispositions

Acquisitions

Nine months ended September 30, 2017

On May 1, 2017, we completed the acquisition of certain assets and the assumption of certain liabilities of Deny Designs, a print-on-demand home décor brand with in-house manufacturing capacity, and both wholesale and direct-to-consumer channels, 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 contingent consideration of $3.6 million, payable annually in three equal installments on the first through third anniversary of the closing date, subject to reduction in certain circumstances. A portion of the contingent consideration will secure post-closing indemnification obligations of the seller and/or post-closing working capital adjustments to the purchase price. The business will operate as a part of our Marketplaces segment, complementing our Society6 business.

The total fair value of the purchase price for the acquisition including cash paid at closing, fair value of common stock issued and contingent consideration approximated $11.2 million and was allocated to Deny Designs’ tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values as of May 1, 2017, the closing date of the acquisition. The excess of the purchase price over the net assets and liabilities acquired was recorded as goodwill. The acquisition is included in our condensed consolidated financial statements as of the closing date of the acquisition, which was May 1, 2017. During the three months ended September 30, 2017, the valuation of the fair value of tangible and intangible assets acquired and liabilities assumed was finalized. The resulting adjustments recorded to the provisional fair value amounts was not material for the three months ended September 30, 2017 and has been reflected in the condensed consolidated financial statements.

 

The following table summarizes the allocation of the purchase price for Deny Designs (in thousands):

 

 

 

 

 

Goodwill

    

$

5,906

Trademark

 

 

2,300

Customer relationships

 

 

1,400

Artist relationships

 

 

300

Technology

 

 

550

Other assets and liabilities assumed

 

 

705

Total

 

$

11,161

 

The trademark, customer relationships, artist relationships, and technology we acquired have estimated useful lives of ten years, five years, three years, and three years, respectively. The estimated weighted average useful life of the intangible assets we acquired in total is


14

 


 

seven years. Goodwill is primarily derived from our ability to generate synergies with Deny Designs’ products and services with our other marketplaces. The goodwill will be included as part of our marketplaces reporting unit and is expected to be deductible for tax purposes.

 

Contingent consideration is valued at $2.8 million as of the acquisition date based on time value, discount rate, and the estimated probability of achieving the contingent criteria related to the ongoing development of new products for sale, as specified in the purchase agreement. The minimum and maximum amount payable for each of the three years is $0.3 million and $1.2 million, respectively. Such amounts will be adjusted at each subsequent period based on probability of achievement until settlement of such liability. Adjustments to the liability will be recorded to income or expense in our condensed statement of operations. The contingent consideration liability is included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets.

 

Supplemental Pro forma Information (unaudited)

 

Supplemental information on an unaudited pro forma basis, as if the acquisition had been consummated as of January 1, 2016, is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

2017

    

2016

    

2017

    

2016

Revenue

 

$

33,460

 

$

30,527

 

$

91,845

 

$

85,637

Net (loss) income

 

 

(6,817)

 

 

(8,112)

 

 

(25,854)

 

 

4,567

 

The unaudited pro forma supplemental information is based on estimates and assumptions which we believe are reasonable and reflect amortization of intangible assets as a result of the acquisitions. The pro forma results are not necessarily indicative of the results that have been realized had the acquisitions been consolidated as of the beginning of the periods presented.

Nine months ended September 30, 2016

 

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 the United Kingdom, Australia and the United States.

 

The 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.

 

The acquisition is included in our consolidated financial statements as of the closing date of the acquisition, which was July 7, 2016. Operating income and pro forma financial information for The Other Art Fair for the years ended December 31, 2016 and 2015 were not material to our financial results.

 

The following table summarizes the allocation of the purchase price for The Other Art Fair (in thousands):

 

 

 

 

 

Goodwill

    

$

851

Trademark

 

 

556

Artist relationships

 

 

207

Other assets and liabilities assumed

 

 

(143)

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 is included as part of our marketplaces reporting unit and is not deductible for tax purposes.


15

 


 

Dispositions

Nine months ended September 30, 2016

 

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. In July 2017, the full escrow amount of $3.9 million was released and paid to us following the expiration of the indemnification period. 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. Prior to its disposition, the operating results related to Cracked were included as part of our Media segment. 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 utilized our net operating losses to offset any taxable gain resulting from the sale of the Cracked business.

 

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.

12. Business Segments

 

Prior to the second quarter of 2017, we operated in one operating segment. In the second quarter of 2017, as a result of the continued growth of and expanding portfolio within our Marketplaces service offering, including the acquisition of Deny Designs in May 2017, we revised the information used by our chief operating decision maker (the “CODM”) to evaluate financial performance and resource allocation, and determined that we operate in two segments: Marketplaces and Media.

 

Our Marketplaces segment consists of several 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.

 

Our Media segment consists of 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, as well as other media properties focused on specific categories or interests that we either own and operate or host and operate for our partners.

 

Our CODM uses revenue and non-GAAP operating contribution to evaluate the profitability of our operating segments; all other financial information is reviewed by the CODM on a consolidated basis. Segment operating contribution reflects earnings before corporate and unallocated expenses and also excludes: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes. Our CODM does not evaluate our operating segments using asset information. We do not aggregate our operating segments. The majority of our principal operations and assets are located in the United States.

 


16

 


 

The financial performance of our operating segments and reconciliation to consolidated operating loss is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

  

Nine months ended September 30, 

 

 

2017

 

2016

 

2017

 

2016

Segment Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

$

22,493

 

$

16,650

 

$

56,061

 

$

43,521

Media

 

 

10,967

 

 

11,409

 

 

33,202

 

 

35,942

Total revenue

 

$

33,460

 

$

28,059

 

$

89,263

 

$

79,463

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Expenses:

 

 

 

    

 

 

 

 

 

 

 

 

Marketplaces(1)

 

$

22,869

 

$

15,857

 

$

59,584

 

$

42,791

Media(1)

 

 

6,188

 

 

7,356

 

 

20,410

 

 

29,085

Add:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

6,290

 

 

7,102

 

 

19,812

 

 

21,366

Consolidated operating expenses

 

$

35,347

 

$

30,315

 

$

99,806

 

$

93,242

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution:

 

 

 

    

 

 

 

 

 

    

 

 

Marketplaces(3)

 

$

(376)

 

$

793

 

$

(3,523)

 

$

730

Media(3)

 

 

4,779

 

 

4,053

 

 

12,792

 

 

6,857

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

(6,290)

 

 

(7,102)

 

 

(19,812)

 

 

(21,366)

Acquisition, disposition and realignment costs(4)

 

 

 —

 

 

99

 

 

299

 

 

1,396

Adjusted EBITDA(5)

 

$

(1,887)

 

$

(2,157)

 

$

(10,244)

 

$

(12,383)

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to consolidated pre-tax income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(5)

 

$

(1,887)

 

$

(2,157)

 

$

(10,244)

 

$

(12,383)

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

64

 

 

33

 

 

143

 

 

58

Other (expense) income, net(6)

 

 

(6)

 

 

(31)

 

 

(9)

 

 

39,131

Depreciation and amortization(7)

 

 

(2,749)

 

 

(4,447)

 

 

(8,815)

 

 

(15,035)

Stock-based compensation(8)

 

 

(2,182)

 

 

(1,680)

 

 

(6,426)

 

 

(6,118)

Acquisition, disposition and realignment costs(4)

 

 

 —

 

 

(99)

 

 

(299)

 

 

(1,396)

(Loss) income before income taxes

 

$

(6,760)

 

$

(8,381)

 

$

(25,650)

 

$

4,257


(1)

Segment operating expenses reflects operating expenses that are directly attributable to the operating segment, not including corporate and unallocated expenses, and also excluding the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.

 

(2)

Corporate expenses include operating expenses that are not directly attributable to the operating segments, including: corporate information technology, marketing, and general and administrative support functions and also excludes the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.

 

(3)

Segment operating contribution reflects segment revenue less segment operating expenses. Operating contribution has certain limitations in that it does not take into account the impact to the statement of operations of certain expenses and is not directly comparable to similar measures used by other companies.

 

(4)

Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance and other payments attributable to acquisition, disposition or corporate realignment activities.

 

(5)

Adjusted EBITDA reflects net income (loss) excluding interest (income) expense, income tax expense (benefit), and certain other non-cash or non-recurring items impacting net income (loss) from time to time, principally comprised of depreciation and amortization, stock-based compensation and acquisition, disposition and realignment costs.

 

(6)

Primarily consists of income from the disposition of certain businesses and online properties.

 


17

 


 

(7)

Represents depreciation expense of our long-lived tangible assets and amortization expense of our finite-lived intangible assets, including amortization expense related to our investment in media content assets, included in our GAAP results of operations.

 

(8)

Represents the expense related to stock-based awards granted to employees as included in our GAAP results of operations.

 

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 September 30, 

 

Nine months ended September 30, 

 

 

2017

    

2016

    

2017

    

2016

Domestic

 

$

28,058

 

$

22,708

 

$

73,064

 

$

64,214

International

 

 

5,402

 

 

5,351

 

 

16,199

 

 

15,249

Total revenue

 

$

33,460

 

$

28,059

 

$

89,263

 

$

79,463

 

 

 

 

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. Contingent consideration is required to be recognized at fair value as of the acquisition date. We estimate the fair value of these liabilities based on estimated probabilities of achievement of the contingent considerations as per the terms of the purchase agreement, discounted to estimate fair value. We believe our estimates and assumptions are reasonable, however, there is significant judgment involved. We evaluate, on a routine, periodic basis, the estimated fair value of the contingent consideration and changes in estimated fair value, subsequent to the initial fair value estimate at the time of the acquisition, will be reflected in income or expense in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in discount periods and rates and changes in probability assumptions with respect to the likelihood of achieving the contingent criteria. Any changes in the estimated fair value of contingent consideration may have a material impact on our operating results.

As of September 30, 2017, we did not have any Level 1 financial assets measured at fair value. As described in Note 11, we recorded a contingent consideration liability as a result of the acquisition of Deny Designs for $2.8 million. The minimum and maximum amount payable for each of the three years is $0.3 million and $1.2 million, respectively, based upon satisfaction of the contingent criteria related to the ongoing development of new products for sale, as specified in the purchase agreement. Such amounts will be adjusted at each subsequent period based on probability of achievement until settlement of such liability. Adjustments to the liability will be recorded to income or expense in our condensed statement of operations. The fair value adjustment to the liability for the three and nine months ended September 30, 2017 was not material. We classify our contingent consideration resulting from acquisitions within Level 3, as the valuation inputs are based on unobservable inputs.

As of September 30, 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. 


18

 


 

 

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 September 30, 

 

Nine months ended September 30, 

 

 

2017

    

2016

    

2017

    

2016

Net (loss) income

 

$

(6,817)

 

$

(8,349)

 

$

(25,800)

 

$

4,209

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding—basic

 

 

20,745

 

 

20,236

 

 

20,363

 

 

20,279

Dilutive effect of common stock equivalents

 

 

 —

 

 

 —

 

 

 —

 

 

232

Weighted average common shares outstanding—diluted

 

 

20,745

 

 

20,236

 

 

20,363

 

 

20,511

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.33)

 

$

(0.41)

 

$

(1.27)

 

$

0.21

Diluted

 

$

(0.33)

 

$

(0.41)

 

$

(1.27)

 

$

0.21

For the three months ended September 30, 2017 and 2016, we excluded 2.2 million and 3.6 million shares, respectively, and for the nine months ended September 30, 2017 and 2016, we excluded 2.5 million and 3.4 million shares, respectively, from the calculation of diluted weighted average common shares outstanding, as their inclusion would have been antidilutive.

 

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”, “Society6”, “Deny Designs” and “The Other Art Fair”, 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


19

 


 

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 segments: Marketplaces and Media.

Marketplaces

Through our Marketplaces segment, 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. Deny Designs, acquired in May 2017, is a print-on-demand home décor brand with in-house manufacturing capacity, and both wholesale and direct-to-consumer channels, complementing our Society6 business. 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. The Other Art Fair is a leading London-based art fair for discovering emerging artists that complements our Saatchi Art marketplace.

Our Marketplaces segment primarily generates revenue from the sale of products and services through our art and design marketplaces. On Society6 and Deny Designs, 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 segment 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, growing our wholesale and direct-to-consumer channels, international expansion and offering product bundling and other promotions.

Media

Our Media segment 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. Beginning in the third quarter of 2016, we launched several category-specific properties leveraging topics and certain content from eHow and our content library. During this process of migrating categories of content onto new media properties, we have also focused on creating new high-quality content, adding new features and improved products, while syndicating our content across multiple channels, including social media networks and third-party publishers. As we near the completion of this transformation of our media properties, eHow.com has significantly narrowed its focus on informative and entertaining projects for do-it-yourself enthusiasts. Our Media segment also includes our content publishing studio, through which we create content for third-party publishers and brands.


20

 


 

Our Media segment 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, Hunker.com, Techwalla.com, LEAF.tv and Sapling.com. In order to improve the quality of our products, we continually redesign and update our websites; refine our content library; rationalize ad unit density; and develop 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 curated network of contributors and influencers to create more authoritative and engaging content and we are focused on building strong followings on various social media platforms such as Facebook and Pinterest, where we also publish our content. Although these changes result in initial increased operating expenses and lower revenue, 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.

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. In July 2017, the full escrow amount of $3.9 million was released and paid to us following the expiration of the indemnification period. 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 resulting from the sale.

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 segment. As part of this realignment, we reduced the staffing within this business by 35 full-time employees, and the remaining employees were integrated into our other Media businesses. 


21

 


 

Revenue

For the three months ended September 30, 2017 and 2016, we reported revenue of $33.5 million and $28.1 million, respectively. For the three months ended September 30, 2017 and 2016, Marketplaces revenue accounted for 67% and 59% of our total revenue, respectively, and Media revenue accounted for 33% and 41% of our total revenue, respectively.

For the nine months ended September 30, 2017 and 2016, we reported revenue of $89.3 million and $79.5 million, respectively. For the nine months ended September 30, 2017 and 2016, Marketplaces revenue accounted for 63% and 55% of our total revenue, respectively, and Media revenue accounted for 37% and 45% of our total revenue, respectively.

The revenue generated by our Marketplaces segment has higher costs associated with it as compared to our Media segment due to variable product costs, including outsourced product manufacturing costs, artist royalties, marketing costs, and shipping and handling costs. During the nine months ended September 30, 2017, a higher percentage of our total revenue was generated by our Marketplaces segment as compared to the prior year. If our revenue sources continue to shift from our Media segment to our Marketplaces segment, our total costs relative to our revenue will be negatively impacted.

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. 

Marketplaces Metrics

·

Number of transactions: We define transactions as the total number of transactions successfully completed by a customer during the applicable period, excluding certain transactions generated by The Other Art Fair that relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships and tickets.

·

Average revenue per transaction: We calculate average revenue per transaction by dividing total revenue, excluding certain revenue generated by The Other Art Fair that relate to the hosting of the art fairs, such as fees paid by artists for leased space, fees paid for sponsorship opportunities and fair ticket sales, by the number of transactions initiated in that period.

Media Metrics

·

Visits: We define visits as the total number of times users access our content across (a) one of our owned and operated properties and/or (b) one of our customers’ 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 our properties.


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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 Marketplaces or Media properties, as applicable, as of the last day of the relevant period. Social Media Followers includes subscribers for multiple YouTube channels affiliated with our 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

  

Nine months ended September 30, 

 

 

 

 

 

2017

 

2016

 

% Change

 

 

2017

 

2016

 

% Change

 

Marketplaces Metrics(1)(2)(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Transactions

 

 

380,766

 

 

282,960

 

35

%  

 

 

946,763

 

 

728,866

 

30

%  

Average Revenue per Transaction

 

$

58.85

 

$

58.56

 

 —

%  

 

$

58.45

 

$

59.60

 

(2)

%  

Media Metrics(3)(4):

 

 

 

    

 

 

    

 

 

 

 

 

    

 

 

    

 

 

Visits (in thousands)

 

 

693,945

 

 

651,545

 

 7

%

 

 

2,097,023

 

 

2,082,666

 

 1

%

Revenue per Visit

 

$

15.80

 

$

17.51

 

(10)

%

 

$

15.83

 

$

17.26

 

(8)

%

Video Views (in thousands)

 

 

195,440

 

 

176,445

 

11

%

 

 

605,105

 

 

501,887

 

21

%

Social Metrics (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Social Media Followers - Marketplaces(2)

 

 

2,618

 

 

1,913

 

37

%

 

 

2,618

 

 

1,913

 

37

%

Social Media Followers - Media

 

 

14,617

 

 

12,596

 

16

%

 

 

14,617

 

 

12,596

 

16

%

(1)

Marketplaces Metrics excludes certain revenue or transactions generated by The Other Art Fair that relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships and tickets.

(2)

Marketplaces Metrics and Social Media Followers for prior period metrics have been revised to conform to current period presentation to include The Other Art Fair acquired in July 2016 and Deny Designs acquired in May 2017.

(3)

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.

(4)

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.

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

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.

We recognize product revenue from sales of 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 first quarter of 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 as a result of this change was not material for the three months ended September 30, 2017. The impact as a result of this change was an increase in product revenue of approximately $0.9 million for the nine months ended September 30, 2017. Such amounts would have been otherwise recorded as deferred revenue at the end of the period.


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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, inclusive of The Other Art Fair. We also generate Marketplaces service revenue from various sources relating to The Other Art Fair, including 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. 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 content from our content library and 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 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 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 relatively flat as a percentage of service revenue. 

Shipping and Handling

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


24

 


 

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 remain relatively flat in the near term as a percentage of revenue.

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 increase in the near term due to recent acquisitions. We expect total amortization expense to decrease in the near term due to assets completing their useful lives. 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.


25

 


 

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.

 


26

 


 

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 and Deny Designs 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 first quarter of 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.

 


27

 


 

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 September 30, 

 

Nine months ended September 30, 

 

 

2017

    

2016

    

2017

    

2016

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

20,908

 

$

15,371

 

$

50,841

 

$

39,840

Service revenue

 

 

12,552

 

 

12,688

 

 

38,422

 

 

39,623

Total revenue

 

 

33,460

 

 

28,059

 

 

89,263

 

 

79,463

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Product costs (exclusive of amortization of intangible assets shown separately below)(1)

 

 

15,385

 

 

9,791

 

 

37,456

 

 

26,588

Service costs (exclusive of amortization of intangible assets shown separately below)(1)(2)

 

 

4,993

 

 

5,370

 

 

15,881

 

 

19,887

Sales and marketing(1)(2)

 

 

6,973

 

 

6,031

 

 

20,893

 

 

19,610

Product development(1)(2)

 

 

4,558

 

 

4,652

 

 

14,337

 

 

15,614

General and administrative(1)(2)

 

 

7,056

 

 

7,498

 

 

21,933

 

 

23,450

Amortization of intangible assets

 

 

1,313

 

 

3,100

 

 

4,547

 

 

9,246

Total operating expenses

 

 

40,278

 

 

36,442

 

 

115,047

 

 

114,395

Loss from operations

 

 

(6,818)

 

 

(8,383)

 

 

(25,784)

 

 

(34,932)

Interest income

 

 

66

 

 

35

 

 

148

 

 

60

Interest expense

 

 

(2)

 

 

(2)

 

 

(5)

 

 

(2)

Other (expense) income, net

 

 

(6)

 

 

(31)

 

 

(9)

 

 

39,131

Loss before income taxes

 

 

(6,760)

 

 

(8,381)

 

 

(25,650)

 

 

4,257

Income tax (expense) benefit

 

 

(57)

 

 

32

 

 

(150)

 

 

(48)

Net (loss) income

 

$

(6,817)

 

$

(8,349)

 

$

(25,800)

 

$

4,209

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Depreciation expense included in the above line items:

 

 

 

 

 

 

 

 

 

 

 

 

Product costs

 

$

16

 

$

 —

 

$

31

 

$

 —

Service costs

 

 

725

 

 

603

 

 

2,174

 

 

2,931

Sales and marketing

 

 

 9

 

 

12

 

 

27

 

 

38

Product development

 

 

22

 

 

32

 

 

68

 

 

105

General and administrative

 

 

664

 

 

700

 

 

1,968

 

 

2,715

Total depreciation

 

$

1,436

 

$

1,347

 

$

4,268

 

$

5,789

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Stock-based compensation included in the above line items:

 

 

 

 

 

 

 

 

 

 

 

 

Service costs

 

$

155

 

$

142

 

$

453

 

$

1,054

Sales and marketing

 

 

209

 

 

145

 

 

586

 

 

586

Product development

 

 

475

 

 

290

 

 

1,352

 

 

1,206

General and administrative

 

 

1,343

 

 

1,103

 

 

4,035

 

 

3,272

Total stock-based compensation

 

$

2,182

 

$

1,680

 

$

6,426

 

$

6,118


28

 


 

As a percentage of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

 

    

    

2017

    

2016

    

 

2017

    

2016

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

 

62.5

%  

54.8

%  

 

57.0

%  

50.1

%  

Service revenue

 

 

37.5

%  

45.2

%  

 

43.0

%  

49.9

%  

Total revenue

 

 

100.0

%  

100.0

%  

 

100.0

%  

100.0

%  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

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

 

 

46.0

%  

34.9

%  

 

42.0

%  

33.5

%  

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

 

 

14.9

%  

19.1

%  

 

17.8

%  

25.0

%  

Sales and marketing

 

 

20.9

%  

21.5

%  

 

23.4

%  

24.7

%  

Product development

 

 

13.6

%  

16.6

%  

 

16.1

%  

19.7

%  

General and administrative

 

 

21.1

%  

26.7

%  

 

24.6

%  

29.5

%  

Amortization of intangible assets

 

 

3.9

%  

11.1

%  

 

5.0

%  

11.6

%  

Total operating expenses

 

 

120.4

%  

129.9

%  

 

128.9

%  

144.0

%  

Loss from operations

 

 

(20.4)

%  

(29.9)

%  

 

(28.9)

%  

(44.0)

%  

Interest income

 

 

0.2

%  

 —

%  

 

0.2

%  

0.1

%  

Interest expense

 

 

 —

%  

 —

%  

 

 —

%  

 —

%  

Other (expense) income, net

 

 

 —

%  

 —

%  

 

 —

%  

49.3

%  

Loss before income taxes

 

 

(20.2)

%  

(29.9)

%  

 

(28.7)

%  

5.4

%  

Income tax (expense) benefit

 

 

(0.2)

%  

0.1

%  

 

(0.2)

%  

(0.1)

%  

Net (loss) income

 

 

(20.4)

%  

(29.8)

%  

 

(28.9)

%  

5.3

%  

Segment results (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

  

Nine months ended September 30, 

 

 

 

 

 

2017

 

2016

 

% Change

 

 

2017

 

2016

 

% Change

 

Segment Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

$

22,493

 

$

16,650

 

35

%  

 

$

56,061

 

$

43,521

 

29

%  

Media

 

 

10,967

 

 

11,409

 

(4)

%  

 

 

33,202

 

 

35,942

 

(8)

%  

Total revenue

 

$

33,460

 

$

28,059

 

19

%  

 

$

89,263

 

$

79,463

 

12

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Expenses:

 

 

 

    

 

 

    

 

 

 

 

 

    

 

 

    

 

 

Marketplaces(1)

 

$

22,869

 

$

15,857

 

44

%

 

$

59,584

 

$

42,791

 

39

%

Media(1)

 

 

6,188

 

 

7,356

 

(16)

%

 

 

20,410

 

 

29,085

 

(30)

%

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

6,290

 

 

7,102

 

(11)

%

 

 

19,812

 

 

21,366

 

(7)

%

Consolidated operating expenses

 

$

35,347

 

$

30,315

 

17

%

 

$

99,806

 

$

93,242

 

 7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution:

 

 

 

    

 

 

    

 

 

 

 

 

    

 

 

    

 

 

Marketplaces(3)

 

$

(376)

 

$

793

 

(147)

%

 

$

(3,523)

 

$

730

 

(583)

%

Media(3)

 

 

4,779

 

 

4,053

 

18

%

 

 

12,792

 

 

6,857

 

87

%

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

(6,290)

 

 

(7,102)

 

11

%

 

 

(19,812)

 

 

(21,366)

 

 7

%

Acquisition, disposition and realignment costs(4)

 

 

 —

 

 

99

 

(100)

%

 

 

299

 

 

1,396

 

(79)

%

Adjusted EBITDA(5)

 

$

(1,887)

 

$

(2,157)

 

13

%

 

$

(10,244)

 

$

(12,383)

 

17

%

 

(1)

Segment operating expenses reflects operating expenses that are directly attributable to the operating segment, not including corporate and unallocated expenses, and also excluding the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.

 


29

 


 

(2)

Corporate expenses include operating expenses that are not directly attributable to the operating segments, including: corporate information technology, marketing, and general and administrative support functions and also excludes the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.

(3)

Segment operating contribution reflects segment revenue less segment operating expenses. Operating contribution has certain limitations in that it does not take into account the impact to the statement of operations of certain expenses and is not directly comparable to similar measures used by other companies.

(4)

Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance and other payments attributable to acquisition, disposition or corporate realignment activities.

(5)

Adjusted EBITDA reflects net income (loss) excluding interest (income) expense, income tax expense (benefit), and certain other non-cash or non-recurring items impacting net income (loss) from time to time, principally comprised of depreciation and amortization, stock-based compensation and acquisition, disposition and realignment costs.

See Note 12 of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and “Non-GAAP Financial Measures" below for more information and reconciliation of segment results to consolidated GAAP operating income (loss).

Marketplaces Revenue

Marketplaces revenue increased by $5.8 million, a 35% increase, to $22.5 million for the three months ended September 30, 2017, as compared to $16.7 million for the same period in 2016. The number of transactions increased 35% to 380,766 in the three months ended September 30, 2017 as compared to 282,960 in the same period in 2016, primarily due to the acquisition of Deny Designs, new product introductions and increased conversion rates. For the three months ended September 30, 2017, Marketplaces average revenue per transaction, which excludes certain revenue or transactions generated by The Other Art Fair that relate to the hosting of the art fairs, was $58.85, remaining relatively flat as compared to $58.56 in the prior year period. The increase in Marketplaces revenue was also driven by the acquisition of Deny Designs.

Marketplaces revenue increased by $12.5 million, a 29% increase, to $56.1 million for the nine months ended September 30, 2017, as compared to $43.5 million for the same period in 2016. The number of transactions increased 30% to 946,763 in the nine months ended September 30, 2017 as compared to 728,866 in the same period in 2016, primarily due to the acquisition of Deny Designs, new product introductions and increased conversion rates. For the nine months ended September 30, 2017, Marketplaces average revenue per transaction, which excludes certain revenue or transactions generated by The Other Art Fair that relate to the hosting of the art fairs, was $58.45, a decrease as compared to $59.60 in the prior year period due to an increase in promotional discounts. During the nine months ended September 30, 2017, we revised the terms of sales for Society6 to reflect the transfer of title and risk of loss upon shipment and began recognizing revenue upon the shipment of fulfilled orders. As a result of this change, we recognized approximately $0.9 million in product revenue for the nine months ended September 30, 2017. Such amounts would have been otherwise recorded as deferred revenue at the end of the period. The increase in Marketplaces revenue was also driven by the acquisitions of Deny Designs and The Other Art Fair.

Media Revenue

 

Media revenue decreased by $0.4 million, a 4% decline, to $11.0 million for the three months ended September 30, 2017, as compared to $11.4 million for the same period in 2016. Visits increased by 7% to 694 million visits in the three months ended September 30, 2017 from 652 million visits in the same period in 2016, primarily as a result of an increase in mobile traffic. RPV decreased by 10%, to $15.80 in the three months ended September 30, 2017 from $17.51 in the same period in 2016, primarily due to lower advertising monetization yields from the strategic shift to launch several category-specific media properties leveraging topics and content from eHow and a continued shift to higher mobile traffic with lower RPV than desktop visits

 

Media revenue decreased by $2.7 million, an 8% decline, to $33.2 million for the nine months ended September 30, 2017, as compared to $35.9 million for the same period in 2016. Visits increased by 1% to 2,097 million visits in nine months ended September 30, 2017 from 2,083 million visits in the same period in 2016, primarily as a result of the divestitures of certain online properties, including Cracked, as well as continued traffic declines on international sites, partially offset by traffic growth on Livestrong.com and other category-specific sites. RPV decreased by 8%, to $15.83 in the nine months ended September 30, 2017 from $17.26 in the same period in 2016, primarily due to lower advertising monetization yields from the strategic shift to launch several category-specific media properties leveraging topics and content from eHow and a continued shift to higher mobile traffic with lower RPV


30

 


 

than desktop visits.

 

Consolidated Costs and Expenses

Operating costs and expenses were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

2017

 

2016

 

% Change

 

 

2017

 

2016

 

% Change

 

Product costs (exclusive of amortization of intangible assets)

$

15,385

 

$

9,791

 

57

%

   

$

37,456

 

$

26,588

 

41

%

Service costs (exclusive of amortization of intangible assets)

 

4,993

 

 

5,370

 

(7)

%

 

 

15,881

 

 

19,887

 

(20)

%

Sales and marketing

 

6,973

 

 

6,031

 

16

%

 

 

20,893

 

 

19,610

 

 7

%

Product development

 

4,558

 

 

4,652

 

(2)

%

 

 

14,337

 

 

15,614

 

(8)

%

General and administrative

 

7,056

 

 

7,498

 

(6)

%

 

 

21,933

 

 

23,450

 

(6)

%

Amortization of intangible assets

 

1,313

 

 

3,100

 

(58)

%

 

 

4,547

 

 

9,246

 

(51)

%

Product Costs

Product costs for the three months ended September 30, 2017 increased by $5.6 million, or 57%, to $15.4 million, as compared to $9.8 million for the same period in 2016. The increase was primarily due to increased costs related to the higher volume of products sold on Society6 and the acquisition of Deny Designs, including higher in-house manufacturing personnel and related costs as a result of the acquisition.

Product costs for the nine months ended September 30, 2017 increased by $10.9 million, or 41%, to $37.4 million, as compared to $26.6 million for the same period in 2016. The increase was primarily due to increased costs related to the higher volume of products sold on Society6 and the acquisition of Deny Designs, including higher in-house manufacturing personnel and related costs as a result of the acquisition.

Service Costs

Service costs for the three months ended September 30, 2017 decreased by $0.4 million, or 7%, to $5.0 million, as compared to $5.4 million for the same period in 2016. The decrease was primarily due to decreases of $0.3 million from the realignment of our content studio and the related low margin custom content sale contracts, $0.2 million in information technology costs and $0.1 million in personnel and related costs, partially offset by an increase of $0.2 million in cost of services related to The Other Art Fair.

Service costs for the nine months ended September 30, 2017 decreased by $4.0 million, or 20%, to $15.9 million, as compared to $19.9 million for the same period in 2016. The decrease was primarily due to decreases of $1.9 million in personnel and related costs primarily driven by headcount reductions from the realignment of our content studio and the sale of our Cracked business, $1.3 million in content and content renovation expense, including from the realignment of our content studio and the related low margin custom content sale contracts, $0.8 million in depreciation expense, $0.4 million in information technology costs, $0.2 million in ad serving costs, partially offset by an increase of $0.7 million in cost of services related to The Other Art Fair.

Sales and Marketing

Sales and marketing expenses for the three months ended September 30, 2017 increased by $0.9 million, or 16%, to $7.0 million, as compared to $6.0 million for the same period in 2016. The increase was primarily due to increases of $0.7 million in marketing activities primarily relating to Livestrong.com and Society6 and $0.2 million in personnel related costs primarily driven by an increase in headcount from the acquisition of Deny Designs.

Sales and marketing expenses for the nine months ended September 30, 2017 increased by $1.3 million, or 7%, to $20.9 million, as compared to $19.6 million for the same period in 2016. The increase was primarily due to an increase of $3.9 million in marketing activities primarily relating to Livestrong.com and Society6, partially offset by a decrease of $2.6 million in personnel and related costs primarily driven by headcount reductions from the realignment of our content studio.


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Product Development

Product development expenses for the three months ended September 30, 2017 decreased by $0.1 million, or 2%, to $4.6 million, as compared to $4.7 million in the same period in 2016, primarily due to a decrease of $0.2 million in personnel and related costs, partially offset by an increase of $0.1 million in licenses and support costs.

Product development expenses for the nine months ended September 30, 2017 decreased by $1.3 million, or 8%, to $14.3 million, as compared to $15.6 million in the same period in 2016, primarily due to decreases of $1.2 million in personnel and related costs driven by headcount reductions from the realignment of our content studio and the sale of our Cracked business and $0.3 million in consulting fees, partially offset by an increase of $0.2 million in licenses and support costs. 

General and Administrative

General and administrative expenses for the three months ended September 30, 2017 decreased by $0.4 million, or 6%, to $7.1 million, as compared to $7.5 million in the same period in 2016. The decrease was primarily due to decreases of $0.2 million in legal and audit related costs, $0.1 million in personnel and related costs and $0.1 million in taxes and insurance costs.

General and administrative expenses for the nine months ended September 30, 2017 decreased by $1.5 million, or 6%, to $21.9 million, as compared to $23.5 million in the same period in 2016. The decrease was primarily due to decreases of $0.7 million in depreciation expense, $0.4 million taxes and insurance costs, $0.2 million in facilities and related costs, $0.1 million in personnel and related costs and $0.1 million in consulting fees.

Amortization of Intangible Assets  

Amortization expense for the three months ended September 30, 2017 decreased by $1.8 million, or 58%, to $1.3 million, as compared to $3.1 million in the same period in 2016. The change was primarily due to the removal of certain content units in the three months ended September 30, 2016.

Amortization expense for the nine months ended September 30, 2017 decreased by $4.7 million, or 51%, to $4.5 million, as compared to $9.2 million in the same period in 2016. The change was primarily due to a decrease in amortization expense from intangible assets completing their useful life and the removal of certain content units in 2016.

Interest Income (Expense), Net

Interest income for each of the three month periods ended September 30, 2017 and 2016 was less than $0.1 million.

Interest income for the nine month periods ended September 30, 2017 and 2016 was $0.1 million and less than $0.1 million, respectively, primarily related to interest income paid to us on our money market deposit accounts which are included in cash and cash equivalents.

Other Income (Expense), Net

Other expense, net for each of the three months ended September 30, 2017 and 2016 was less than $0.1 million.

Other expense, net for the nine months ended September 30, 2017 was less than $0.1 million, as compared to other income, net of $39.1 million for the same period in 2016. The decrease was due to the gains recorded for the sales of our Cracked business and one of our non-core online properties during the nine months ended September 30, 2016.  

Income Tax Benefit (Expense)

Income tax (expense) benefit for each of the three month periods ended September 30, 2017 and 2016 was less than $0.1 million.

Income tax expense for the nine month periods ended September 30, 2017 and 2016 was $0.2 million and less than $0.1 million, respectively, primarily related to minimal state and foreign income tax expenses.


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Segment Results

Marketplaces Operating Expenses and Operating Contribution

Marketplaces operating expenses for the three months ended September 30, 2017 increased by $7.0 million, or 44%, to $22.9 million, as compared to $15.9 million in the same period in 2016. The change was primarily due to increases of $5.6 million in product costs as a result of revenue growth, $0.9 million in sales and marketing expense related to increased marketing investment and higher personnel costs, and $0.4 million in product development expense from increased personnel and related costs as a result of increased headcount. Marketplaces operating contribution was $(0.4) million for the three months ended September 30, 2017, as compared to $0.8 million in the same period in 2016.

Marketplaces operating expenses for the nine months ended September 30, 2017 increased by $16.8 million, or 39%, to $59.6 million, as compared to $42.8 million in the same period in 2016. The change was primarily due to increases of $11.6 million in product costs as a result of revenue growth, $3.2 million in sales and marketing expense related to increased marketing investment and higher personnel costs, $1.6 million in product development expense from increased personnel and related costs as a result of increased headcount and $0.3 million in general and administrative costs. Marketplaces operating contribution was $(3.5) million for the nine months ended September 30, 2017, as compared to $0.7 million in the same period in 2016.

Media Operating Expenses and Operating Contribution

Media operating expenses for the three months ended September 30, 2017 decreased by $1.2 million, or 16%, to $6.2 million, as compared to $7.4 million in the same period in 2016. The change was primarily due to decreases of $0.7 million in product development costs, primarily as a result of lower personnel and related costs due to a decrease in headcount, and $0.5 million in cost of services, including from the realignment of our content studio and the related low margin custom content sale contracts. Media operating contribution was $4.8 million for the three months ended September 30, 2017, as compared to $4.1 million in the same period in 2016. 

Media operating expenses for the nine months ended September 30, 2017 decreased by $8.7 million, or 30%, to $20.4 million, as compared to $29.1 million in the same period in 2016. The change was primarily due to decreases of $3.7 million in cost of services, $3.0 million in product development costs and $2.0 million in sales and marketing expense, primarily as a result of lower personnel and related costs due to a decrease in headcount, including from the realignment of our content studio, partially offset by increased marketing investment. Media operating contribution was $12.8 million for the nine months ended September 30, 2017, as compared to $6.9 million in the same period in 2016.

Corporate Operating Expenses

Corporate operating expenses for the three months ended September 30, 2017 decreased by $0.8 million, or 11%, to $6.3 million, as compared to $7.1 million in the same period in 2016. The change was primarily due to decreases of $0.5 million in personnel and related costs due to a decrease in headcount, $0.2 million in legal and audit costs and $0.1 million in consulting fees.

Corporate operating expenses for the nine months ended September 30, 2017 decreased by $1.6 million, or 7%, to $19.8 million, as compared to $21.4 million in the same period in 2016. The change was primarily due to decreases of $0.8 million in personnel and related costs due to a decrease in headcount, $0.3 million in taxes and insurance expense, $0.2 million in consulting expense and $0.2 million in facilities related expense.

Non-GAAP Financial Measures

To provide investors and others with additional information regarding our financial results, we have disclosed in the table below adjusted earnings before interest, taxes, depreciation and amortization expense, or Adjusted EBITDA. We have provided a reconciliation of this non-GAAP financial measure to net income (loss), the most directly comparable GAAP financial measure. Our Adjusted EBITDA financial measure differs from GAAP net income (loss) in that it excludes interest expense (income), income tax expense (benefit), and certain other non-cash or non-recurring items impacting net income (loss) from time to time, principally comprised of depreciation and amortization, stock-based compensation, and acquisition, disposition and realignment costs.    


33

 


 

Adjusted EBITDA is one of the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends, including period-to-period comparisons, because it excludes certain expenses and gains that management believes are not indicative of our core operating results. Management believes that the exclusion of these expenses and gains provides a useful measure for period-to-period comparisons of our underlying core revenue and operating costs that is focused more closely on the current costs necessary to operate our businesses and reflects our ongoing business in a manner that allows for meaningful analysis of trends. In addition, management believes that excluding certain non-cash charges can be useful because the amounts of such expenses is the result of long-term investment decisions made in previous periods rather than day-to-day operating decisions. Adjusted EBITDA is also one of the primary measures management uses to prepare and update our short and long term financial and operational plans and to evaluate investment decisions. We also frequently use Adjusted EBITDA in our discussions with investors, commercial bankers, equity research analysts and other users of our financial statements. 

Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and in comparing operating results across periods and to those of our peer companies. However, the use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expense that affect our operations. We compensate for these limitations by reconciling Adjusted EBITDA to net income (loss), the most comparable GAAP financial measure. Further, Adjusted EBITDA does not have a standardized meaning, and therefore other companies, including peer companies, may use the same or similarly named measures but exclude different items or use different computations, so comparability may be limited. Adjusted EBITDA should be considered in addition to, and not as a substitute for, measures prepared in accordance with GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

The following table presents a reconciliation of Adjusted EBITDA for each of the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

2017

    

2016

 

2017

    

2016

Net (loss) income 

 

$

(6,817)

 

$

(8,349)

    

$

(25,800)

 

$

4,209

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense (benefit)

 

 

57

 

 

(32)

 

 

150

 

 

48

Interest (income) expense, net

 

 

(64)

 

 

(33)

 

 

(143)

 

 

(58)

Other expense (income), net(1)

 

 

 6

 

 

31

 

 

 9

 

 

(39,131)

Depreciation and amortization(2)

 

 

2,749

 

 

4,447

 

 

8,815

 

 

15,035

Stock-based compensation(3)

 

 

2,182

 

 

1,680

 

 

6,426

 

 

6,118

Acquisition, disposition and realignment costs(4)

 

 

 —

 

 

99

 

 

299

 

 

1,396

Adjusted EBITDA

 

$

(1,887)

 

$

(2,157)

 

$

(10,244)

 

$

(12,383)


(1)

Primarily consists of income from the disposition of certain businesses and online properties.

(2)

Represents depreciation expense of our long-lived tangible assets and amortization expense of our finite-lived intangible assets, including amortization expense related to our investment in media content assets, included in our GAAP results of operations.

(3)

Represents the expense related to stock-based awards granted to employees as included in our GAAP results of operations.

(4)

Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance and other payments attributable to acquisition, disposition or corporate realignment activities.

Liquidity and Capital Resources

As of September 30, 2017, we had $33.0 million of cash and cash equivalents. In May 2017, we acquired Deny Designs for total consideration of $12.0 million, including $6.7 million in cash paid at closing, approximately 215,000 shares of Leaf Group common stock valued at approximately $1.7 million and $3.6 million of contingent consideration payable annually in three equal installments on the first through third anniversaries of the closing date, subject to reduction in certain circumstances.

Our principal sources of liquidity are our cash and cash equivalents, cash we generate from our operations and, in recent periods, cash generated from the disposition of businesses and certain non-core media properties. Historically, we have principally financed our operations from the issuance of stock, net cash provided by our operating activities and borrowings under our previous credit facilities. We do not currently have an available line of credit. We believe that our existing cash and cash equivalents and our cash generated by operating activities will be sufficient to fund our operations for at least the next 12 months. However, in order to fund our operations, make potential acquisitions, pursue new business opportunities and invest in our existing businesses, platforms and technologies, we may need


34

 


 

to raise additional funds by entering into a new credit facility, selling certain assets or issuing equity, equity-related or debt securities. We currently have a shelf registration statement on file with the SEC that is effective until March 28, 2020, which we may use to offer and sell equity securities with an aggregate offering price not to exceed $100.0 million.

 

Since our inception, we have used significant amounts of cash to make strategic acquisitions to grow our business, including the acquisitions of Deny Designs in May 2017, The Other Art Fair in July 2016, Saatchi Art in August 2014 and Society6 in June 2013. We have also generated cash by disposing of certain businesses. In April 2016, we completed the sale of our Cracked business for $39.0 million in cash. We received cash proceeds of $35.1 million on the closing date and 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. In July 2017, the full escrow amount of $3.9 million was released and paid to us following the expiration of the indemnification period. During 2016, we also received approximately $1.7 million of cash from the sales of two of our non-core media properties, with an additional $0.4 million received in the first quarter of 2017. We may make further acquisitions and dispositions in the future.

Under our stock repurchase plan announced in August 2011 and amended in February 2012, we are authorized to repurchase up to $50.0 million of our common stock from time to time in open market purchases or negotiated transactions. During the year ended December 31, 2016, we repurchased approximately 844,000 shares at an average price of $5.74 per share for an aggregate amount of $4.9 million. We have not initiated any repurchases of our common stock during the nine months ended September 30, 2017 and are not currently making repurchases. Repurchases were made as open market purchases pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, as well as through certain negotiated transactions. The stock repurchases were funded with available cash balances. As of September 30, 2017, approximately $14.3 million remained available under the stock repurchase plan. Management continues to assess the benefits of repurchasing additional shares of our common stock under the stock repurchase plan, and may elect to repurchase additional shares in the future from time to time. The timing and actual number of additional shares to be repurchased will depend on various factors including price, corporate and regulatory requirements, any applicable debt covenant requirements, alternative investment opportunities and other market conditions.

 

Our cash flows from operating activities are significantly affected by our cash-based investments in operations, including working capital, and corporate infrastructure to support our ability to generate revenue and conduct operations. Cash used in investing activities has historically been, and is expected to be, impacted by our ongoing investments in our properties, company infrastructure and equipment. The following table sets forth our major sources and (uses) of cash for each of the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

2017

    

2016

Net cash used in operating activities

 

$

(11,511)

 

$

(13,478)

Net cash (used in) provided by investing activities

 

$

(5,224)

 

$

31,038

Net cash used in financing activities

 

$

(1,053)

 

$

(4,436)

Cash Flows from Operating Activities

Nine months ended September 30, 2017 and September 30, 2016

Net cash used in our operating activities during the nine months ended September 30, 2017 was $11.5 million as a result of our net loss during the period of $25.8 million, non-cash charges of $15.3 million related primarily to depreciation, amortization and stock-based compensation, and a net decrease in our working capital of $1.0 million. The change in working capital during the nine months ended September 30, 2017 was primarily due to the timing of payments associated with increased vendor and artists liabilities related to our Marketplaces segment, which continues to become a larger portion of our results.

Net cash used in our operating activities during the nine months ended September 30, 2016 was $13.5 million. Our net income during the period was $4.2 million, which included gains on disposal of businesses and online properties of $39.1 million, partially offset by non-cash charges of $21.1 million related to depreciation, amortization and stock-based compensation. Cash flow from operating activities was also impacted by changes in our working capital of $0.3 million. The change in working capital during the nine months ended September 30, 2016 was primarily due to the timing of the collection of accounts receivable balances associated with our Media segment, as well as the timing of payments associated with increased vendor and artists liabilities related to our Marketplaces segment, which continues to become a larger portion of our results.


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Cash Flows from Investing Activities

Nine months ended September 30, 2017 and September 30, 2016

Net cash used in investing activities was $5.2 million during the nine months ended September 30, 2017. Cash used in investing activities for the nine months ended September 30, 2017 included $6.3 million paid for the acquisition of Deny Designs, net of cash acquired, $3.7 million related to investments in property and equipment, $0.2 million related to purchases of intangible assets, partially offset by cash inflows of $3.9 million from the release of the full escrow amount related to the sale of our Cracked business, $0.7 million from the release of restricted deposits, primarily related to the release of the escrow held for the Saatchi acquisition, and $0.4 million received from sale of one of our non-core online media properties in 2016.

Net cash provided by investing activities was $31.0 million during the nine months ended September 30, 2016. Cash provided by investing activities for the nine months ended September 30, 2016 included cash inflows of $36.1 million from the sale of our Cracked business and one of our non-core online media properties, partially offset by cash paid for acquisitions, net of cash acquired, of $1.4 million, and investments in property and equipment of $3.7 million.  

Cash Flows from Financing Activities

Nine months ended September 30, 2017 and September 30, 2016

Net cash used in financing activities was $1.1 million during the nine months ended September 30, 2017. Cash used in financing activities for the nine months ended September 30, 2017 primarily consists of $2.8 million related to taxes paid on vesting of restricted stock units, $0.1 million of cash paid for acquisition holdback and $0.1 million used for repurchases of common stock, partially offset by $1.9 million in proceeds from exercises of stock options and purchases under ESPP.

Net cash used in financing activities was $4.4 million during the nine months ended September 30, 2016. Cash used in financing activities for the nine months ended September 30, 2016 primarily consists of $3.5 million used to fund repurchases of our common stock, and $1.1 million related to net taxes paid on employee stock option exercises and restricted stock units vesting, partially offset by $0.2 million in proceeds from exercises of stock options and purchases under ESPP.

Off Balance Sheet Arrangements

As of September 30, 2017, we did not have any off balance sheet arrangements.

Capital Expenditures

For the nine months ended September 30, 2017 and 2016, we used $3.7 million and $3.7 million, respectively, in cash to fund capital expenditures to create internally developed software and purchase property and equipment. We currently anticipate making capital expenditures of between $0.5 million and $2 million during the remainder of the year ending December 31, 2017.

Contractual Obligations

For the nine months ended September 30, 2017, as a result of the acquisition of Deny Designs, our operating lease obligations increased by $0.8 million, to be paid over the next four years. In addition, contingent consideration of up to $3.6 million is payable annually in three equal installments on the first through third anniversary of the closing date. The contingent consideration is valued at $2.8 million as of the acquisition date based on time value, discount rate, and the estimated probability of achieving the contingent criteria per the purchase agreement, and is included in accrued expenses and other long-term liabilities in our condensed consolidated balance sheets as of September 30, 2017. Such amounts will be adjusted at each subsequent period based on probability of achievement until settlement of such liability. We classify our contingent consideration resulting from acquisitions within Level 3, as the valuation inputs are based on unobservable inputs.


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Recent Accounting Pronouncements

See Note 2 of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Item 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign currency exchange, inflation, and concentration of credit risk. To reduce and manage these risks, we assess the financial condition of our large advertising network providers, large direct advertisers and their agencies, and other large customers when we enter into or amend agreements with them and limit credit risk by setting and adjusting credit limits where we deem appropriate. In addition, our recent investment strategy has been to invest in high credit quality financial instruments, which are highly liquid, readily convertible into cash and mature within three months from the date of purchase.

Foreign Currency Exchange Risk

While relatively small, we have operations and generate revenue from sources outside the United States. We have foreign currency exchange risks related to our revenue being denominated in currencies other than the U.S. dollar, principally in the Euro, British Pound Sterling, Australian dollar, and a relatively smaller percentage of our expenses being denominated in such currencies. We do not believe that movements in the foreign currencies in which we transact will significantly affect future net earnings or losses. Foreign currency exchange risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We do not believe that such a change would currently have a material impact on our results of operations. As our international operations grow, our risks associated with fluctuations in currency rates will become greater, and we intend to continue to assess our approach to managing this risk.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Concentrations of Credit Risk

As of September 30, 2017, our cash and cash equivalents were maintained primarily with two major U.S. financial institutions and four foreign banks. We also maintained cash balances with four Internet payment processors. Deposits with these institutions at times exceed the federally insured limits, which potentially subject us to concentration of credit risk. Historically, we have not experienced any losses related to these balances and believe that there is minimal risk of expected future losses. However, there can be no assurance that there will not be losses on these deposits.

Components of our consolidated accounts receivable balance comprising more than 10% were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Google Inc.

 

 

34

35

 

 

 

 


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Item 4.       CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal accounting officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal accounting officer concluded that our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to our management, including the principal executive officer and principal accounting officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


38

 


 

PART II

OTHER INFORMATION  

Item 1.        LEGAL PROCEEDINGS

 

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.

 

Item 1A.     RISK FACTORS

There are certain risks and uncertainties in our business that could materially affect our business, financial condition and/or future results and cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors was included in Part I, Item 1A, “Risk Factors” of our 2016 Annual Report, which is available at www.sec.gov and at ir.leafgroup.com.  We are providing below, in supplemental form, the material changes to our risk factors that occurred during the past quarter. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements and other information contained in this Quarterly Report on Form 10-Q. The risk factors described in the 2016 Annual Report and the risk factor below are not the only risks facing us. Additional risks and uncertainties not currently known to us, or that are currently deemed to be immaterial, could also materially adversely affect our business, financial condition and/or future results. There have been no material changes to the risk factors set forth in the 2016 Annual Report.

 

Item 2.       UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  

Unregistered Sales of Equity Securities

 

None.

Repurchases of our Common Stock

We did not repurchase any of our common stock during the three months ended September 30, 2017.  

Item 3.      DEFAULTS UPON SENIOR SECURITIES  

None.

Item 4.       MINE SAFETY DISCLOSURES  

Not applicable.

Item 5.       OTHER INFORMATION  

None.

 

Item 6.       EXHIBITS  

 

See the Exhibit Index for a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which Exhibit Index is incorporated herein by reference.


39

 


 

 

 

Exhibit Index

 

 

 

 

Exhibit No

     

Description of Exhibit

 

 

 

2.1

 

Asset Purchase Agreement, dated April 8, 2016, by and among the Company, Scripps Media, Inc., a Delaware corporation, and, solely with respect to Section 10.15, The E.W. Scripps Company, an Ohio corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2016)

 

 

 

2.2

 

Asset Purchase Agreement, dated May 1, 2017, by and among the Company, Deny Designs, a Colorado corporation, and Dustin Nyhus (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 4, 2017)

 

 

 

31.1

 

Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of the Principal Accounting Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

 

 

32.2

 

Certification of the Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

Indicates management contract or compensatory plan, contract or arrangement.

 

 

 

 

 

 

 

 


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SIGNATURES 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

LEAF GROUP LTD.

 

 

 

 

By:

/s/ Sean Moriarty

 

Name:

 Sean Moriarty

 

Title:

 Chief Executive Officer

 (Principal Executive Officer)

 

 

 

 

 

 

 

By:

/s/ Wendy Voong

 

Name:

 Wendy Voong

 

Title:

 Chief Accounting Officer

 (Principal Accounting Officer)

 

Date: November 7, 2017

 


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