10-Q 1 leaf-20190930x10q.htm 10-Q leaf_Current_Folio_10Q

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, 2019

 

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)


Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value

LEAF

New York Stock Exchange

 

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 every Interactive Data File required to be submitted 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 such files).  Yes   No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “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

 

 

  

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, 2019, there were 26,197,583 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

  

6

 

 

  

Notes to the Condensed Consolidated Financial Statements

  

7

 

Item 2.

  

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

  

20

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

37

 

Item 4.

  

Controls and Procedures

  

38

 

 

 

 

Part II 

Other Information

 

 

 

Item 1.

  

Legal Proceedings

  

38

 

Item 1A.

  

Risk Factors

  

38

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

38

 

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, 

 

 

 

2019

 

2018

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,790

 

$

31,081

 

Accounts receivable, net

 

 

11,854

 

 

12,627

 

Prepaid expenses and other current assets

 

 

3,087

 

 

3,932

 

Total current assets

 

 

26,731

 

 

47,640

 

Property and equipment, net

 

 

13,545

 

 

13,126

 

Operating lease right-of-use assets

 

 

7,713

 

 

 —

 

Intangible assets, net

 

 

13,308

 

 

13,933

 

Goodwill

 

 

19,406

 

 

19,435

 

Other assets

 

 

1,045

 

 

988

 

Total assets

 

$

81,748

 

$

95,122

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

3,633

 

$

1,519

 

Accrued expenses and other current liabilities

 

 

17,389

 

 

22,149

 

Deferred revenue

 

 

2,709

 

 

2,115

 

Total current liabilities

 

 

23,731

 

 

25,783

 

Deferred tax liability

 

 

106

 

 

86

 

Operating lease liabilities

 

 

7,249

 

 

 —

 

Other liabilities

 

 

284

 

 

2,566

 

Total liabilities

 

 

31,370

 

 

28,435

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 27,805 and 26,150 shares issued and outstanding at September 30, 2019 and 27,138 and 25,483 shares issued and outstanding at December 31, 2018

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

559,664

 

 

554,403

 

Treasury stock at cost, 1,655 shares at September 30, 2019 and December 31, 2018

 

 

(35,706)

 

 

(35,706)

 

Accumulated other comprehensive loss

 

 

(89)

 

 

(52)

 

Accumulated deficit

 

 

(473,494)

 

 

(451,961)

 

Total stockholders’ equity

 

 

50,378

 

 

66,687

 

Total liabilities and stockholders’ equity

 

$

81,748

 

$

95,122

 

 

The accompanying notes are an integral part of these unaudited 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, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

19,611

 

$

22,482

 

$

53,021

 

$

58,125

 

Service revenue

 

 

20,419

 

 

18,974

 

 

56,836

 

 

51,398

 

Total revenue

 

 

40,030

 

 

41,456

 

 

109,857

 

 

109,523

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

14,221

 

 

16,202

 

 

40,049

 

 

42,003

 

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

 

 

9,107

 

 

8,229

 

 

26,000

 

 

21,077

 

Sales and marketing

 

 

7,372

 

 

8,796

 

 

22,498

 

 

23,644

 

Product development

 

 

4,973

 

 

5,558

 

 

15,652

 

 

15,362

 

General and administrative

 

 

8,072

 

 

7,615

 

 

24,724

 

 

22,584

 

Amortization of intangible assets

 

 

807

 

 

1,133

 

 

2,619

 

 

3,115

 

Total operating expenses

 

 

44,552

 

 

47,533

 

 

131,542

 

 

127,785

 

Loss from operations

 

 

(4,522)

 

 

(6,077)

 

 

(21,685)

 

 

(18,262)

 

Interest income

 

 

44

 

 

116

 

 

232

 

 

164

 

Interest expense

 

 

(5)

 

 

(2)

 

 

(15)

 

 

(4)

 

Other income (expense), net

 

 

(6)

 

 

(59)

 

 

 6

 

 

(92)

 

Loss before income taxes

 

 

(4,489)

 

 

(6,022)

 

 

(21,462)

 

 

(18,194)

 

Income tax benefit (expense)

 

 

 4

 

 

(13)

 

 

(71)

 

 

(59)

 

Net loss

 

$

(4,485)

 

$

(6,035)

 

$

(21,533)

 

$

(18,253)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share—basic and diluted

 

$

(0.17)

 

$

(0.24)

 

$

(0.83)

 

$

(0.75)

 

Weighted average number of shares—basic and diluted

 

 

26,089

 

 

25,111

 

 

25,868

 

 

24,315

 

 

The accompanying notes are an integral part of these unaudited 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, 

 

    

2019

    

2018

    

2019

    

2018

Net loss

 

$

(4,485)

 

$

(6,035)

 

$

(21,533)

 

$

(18,253)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(40)

 

 

29

 

 

(37)

 

 

 1

Comprehensive loss

 

$

(4,525)

 

$

(6,006)

 

$

(21,570)

 

$

(18,252)

 

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


3

 

Leaf Group Ltd. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2018

 

25,483

 

$

 3

 

$

554,403

 

$

(35,706)

 

$

(52)

 

$

(451,961)

 

$

66,687

Issuance of stock under employee stock awards and other, net

 

319

 

 

 —

 

 

270

 

 

 —

 

 

 —

 

 

 —

 

 

270

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(1,322)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,322)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,045

 

 

 —

 

 

 —

 

 

 —

 

 

2,045

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27

 

 

 —

 

 

27

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,286)

 

 

(10,286)

Balance at March 31, 2019

 

25,802

 

$

 3

 

$

555,396

 

$

(35,706)

 

$

(25)

 

$

(462,247)

 

$

57,421

Issuance of stock under employee stock awards and other, net

 

187

 

 

 —

 

 

175

 

 

 —

 

 

 —

 

 

 —

 

 

175

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(717)

 

 

 —

 

 

 —

 

 

 —

 

 

(717)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,331

 

 

 —

 

 

 —

 

 

 —

 

 

2,331

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(24)

 

 

 —

 

 

(24)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,762)

 

 

(6,762)

Balance at June 30, 2019

 

25,989

 

$

 3

 

$

557,185

 

$

(35,706)

 

$

(49)

 

$

(469,009)

 

$

52,424

Issuance of stock under employee stock awards and other, net

 

161

 

 

 —

 

 

281

 

 

 —

 

 

 —

 

 

 —

 

 

281

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(364)

 

 

 —

 

 

 —

 

 

 —

 

 

(364)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,562

 

 

 —

 

 

 —

 

 

 —

 

 

2,562

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(40)

 

 

 —

 

 

(40)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,485)

 

 

(4,485)

Balance at September 30, 2019

 

26,150

 

$

 3

 

$

559,664

 

$

(35,706)

 

$

(89)

 

$

(473,494)

 

$

50,378

 

 


4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2017

 

21,031

 

$

 2

 

$

523,012

 

$

(35,706)

 

$

(17)

 

$

(428,771)

 

$

58,520

Issuance of stock under employee stock awards and other, net

 

326

 

 

 —

 

 

148

 

 

 —

 

 

 —

 

 

 —

 

 

148

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(1,402)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,402)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,320

 

 

 —

 

 

 —

 

 

 —

 

 

2,320

Issuance of common stock in connection with follow-on public offering, net of offering costs

 

3,373

 

 

 —

 

 

23,367

 

 

 —

 

 

 —

 

 

 —

 

 

23,367

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

52

 

 

 —

 

 

52

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,925)

 

 

(5,925)

Balance at March 31, 2018

 

24,730

 

$

 2

 

$

547,445

 

$

(35,706)

 

$

35

 

$

(434,696)

 

$

77,080

Issuance of stock under employee stock awards and other, net

 

250

 

 

 —

 

 

481

 

 

 —

 

 

 —

 

 

 —

 

 

481

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(866)

 

 

 —

 

 

 —

 

 

 —

 

 

(866)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,835

 

 

 —

 

 

 —

 

 

 —

 

 

2,835

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(80)

 

 

 —

 

 

(80)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,293)

 

 

(6,293)

Balance at June 30, 2018

 

24,980

 

$

 2

 

$

549,895

 

$

(35,706)

 

$

(45)

 

$

(440,989)

 

$

73,157

Issuance of stock under employee stock awards and other, net

 

285

 

 

 —

 

 

840

 

 

 —

 

 

 —

 

 

 —

 

 

840

Tax withholdings related to vesting of share-based payments

 

 —

 

 

 —

 

 

(915)

 

 

 —

 

 

 —

 

 

 —

 

 

(915)

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,632

 

 

 —

 

 

 —

 

 

 —

 

 

2,632

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

29

 

 

 —

 

 

29

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,035)

 

 

(6,035)

Balance at September 30, 2018

 

25,265

 

$

 2

 

$

552,452

 

$

(35,706)

 

$

(16)

 

$

(447,024)

 

$

69,708

 

 

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

.


5

 

Leaf Group Ltd. and Subsidiaries 

Condensed Consolidated Statements of Cash Flows  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(21,533)

 

$

(18,253)

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,740

 

 

7,588

 

Non-cash lease expense

 

 

1,386

 

 

 —

 

Deferred income taxes

 

 

20

 

 

17

 

Stock-based compensation

 

 

6,590

 

 

7,386

 

Other

 

 

118

 

 

67

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

 

654

 

 

(812)

 

Prepaid expenses and other current assets

 

 

845

 

 

(665)

 

Other long-term assets

 

 

109

 

 

231

 

Operating lease ROU assets and liabilities

 

 

(1,695)

 

 

 —

 

Accounts payable

 

 

2,034

 

 

(222)

 

Accrued expenses and other liabilities

 

 

(5,607)

 

 

731

 

Deferred revenue

 

 

594

 

 

 8

 

Net cash used in operating activities

 

 

(8,745)

 

 

(3,924)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,167)

 

 

(5,062)

 

Purchases of intangible assets

 

 

 —

 

 

(45)

 

Cash paid for acquisitions, net of cash acquired

 

 

(1,900)

 

 

(10,349)

 

Other

 

 

 —

 

 

 5

 

Net cash used in investing activities

 

 

(7,067)

 

 

(15,451)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from exercises of stock options and purchases under ESPP

 

 

726

 

 

1,470

 

Proceeds from issuance of common stock

 

 

 —

 

 

23,367

 

Taxes paid on net share settlements of restricted stock units

 

 

(2,403)

 

 

(3,184)

 

Cash paid for acquisition holdback

 

 

(625)

 

 

 —

 

Cash paid for contingent consideration liability

 

 

(934)

 

 

(905)

 

Other

 

 

(75)

 

 

(51)

 

Net cash (used in) provided by financing activities

 

 

(3,311)

 

 

20,697

 

Effect of foreign currency on cash, cash equivalents and restricted cash

 

 

(2)

 

 

42

 

Change in cash, cash equivalents and restricted cash

 

 

(19,125)

 

 

1,364

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

31,935

 

 

32,300

 

Cash, cash equivalents and restricted cash, end of period

 

$

12,810

 

$

33,664

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,790

 

$

32,810

 

Restricted cash included in other current assets

 

 

136

 

 

136

 

Restricted cash included in other long-term assets

 

 

884

 

 

718

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

 

$

12,810

 

$

33,664

 

 

 

 

 

 

 

 

 

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

 


6

 

 

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 consumer internet company that builds enduring, digital-first brands that reach passionate audiences in large and growing lifestyle categories, including fitness and wellness and art and design.

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 and designers can market and sell their original art and designs printed on a wide variety of products. Our made-to-order marketplaces, consisting of Society6.com (“Society6”) and our wholesale channel, Deny Designs (collectively, “Society6 Group”), provide artists and designers with an online commerce platform to feature and sell their original art and designs on an array of consumer products primarily in the home décor category. Saatchi Art, inclusive of SaatchiArt.com (“Saatchi Art”) and its art fair event brand, The Other Art Fair (collectively, “Saatchi Art Group”), is a leading online art gallery where a global community of artists exhibit and sell their original artwork directly to consumers through a curated online gallery or in-person at art fairs hosted in the United Kingdom, Australia, and the United States. Saatchi Art’s online art gallery features a wide selection of original paintings, drawings, sculptures and photography.  

Media

Our Media segment brands educate and entertain consumers across a wide variety of life topics, including the popular fitness and wellness and home and design verticals. In the fitness and wellness vertical, our leading brands include Well+Good and Livestrong.com which help people lead healthier lives. In the home and design vertical, Hunker is our leading brand inspiring people to improve the space around them. These brands are the leaders in our catalog of over 50 other brands focused on specific categories or interests that we either own and operate or host and operate for our partners. 

2. Basis of Presentation

The accompanying interim condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive (loss) income for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 and the condensed consolidated statement of stockholders’ equity for the nine months ended September 30, 2019 and 2018 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, 2019, our results of operations for the three and nine months ended September 30, 2019 and 2018, and our cash flows for the nine months ended September 30, 2019 and 2018. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full year. The consolidated balance sheet as of December 31, 2018 has been derived from our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), 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 interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC.


7

 

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 intercompany transactions and balances have been eliminated in consolidation.  

Use of Estimates

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

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires 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 us commencing in the first quarter of fiscal year 2019. In July 2018, the FASB issued ASU 2018-11, which provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We have adopted Topic 842 as of January 1, 2019 using the new transition method, utilizing certain practical expedients allowable with the adoption of ASU 2016-02. Substantially all of our operating lease commitments with terms greater than 12 months are subject to the new guidance and are recognized as operating lease liabilities and right-of-use assets upon adoption. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $9.2 million and $10.3 million, respectively, as of January 1, 2019. The standard did not have a material impact on the recognition, measurement or presentation of lease expenses within our consolidated statements of operations or cash flows.

 

3. Revenue Recognition

Revenue

 

Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the promised good or service. We allocate any arrangement fee or other incentive or promotional offers to each of the elements based on their relative selling prices.  

 

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts where we recognize revenue in the amount which we have the right to invoice for services performed. We do not capitalize costs incurred to fulfill a contract when the contract term is one year or less.


8

 

Our revenue is principally derived from the following products and services:

Product Revenue

Marketplaces

We recognize product revenue from sales of products when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods. In determining the amount of consideration we expect to be entitled to, we take into account sales allowances, estimated returns based on historical experience and any incentive offers provided to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other promotional offers. Because we are the principal in a transaction and obtain control of the goods before they are transferred to the customer, we record product revenue at the gross amount. Value-added taxes (“VAT”), sales tax and other taxes are not included in product revenue because we are a pass-through conduit for collecting and remitting any such taxes.  

Service Revenue

Marketplaces

We generate Marketplaces service revenue from commissions we receive from facilitating the sale of original art by artists to customers through Saatchi Art. We also generate Marketplaces service revenue from various sources relating to Saatchi Art’s The Other Art Fair, including commissions from the sale of original art, fees paid by artists for stands at fairs and through sponsorship opportunities with third-party brands and advertisers. We recognize fair-related service revenue upon completion of each fair. We recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not the principal in the transaction and we do not obtain control over the original art. Revenue is recognized when we transfer control of the promised service, which is after the original art has been delivered and the return period has expired. We provide incentive offers to Saatchi Art customers to encourage purchases, including percentage discounts off current purchases, free shipping and other promotional 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

Advertising Revenue. 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 display advertisements, where revenue is dependent upon the number of advertising impressions delivered; performance-based cost-per-click advertising, in which an advertiser pays only when a visitor clicks on an advertisement; sponsored content; or advertising links. Performance obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements is recognized as the related performance criteria are met. We assess whether performance criteria have been met based on a reconciliation of the performance criteria. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or partner-performance data in circumstances where that data is available. 

Where we enter into revenue-sharing arrangements with our partners, such as those relating to our advertiser network, we report revenue on a gross or net basis depending on whether we are considered the principal in the transaction. In addition, we consider which party controls the service, including which party is primarily responsible for fulfilling the promise to provide the service. We also consider which party has the latitude to establish the sales prices to advertisers. When we are considered the principal, we report the underlying revenue on a gross basis in our consolidated statements of operations, and record these revenue-sharing payments to our partners in service costs.

Content Sales and Licensing Revenue. We generate revenue from the sale or license of media content, including the creation and distribution of content for third-party brands and publishers. Revenue from the sale or perpetual license of media content is recognized when the control of content is transferred or when the right to use is transferred 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 the right to access content is delivered or when other related performance criteria are fulfilled. In circumstances where we distribute our content on third-party properties and the customer acts as the principal, we recognize revenue on a net basis.


9

 

Disaggregation of Revenue

 

The following table presents our revenues disaggregated by revenue source (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

2019

    

2018

    

2019

    

2018

Product

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

$

19,611

 

$

22,482

 

$

53,021

 

$

58,125

Service

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

 

3,716

 

 

2,230

 

 

10,333

 

 

7,209

Media

 

 

16,703

 

 

16,744

 

 

46,503

 

 

44,189

Total revenue

 

$

40,030

 

$

41,456

 

$

109,857

 

$

109,523

 

Deferred Revenue

Deferred revenue consists of amounts received from or invoiced to customers in advance of our performance obligations being satisfied, including amounts which are refundable. Deferred revenue includes payments received from sales of our products on Society6 and Deny Designs prior to the transfer of control of such products to the customers; payments made for original art sold via Saatchi Art that are collected prior to the completion of the return period upon which our service is considered completed; and amounts billed to media customers prior to delivery of content; and sales of subscriptions for premium content or services not yet delivered. During the nine months ended September 30, 2019, we recognized $1.6 million of revenues that were included in the deferred revenue balance as of December 31, 2018.

Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services, we require payment before the products or services are delivered to the customer.  

4. Property and Equipment

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

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

2019

 

2018

Computers and other related equipment

 

$

12,085

 

$

10,859

Purchased and internally developed software

 

 

33,256

 

 

29,758

Furniture and fixtures

 

 

1,487

 

 

1,470

Leasehold improvements

 

 

6,795

 

 

6,795

Machinery and related equipment

 

 

581

 

 

581

 

 

 

54,204

 

 

49,463

Less accumulated depreciation

 

 

(40,659)

 

 

(36,337)

Property and equipment, net

 

$

13,545

 

$

13,126

 

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 and nine months ended September 30, 2019 and 2018, is shown by classification below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Product costs

 

$

401

 

$

235

 

$

1,162

 

$

629

 

Service costs

 

 

951

 

 

787

 

 

2,831

 

 

2,179

 

Sales and marketing

 

 

 7

 

 

 6

 

 

20

 

 

22

 

Product development

 

 

12

 

 

14

 

 

35

 

 

52

 

General and administrative

 

 

184

 

 

512

 

 

1,073

 

 

1,591

 

Total depreciation

 

$

1,555

 

$

1,554

 

$

5,121

 

$

4,473

 

 


10

 

5. Goodwill and Intangible Assets

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

 

 

 

 

 

Balance at December 31, 2018

    

$

19,435

Foreign currency impact

 

 

(29)

Balance at September 30, 2019

 

$

19,406

We have two reporting units, Marketplaces and Media. Goodwill related to our Marketplaces reporting unit was $17.1 million as of September 30, 2019. Goodwill related to our Media reporting unit was $2.3 million and was recorded in connection with the acquisition of Well+Good in June 2018. Refer to Note 12 for additional information regarding our acquisition of Well+Good.

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

4,003

 

$

(2,861)

 

$

1,142

Artist relationships

 

 

12,216

 

 

(11,250)

 

 

966

Media content

 

 

91,489

 

 

(91,319)

 

 

170

Technology

 

 

6,204

 

 

(6,110)

 

 

94

Non-compete agreements

 

 

25

 

 

(25)

 

 

 —

Trade names

 

 

18,238

 

 

(7,302)

 

 

10,936

 

 

$

132,175

 

$

(118,867)

 

$

13,308

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

4,003

 

$

(2,219)

 

$

1,784

Artist relationships

 

 

12,223

 

 

(11,007)

 

 

1,216

Media content

 

 

91,489

 

 

(91,215)

 

 

274

Technology

 

 

6,204

 

 

(5,682)

 

 

522

Non-compete agreements

 

 

25

 

 

(25)

 

 

 —

Trade names

 

 

16,257

 

 

(6,120)

 

 

10,137

 

 

$

130,201

 

$

(116,268)

 

$

13,933

 

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, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Service costs

 

$

17

 

$

220

 

$

105

 

$

889

 

Sales and marketing

 

 

288

 

 

326

 

 

892

 

 

646

 

Product development

 

 

104

 

 

184

 

 

428

 

 

769

 

General and administrative

 

 

398

 

 

403

 

 

1,194

 

 

811

 

Total amortization

 

$

807

 

$

1,133

 

$

2,619

 

$

3,115

 

 

 

 

 


11

 

6. Accrued Expenses and Other Liabilities

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

Accrued payroll and related items

 

$

3,304

 

$

4,769

Artist payables

 

 

4,483

 

 

5,528

Accrued product costs

 

 

1,452

 

 

3,008

Operating lease liabilities

 

 

1,608

 

 

 —

Contingent liabilities

 

 

1,071

 

 

1,082

Accrued post-combination compensation

 

 

 —

 

 

1,819

Other

 

 

5,471

 

 

5,943

Accrued expenses and other current liabilities

 

$

17,389

 

$

22,149

 

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

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

 

2018

Accrued rent

 

$

 —

 

$

1,320

Contingent liabilities

 

 

 —

 

 

976

Other

 

 

284

 

 

270

Other liabilities

 

$

284

 

$

2,566

As part of the acquisition of Deny Designs in May 2017, contingent consideration of up to $3.6 million is payable to the seller annually in three equal installments on the first through third anniversary of the closing date. The contingent consideration was 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 are adjusted at each subsequent period based on probability of achievement until settlement of such liability. Adjustments to the liability are recorded to income or expense in our condensed consolidated statement of operations. The fair value adjustment to the liability for the three and nine months ended September 30, 2019 was not material. The May 2018 and May 2019 installments of the contingent consideration, net of post-closing working capital adjustments to the purchase price, were paid to the seller in the amounts of $1.1 million and $1.2 million, respectively. The estimated amount payable upon the third anniversary is included in other liabilities in our condensed consolidated balance sheets.

 

 

7. Leases

 

We adopted ASU 2016-02—Leases (Topic 842) as of January 1, 2019, using the new transition method issued under ASU 2018-11, which allows an entity to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and also allows an entity to elect not to recast its comparative periods in transition. In addition, we elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We also elected to use the practical expedient related to short-term leases, allowing us to not recognize right-of-use assets and lease liabilities for leases with a lease term of 12 months or less.

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our consolidated balance sheets.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.


12

 

 

We have operating leases primarily for office space facilities. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Our operating leases have remaining lease terms of one year to five years, some of which include options to extend the leases for up to five years or to terminate the leases within one year. Our operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. As of September 30, 2019, finance leases were not material.

 

As of September 30, 2019, lease expense was comprised of $2.1 million in operating lease cost.

 

Supplemental cash flow information related to leases was as follows (in thousands):

 

 

 

 

 

 

 

 

    

Three months ended September 30, 2019

    

Nine months ended September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

625

 

$

2,063

 

Supplemental balance sheet information related to leases was as follows (in thousands):

 

 

 

 

 

    

September 30, 2019

Operating leases:

 

 

 

Operating lease right-of-use assets

 

$

7,713

 

 

 

 

Other current liabilities

 

 

1,608

Operating lease liabilities

 

 

7,249

Total operating lease liabilities

 

$

8,857

 

 

 

 

Weighted average remaining lease term:

 

 

 

Operating leases

 

 

5 years

 

 

 

 

Weighted average discount rate:

 

 

 

Operating leases

 

 

9%

 

Maturities of operating lease liabilities as of September 30, 2019 were as follows (in thousands):

 

 

 

 

 

 

Operating

 

    

Leases

2019

 

$

625

2020

 

 

2,275

2021

 

 

2,281

2022

 

 

2,183

2023

 

 

2,236

Thereafter

 

 

1,336

Total lease payments

 

 

10,936

Less imputed interest

 

 

2,079

Total operating lease liabilities

 

$

8,857

 


13

 

The following is a schedule of future minimum lease payments under operating leases as of December 31, 2018 (in thousands):

 

 

 

 

 

 

Operating

 

    

leases

Year ending December 31,

 

 

   

2019

 

$

2,765

2020

 

 

2,275

2021

 

 

2,281

2022

 

 

2,183

2023

 

 

2,236

Thereafter

 

 

1,336

Total minimum lease payments

 

$

13,076

 

 

 

 

8. Commitments and Contingencies

Leases

We conduct our operations utilizing leased office facilities in various locations under operating leases and, as of September 30, 2019, these leases have non-cancelable periods ending between October 2019 and July 2024. The lease for our Santa Monica office facility expires in July 2024.

Litigation

 

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

Taxes

From time to time, various federal, state and other jurisdictional tax authorities undertake reviews of the Company and its filings. In evaluating the exposure associated with various tax filing positions, we accrue charges for possible exposures. We believe any adjustments that may ultimately be required as a result of any of these reviews will not be material to our consolidated financial statements.

Indemnification

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

9. Income Taxes

Income tax benefit (expense) was less than $0.1 million for each of the three and nine months ended September 30, 2019 and 2018.

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


14

 

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 a portion of the deferred tax assets. However, the reversal of deferred tax liabilities associated with tax deductible goodwill can be a source of taxable income to support the realization of a deductible temporary difference that is scheduled to reverse into net operating losses with an unlimited carryforward period. Except for the deferred tax liabilities resulting 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 does not meet the more likely than not criteria and is thus subject to a valuation allowance. Accordingly, we have established a full valuation allowance against our deferred tax assets.

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

Our policy for recording interest and penalties associated with audits and uncertain tax positions is to record such items as a component of income tax expense, and no interest or penalties were recognized in the three and nine months ended September 30, 2019 or 2018. There are no material uncertain tax positions and no uncertain income tax positions were recorded during the three and nine months ended September 30, 2019 or 2018, 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.

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Act”) was enacted. As of December 31, 2018, we had completed our analysis on the tax impact relating to the 2017 Act and no material changes were made to the provisional amounts recorded. There was no additional impact on the income tax provision as of September 30, 2019 

10. 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, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Service costs

 

$

315

 

$

189

 

$

758

 

$

515

 

Sales and marketing

 

 

269

 

 

292

 

 

520

 

 

760

 

Product development

 

 

635

 

 

603

 

 

1,791

 

 

1,762

 

General and administrative

 

 

1,241

 

 

1,418

 

 

3,521

 

 

4,349

 

Total stock-based compensation

 

$

2,460

 

$

2,502

 

$

6,590

 

$

7,386

 


15

 

Award Activity

Stock Options

Stock option activity is as follows (in thousands):

 

 

 

 

 

Number of

 

    

options

 

 

outstanding

Outstanding at December 31, 2018

 

1,853

Options granted

 

120

Options exercised

 

(105)

Options forfeited or cancelled

 

(41)

Outstanding at September 30, 2019

 

1,827

Restricted Stock Units

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

 

 

 

 

 

Number of

 

    

shares

Unvested at December 31, 2018

 

1,921

Granted

 

2,465

Vested

 

(863)

Forfeited

 

(375)

Unvested at September 30, 2019

 

3,148

 

11. Stockholders’ Equity

Follow-on Public Offering of Common Stock

 

On February 12, 2018, we completed an underwritten registered public offering of 3,373,332 shares of our common stock, which included full exercise of the underwriter’s option to purchase additional shares of common stock, at a public offering price of $7.50 per share. We received aggregate net proceeds from the offering of $23.4 million, after deducting the underwriting discounts and commissions and offering expenses of approximately $1.9 million.

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. We have not initiated any repurchases of our common stock since December 2016 and are not currently making repurchases. As of September 30, 2019, 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, 2019, there were no unsettled share repurchases. The par value of shares repurchased 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.


16

 

12. Acquisitions and Dispositions

Acquisitions

Only In Your State

On February 1, 2019, pursuant to an Asset Purchase Agreement, we acquired substantially all of the assets of Only In Your State, LLC (“Only In Your State”), including its website that focuses on travel and local tourism for total consideration of $2.0 million in cash, of which $0.1 million was held back to secure post-closing indemnification obligations.

We evaluated the acquisition of Only In Your State under ASU 2017-01, Business Combinations: Clarifying the Definition of a Business. Based on the results of the analysis performed, we determined that substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. As a result, we concluded that the acquisition of Only In Your State represents an asset acquisition and does not represent a business combination to be accounted for under ASC 805. The total purchase price of $2.0 million was preliminarily allocated entirely to the trademark acquired, which has an estimated useful life of ten years. Our preliminary allocation and valuation of the fair value of individual assets acquired is based on estimates and assumptions and is subject to change pending finalization of the allocation and valuation.

 

The acquisition is included in our condensed consolidated financial statements as of the closing date of the acquisition, which was February 1, 2019. Acquisition-related transaction costs were not material.

 

Well+Good

 

On June 5, 2018, we acquired 100% of the issued and outstanding membership interests of Well+Good LLC (“Well+Good”), a health and wellness media company, for an initial payment of $12.3 million in cash, comprised of a $10.0 million purchase price and an additional $2.3 million after giving effect to working capital adjustments as of the closing date. Of the aggregate $12.3 million in cash paid at closing, $0.8 million was held back to secure post-closing indemnification obligations of the sellers and/or post-closing adjustments to the purchase price. Any remaining portion of the holdback amount not subject to then-pending claims will be paid on the one year anniversary of the closing of the acquisition. In addition, we agreed to pay certain key employees/equity holders of Well+Good deferred compensation targeted at $9.0 million, payable over a three year period upon the achievement of certain operating targets through the end of the 2020 fiscal year, subject to reduction, increase and acceleration in certain circumstances. The deferred compensation is considered post-combination consideration and any estimated deferred compensation expense for future periods accrues and is included in other liabilities in our condensed consolidated balance sheet. In February 2019, deferred compensation of $1.9 million was paid to certain key employees/equity holders of Well+Good based on fiscal year 2018 results. As of September 30, 2019, we have not accrued any expense for Well+Good deferred compensation based on the 2019 fiscal year period. 

13. Business Segments

 

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 other content 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 chief operating decision maker (the “CODM”) uses revenue and 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 (expense); (e) income taxes; and (f) contingent payments to certain key employees/equity holders of acquired businesses. 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.

 


17

 

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, 

 

 

 

2019

 

2018

 

2019

 

2018

 

Segment Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

$

23,327

 

$

24,712

 

$

63,354

 

$

65,334

 

Media

 

 

16,703

 

 

16,744

 

 

46,503

 

 

44,189

 

Total revenue

 

$

40,030

 

$

41,456

 

$

109,857

 

$

109,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Expenses:

 

 

 

    

 

 

 

 

 

 

 

 

 

Marketplaces(1)

 

$

22,512

 

$

24,386

 

$

65,194

 

$

65,498

 

Media(1)

 

 

10,039

 

 

10,185

 

 

29,585

 

 

25,636

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

7,179

 

 

6,774

 

 

22,343

 

 

20,363

 

Consolidated operating expenses

 

$

39,730

 

$

41,345

 

$

117,122

 

$

111,497

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution:

    

 

 

    

 

 

    

 

 

    

 

 

 

Marketplaces(3)

 

$

815

 

$

326

 

$

(1,840)

 

$

(164)

 

Media(3)

 

 

6,664

 

 

6,559

 

 

16,918

 

 

18,553

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

(7,179)

 

 

(6,774)

 

 

(22,343)

 

 

(20,363)

 

Acquisition, disposition and realignment costs(4)

 

 

 —

 

 

17

 

 

 —

 

 

241

 

Adjusted EBITDA(5)

 

$

300

 

$

128

 

$

(7,265)

 

$

(1,733)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reconciliation to consolidated pre-tax income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA(5)

 

$

300

 

$

128

 

$

(7,265)

 

$

(1,733)

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income (expense), net

 

 

39

 

 

114

 

 

217

 

 

160

 

Other (expense) income, net

 

 

(6)

 

 

(59)

 

 

 6

 

 

(92)

 

Depreciation and amortization(6)

 

 

(2,362)

 

 

(2,687)

 

 

(7,740)

 

 

(7,588)

 

Stock-based compensation(7)

 

 

(2,460)

 

 

(2,502)

 

 

(6,590)

 

 

(7,386)

 

Acquisition, disposition, realignment and contingent payment costs(8)

 

 

 —

 

 

(1,016)

 

 

(90)

 

 

(1,555)

 

Loss before income taxes

 

$

(4,489)

 

$

(6,022)

 

$

(21,462)

 

$

(18,194)

 


(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 (expense); (e) income taxes; and (f) contingent payments to certain key employees/equity holders of acquired businesses.

 

(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 (expense); 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, (b) employee severance, and (c) other payments attributable to acquisition, disposition or corporate realignment activities, excluding contingent payments to certain key employees/equity holders of acquired businesses.

 

(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, contingent payments to certain key employees/equity holders of acquired businesses and other payments attributable to acquisition, disposition or corporate realignment activities.

 


18

 

(6)

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.

 

(7)

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

 

(8)

Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities, (b) employee severance, (c) contingent payments to certain key employees/equity holders of acquired businesses and (d) other payments attributable to acquisition, disposition or corporate realignment activities.

 

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, 

 

 

2019

    

2018

    

2019

    

2018

Domestic

 

$

35,041

 

$

35,343

 

$

94,336

 

$

91,181

International

 

 

4,989

 

 

6,113

 

 

15,521

 

 

18,342

Total revenue

 

$

40,030

 

$

41,456

 

$

109,857

 

$

109,523

 

14. Fair Value

 

As of each of the periods ended September 30, 2019 and 2018, we did not have any Level 1 financial assets measured at fair value. In May 2017, 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 are 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 May 2018 and May 2019 installments of the contingent consideration, net of post-closing working capital adjustments to the purchase price, were paid to the seller in the amounts of $1.1 million and $1.2 million, respectively. The estimated amount payable upon the third anniversary is included in other liabilities in our condensed consolidated balance sheet. The fair value adjustment to the liability for each of the three and nine months ended September 30, 2019 and 2018 was not material. We classify our contingent consideration resulting from acquisitions within Level 3, as the valuation inputs are based on unobservable inputs.  Of the $0.8 million held back as a result of the Well+Good acquisition, in May and June 2019 we paid $0.6 million to the sellers, net of $0.2 million included as a working capital adjustment pursuant to the purchase agreement.

 

15. Net Loss Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

2019

    

2018

    

2019

    

2018

Net loss

 

$

(4,485)

 

$

(6,035)

 

$

(21,533)

 

$

(18,253)

Weighted average common shares outstanding—basic and diluted

 

 

26,089

 

 

25,111

 

 

25,868

 

 

24,315

Net loss per share—basic and diluted

 

$

(0.17)

 

$

(0.24)

 

$

(0.83)

 

$

(0.75)

For the three months ended September 30, 2019 and 2018, we excluded 5.0 million and 1.8 million shares, respectively, and for the nine months ended September 30, 2019 and 2018, we excluded 5.0 million and 2.4 million shares, respectively,  from the calculation of diluted weighted average common shares outstanding, as their inclusion would have been antidilutive.

For the three months ended September 30, 2019 and 2018, had we reported net income, approximately 0.1 million and 1.4 million common shares would have been included in the number of shares used to calculate earnings per share, respectively. For the nine months ended September 30, 2019 and 2018, had we reported net income, approximately 0.4 million and 1.2 million common shares would have been included in the number of shares used to calculate earnings per share, respectively.


19

 

 

16. Subsequent Events

On November 7, 2019, we entered into a loan and security agreement for a 364-day senior secured working capital revolving line of credit with Silicon Valley Bank. The asset-based revolving credit facility provides for a maximum amount up to the lesser of (i) $10.0 million, or (ii) 80% advance rate against eligible accounts receivable, as described in the agreement. Any borrowing under the facility will bear interest at a floating rate equal to the greater of (i) WSJ Prime Rate plus 0.50%, or (ii) 5.0%. We must also pay an unused line per annum fee of 0.20% based on maximum commitments less outstanding balances on the line of credit, payable monthly in arrears. The agreement is secured by all assets, including intellectual property.

There are no outstanding borrowings under the revolving credit facility.

 

 

 

 

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 “Society6”, “Deny Designs”, “The Other Art Fair”, and “Well+Good” 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, 2018 (the “2018 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 (the “Exchange Act”). 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 2018 Annual Report, which was filed with the SEC on March 4, 2019, and the factors described in the section entitled “Risk Factors” in Part I. Item 1A of the 2018 Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.


20

 

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

Leaf Group is a diversified consumer internet company that builds enduring, digital-first brands that reach passionate audiences in large and growing lifestyle categories, including fitness and wellness and art and design.  

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 and designers can market and sell their original art and designs printed on a wide variety of products. Our made-to-order marketplaces, consisting of Society6.com (“Society6”) and our wholesale channel, Deny Designs (collectively, “Society6 Group”), provide artists and designers with an online commerce platform to feature and sell their original art and designs on an array of consumer products primarily in the home décor category. Saatchi Art, inclusive of SaatchiArt.com (“Saatchi Art”) and its art fair event brand, The Other Art Fair (collectively, “Saatchi Art Group”), is a leading online art gallery where a global community of artists exhibit and sell their original artwork directly to consumers through a curated online gallery or in-person at art fairs hosted in the United Kingdom, Australia, and the United States. Saatchi Art’s online art gallery features a wide selection of original paintings, drawings, sculptures and photography.

Our Marketplaces segment primarily generates revenue from the sale of products and services through our art and design marketplaces. Society6 Group revenue is generated from the sale of made-to-order products. Saatchi Art Group primarily generates revenue through commissions on the final sale price of original works of art and from various sources relating to the hosting of in-person art fairs, including commissions from the sale of original art, fees paid by artists for stands and through sponsorship opportunities with third-party brands and advertisers.

Media

Our Media segment brands educate and entertain consumers across a wide variety of life topics, including the popular fitness and wellness and home and design verticals. In the fitness and wellness vertical, our leading brands include Well+Good and Livestrong.com, which help people lead healthier lives. In the home and design vertical, Hunker is our leading brand inspiring people to improve the space around them. These brands are the leaders in our catalog of over 50 other brands focused on specific categories or interests that we either own and operate or host and operate for our partners.

Our brands each develop a distinct voice and create content that connects with their consumers across a wide variety of platforms, devices and formats. In order to improve our engagement with consumers, we continually redesign and update our websites; refine our content library; evaluate and adjust ad unit density; and develop new ways of integrating the messages from our advertising partners. Our revenues are driven by growing the number of consumers and increasing the number of visits through improving the user and content experience, fostering genuine connections between our audience and their brands and providing engaging advertising or sponsorship opportunities to our partners.

Revenue

For the three months ended September 30, 2019 and 2018, we reported revenue of $40.0 million and $41.5 million, respectively, and for the nine months ended September 30, 2019 and 2018, we reported revenue of $109.9 million and $109.5 million, respectively. For the three months ended September 30, 2019 and 2018, Marketplaces revenue accounted for 58% and 60% of our total revenue, respectively, and Media revenue accounted for 42% and 40% of our total revenue, respectively. For the nine months ended September 30, 2019 and 2018, Marketplaces revenue accounted for 58% and 60% of our total revenue, respectively, and Media revenue accounted for 42% and 40% of our total revenue, respectively.


21

 

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.

Follow-on Public Offering of Common Stock

 

On February 12, 2018, we completed an underwritten registered public offering of 3,373,332 shares of our common stock, which included full exercise of the underwriter’s option to purchase additional shares of common stock, at a public offering price of $7.50 per share. We received aggregate net proceeds from the offering of $23.4 million, after deducting the underwriting discounts and commissions and offering expenses. The net proceeds from the offering have been and continue to be used for working capital and general corporate purposes. A portion of the net proceeds have also been, and may continue to be, used to acquire or invest in complementary businesses, products and technologies. 

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. The number of transactions, gross transaction value, number of visits and revenue per visit are currently the key metrics for understanding our results of operations.

Marketplaces Metrics

·

Number of transactions: We define transactions as the total number of Marketplaces transactions successfully completed by a customer during the applicable period, excluding certain transactions generated by Saatchi Art’s The Other Art Fair, such as sales of stand space to artists at fairs, sponsorship fees and ticket sales.

·

Gross transaction value: We define gross transaction value as the total dollar value of Marketplaces transactions, excluding the revenue from certain transactions generated by Saatchi Art’s The Other Art Fair, such as sales of stand space to artists at fairs, sponsorship fees and ticket sales. Gross transaction value is the total amount paid by the customer including the total product price inclusive of artist margin, shipping charges, and sales taxes, and is net of any promotional discounts. Gross transaction value does not reflect any subsequent cancellations, refunds or credits and does not represent revenue earned by the Company.

Media Metrics

·

Visits per Google Analytics: Visits per Google Analytics are defined 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, a break of access of at least 30 minutes constitutes a unique visit. Additionally, a visit is also considered to have ended at midnight or if a user arrives via one campaign, leaves, and then comes back via a different campaign.

·

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


22

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

  

Nine months ended September 30, 

 

 

 

 

 

2019

 

2018

 

% Change

 

 

2019

 

2018

 

% Change

 

Marketplaces Metrics(1)(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Transactions

 

 

316,490

 

 

374,008

 

(15)

%

 

 

845,859

 

 

955,223

 

(11)

%  

Gross Transaction Value (in thousands)

 

$

29,341

 

$

30,216

 

(3)

%

 

$

81,526

 

$

81,315

 

 0

%  

Media Metrics(2)(3):

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

Visits per Google Analytics (in thousands)

 

 

736,608

 

 

665,193

 

11

%

 

 

2,194,681

 

 

2,221,967

 

(1)

%

Revenue per Visit (Google Analytics)

 

$

22.68

 

$

25.17

 

(10)

%

 

$

21.19

 

$

19.89

 

 7

%

(1)

Marketplaces Metrics excludes transactions and the associated revenue generated by Saatchi Art’s The Other Art Fair, such as sales of stand space to artists at fairs, sponsorship fees and ticket sales.

(2)

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

 

Basis of Presentation

Revenue

 

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the promised good or service. We allocate any arrangement fee or other incentive or promotional offers to each of the elements based on their relative selling prices.  

Our revenue is principally derived from the following products and services:

Product Revenue

Marketplaces

We recognize product revenue from sales of products when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods. In determining the amount of consideration we expect to be entitled to, we take into account sales allowances, estimated returns based on historical experience and any incentive offers provided to customers to encourage purchases, including percentage discounts off current purchases, free shipping and other promotional offers. Because we are the principal in a transaction and obtain control of the goods before they are transferred to the customer, we record product revenue at the gross amount. Value-added taxes (“VAT”), sales tax and other taxes are not included in product revenue because we are a pass-through conduit for collecting and remitting any such taxes.  

Service Revenue

Marketplaces

We generate Marketplaces service revenue from commissions we receive from facilitating the sale of original art by artists to customers through Saatchi Art. We also generate Marketplaces service revenue from various sources relating to Saatchi Art’s The Other Art Fair, including commissions from the sale of original art, fees paid by artists for stands at fairs and through sponsorship opportunities with third-party brands and advertisers. We recognize fair-related service revenue upon completion of each fair. We recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not the principal in the transaction and we do not obtain control over the original art. Revenue is recognized when we transfer control of the promised service, which is after the original art has been delivered and the return period has expired. We provide incentive offers to Saatchi Art customers to encourage purchases, including percentage discounts off current purchases, free shipping and other promotional 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.


23

 

Media

Advertising Revenue. 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 display advertisements, where revenue is dependent upon the number of advertising impressions delivered; performance-based cost-per-click advertising, in which an advertiser pays only when a visitor clicks on an advertisement; sponsored content; or advertising links. Performance obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements is recognized as the related performance criteria are met. We assess whether performance criteria have been met based on a reconciliation of the performance criteria. The reconciliation of the performance criteria generally includes a comparison of third-party performance data to the contractual performance obligation and to internal or partner-performance data in circumstances where that data is available. 

Where we enter into revenue-sharing arrangements with our partners, such as those relating to our advertiser network, we report revenue on a gross or net basis depending on whether we are considered the principal in the transaction. In addition, we consider which party controls the service, including which party is primarily responsible for fulfilling the promise to provide the service. We also consider which party has the latitude to establish the sales prices to advertisers. When we are considered the principal, we report the underlying revenue on a gross basis in our consolidated statements of operations, and record these revenue-sharing payments to our partners in service costs.

 

Content Sales and Licensing Revenue. We generate revenue from the sale or license of media content, including the creation and distribution of content for third-party brands and publishers. Revenue from the sale or perpetual license of media content is recognized when the control of content is transferred or when the right to use is transferred 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 the right to access content is delivered or when other related performance criteria are fulfilled. In circumstances where we distribute our content on third-party properties and the customer acts as the principal, we recognize revenue on a net basis.

Product Costs

Product costs consist of product manufacturing costs, including both in-house and contracted third-party manufacturing costs, artist payments, personnel costs and credit card and other transaction processing fees.

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 principal. In addition, service costs include expenses related to art fairs hosted by Saatchi Art’s The Other Art Fair, such as venue-related costs and fair personnel costs.

Shipping and Handling

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

Sales and Marketing

Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations, advertising, marketing and general promotional expenditures. Fluctuations in our sales and marketing expenses are generally the result of our efforts to drive growth in our product and service offerings.


24

 

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.

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 service fees and insurance. Professional service fees are largely comprised of outside legal, audit and information technology consulting services.

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.

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 non-employees, and expenses relating to our Employee Stock Purchase Plan (the “ESPP”). 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.

Income Tax Benefit (Expense)

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, Australia, Canada and Argentina. We may in the future become subject to taxation in additional countries based on the foreign statutory rates in those countries 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


25

 

deferred tax assets. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended. Currently, we do not expect the utilization of our net operating loss and tax credit carryforwards in the near term to be materially affected as no significant limitations are expected to be placed on these carryforwards 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.

Critical Accounting Policies and Estimates

Our unaudited interim consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of our unaudited interim 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, goodwill, capitalization and useful lives associated with our intangible assets, and the recoverability of our long-lived assets 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 2018 Annual Report. There have been no material changes to our critical accounting policies and estimates since the date of our 2018 Annual Report.


26

 

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, 

 

 

 

2019

    

2018

    

2019

    

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

19,611

 

$

22,482

 

$

53,021

 

$

58,125

 

Service revenue

 

 

20,419

 

 

18,974

 

 

56,836

 

 

51,398

 

Total revenue

 

 

40,030

 

 

41,456

 

 

109,857

 

 

109,523

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

14,221

 

 

16,202

 

 

40,049

 

 

42,003

 

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

 

 

9,107

 

 

8,229

 

 

26,000

 

 

21,077

 

Sales and marketing(1)(2)

 

 

7,372

 

 

8,796

 

 

22,498

 

 

23,644

 

Product development(1)(2)

 

 

4,973

 

 

5,558

 

 

15,652

 

 

15,362

 

General and administrative(1)(2)

 

 

8,072

 

 

7,615

 

 

24,724

 

 

22,584

 

Amortization of intangible assets

 

 

807

 

 

1,133

 

 

2,619

 

 

3,115

 

Total operating expenses

 

 

44,552

 

 

47,533

 

 

131,542

 

 

127,785

 

Loss from operations

 

 

(4,522)

 

 

(6,077)

 

 

(21,685)

 

 

(18,262)

 

Interest income

 

 

44

 

 

116

 

 

232

 

 

164

 

Interest expense

 

 

(5)

 

 

(2)

 

 

(15)

 

 

(4)

 

Other income (expense), net

 

 

(6)

 

 

(59)

 

 

 6

 

 

(92)

 

Loss before income taxes

 

 

(4,489)

 

 

(6,022)

 

 

(21,462)

 

 

(18,194)

 

Income tax benefit (expense)

 

 

 4

 

 

(13)

 

 

(71)

 

 

(59)

 

Net loss

 

$

(4,485)

 

$

(6,035)

 

$

(21,533)

 

$

(18,253)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Product costs

 

$

401

 

$

235

 

$

1,162

 

$

629

 

Service costs

 

 

951

 

 

787

 

 

2,831

 

 

2,179

 

Sales and marketing

 

 

 7

 

 

 6

 

 

20

 

 

22

 

Product development

 

 

12

 

 

14

 

 

35

 

 

52

 

General and administrative

 

 

184

 

 

512

 

 

1,073

 

 

1,591

 

Total depreciation

 

$

1,555

 

$

1,554

 

$

5,121

 

$

4,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Service costs

 

$

315

 

$

189

 

$

758

 

$

515

 

Sales and marketing

 

 

269

 

 

292

 

 

520

 

 

760

 

Product development

 

 

635

 

 

603

 

 

1,791

 

 

1,762

 

General and administrative

 

 

1,241

 

 

1,418

 

 

3,521

 

 

4,349

 

Total stock-based compensation

 

$

2,460

 

$

2,502

 

$

6,590

 

$

7,386

 

 

 

 

 

 

 

 


27

 

 

As a percentage of revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

Nine months ended September 30, 

 

 

    

    

2019

    

2018

    

 

2019

    

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

 

49.0

%  

54.2

%  

 

48.3

%  

53.1

%  

Service revenue

 

 

51.0

%  

45.8

%  

 

51.7

%  

46.9

%  

Total revenue

 

 

100.0

%  

100.0

%  

 

100.0

%  

100.0

%  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

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

 

 

35.5

%  

39.1

%  

 

36.5

%  

38.4

%  

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

 

 

22.8

%  

19.8

%  

 

23.7

%  

19.2

%  

Sales and marketing

 

 

18.4

%  

21.3

%  

 

20.5

%  

21.6

%  

Product development

 

 

12.4

%  

13.4

%  

 

14.2

%  

14.0

%  

General and administrative

 

 

20.2

%  

18.4

%  

 

22.5

%  

20.6

%  

Amortization of intangible assets

 

 

2.0

%  

2.7

%  

 

2.5

%  

2.9

%  

Total operating expenses

 

 

111.3

%  

114.7

%  

 

119.8

%  

116.7

%  

Loss from operations

 

 

(11.3)

%  

(14.7)

%  

 

(19.8)

%  

(16.7)

%  

Interest income

 

 

 —

%  

0.3

%  

 

0.3

%  

0.2

%  

Interest expense

 

 

 —

%  

 —

%  

 

 —

%  

 —

%  

Other income (expense), net

 

 

 —

%  

(0.1)

%  

 

 —

%  

(0.1)

%  

Loss before income taxes

 

 

(11.2)

%  

(14.5)

%  

 

(19.5)

%  

(16.6)

%  

Income tax benefit (expense)

 

 

 —

%  

 —

%  

 

(0.1)

%  

(0.1)

%  

Net loss

 

 

(11.2)

%  

(14.5)

%  

 

(19.6)

%  

(16.7)

%  

Segment results (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

2019

 

2018

 

% Change

 

2019

 

2018

 

% Change

 

Segment Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

$

23,327

 

$

24,712

 

(6)

%  

$

63,354

 

$

65,334

 

(3)

%  

Media

 

 

16,703

 

 

16,744

 

(0)

%  

 

46,503

 

 

44,189

 

 5

%  

Total revenue

 

$

40,030

 

$

41,456

 

(3)

%  

$

109,857

 

$

109,523

 

 0

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Expenses:

 

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

Marketplaces(1)

 

$

22,512

 

$

24,386

 

(8)

%

$

65,194

 

$

65,498

 

(0)

%

Media(1)

 

 

10,039

 

 

10,185

 

(1)

%

 

29,585

 

 

25,636

 

15

%

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

7,179

 

 

6,774

 

 6

%

 

22,343

 

 

20,363

 

10

%

Consolidated operating expenses

 

$

39,730

 

$

41,345

 

(4)

%

$

117,122

 

$

111,497

 

 5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Contribution:

 

 

 

    

 

 

    

 

 

 

 

    

 

 

    

 

 

Marketplaces(3)

 

$

815

 

$

326

 

150

%

$

(1,840)

 

$

(164)

 

(1,022)

%

Media(3)

 

 

6,664

 

 

6,559

 

 2

%

 

16,918

 

 

18,553

 

(9)

%

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate expenses(2)

 

 

(7,179)

 

 

(6,774)

 

 6

%

 

(22,343)

 

 

(20,363)

 

10

%

Acquisition, disposition and realignment costs(4)

 

 

 —

 

 

17

 

(100)

%

 

 —

 

 

241

 

(100)

%

Adjusted EBITDA(5)

 

$

300

 

$

128

 

134

%

$

(7,265)

 

$

(1,733)

 

(319)

%

 

(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


28

 

compensation expense; (d) interest and other income (expense); (e) income taxes; and (f) contingent payments to certain key employees/equity holders of acquired businesses.

 

(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 (expense); 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, (b) employee severance, (c) contingent payments to certain key employees/equity holders of acquired businesses, and (d) 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, contingent payments to certain key employees/equity holders of acquired businesses and other payments attributable to acquisition, disposition or corporate realignment activities.

 

See Note 13 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 decreased by $1.4 million, a 6% decrease, to $23.3 million for the three months ended September 30, 2019, as compared to $24.7 million for the same period in 2018. The decrease was driven by a 13% decrease in Society6 Group revenue year-over-year resulting, in part, from declining sales domestically, internationally, and through third-party marketplaces, partially offset by a 59% increase in Saatchi Art Group revenue year-over-year. The increase in Saatchi Art Group revenue was primarily driven by an increase in the number of transactions and average order value. For the three months ended September 30, 2019, Marketplaces gross transaction value was $29.3 million as compared to $30.2 million in the prior year period, reflecting a decrease of 3%, driven by a 10% decrease in gross transaction value from Society6 Group offset by a 29% increase in gross transaction value from Saatchi Art Group. The decrease in Society6 Group gross transaction value was primarily driven by a decrease in the number of transactions in domestic and international markets and through third-party marketplaces, partially offset by an increase in Society6 Group average order value. The increase in Society6 Group average order value was due to increases in items per order, price per item and the amount of sales tax we collect as a consequence of the impact of the Wayfair decision, which permits states to adopt laws requiring sellers to collect sales and use tax, even in states where the seller has no physical presence. The increase in Saatchi Art Group gross transaction value was primarily driven by an increase in the number of transactions and average order value. Gross transaction value excludes the revenue from certain transactions generated by Saatchi Art’s The Other Art Fair, such as the sales of stand space to artists at fairs, sponsorship fees and ticket sales. The number of transactions decreased 15% to 316,490 in the three months ended September 30, 2019 as compared to 374,008 in the same period in 2018, primarily due to decreases in domestic and international sales on Society6 and from our decision to focus on sales generated through our platforms directly rather than selling through third-party marketplaces, partially offset by an increase in transactions for Saatchi Art Group. 

 

Marketplaces revenue decreased by $2.0 million, a 3% decrease, to $63.3 million for the nine months ended September 30, 2019, as compared to $65.3 million for the same period in 2018, with Society6 Group revenue decreasing 10% year-over-year resulting from, in part, declining sales internationally, through third-party marketplaces, and domestically, partially offset by a 41% increase in Saatchi Art Group revenue year-over-year. The increase in Saatchi Art Group revenue was primarily driven by an increase in the number of transactions. For the nine months ended September 30, 2019, Marketplaces gross transaction value was $81.5 million as compared to $81.3 million in the prior year period, driven by a 23% increase in gross transaction value from Saatchi Art Group offset by a 6% decrease in gross transaction value from Society6 Group. The increase in Saatchi Art Group gross transaction value was primarily driven by an increase in the number of transactions.  The decrease in Society6 Group gross transaction value was primarily driven by a decrease in the number of transactions in domestic and international markets and through third-party marketplaces, partially offset by an increase in Society6 Group average order value. The increase in Society6 Group average order value was due to increases in items per order, price per item and the amount of sales tax we collect as a consequence of the impact of the Wayfair decision, which permits states to adopt laws


29

 

requiring sellers to collect sales and use tax, even in states where the seller has no physical presence. Gross transaction value excludes the revenue from certain transactions generated by Saatchi Art’s The Other Art Fair, such as the sales of stand space to artists at fairs, sponsorship fees and ticket sales. The number of transactions decreased 11% to 845,859 in the nine months ended September 30, 2019, as compared to 955,223 in the same period in 2018, primarily due to decreases in domestic and international sales on Society6 and from our decision to focus on sales generated through our platforms directly rather than selling through third-party marketplaces, partially offset by increases in transactions for Saatchi Art Group. 

Media Revenue

Media revenue remained flat at $16.7 million for the three months ended September 30, 2019, as compared to the same period in 2018, primarily due to an increase in revenue from our premium sites, including a 123% increase from Hunker, offset by a 35% decrease in revenue from Livestrong.com. Google Analytics data shows that visits increased by 11% to 737 million visits in the three months ended September 30, 2019 from 665 million visits in the same period in 2018. This increase was primarily due to visits related to the acquisition of Only in Your State in February 2019 and sustained growth across our premium sites, including Hunker, partially offset by a decrease in Livestrong.com traffic due to recent Google search engine updates that negatively impacted the volume of referral traffic to many health-related sites, and the removal of content as part of our efforts to refine our content library on Livestrong.com. RPV, calculated using visits per Google Analytics, decreased by 10%, to $22.68 in the three months ended September 30, 2019 from $25.17 in the same period in 2018.

Media revenue increased by $2.3 million, a 5% increase, to $46.5 million for the nine months ended September 30, 2019, as compared to $44.2 million for the same period in 2018 primarily due to the acquisition of Well+Good in June 2018 and an increase in revenue from our premium sites, including a 142% increase from Hunker, partially offset by a 38% decrease in revenue from Livestrong.com. Google Analytics data shows that visits remained flat at 2.2 million visits in the nine months ended September 30, 2019 compared to the same period in 2018, primarily due to a decrease in Livestrong.com traffic due to recent Google search engine updates that negatively impacted the volume of referral traffic to many health-related sites, and the removal of content as part of our efforts to refine our content library on Livestrong.com, offset by an increase in visits as a result of the acquisitions of Well+Good in June 2018 and Only in Your State in February 2019 and increases in our premium sites, including Hunker. RPV, calculated using visits per Google Analytics, increased 7%, to $21.19 in the nine months ended September 30, 2019 from $19.89 in the same period in 2018, as a result of the acquisition of Well+Good in June 2018 and improved ad monetization yields on several of our media properties.

 

Consolidated Costs and Expenses

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

 

 

 

Nine months ended September 30, 

 

 

 

 

 

2019

 

2018

 

% Change

 

 

2019

 

2018

 

% Change

 

Product costs (exclusive of amortization of intangible assets)

 

$

14,221

 

$

16,202

 

(12)

%

   

$

40,049

 

$

42,003

 

(5)

%

Service costs (exclusive of amortization of intangible assets)

 

 

9,107

 

 

8,229

 

11

%

 

 

26,000

 

 

21,077

 

23

%

Sales and marketing

 

 

7,372

 

 

8,796

 

(16)

%

 

 

22,498

 

 

23,644

 

(5)

%

Product development

 

 

4,973

 

 

5,558

 

(11)

%

 

 

15,652

 

 

15,362

 

 2

%

General and administrative

 

 

8,072

 

 

7,615

 

 6

%

 

 

24,724

 

 

22,584

 

 9

%

Amortization of intangible assets

 

 

807

 

 

1,133

 

(29)

%

 

 

2,619

 

 

3,115

 

(16)

%

Product Costs

Product costs for the three months ended September 30, 2019 decreased by $2.0 million, or 12%, to $14.2 million, as compared to $16.2 million for the same period in 2018, primarily due to a decrease in marketplace revenue.

Product costs for the nine months ended September 30, 2019 decreased by $2.0 million, or 5%, to $40.0 million, as compared to $42.0 million for the same period in 2018, primarily due to a decrease in marketplace revenue.


30

 

Service Costs

Service costs for the three months ended September 30, 2019 increased by $0.9 million, or 11%, to $9.1 million, as compared to $8.2 million for the same period in 2018. The increase was primarily due to increases of $0.7 million related to content development and renovation, $0.2 million in cost of services primarily related to higher media event costs for Well+Good and its offline programming and custom events offerings, higher shipping on Saatchi Art due to more transactions, $0.2 million in depreciation expense, and $0.1 million in consulting fees, partially offset by a decrease of $0.4 million in earn-out costs.

Service costs for the nine months ended September 30, 2019 increased by $4.9 million, or 23%, to $26.0 million, as compared to $21.1 million for the same period in 2018. The increase was primarily due to increases of $1.8 million related to content development and renovation, $1.3 million in personnel and related costs primarily driven by an increase in headcount due to the acquisition of Well+Good in June 2018, $0.8 million in cost of services primarily related to higher media event costs due to the acquisition of Well+Good and its offline programming and custom events offerings, higher shipping costs on Saatchi Art resulting from more transactions, $0.7 million in depreciation expense, $0.3 million in consulting fees and $0.1 million in ad serving costs, partially offset by a decrease of $0.6 million in earn-out costs.

Sales and Marketing

Sales and marketing expenses for the three months ended September 30, 2019 decreased by $1.4 million, or 16%, to $7.4 million, as compared to $8.8 million for the same period in 2018. The decrease was primarily due to decreases of $1.3 million in marketing activities, primarily from lower performance marketing spend on Livestrong.com, and $0.4 million in personnel and related costs, partially offset by an increase of $0.3 million in license and support costs.

Sales and marketing expenses for the nine months ended September 30, 2019 decreased by $1.1 million, or 5%, to $22.5 million, as compared to $23.6 million for the same period in 2018. The decrease was primarily due to a decrease of $3.0 million in marketing activities, primarily from lower performance marketing spend on Livestrong.com, partially offset by increases of $1.2 million in personnel and related costs, primarily driven by an increase in headcount resulting from the acquisition of Well+Good in June 2018 and the expansion of our branded direct salesforce, and $0.7 million in license and support costs.

Product Development

Product development expenses for the three months ended September 30, 2019 decreased by $0.6 million, or 11%, to $5.0 million, as compared to $5.6 million for the same period in 2018. The decrease was primarily due to $0.5 million in earn-out costs not incurred in 2019.

Product development expenses for the nine months ended September 30, 2019 increased by $0.3 million, or 2%, to $15.7 million, as compared to $15.4 million in the same period in 2018. The increase was primarily due to increases of $0.5 million in personnel and related costs and $0.4 million in consulting cost, partially offset by a decrease of $0.7 million in earn-out costs not incurred in 2019.

General and Administrative

General and administrative expenses for the three months ended September 30, 2019 increased by $0.5 million, or 6%, to $8.1 million, as compared to $7.6 million in the same period in 2018. The increase was primarily due to increases of $0.3 million associated with strategic review costs including fees of legal, financial and other advisors, $0.2 million in facilities costs and $0.2 million in board fees, licenses and taxes, partially offset by a decrease of $0.3 million in depreciation expense.

General and administrative expenses for the nine months ended September 30, 2019 increased by $2.1 million, or 9%, to $24.7 million, as compared to $22.6 million in the same period in 2018. The increase was primarily due to increases of $1.5 million associated with potential proxy contest and strategic review costs including fees of legal, financial and other advisors, $0.7 million in board fees, and $0.3 million in consulting costs licenses and taxes partially offset by decreases of $0.5 million in depreciation expense. 


31

 

Amortization of Intangible Assets

Amortization expense for the three months ended September 30, 2019 decreased by $0.3 million, or 29%, to $0.8 million, as compared to $1.1 million in the same period in 2018.  The decrease in amortization expense is primarily due to intangible assets completing their useful life.

Amortization expense for the nine months ended September 30, 2019 decreased by $0.5 million, or 16%, to $2.6 million, as compared to $3.1 million in the same period in 2018.  The decrease in amortization expense is primarily due to intangible assets completing their useful life.

Interest Income (Expense), Net

Interest income (expense) for the three months ended September 30, 2019 was less than $0.1 million, as compared to $0.1 million in the same period in 2018. Interest income (expense) for the nine months ended September 30, 2019 remained flat at $0.2 million, as compared to the same period in 2018.

Other Income (Expense), Net

Other income (expense), net for each of the three and nine months ended September 30, 2019 and 2018 was less than $0.1 million.  

Income Tax Benefit (Expense)

Income tax expense for each of the three and nine months ended September 30, 2019 and 2018 was less than $0.1 million.

Segment Results

Marketplaces Operating Expenses and Operating Contribution

Marketplaces operating expenses for the three months ended September 30, 2019 decreased by $1.9 million, or 8%, to $22.5 million, as compared to $24.4 million in the same period in 2018. The decrease was primarily due to a decrease in marketplace revenue, with a decrease of $1.6 million in cost of services and $0.7 million in marketing, partially offset by an increase of $0.4 million in product development. Marketplaces operating contribution was $0.8 million for the three months ended September 30, 2019, as compared to $0.3 million in the same period in 2018.

Marketplaces operating expenses for the nine months ended September 30, 2019 decreased by $0.3 million, or 0.5%, to $65.2 million, as compared to $65.5 million in the same period in 2018. The decrease was primarily due to decreases in marketplace revenue, with decreases of $0.8 million in cost of services and $0.2 million in marketing, partially offset by increases of $0.7 million in product development. Marketplaces operating contribution was a loss of $1.8 million for the nine months ended September 30, 2019, as compared to a loss of $0.2 million in the same period in 2018.

Media Operating Expenses and Operating Contribution

Media operating expenses for the three months ended September 30, 2019 decreased by $0.2 million, or 1%, to $10.0 million, as compared to $10.2 million in the same period in 2018. The decrease was primarily due to a decrease of $0.5 million in sales and marketing and $0.4 million in product development, partially offset by an increase of $0.6 million in cost of sales and $0.1 in general and administrative costs. Media operating contribution was $6.7 million for the three months ended September 30, 2019, as compared to $6.6 million in the same period in 2018.

Media operating expenses for the nine months ended September 30, 2019 increased by $3.9 million, or 15%, to $29.6 million, as compared to $25.6 million in the same period in 2018. The increase was primarily due to increased costs attributable to the acquisition of Well+Good in June 2018. The Well+Good acquisition increased personnel and related costs by $2.5 million, content fees by $1.0 million, cost of sales by $0.9 million, and professional and consulting fees by $0.7 million. Such increased costs were partially offset by a decrease in marketing spend of $2.0 million.  Media operating contribution was $16.9 million for the nine months ended September 30, 2019, as compared to $18.6 million in the same period in 2018. 


32

 

Corporate Operating Expenses

Corporate operating expenses for the three months ended September 30, 2019 increased by $0.4 million, or 6%, to $7.2 million, as compared to $6.8 million in the same period in 2018. The increase was primarily due to strategic review costs including fees of legal, financial and other advisors.

Corporate operating expenses for the nine months ended September 30, 2019 increased by $1.9 million, or 10%, to $22.3 million, as compared to $20.4 million in the same period in 2018. The increase was primarily due to potential proxy contest and strategic review costs including fees of legal, financial and other advisors, as well as an increase in personnel and related costs.

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, contingent payments to certain key employees/equity holders of acquired businesses and other payments attributable to acquisition, disposition or corporate realignment activities. 

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.


33

 

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, 

 

 

 

2019

    

2018

 

2019

    

2018

 

Net loss

 

$

(4,485)

 

$

(6,035)

    

$

(21,533)

 

$

(18,253)

 

Add (deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

 

(4)

 

 

13

 

 

71

 

 

59

 

Interest (income) expense, net

 

 

(39)

 

 

(114)

 

 

(217)

 

 

(160)

 

Other expense (income), net

 

 

 6

 

 

59

 

 

(6)

 

 

92

 

Depreciation and amortization(1)

 

 

2,362

 

 

2,687

 

 

7,740

 

 

7,588

 

Stock-based compensation(2)

 

 

2,460

 

 

2,502

 

 

6,590

 

 

7,386

 

Acquisition, disposition, realignment and contingent payment costs(3)

 

 

 —

 

 

1,016

 

 

90

 

 

1,555

 

Adjusted EBITDA

 

$

300

 

$

128

 

$

(7,265)

 

$

(1,733)

 


(1)

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.

(2)

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

(3)

Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities, (b) employee severance, (c) contingent payments to certain key employees/equity holders of acquired businesses, and (d) other payments attributable to acquisition, disposition or corporate realignment activities.

Liquidity and Capital Resources

As of September 30, 2019, we had $11.8 million of cash and cash equivalents. In February 2019, we acquired substantially all of the assets of Only In Your State, LLC for total consideration of $2.0 million in cash, of which $0.1 million was held back to secure post-closing indemnification obligations. In June 2018, we acquired Well+Good for an initial payment of $12.3 million in cash, comprised of a $10.0 million purchase price and an additional $2.3 million after giving effect to working capital adjustments as of the closing date. Of the aggregate $12.3 million in cash paid at closing, $0.8 million was held back to secure post-closing indemnification obligations of the sellers and/or post-closing adjustments to the purchase price. In May and June 2019, we paid $0.6 million of the $0.8 million held back and $0.2 million was included as a working capital adjustment pursuant to the purchase agreement. In addition, we agreed to pay certain key employees/equity holders of Well+Good deferred compensation targeted at $9.0 million, payable over a three year period upon the achievement of certain operating targets through the end of the 2020 fiscal year, subject to reduction, increase and acceleration in certain circumstances. The deferred compensation is considered post-combination consideration and any estimated deferred compensation expense for future periods accrues and is included in other liabilities in our condensed consolidated balance sheet. In February 2019, deferred compensation of $1.9 million was paid to certain key employees/equity holders of Well+Good in accordance with the purchase agreement based on fiscal year 2018 results. As of September 30, 2019, we have not accrued any expense for Well+Good deferred compensation based on the 2019 fiscal year period. 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. The May 2018 and May 2019 installments of the contingent consideration, net of post-closing working capital adjustments to the purchase price, were paid to the seller in the amounts of $1.1 million and $1.2 million, respectively. The estimated amount payable upon the third anniversary is included in other liabilities in our condensed consolidated balance sheet.

On February 12, 2018, we completed an underwritten registered public offering of 3,373,332 shares of our common stock, which included full exercise of the underwriter’s option to purchase additional shares of common stock, at a public offering price of $7.50 per share. We received aggregate net proceeds from the offering of $23.4 million, after deducting the underwriting discounts and commissions and offering expenses. The net proceeds from the offering have been and continue to be used for working capital and general corporate purposes. We have and may continue to also use a portion of the net proceeds to acquire or invest in complementary businesses, products and technologies.

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 issuance of stock and the disposition of businesses and certain non-core media properties. We believe that our


34

 

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.

For additional working capital, we entered into a new credit facility, on November 7, 2019. The loan and security agreement is a 364-day senior secured working capital revolving line of credit with Silicon Valley Bank. The asset-based revolving credit facility provides for a maximum amount up to the lesser of (i) $10.0 million, or (ii) 80% advance rate against eligible accounts receivable, as described in the agreement. Any borrowing under the facility will bear interest at a floating rate equal to the greater of (i) WSJ Prime Rate plus 0.50%, or (ii) 5.0%. We must also pay an unused line per annum fee of 0.20% based on maximum commitments less outstanding balances on the line of credit, payable monthly in arrears. The agreement is secured by all assets, including intellectual property. As of the date of this report, there were no outstanding borrowings under the revolving credit facility.

In order to fund our operations, make potential acquisitions, pursue new business opportunities, and invest in our existing businesses, platforms, and technologies, we may also need to raise additional funds by selling certain assets or using equity or 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 value not to exceed $100.0 million. Subsequent to the registered public offering in February 2018, the aggregate offering value remaining on our shelf registration statement is $76.7 million.

Since our inception, we have used cash and stock to make strategic acquisitions to grow our business, including the recent acquisitions of Only In Your State in February 2019, Well+Good in June 2018, Deny Designs in May 2017 and The Other Art Fair in July 2016. 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, of which we received $35.1 million on the closing date of the acquisition and $3.9 million the third quarter of 2017. 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. We have not initiated any repurchases of our common stock since December 2016 and are not currently making repurchases. As of September 30, 2019, 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 platforms, products, 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, 

 

 

 

2019

    

2018

 

Net cash used in operating activities

 

$

(8,745)

 

$

(3,924)

 

Net cash used in investing activities

 

$

(7,067)

 

$

(15,451)

 

Net cash (used in) provided by financing activities

 

$

(3,311)

 

$

20,697

 

Cash Flows from Operating Activities

Nine months ended September 30, 2019 and September 30, 2018

Net cash used in our operating activities during the nine months ended September 30, 2019 was $8.7 million as a result of our net loss during the period of $21.5 million, non-cash charges of $15.8 million related primarily to depreciation, amortization and stock-based


35

 

compensation, and a net decrease in our working capital of $3.0 million. The change in working capital during the nine months ended September 30, 2019 was primarily due to ordinary course variances in the timing of collections and payments, including collections of advance payments related to art fairs hosted by Saatchi Art, as well as increased personnel and related costs and service costs, including from the acquisition of Well+Good.

Net cash used in our operating activities during the nine months ended September 30, 2018 was $3.9 million as a result of our net loss during the period of $18.3 million, non-cash charges of $15.1 million related primarily to depreciation, amortization and stock-based compensation, and a net decrease in our working capital of $0.7 million. The change in working capital during the nine months ended September 30, 2018 was primarily due to ordinary course variances in the timing of collections associated with increased receivables related to our Media segment.

Cash Flows from Investing Activities

Nine months ended September 30, 2019 and September 30, 2018

Net cash used in investing activities was $7.1 million during the nine months ended September 30, 2019. Cash used in investing activities for the nine months ended September 30, 2019 primarily related to $5.2 million related to investments in property and equipment and $1.9 million paid for the acquisition of Only In Your State.

Net cash used in investing activities was $15.5 million during the nine months ended September 30, 2018. Cash used in investing activities for the nine months ended September 30, 2018 primarily related to $10.3 million paid for the acquisition of Well+Good, net of cash acquired, and $5.1 million related to investments in property and equipment.

Cash Flows from Financing Activities

Nine months ended September 30, 2019 and September 30, 2018

Net cash used in financing activities was $3.3 million during the nine months ended September 30, 2019. Cash used in financing activities for the nine months ended September 30, 2019 primarily consists of $2.4 million related to taxes paid on vesting of restricted stock units, $0.9 million of deferred consideration paid related to the acquisition of Deny Designs and $0.6 million holdback payment related to the Well+Good acquisition pursuant to the purchase agreement, partially offset by $0.7 million in proceeds from exercises of stock options and purchases under our employee stock purchase plan (“ESPP”).

Net cash provided by financing activities was $20.7 million during the nine months ended September 30, 2018. Cash provided by financing activities for the nine months ended September 30, 2018 primarily consists of $23.4 million in proceeds from the issuance of our common stock in connection with our follow-on public offering in February 2018 and $1.4 million in proceeds from exercises of stock options and purchases under our ESPP, partially offset by $3.2 million related to taxes paid on vesting of restricted stock units and $0.9 million of deferred consideration paid related to the acquisition of Deny Designs.

Off-Balance Sheet Arrangements

As of September 30, 2019, we did not have any off-balance sheet arrangements.

Capital Expenditures

For the nine months ended September 30, 2019 and 2018, we used $5.2 million and $5.1 million, respectively, in cash to fund capital expenditures to create internally developed software and purchase property and equipment.

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.


36

 

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 foreign currency exchange, inflation, concentration of credit risk and interest rate 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, 2019, our cash and cash equivalents were maintained primarily with two major U.S. financial institutions and three foreign banks. We also maintained cash balances with three 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.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

    

September 30, 2019

    

December 31, 2018

 

Google Inc.

 

27

%

25

%

Interest Rate Risk

We do not believe that interest rate risk has had a material effect on our business, financial condition or results of operations.

 

 

 

 


37

 

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 Exchange Act 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 financial officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our principal executive officer and principal financial 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 financial 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.

 

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 2018 Annual Report, which is available at www.sec.gov and at ir.leafgroup.com.  The risk factors described in the 2018 Annual Report and the risk factors 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 2018 Annual Report and in our quarterly report on Form 10-Q for the quarter ended June 30, 2019.

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, 2019.  


38

 

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.


39

 

 

 

Exhibit Index

 

 

 

 

Exhibit No

     

Description of Exhibit

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation of Leaf Group Ltd., as amended effective November 9, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the SEC on February 23, 2017).

 

3.2

 

Amended and Restated Bylaws of Leaf Group Ltd. (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on November 14, 2016).

 

 

 

4.1

 

Form of Leaf Group Ltd. Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 14, 2016).

 

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 (furnished herewith).

 

 

 

31.2

 

Certification of the Principal Financial 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 (furnished herewith).

 

 

 

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 Financial 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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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/ Jantoon Reigersman

 

Name:

Jantoon Reigersman

 

Title:

Chief Financial Officer

(Principal Financial Officer)

 

Date: November 7, 2019


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