Item
2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
S
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, 2017 (the “2017 Annual Report”).
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended
. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “plan” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are so identified.
You should not rely upon forward-looking statements as guarantees of future performance.
We have based these forward-looking statements largely on our current estimates of our financial results and our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those discussed below and elsewhere in this Quarterly Report on Form 10-Q, as well as those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”), including our 2017 Annual Report, which was filed with the SEC on March 1, 2018, and the factors described in the section entitled “Risk Factors” in Part I. Item 1A of the 2017 Annual Report. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.
You should read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed with the SEC with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we currently expect.
Overview
Leaf Group is a diversified consumer internet company that builds enduring, creator-driven brands that reach passionate audiences in large and growing lifestyle categories, including art and design, fitness and wellness, and home and décor, amongst others.
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 our Society6.com (“Society6”) and Deny Designs brands, 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. Our fine art marketplace, Saatchi Art,
inclusive of SaatchiArt.com and its art fair event brand, The Other Art Fair (collectively, “Saatchi Art”), is a leading fine art marketplace 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. On Society6 and Deny Designs, revenue is generated from the sale of made-to-order products. Saatchi Art 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 brands and advertisers.
Media
Our Media segment includes 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. Our media properties include Livestrong.com, a fitness, health and wellness destination; Hunker, a home and space inspiration destination; Cuteness.com, an online community for pet owners and animal lovers; and over 50 other media properties focused on specific categories or interests that we either own and operate or host and operate for our partners. In addition, our portfolio of media properties includes Well+Good, a leading wellness destination and brand, which we acquired in June 2018. Well+Good will operate together with our Livestrong.com media property in the fitness and wellness category.
In order to improve the quality of our products, we continually redesign and update our websites; refine our content library; rationalize ad unit density; and develop a greater variety of content formats, particularly video content and formats better suited for mobile devices and consumption on other platforms, such as social media sites. We are also working with a curated network of contributors and influencers to create more authoritative and engaging content and we are focused on building strong followings on various social media platforms such as Facebook and Pinterest, where we also publish our content. We believe that by providing consumers with an improved user and content experience, we will be able to continue to increase the number of visits and revenue in a sustained fashion over the long-term. We also believe that there are opportunities to increase our advertising revenue by continuing to optimize our ad product stack, increasing branded ad sales through direct sellers and offering more innovative products such as native advertisements and sponsored content in order to increase the overall ad unit rates we receive from our advertising partners.
Revenue
For the three months ended June 30, 2018 and 2017, we reported revenue of $34.3 million and $28.6 million, respectively, and for the six months ended June 30, 2018 and 2017, we reported revenue of $68.1 million and $55.8 million, respectively. For the three months ended June 30 2018 and 2017, Marketplaces revenue accounted for 57% and 62% of our total revenue, respectively, and Media revenue accounted for 43% and 38% of our total revenue, respectively. For each of the six months ended June 30, 2018 and 2017, Marketplaces revenue accounted for 60% of our total revenue, and Media revenue accounted for 40% of our total revenue.
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. If our revenue sources continue to shift from our Media segment to our Marketplaces segment, our total costs relative to our revenue will be negatively impacted.
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. We intend to use the net proceeds from the offering for working capital and general corporate purposes. We may also use a portion of the net proceeds 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.
In the first quarter of 2018, we added gross transaction value as a key metric for our Marketplaces segment as w
e believe that gross transaction value provides a useful measure of the overall volume that flows through our marketplaces in a given period and provides insight into the growth of the business. We are no
longer reporting on average revenue per transaction, video views and social media followers because management no longer uses these as key metrics to evaluate the business
. Historically, the company has reported the number of visits to its Media properties as a key operating metric and has used internal data to derive the number of visits during the applicable reporting period. In the second quarter of 2018, we began to report visits using data derived from Google Analytics, as we are replacing our internal methodology with Google Analytics. On a transitional basis and for the remainder of 2018, we will report visits using data derived from both our internal methodology and Google Analytics. Beginning in 2019, we will only report visits using data derived from Google Analytics.
Marketplaces Metrics
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·
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Number of transactions:
We define transactions as the total number of transactions successfully completed by a customer during the applicable period, excluding certain transactions generated by Saatchi Art’s The Other Art Fair that primarily relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships and tickets.
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·
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Gross transaction value: We define gross transaction value as the total dollar value of Marketplaces transactions, excluding certain transactions generated by Saatchi Art's The Other Art Fair that relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships and tickets. Gross transaction value is the total amount paid by the customer including the total product price, inclusive of artist margin, shipping charges, 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.
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Media Metrics
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·
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Visits – Internal: We define visits as the total number of times users access our content across (a) one of our owned and operated properties and/or (b) one of our customers’ properties, to the extent that the visited customer web pages are hosted by our content services. In each case, breaks of access of at least 30 minutes constitute a unique visit.
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·
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Visits – 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, breaks of access of at least 30 minutes constitute 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.
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·
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Revenue per visit (“RPV”): We define RPV as Media revenue per one thousand visits.
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The following table sets forth our key business metrics for the periods presented:
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Three months ended June 30,
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Six months ended June 30,
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2018
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2017
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% Change
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2018
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2017
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% Change
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Marketplaces Metrics
(1)(2)
:
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|
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Number of Transactions
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273,280
|
|
|
298,229
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|
(8)
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%
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|
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581,215
|
|
|
565,997
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3
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%
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Gross Transaction Value (in thousands)
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$
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24,507
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$
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22,517
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9
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%
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$
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51,099
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$
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42,192
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21
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%
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Media Metrics
(2)
:
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Visits - Internal (in thousands)
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776,843
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707,535
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10
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%
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1,548,414
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1,403,078
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10
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%
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Revenue per Visit (Internal)
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$
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18.88
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$
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15.37
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23
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%
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$
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17.73
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$
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15.85
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12
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%
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Visits - Google Analytics (in thousands)
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770,460
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721,973
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7
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%
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1,556,774
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1,435,479
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8
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%
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Revenue per Visit (Google Analytics)
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$
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19.04
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$
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15.06
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26
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%
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$
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17.63
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$
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15.49
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14
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%
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(1)
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Marketplaces Metrics excludes transactions and the associated revenue generated by Saatchi Art’s The Other Art Fair that directly relate to the hosting of the art fairs, such as sales of leased space to artists, sponsorships fees and ticket sales.
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(2)
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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.
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Basis of Presentation
Revenue
Revenues are 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 prices 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 periodically provided to customers to encourage purchases, including percentage discounts
off current purchases, free shipping and other promotional offers.
Product revenue is recorded at the gross amount due to the following factors: we are the principal in a transaction and obtain control of the goods before they are transferred to the customer.
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 the fairs and sponsorship opportunities and generally 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 periodically 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 through our content studio
. 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. In the near term, we expect our product costs to decrease as a percentage of product revenue due to managed promotional activity.
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. In the near term, we expect service costs to remain relatively flat as a percentage of service revenue.
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. We currently anticipate that our sales and marketing expenses will remain relatively flat as a percentage of total revenue.
Product Development
Product development expenses consist primarily of expenses incurred in our software engineering, product development and web design activities and related personnel costs. Fluctuations in our product development expenses are generally the result of hiring personnel to support and develop our platforms, including the costs to improve our owned and operated media properties and related mobile applications, as well as the costs to develop future product and service offerings. We currently anticipate that our product development expenses will remain relatively flat in the near term as a percentage of total revenue.
General and Administrative
General and administrative expenses consist primarily of personnel costs from our corporate executive, legal, finance, human resources and information technology organizations and facilities-related expenditures, as well as third party professional fees and insurance. Professional fees are largely comprised of outside legal, audit and information technology consulting. We currently anticipate that general and administrative expenses will remain relatively flat in the near term as a percentage of total revenue.
Amortization of Intangible Assets
We capitalize certain costs (i) allocated to the purchase price of certain identifiable intangible assets acquired in connection with business combinations and (ii) incurred to develop media content that is determined to have a probable economic benefit. We amortize these costs on a straight-line basis over the related expected useful lives of these assets. We determine the appropriate useful life of intangible assets by performing an analysis of expected cash flows based on our historical experience of intangible assets of similar quality and value. In the event of content remediation or removal in future periods, additional accelerated amortization expense may be incurred in the periods such actions occur. We expect amortization expense related to business combinations to increase in the near term due to recent acquisitions. We expect total amortization expense to decrease in the near term due to assets completing their useful lives. Amortization as a percentage of revenue will depend upon a variety of factors, such as the amounts and mix of our investments in content and identifiable intangible assets acquired in business combinations.
Stock-based Compensation
Included in operating expenses are expenses associated with stock-based compensation, which are allocated and included in service costs, sales and marketing, product development and general and administrative expenses. Stock-based compensation expense is largely comprised of costs associated with stock options and restricted stock units granted to employees, directors and non-employees, and expenses relating to our Employee Stock Purchase Plan. We record the fair value of these equity-based awards and expenses at their cost ratably over related vesting periods.
Interest Income (Expense), Net
Interest income consists primarily of interest earned on cash balances and money market deposits, which are included in cash and cash equivalents.
Other Income (Expense), Net
Other income (expense), net consists primarily of transaction gains and losses on foreign currency-denominated assets and liabilities and gains or losses on sales of businesses. We expect that these gains and losses will vary depending upon movements in underlying currency exchange rates and whether we dispose of any businesses.
Provision for Income Taxes
Since our inception, we have been subject to income taxes principally in the United States, and certain other countries where we have or had a legal presence, including the United Kingdom, 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 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 Code. 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 consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the estimates and assumptions associated with our revenue recognition, accounts receivable and allowance for doubtful accounts, goodwill, capitalization and useful lives associated with our intangible assets, the recoverability of our long-lived assets including our media content, income taxes, and stock-based compensation 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 2017 Annual Report. There have been no material changes to our critical accounting policies and estimates since the date of our 2017 Annual Report.
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.
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|
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Three months ended June 30,
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Six months ended June 30,
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|
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2018
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2017
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2018
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2017
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|
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Revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
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Product revenue
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|
$
|
17,192
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|
$
|
15,349
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|
$
|
35,644
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|
$
|
29,933
|
|
|
Service revenue
|
|
|
17,129
|
|
|
13,216
|
|
|
32,424
|
|
|
25,870
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|
|
Total revenue
|
|
|
34,321
|
|
|
28,565
|
|
|
68,068
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|
|
55,803
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|
Operating expenses:
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|
|
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|
|
|
|
|
|
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|
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Product costs (exclusive of amortization of intangible assets shown separately below)
(1)
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|
12,464
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|
|
11,538
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|
|
25,801
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|
|
22,072
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|
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Service costs (exclusive of amortization of intangible assets shown separately below)
(1)(2)
|
|
|
6,561
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|
|
5,098
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|
|
12,848
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|
|
10,888
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Sales and marketing
(1)(2)
|
|
|
7,859
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|
|
7,196
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|
|
14,848
|
|
|
13,920
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Product development
(1)(2)
|
|
|
5,095
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|
|
5,029
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|
|
9,805
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|
|
9,779
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General and administrative
(1)(2)
|
|
|
7,661
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|
|
7,225
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|
|
14,969
|
|
|
14,878
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|
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Amortization of intangible assets
|
|
|
956
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|
|
1,396
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|
|
1,982
|
|
|
3,233
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|
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Total operating expenses
|
|
|
40,596
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|
|
37,482
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|
|
80,253
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|
74,770
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Loss from operations
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|
|
(6,275)
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|
|
(8,917)
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|
|
(12,185)
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|
|
(18,967)
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|
|
Interest income
|
|
|
30
|
|
|
39
|
|
|
48
|
|
|
82
|
|
|
Interest expense
|
|
|
(1)
|
|
|
(1)
|
|
|
(2)
|
|
|
(3)
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|
|
Other (expense) income, net
|
|
|
(25)
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|
|
(6)
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|
|
(33)
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|
|
(3)
|
|
|
Loss before income taxes
|
|
|
(6,271)
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|
|
(8,885)
|
|
|
(12,172)
|
|
|
(18,891)
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|
|
Income tax expense
|
|
|
(22)
|
|
|
(80)
|
|
|
(46)
|
|
|
(92)
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|
|
Net loss
|
|
$
|
(6,293)
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|
$
|
(8,965)
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|
$
|
(12,218)
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|
$
|
(18,983)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Depreciation expense included in the above line items:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs
|
|
$
|
213
|
|
$
|
19
|
|
$
|
395
|
|
$
|
19
|
|
|
Service costs
|
|
|
737
|
|
|
702
|
|
|
1,391
|
|
|
1,445
|
|
|
Sales and marketing
|
|
|
8
|
|
|
9
|
|
|
16
|
|
|
18
|
|
|
Product development
|
|
|
18
|
|
|
23
|
|
|
38
|
|
|
46
|
|
|
General and administrative
|
|
|
514
|
|
|
650
|
|
|
1,079
|
|
|
1,305
|
|
|
Total depreciation
|
|
$
|
1,490
|
|
$
|
1,403
|
|
$
|
2,919
|
|
$
|
2,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Stock-based compensation included in the above line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
$
|
177
|
|
$
|
143
|
|
$
|
326
|
|
$
|
298
|
|
|
Sales and marketing
|
|
|
258
|
|
|
176
|
|
|
468
|
|
|
377
|
|
|
Product development
|
|
|
651
|
|
|
481
|
|
|
1,159
|
|
|
877
|
|
|
General and administrative
|
|
|
1,590
|
|
|
1,366
|
|
|
2,931
|
|
|
2,692
|
|
|
Total stock-based compensation
|
|
$
|
2,676
|
|
$
|
2,166
|
|
$
|
4,884
|
|
$
|
4,244
|
|
As a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenue
|
|
|
50.1
|
%
|
53.7
|
%
|
|
52.4
|
%
|
53.6
|
%
|
|
Service revenue
|
|
|
49.9
|
%
|
46.3
|
%
|
|
47.6
|
%
|
46.4
|
%
|
|
Total revenue
|
|
|
100.0
|
%
|
100.0
|
%
|
|
100.0
|
%
|
100.0
|
%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs (exclusive of amortization of intangible assets shown separately below)
|
|
|
36.3
|
%
|
40.4
|
%
|
|
37.9
|
%
|
39.6
|
%
|
|
Service costs (exclusive of amortization of intangible assets shown separately below)
|
|
|
19.1
|
%
|
17.8
|
%
|
|
18.9
|
%
|
19.5
|
%
|
|
Sales and marketing
|
|
|
23.0
|
%
|
25.2
|
%
|
|
21.8
|
%
|
24.9
|
%
|
|
Product development
|
|
|
14.8
|
%
|
17.6
|
%
|
|
14.4
|
%
|
17.5
|
%
|
|
General and administrative
|
|
|
22.3
|
%
|
25.3
|
%
|
|
22.0
|
%
|
26.7
|
%
|
|
Amortization of intangible assets
|
|
|
2.8
|
%
|
4.9
|
%
|
|
2.9
|
%
|
5.8
|
%
|
|
Total operating expenses
|
|
|
118.3
|
%
|
131.2
|
%
|
|
117.9
|
%
|
134.0
|
%
|
|
Loss from operations
|
|
|
(18.3)
|
%
|
(31.2)
|
%
|
|
(17.9)
|
%
|
(34.0)
|
%
|
|
Interest income
|
|
|
0.1
|
%
|
0.1
|
%
|
|
—
|
%
|
0.1
|
%
|
|
Interest expense
|
|
|
—
|
%
|
—
|
%
|
|
—
|
%
|
—
|
%
|
|
Other (expense) income, net
|
|
|
(0.1)
|
%
|
—
|
%
|
|
—
|
%
|
—
|
%
|
|
Loss before income taxes
|
|
|
(18.3)
|
%
|
(31.1)
|
%
|
|
(17.9)
|
%
|
(33.9)
|
%
|
|
Income tax expense
|
|
|
(0.1)
|
%
|
(0.3)
|
%
|
|
(0.1)
|
%
|
(0.2)
|
%
|
|
Net loss
|
|
|
(18.4)
|
%
|
(31.4)
|
%
|
|
(18.0)
|
%
|
(34.1)
|
%
|
Segment results (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
% Change
|
|
2018
|
|
2017
|
|
% Change
|
|
|
Segment Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
|
|
$
|
19,655
|
|
$
|
17,691
|
|
11
|
%
|
$
|
40,622
|
|
$
|
33,568
|
|
21
|
%
|
|
Media
|
|
|
14,666
|
|
|
10,874
|
|
35
|
%
|
|
27,446
|
|
|
22,235
|
|
23
|
%
|
|
Total revenue
|
|
$
|
34,321
|
|
$
|
28,565
|
|
20
|
%
|
$
|
68,068
|
|
$
|
55,803
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
(1)
|
|
$
|
20,203
|
|
$
|
19,434
|
|
4
|
%
|
$
|
41,113
|
|
$
|
36,716
|
|
12
|
%
|
|
Media
(1)
|
|
|
8,447
|
|
|
6,476
|
|
30
|
%
|
|
15,766
|
|
|
14,222
|
|
11
|
%
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
(2)
|
|
|
6,824
|
|
|
6,607
|
|
3
|
%
|
|
13,589
|
|
|
13,522
|
|
—
|
%
|
|
Consolidated operating expenses
|
|
$
|
35,474
|
|
$
|
32,517
|
|
9
|
%
|
$
|
70,468
|
|
$
|
64,460
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Contribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketplaces
(3)
|
|
$
|
(548)
|
|
$
|
(1,743)
|
|
69
|
%
|
$
|
(491)
|
|
$
|
(3,148)
|
|
84
|
%
|
|
Media
(3)
|
|
|
6,219
|
|
|
4,398
|
|
41
|
%
|
|
11,680
|
|
|
8,013
|
|
46
|
%
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
(2)
|
|
|
(6,824)
|
|
|
(6,607)
|
|
(3)
|
%
|
|
(13,589)
|
|
|
(13,522)
|
|
—
|
%
|
|
Acquisition, disposition and realignment costs
(4)
|
|
|
539
|
|
|
19
|
|
2737
|
%
|
|
539
|
|
|
299
|
|
80
|
%
|
|
Adjusted EBITDA
(5)
|
|
$
|
(614)
|
|
$
|
(3,933)
|
|
84
|
%
|
$
|
(1,861)
|
|
$
|
(8,358)
|
|
78
|
%
|
|
|
(1)
|
|
Segment operating expenses reflects operating expenses that are directly attributable to the operating segment, not including corporate and unallocated expenses, and also excluding the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.
|
|
|
(2)
|
|
Corporate expenses include operating expenses that are not directly attributable to the operating segments, including: corporate information technology, marketing, and general and administrative support functions and also excludes the following: (a) depreciation expense; (b) amortization of intangible assets; (c) share-based compensation expense; (d) interest and other income (expenses); and (e) income taxes.
|
|
|
(3)
|
|
Segment operating contribution reflects segment revenue less segment operating expenses. Operating contribution has certain limitations in that it does not take into account the impact to the statement of operations of certain expenses and is not directly comparable to similar measures used by other companies.
|
|
|
(4)
|
|
Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance, contingent payments to certain key employees/equity holders of acquired businesses and other payments attributable to acquisition, disposition or corporate realignment activities.
|
|
|
(5)
|
|
Adjusted EBITDA reflects net income (loss) excluding interest (income) expense, income tax expense (benefit), and certain other non-cash or non-recurring items impacting net income (loss) from time to time, principally comprised of depreciation and amortization, stock-based compensation and acquisition, disposition and realignment costs.
|
See Note 12 of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and “Non-GAAP Financial Measures” below for more information and reconciliation of segment results to consolidated GAAP operating income (loss).
Marketplaces Revenue
Marketplaces revenue increased by $2.0 million, a 11% increase, to $19.7 million for the three months ended June 30, 2018, as compared to $17.7 million for the same period in 2017. The number of transactions decreased 8% to 273,280 in the three months ended June 30, 2018 as compared to 298,229 in the same period in 2017, primarily due to a decrease in conversion rates on Society6 and Deny Designs and the hosting of two fewer art fairs as compared to the prior year period. For the three months ended June 30, 2018, Marketplaces gross transaction value, which excludes certain transactions and the associated revenue generated by Saatchi Art’s The Other Art Fair that
primarily relate to the hosting of the art fairs
, was $24.5 million as compared to $22.5 million in the prior year period, reflecting an increase of 9%
, driven by an increase in average order values from managed promotional activity and from the acquisition of Deny Designs in May 2017
.
Marketplaces revenue increased by $7.1 million, a 21% increase, to $40.6 million for the six months ended June 30, 2018, as compared to $33.6 million for the same period in 2017. The number of transactions increased 3% to 581,215 in the six months ended June 30, 2018 as compared to 565,997 in the same period in 2017, primarily due to the acquisition of Deny Designs, increased conversion rates, and the hosting of one additional art fair as compared to the prior year period. For the six months ended June 30, 2018, Marketplaces gross transaction value, which excludes certain transactions and the associated revenue generated by Saatchi Art’s The Other Art Fair that
primarily relate to the hosting of the art fairs
, was $51
.1
million as compared to $42
.2
million in the prior year period, reflecting an increase of 21%, driven by an increase in average order values and number of transactions, including from the acquisition of Deny Designs.
Media Revenue
Media revenue increased by $3.8 million, a 35% increase, to
$14.7
million for the three months ended June 30, 2018, as compared to $10.9 million for the same period in 2017. Visits from Google Analytics data increased by 7% to 770 million visits in the three months ended June 30, 2018 from 722 million visits in the same period in 2017. RPV, calculated using visits per Google Analytics, increased by 26%, to $19.04 in the three months ended June 30, 2018 from $15.06 in the same period in 2017, as a result of improved ad monetization yields and from the acquisition of Well+Good in June 2018
.
Media revenue increased by $5.2 million, a 23% increase, to
$27.4
million for the six months ended June 30, 2018, as compared to $22.2 million for the same period in 2017. Visits from Google Analytics data increased by 8% to 1,557 million visits in the six months ended June 30, 2018 from 1,435 million visits in the same period in 2017. RPV, calculated using visits per Google Analytics, increased by 14%, to $17.63 in the six months ended June 30, 2018 from $15.49 in the same period in 2017, as a result of improved ad monetization yields and from the acquisition of Well+Good in June 2018
.
Consolidated Costs and Expenses
Operating costs and expenses were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
|
|
|
Six months ended June 30,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
2018
|
|
2017
|
|
% Change
|
|
|
Product costs (exclusive of amortization of intangible assets)
|
|
$
|
12,464
|
|
$
|
11,538
|
|
8
|
%
|
|
$
|
25,801
|
|
$
|
22,072
|
|
17
|
%
|
|
Service costs (exclusive of amortization of intangible assets)
|
|
|
6,561
|
|
|
5,098
|
|
29
|
%
|
|
|
12,848
|
|
|
10,888
|
|
18
|
%
|
|
Sales and marketing
|
|
|
7,859
|
|
|
7,196
|
|
9
|
%
|
|
|
14,848
|
|
|
13,920
|
|
7
|
%
|
|
Product development
|
|
|
5,095
|
|
|
5,029
|
|
1
|
%
|
|
|
9,805
|
|
|
9,779
|
|
—
|
%
|
|
General and administrative
|
|
|
7,661
|
|
|
7,225
|
|
6
|
%
|
|
|
14,969
|
|
|
14,878
|
|
1
|
%
|
|
Amortization of intangible assets
|
|
|
956
|
|
|
1,396
|
|
(32)
|
%
|
|
|
1,982
|
|
|
3,233
|
|
(39)
|
%
|
Product Costs
Product costs for the three months ended June 30, 2018 increased by $0.9 million, or 8%, to $12.5 million, as compared to $11.5 million for the same period in 2017. The increase was primarily due to increased costs related to higher order values of products sold on Society6 and the acquisition of Deny Designs in May 2017, including costs attributable to in-house manufacturing personnel and related costs as a result of the acquisition, and increased costs related to the sale of art prints on Saatchi Art.
Product costs for the six months ended June 30, 2018 increased by $3.7 million, or 17%, to $25.8 million, as compared to $22.1 million for the same period in 2017. The increase was primarily due to increased costs related to the higher volume of products sold on Society6 and the acquisition of Deny Designs in May 2017, including costs attributable to in-house manufacturing personnel and related costs as a result of the acquisition.
Service Costs
Service costs for the three months ended June 30, 2018 increased by $1.5 million, or 29%, to $6.6 million, as compared to $5.1 million for the same period in 2017. The increase was primarily due to increases of $0.7 million related to content renovation, $0.5 million in personnel and related costs primarily driven by an increase in headcount and post-combination consideration expense resulting from the acquisition of Well+Good in June 2018, $0.2 million in cost of services primarily related to Saatchi Art and $0.1 million in ad serving costs.
Service costs for the six months ended June 30, 2018 increased by $2.0 million, or 18%, to $12.8 million, as compared to $10.9 million for the same period in 2017. The increase was primarily due to increases of $1.1 million related to content renovation, $0.8 million in cost of services related to Saatchi Art, including The Other Art Fair, $0.2 million in ad serving costs and $0.2 million in personnel and related costs, primarily driven by an increase in headcount and post-combination consideration expense resulting from the acquisition of Well+Good in June 2018, partially offset by $0.3 million in information technology expense.
Sales and Marketing
Sales and marketing expenses for the three months ended June 30, 2018 increased by $0.7 million, or 9%, to $7.9 million, as compared to $7.2 million for the same period in 2017. The increase was primarily due to increases of $0.5 million in personnel related costs, primarily driven by an increase in headcount resulting from the acquisition of Well+Good in June 2018, and $0.2 million in marketing activities.
Sales and marketing expenses for the six months ended June 30, 2018 increased by $0.9 million, or 7%, to $14.8 million, as compared to $13.9 million for the same period in 2017. The increase was primarily due to increases of $0.6 million in personnel related costs and $0.3 million in marketing activities. The increase in personnel related costs was driven primarily by an increase in headcount resulting from the acquisitions of Well+Good in June 2018 and Deny Designs in May 2017.
Product Development
Product development expenses for the three months ended June 30, 2018 increased by $0.1 million or $1%, to $5.1 million, as compared to $5.0 million in the same period in 2017, primarily due to an increase of $0.1 million in licenses and support costs.
Product development expenses for the six months ended June 30, 2018 remained flat at $9.8 million primarily due to a decrease of $0.2 million in personnel and related costs, offset by an increase of $0.2 million in licenses and support costs.
General and Administrative
General and administrative expenses for the three months ended June 30, 2018 increased by $0.4 million, or 6%, to $7.7 million, as compared to $7.2 million in the same period in 2017. The increase was primarily due to increases of $0.2 million in personnel and related costs, $0.2 million in facilities costs and $0.1 million in legal expenses, partially offset by a decrease of $0.1 million in depreciation expense.
General and administrative expenses for the six months ended June 30, 2018 remained relatively flat, increasing by $0.1 million, or 1%, to $15.0 million, as compared to $14.9 million in the same period in 2017. The increase was primarily due to increases of $0.3 million in facilities costs and $0.2 million in consulting expenses, partially offset by decreases of $0.2 million in personnel and related costs and $0.2 million in depreciation expense.
Amortization of Intangible Assets
Amortization expense for the three months ended June 30, 2018 decreased by $0.4 million, or 32%, to $1.0 million, as compared to $1.4 million in the same period in 2017. The decrease in amortization expense is primarily due to intangible assets completing their useful life.
Amortization expense for the six months ended June 30, 2018 decreased by $1.3 million, or 39%, to $2.0 million, as compared to $3.2 million in the same period in 2017. The decrease in amortization expense is due to intangible assets completing their useful life and the removal of certain content units in the six months ended June 30, 2017.
Interest Income (Expense), Net
Interest income for each of the three and six month periods ended June 30, 2018 and 2017 was less than $0.1 million.
Other Income (Expense), Net
Other expense, net for each of the three and six month periods ended June 30, 2018 and 2017 was less than $0.1 million.
Income Tax Benefit (Expense)
Income tax expense for each of the
three and six month periods ended June 30, 2018 and 2017
was less than $0.1 million.
Segment Results
Marketplaces Operating Expenses and Operating Contribution
Marketplaces operating expenses for the three months ended June 30, 2018 increased by $0.8 million, or 4%, to $20.2 million, as compared to $19.4 million in the same period in 2017. The change was primarily due to increases of $0.7 million in product costs as a result of revenue growth and $0.4 million in sales and marketing expense related to increased marketing investment, partially offset by a decrease of $0.4 million in product development expense from additional internally developed software projects that were capitalized. Marketplaces operating contribution was $(0.5) million for the three months ended June 30 2018, as compared to $(1.7) million in the same period in 2017.
Marketplaces operating expenses for the six months ended June 30, 2018 increased by $4.4 million, or 12%, to $41.1 million, as compared to $36.7 million in the same period in 2017. The change was primarily due to increases of $4.3 million in product costs as a result
of revenue growth and $0.9 million in sales and marketing expense related to increased marketing investment and higher personnel costs, partially offset by a decrease of $0.8 million in product development expense from additional internally developed software projects that were capitalized. Marketplaces operating contribution was $(0.5) million for the six months ended June 30, 2018, as compared to $(3.1) million in the same period in 2017.
Media Operating Expenses and Operating Contribution
Media operating expenses for the three months ended June 30, 2018 increased by $2.0 million, or 30%, to $8.4 million, as compared to $6.5 million in the same period in 2017. The change was primarily due to increases of $1.5 million in cost of sales, $0.2 million in sales and marketing costs, $0.2 million in general and administrative costs and $0.1 million in product development costs. Media operating contribution was $6.2 million for the three months ended June 30, 2018, as compared to $4.4 million in the same period in 2017.
Media operating expenses for the six months ended June 30, 2018 increased by $1.5 million, or 11%, to $15.8 million, as compared to $14.2 million in the same period in 2017. The change was primarily due to increases of $1.5 million in cost of sales, $0.2 million in general and administrative costs and $0.2 million in sales and marketing costs, partially offset by a decrease of $0.4 million in product development costs, primarily as a result of lower personnel and related costs due to a decrease in headcount. Media operating contribution was $11.7 million for the six months ended June 30, 2018, as compared to $8.0 million in the same period in 2017.
Corporate Operating Expenses
Corporate operating expenses for the three months ended June 30, 2018 remained relatively flat, increasing by $0.2 million, or 3%, to $6.8 million, as compared to $6.6 million in the same period in 2017. The change was primarily due to an increase in facilities costs.
Corporate operating expenses for the six months ended June 30, 2018 remained relatively flat, decreasing by less than $0.1 million to $13.6 million, as compared to $13.5 million in the same period in 2017. The change was primarily due to a decrease of $0.5 million in personnel and related costs, partially offset by an increase of $0.3 million in facilities 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, and acquisition, disposition and realignment costs.
Adjusted EBITDA is one of the primary measures used by our management and board of directors to understand and evaluate our financial performance and operating trends, including period-to-period comparisons, because it excludes certain expenses and gains that management believes are not indicative of our core operating results. Management believes that the exclusion of these expenses and gains provides a useful measure for period-to-period comparisons of our underlying core revenue and operating costs that is focused more closely on the current costs necessary to operate our businesses and reflects our ongoing business in a manner that allows for meaningful analysis of trends. In addition, management believes that excluding certain non-cash charges can be useful because the amounts of such expenses is the result of long-term investment decisions made in previous periods rather than day-to-day operating decisions. Adjusted EBITDA is also one of the primary measures management uses to prepare and update our short and long term financial and operational plans and to evaluate investment decisions. We also frequently use Adjusted EBITDA in our discussions with investors, commercial bankers, equity research analysts and other users of our financial statements.
Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and in comparing operating results across periods and to those of our peer companies. However, the use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expense that affect our operations. We compensate for these limitations by reconciling Adjusted EBITDA to net income (loss), the most comparable GAAP financial measure. Further, Adjusted EBITDA does not have a standardized meaning, and therefore other companies, including peer companies, may use the same or similarly named measures but exclude different items or use different computations, so comparability may be limited. Adjusted EBITDA should be considered in addition to, and not as a substitute for, measures prepared in
accordance with GAAP. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.
The following table presents a reconciliation of Adjusted EBITDA for each of the periods presented (in thousands):
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Three months ended June 30,
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Six months ended June 30,
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2018
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2017
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2018
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2017
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Net loss
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$
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(6,293)
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$
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(8,965)
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$
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(12,218)
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$
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(18,983)
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Add (deduct):
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Income tax (benefit) expense
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22
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|
|
80
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|
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46
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|
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92
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Interest (income) expense, net
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(29)
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(38)
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(46)
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(79)
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Other expense (income), net
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25
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6
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|
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33
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|
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3
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Depreciation and amortization
(1)
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2,446
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|
|
2,799
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|
|
4,901
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|
|
6,066
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Stock-based compensation
(2)
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|
|
2,676
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|
|
2,166
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|
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4,884
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|
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4,244
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Acquisition, disposition and realignment costs
(3)
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539
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19
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|
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539
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299
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Adjusted EBITDA
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$
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(614)
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$
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(3,933)
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$
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(1,861)
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$
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(8,358)
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(1)
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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.
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(2)
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Represents the expense related to stock-based awards granted to employees as included in our GAAP results of operations.
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(3)
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Represents such items, when applicable, as (a) legal, accounting and other professional service fees directly attributable to acquisition, disposition or corporate realignment activities and (b) employee severance, contingent payments to certain key employees/equity holders of acquired businesses and other payments attributable to acquisition, disposition or corporate realignment activities.
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Liquidity and Capital Resources
As of June 30, 2018, we had $32.0 million of cash and cash equivalents. In June 2018, we acquired Well+Good for an initial payment of $12.3 million in cash, comprised of the $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.
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. We intend to use the net proceeds from the offering 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 disposition of businesses and certain non-core media properties. Historically, we have principally financed our operations from the issuance of stock, disposals of businesses, and net cash provided by our operating activities. We do not currently have an available line of credit. We believe that our existing cash and cash equivalents and our cash generated by operating activities will be sufficient to fund our operations for at least the next 12 months. However, in order to fund our operations, make potential acquisitions, pursue new business opportunities and invest in our existing businesses, platforms and technologies, we may need to raise additional funds by entering into a new credit facility, selling certain assets or issuing equity, equity-related or debt securities.
We currently have a shelf registration statement on file with the SEC that is effective until March 28, 2020, which we may use to offer and sell equity securities with an aggregate offering value not to exceed $100.0 million. Subsequent to the registered public offering in February 2018, the aggregate offering value remaining on our effective 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 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. During 2016, we also received approximately $1.7 million of cash from the sales of two of our non-core media properties, with an additional $0.4 million received in the first quarter of 2017. We may make further acquisitions and dispositions in the future.
Under our stock repurchase plan announced in August 2011 and amended in February 2012, we are authorized to repurchase up to $50.0 million of our common stock from time to time in open market purchases or negotiated transactions.
During the year ended December 31, 2016, we
repurchased approximately 844,000 shares at an average price of $5.74 per share for an aggregate amount of $4.9 million
.
We have not initiated any repurchases of our common stock during the year ended December 31, 2017 or the six months ended June 30, 2018, and are not currently making repurchases. Repurchases were made as open market purchases pursuant to a trading plan implemented pursuant to Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, as well as through certain negotiated transactions.
The stock repurchases were funded with available cash balances. As of June 30, 2018, approximately $14.3 million remained available under the stock repurchase plan. Management continues to assess the benefits of repurchasing additional shares of our common stock under the stock repurchase plan, and may elect to repurchase additional shares in the future from time to time. The timing and actual number of additional shares to be repurchased will depend on various factors including price, corporate and regulatory requirements, any applicable debt covenant requirements, alternative investment opportunities and other market conditions.
Our cash flows from operating activities are significantly affected by our cash-based investments in operations, including working capital, and corporate infrastructure to support our ability to generate revenue and conduct operations. Cash used in investing activities has historically been, and is expected to be, impacted by our ongoing investments in our properties, company infrastructure and equipment. The following table sets forth our major sources and (uses) of cash for each of the periods presented (in thousands):
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Six months ended June 30,
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2018
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2017
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Net cash used in operating activities
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$
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(6,401)
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$
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(11,783)
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Net cash used in investing activities
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$
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(13,879)
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$
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(7,669)
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Net cash provided by (used in) financing activities
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$
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20,789
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$
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(1,058)
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Cash Flows from Operating Activities
Six months ended June 30, 2018 and June 30, 2017
Net cash used in our operating activities during the six months ended June 30, 2018 was $6.4 million as a result of our net loss during the period of $12.2 million, non-cash charges of $9.8 million related primarily to depreciation, amortization and stock-based compensation, and a net decrease in our working capital of $4.0 million. The change in working capital during the six months ended June 30, 2018 was primarily due to the timing of payments associated with increased artist liabilities related to our Marketplaces segment.
Net cash used in our operating activities during the six months ended June 30, 2017 was $11.8 million as a result of our net loss during the period of $19.0 million, non-cash charges of $10.3 million related to depreciation, amortization and stock-based compensation, and a net decrease in our working capital of $3.1 million. The change in working capital during the six months ended June 30, 2017 was primarily due to the timing of payments associated with increased vendor and artists liabilities related to our Marketplaces segment, which continues to become a larger portion of our results.
Cash Flows from Investing Activities
Six months ended June 30, 2018 and June 30, 2017
Net cash used in investing activities was $13.9 million during the six months ended June 30, 2018. Cash used in investing activities for the six months ended June 30, 2018 primarily related to $10.3 million paid for the acquisition of Well+Good, net of cash acquired, and $3.5 million related to investments in property and equipment.
Net cash used in investing activities was $7.7 million during the six months ended June 30, 2017. Cash used in investing activities for the six months ended June 30, 2017 included $6.3 million paid for the acquisition of Deny Designs, net of cash acquired, and $2.2 million related to investments in property and equipment, partially offset by cash inflows of $0.6 million from restricted deposits,
primarily related to the release of the escrow held for the Saatchi acquisition, and $0.4 million received from sale of one of our non-core online media properties in 2016.
Cash Flows from Financing Activities
Six months ended June 30, 2018 and June 30, 2017
Net cash provided by financing activities was $20.8 million during the six months ended June 30, 2018. Cash provided by financing activities for the six months ended June 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 $0.6 million in proceeds from exercises of stock options and purchases under ESPP, partially offset by $2.3 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.
Net cash used in financing activities was $1.1 million during the six months ended June 30, 2017. Cash used in financing activities for the six months ended June 30, 2017 primarily consists of $2.4 million related to taxes paid on vesting of restricted stock units and $0.1 million of cash paid for acquisition holdback, partially offset by $1.5 million in proceeds from exercises of stock options and purchases under ESPP.
Off Balance Sheet Arrangements
As of June 30, 2018, we did not have any off balance sheet arrangements.
Capital Expenditures
For the six months ended June 30, 2018 and 2017, we used $3.5 million and $2.2 million, respectively, in cash to fund capital expenditures to create internally developed software and purchase property and equipment. We currently anticipate making capital expenditures of between $1.0 million and $4.0 million during the remainder of the year ending December 31, 2018.
Contractual Obligations
For the six months ended June 30, 2018, as a result of the acquisition of Well+Good, 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 will be expensed over the service period in the condensed statement of operations.
Recent Accounting Pronouncements
See Note 2 of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RIS
K
We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign currency exchange, inflation, and concentration of credit risk. To reduce and manage these risks, we assess the financial condition of our large advertising network providers, large direct advertisers and their agencies, and other large customers when we enter into or amend agreements with them and limit credit risk by setting and adjusting credit limits where we deem appropriate. In addition, our recent investment strategy has been to invest in high credit quality financial instruments, which are highly liquid, readily convertible into cash and mature within three months from the date of purchase.
Foreign Currency Exchange Risk
While relatively small, we have operations and generate revenue from sources outside the United States. We have foreign currency exchange risks related to our revenue being denominated in currencies other than the U.S. dollar, principally in the Euro, British
Pound Sterling, Australian dollar, and a relatively smaller percentage of our expenses being denominated in such currencies. We do not believe that movements in the foreign currencies in which we transact will significantly affect future net earnings or losses. Foreign currency exchange risk can be quantified by estimating the change in cash flows resulting from a hypothetical 10% adverse change in foreign exchange rates. We do not believe that such a change would currently have a material impact on our results of operations. As our international operations grow, our risks associated with fluctuations in currency rates will become greater, and we intend to continue to assess our approach to managing this risk.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Concentrations of Credit Risk
As of June 30, 2018, our cash and cash equivalents were maintained primarily with two major U.S. financial institutions and four foreign banks. We also maintained cash balances with 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.
Components of our consolidated accounts receivable balance comprising more than 10% were as follows:
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June 30, 2018
|
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December 31, 2017
|
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Google Inc.
|
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30
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%
|
34
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%
|
Item
4.
CONTROLS AND PROCEDURE
S
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal 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.