Quarterly Report (10-q)

Date : 08/05/2019 @ 8:13PM
Source : Edgar (US Regulatory)
Stock : Leaf Group Ltd (LEAF)
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Quarterly Report (10-q)

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 June 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 July 30, 2019, there were 26,070,117 shares of the registrant’s common stock, $0.0001 par value, outstanding.

 

LEAF GROUP LTD.

INDEX TO FORM 10-Q

 

 

 

 

 

 

 

  

 

  

Page

Part I  

Financial Information

  

 

 

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

  

1

 

 

  

Condensed Consolidated Balance Sheets

  

1

 

 

  

Condensed Consolidated Statements of Operations

  

2

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss)  

  

3

 

 

  

Condensed Consolidated Statements of Stockholders’ Equity

  

4

 

 

  

Condensed Consolidated Statements of Cash Flows

  

5

 

 

  

Notes to the Condensed Consolidated Financial Statements

  

6

 

Item 2.

  

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

  

19

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

34

 

Item 4.

  

Controls and Procedures

  

35

 

 

 

 

Part II  

Other Information

 

 

 

Item 1.

  

Legal Proceedings

  

36

 

Item 1A.

  

Risk Factors

  

36

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

37

 

Item 3.

  

Defaults Upon Senior Securities

  

37

 

Item 4.

  

Mine Safety Disclosures

  

37

 

Item 5.

  

Other Information

  

37

 

Item 6.

  

Exhibits

  

37

 

 

  

Signatures

  

39

 

 

 

Part  I.         FINANCIAL INFORMATIO N

 

Item  1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED )  

Leaf Group Ltd. and Subsidiaries  

Condensed Consolidated Balance Sheet s  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2019

 

2018

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,904

 

$

31,081

Accounts receivable, net

 

 

11,592

 

 

12,627

Prepaid expenses and other current assets

 

 

3,803

 

 

3,932

Total current assets

 

 

25,299

 

 

47,640

Property and equipment, net

 

 

13,300

 

 

13,126

Operating lease right-of-use assets

 

 

8,182

 

 

 —

Intangible assets, net

 

 

14,122

 

 

13,933

Goodwill

 

 

19,432

 

 

19,435

Other assets

 

 

761

 

 

988

Total assets

 

$

81,096

 

$

95,122

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

2,190

 

$

1,519

Accrued expenses and other current liabilities

 

 

15,846

 

 

22,149

Deferred revenue

 

 

2,640

 

 

2,115

Total current liabilities

 

 

20,676

 

 

25,783

Deferred tax liability

 

 

91

 

 

86

Operating lease liabilities

 

 

7,643

 

 

 —

Other liabilities

 

 

262

 

 

2,566

Total liabilities

 

 

28,672

 

 

28,435

Commitments and contingencies (Note 8)

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

Common stock, $0.0001 par value. Authorized 100,000 shares; 27,644 and 25,989 shares issued and outstanding at June 30, 2019 and 27,138 and 25,483 shares issued and outstanding at December 31, 2018

 

 

 3

 

 

 3

Additional paid-in capital

 

 

557,185

 

 

554,403

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

 

 

(35,706)

 

 

(35,706)

Accumulated other comprehensive loss

 

 

(49)

 

 

(52)

Accumulated deficit

 

 

(469,009)

 

 

(451,961)

Total stockholders’ equity

 

 

52,424

 

 

66,687

Total liabilities and stockholders’ equity

 

$

81,096

 

$

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 Operation s  

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

15,869

 

$

17,192

 

$

33,410

 

$

35,644

 

Service revenue

 

 

19,920

 

 

17,129

 

 

36,417

 

 

32,424

 

Total revenue

 

 

35,789

 

 

34,321

 

 

69,827

 

 

68,068

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

12,010

 

 

12,464

 

 

25,828

 

 

25,801

 

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

 

 

8,981

 

 

6,561

 

 

16,893

 

 

12,848

 

Sales and marketing

 

 

7,488

 

 

7,859

 

 

15,126

 

 

14,848

 

Product development

 

 

5,110

 

 

5,095

 

 

10,679

 

 

9,805

 

General and administrative

 

 

8,112

 

 

7,661

 

 

16,652

 

 

14,969

 

Amortization of intangible assets

 

 

895

 

 

956

 

 

1,812

 

 

1,982

 

Total operating expenses

 

 

42,596

 

 

40,596

 

 

86,990

 

 

80,253

 

Loss from operations

 

 

(6,807)

 

 

(6,275)

 

 

(17,163)

 

 

(12,185)

 

Interest income

 

 

66

 

 

30

 

 

188

 

 

48

 

Interest expense

 

 

(6)

 

 

(1)

 

 

(10)

 

 

(2)

 

Other income (expense), net

 

 

19

 

 

(25)

 

 

12

 

 

(33)

 

Loss before income taxes

 

 

(6,728)

 

 

(6,271)

 

 

(16,973)

 

 

(12,172)

 

Income tax expense

 

 

(34)

 

 

(22)

 

 

(75)

 

 

(46)

 

Net loss

 

$

(6,762)

 

$

(6,293)

 

$

(17,048)

 

$

(12,218)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

 

$

(0.26)

 

$

(0.25)

 

 

(0.66)

 

 

(0.51)

 

Weighted average number of shares - basic and diluted

 

 

25,907

 

 

24,854

 

 

25,755

 

 

23,910

 

 

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 June 30, 

 

Six months ended June 30, 

 

    

2019

    

2018

    

2019

    

2018

Net loss

 

$

(6,762)

 

$

(6,293)

 

$

(17,048)

 

$

(12,218)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation adjustment

 

 

(24)

 

 

(80)

 

 

 3

 

 

(28)

Comprehensive loss

 

$

(6,786)

 

$

(6,373)

 

$

(17,045)

 

$

(12,246)

 

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’ Equit y  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 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

 

 

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


4

 

.

Leaf Group Ltd. and Subsidiaries  

Condensed Consolidated Statements of Cash Flow s  

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 

 

 

    

2019

    

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

 

$

(17,048)

 

$

(12,218)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,378

 

 

4,901

 

Non-cash lease expense

 

 

962

 

 

 —

 

Deferred income taxes

 

 

 5

 

 

10

 

Stock-based compensation

 

 

4,130

 

 

4,884

 

Other

 

 

21

 

 

54

 

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

 

 

 

 

 

 

 

Accounts receivable, net

 

 

1,014

 

 

 4

 

Prepaid expenses and other current assets

 

 

123

 

 

21

 

Other long-term assets

 

 

102

 

 

79

 

Operating lease ROU assets and liabilities

 

 

(1,280)

 

 

 —

 

Accounts payable

 

 

485

 

 

(883)

 

Accrued expenses and other liabilities

 

 

(7,265)

 

 

(2,679)

 

Deferred revenue

 

 

525

 

 

(574)

 

Net cash used in operating activities

 

 

(12,848)

 

 

(6,401)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,361)

 

 

(3,501)

 

Purchases of intangible assets

 

 

 —

 

 

(29)

 

Cash paid for acquisitions, net of cash acquired

 

 

(1,900)

 

 

(10,349)

 

Net cash used in investing activities

 

 

(5,261)

 

 

(13,879)

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from exercises of stock options and purchases under ESPP

 

 

445

 

 

629

 

Proceeds from issuance of common stock

 

 

 —

 

 

23,367

 

Taxes paid on net share settlements of restricted stock units

 

 

(2,039)

 

 

(2,268)

 

Cash paid for acquisition holdback

 

 

(625)

 

 

 —

 

Cash paid for contingent consideration liability

 

 

(934)

 

 

(905)

 

Other

 

 

(55)

 

 

(34)

 

Net cash (used in) provided by financing activities

 

 

(3,208)

 

 

20,789

 

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

 

 

 4

 

 

(3)

 

Change in cash, cash equivalents and restricted cash

 

 

(21,313)

 

 

506

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

31,935

 

 

32,300

 

Cash, cash equivalents and restricted cash, end of period

 

$

10,622

 

$

32,806

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents and restricted cash

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,904

 

$

31,952

 

Restricted cash included in other current assets

 

 

136

 

 

136

 

Restricted cash included in other long-term assets

 

 

582

 

 

718

 

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

 

$

10,622

 

$

32,806

 

 

 

 

 

 

 

 

 

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

 


5

 

 

Leaf Group Ltd. and Subsidiaries  

Notes to Condensed Consolidated Financial Statement s  

(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 June 30, 2019, the condensed consolidated statements of operations and condensed consolidated statements of comprehensive (loss) income for the three and six months ended June 30, 2019 and 2018, the condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 and the condensed consolidated statement of stockholders’ equity for the six months ended June 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 June 30, 2019, our results of operations for the three and six months ended June 30, 2019 and 2018, and our cash flows for the six months ended June 30, 2019 and 2018. The results for the three and six months ended June 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.


6

 

Principles of Consolidation

The consolidated financial statements include the accounts of Leaf Group and its wholly owned subsidiaries. Acquisitions are included in our consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All 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.

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


7

 

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.

 


8

 

Disaggregation of Revenue

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

 

2019

    

2018

    

2019

    

2018

Product

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

$

15,869

 

$

17,192

 

$

33,410

 

$

35,644

Service

 

 

 

 

 

 

 

 

 

 

 

 

Marketplaces

 

 

3,320

 

 

2,463

 

 

6,617

 

 

4,978

Media

 

 

16,600

 

 

14,666

 

 

29,800

 

 

27,446

Total revenue

 

$

35,789

 

$

34,321

 

$

69,827

 

$

68,068

 

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 six months ended June 30, 2019, we recognized $ 3.6 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):

 

 

 

 

 

 

 

 

    

June 30, 

    

December 31, 

 

 

2019

 

2018

Computers and other related equipment

 

$

11,655

 

$

10,859

Purchased and internally developed software

 

 

32,387

 

 

29,758

Furniture and fixtures

 

 

1,472

 

 

1,470

Leasehold improvements

 

 

6,795

 

 

6,795

Machinery and related equipment

 

 

581

 

 

581

 

 

 

52,890

 

 

49,463

Less accumulated depreciation

 

 

(39,590)

 

 

(36,337)

Property and equipment, net

 

$

13,300

 

$

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 

 

Six months ended June 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Product costs

 

$

393

 

$

213

 

$

761

 

$

395

 

Service costs

 

 

944

 

 

737

 

 

1,880

 

 

1,391

 

Sales and marketing

 

 

 6

 

 

 8

 

 

13

 

 

16

 

Product development

 

 

12

 

 

18

 

 

23

 

 

38

 

General and administrative

 

 

412

 

 

514

 

 

889

 

 

1,079

 

Total depreciation

 

$

1,767

 

$

1,490

 

$

3,566

 

$

2,919

 

 


9

 

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

 

 

(3)

Balance at June 30, 2019

 

$

19,432

We have two reporting units, Marketplaces and Media. Goodwill related to our Marketplaces reporting unit was $17.1 million as of June 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.

Intangible assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

Gross carrying

 

Accumulated

 

Net carrying

 

 

amount

 

amortization

 

amount

Customer relationships

 

$

4,003

 

$

(2,647)

 

$

1,356

Artist relationships

 

 

12,222

 

 

(11,183)

 

 

1,039

Media content

 

 

91,489

 

 

(91,301)

 

 

188

Technology

 

 

6,204

 

 

(6,006)

 

 

198

Non-compete agreements

 

 

25

 

 

(25)

 

 

 —

Trade names

 

 

18,254

 

 

(6,913)

 

 

11,341

 

 

$

132,197

 

$

(118,075)

 

$

14,122

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018