Leaf Group Ltd. (NYSE: LEAF), a diversified consumer internet
company, today issued the following letter to its shareholders in
response to recent public letters from a group of Leaf Group
Shareholders (the “Investor Group”):
Dear Valued Shareholders,
Following the release of our letter to shareholders on July 2,
2020, the appointed Independent Committee of Directors, comprised
of Beverly Carmichael and Deborah Benton, participated in a
telephone call with the Investor Group. We remain committed to
listening to the Investor Group’s views and trying to engage them
in a constructive, private dialogue, as we would with any
shareholder. As such, we have been disappointed that they have
continued to attack Leaf Group publicly, attempting to further
distract our Board and Management team at a time when the Company
is posting outstanding results.
We do not intend to respond to every public missive from the
Investor Group. Our focus is on executing our business strategy and
continuing to drive strong performance. However, we do want to take
this opportunity to set the record straight on some points for our
shareholders regarding the Investor Group, their history with the
Company and their intentions.
SEVERAL MEMBERS OF THE INVESTOR GROUP
SERVED AS DIRECTORS ON LEAF GROUP’S BOARD, AND WERE INTIMATELY
INVOLVED IN OVERSEEING THE VERY INITIATIVES AND PRACTICES THEY NOW
CRITICIZE
In their letters, the Investor Group has expressed concerns
regarding three primary issues: 1) the thoroughness and integrity
of our strategic review process; 2) CEO Sean Moriarty’s
compensation; and 3) the composition of our Board and relationships
among its members.
What the Investor Group fails to mention, however, is that
several of their own members were long-time Directors of
the Leaf Group Board who were involved in making key decisions
related to these topics, and were directly responsible for
overseeing and helping steer the Company in these areas.
Specifically:
1) The thoroughness
and integrity of the strategic review processThe Investor
Group has questioned the thoroughness and integrity of our 13-month
strategic review, each time failing to acknowledge that two of its
members had direct oversight of the process. John Hawkins of
Generation Partners and Brian Regan, Chief Financial Officer of
Spectrum Equity, were longstanding members of Leaf Group’s Board of
Directors and were on the Board as the review process was planned,
developed and executed. While Mr. Hawkins and Mr. Regan were not
part of the Special Committee established to guide the strategic
review, it was ultimately the full Board that had sole
decision-making power over the process. This included the important
tasks of choosing the investment bankers, designing the process
guidelines and evaluating the results and level of interest from
potential acquirers and financial partners. The Special Committee
was only empowered to put forth recommendations to the full Board.
Leaf Group’s Board also convened frequently to discuss updates and
review progress. Every decision by the Board of Directors during
this 13-month process was unanimously approved.
Never did Mr. Hawkins or Mr. Regan vote “no” or abstain from voting
on any Board action related to the strategic process.
As we shared previously, Leaf Group and its advisors contacted
over 160 potential acquirers regarding a possible sale of the
Company or certain assets and entered into non-disclosure
agreements with 45 of those parties to facilitate discussions.
Additionally, Leaf Group and its advisors contacted over 48
companies to discuss financing options and engaged in negotiations
with parties concerning potential asset sales. The Company received
just one wholly inadequate, $30.5 million bid for Society6 Group –
a business that is expected to post its best-ever performance in
the second quarter of 2020 with year-over-year Gross Transaction
Value (“GTV”) growth in excess of 100%. The Board and management
team are extremely comfortable with the thoroughness and integrity
of the review process—and we urge our shareholders to keep in mind
that the very people criticizing it today are the ones who helped
develop and oversee the
process.2) CEO Sean
Moriarty’s compensationIn both their June 29 and July 13
letters, the Investor Group also criticized Mr. Moriarty’s
compensation. What they conveniently chose to omit is that two of
the individuals who have overseen the structuring and approval of
Mr. Moriarty’s compensation for the entire duration of his tenure
are both members of the Investor Group. Mr. Regan joined the
Compensation Committee in 2015 and was the Chair of the
Compensation Committee from February 2018 to April 2020, and
Investor Group member Fred Harman was Mr. Regan’s predecessor,
serving as Chair from the Company’s 2011 IPO until his resignation
in January 2018. Mr. Regan and Mr. Harman approved
every compensation decision that has been made about Mr. Moriarty
through April 2020, and as such, the Investor Group is again
criticizing an executive compensation package that THEY structured
and approved.
3) The composition of our
Board and the relationships among its membersAdditionally,
in their June 29 letter, the Investor Group questioned the
composition of the Board and the relationships among its members.
In doing so, it has willfully ignored the fact that the Nominating
and Corporate Governance Committee – the committee responsible for
overseeing Director nominees and Board composition – included three
members of the Investor Group, Mr. Harman, Mr. Regan and Mr.
Hawkins, for many years. Mr. Harman served on the Nominating and
Corporate Governance Committee from the Company's 2011 IPO until
his resignation from the Board in January 2018. Mr. Regan
served as Nominating and Corporate Governance Committee Chairman
from 2016 to 2020, and Mr. Hawkins served as a member of the
Nominating and Corporate Governance Committee from the Company’s
2011 IPO to 2020. Again, the Group is criticizing the Board
composition that they recommended that our Board and shareholders
approve.
Furthermore, in their most recent letter, the Investor Group
suggested that the three Director resignations this year have been
the result of frustration with the Company’s leadership and
governance practices. In reality, two of those departures were
Investor Group members Mr. Regan and Mr. Hawkins, who both chose to
leave the Board after not being re-nominated for another term. Mr.
Regan specifically said that he resigned after being advised that
he “would not be recommended by the ad hoc committee of designated
independent directors to be nominated by the Company in order to
stand for re-election to the Company’s board of directors at the
upcoming 2020 annual meeting of stockholders.” The third –
Mitchell Stern (who was never contacted by any members of the
Investor Group regarding his resignation from the Board) – offered
this statement regarding his departure: “I resigned from the Leaf
Group Board for personal reasons. My departure is in no way a
reflection of my opinion of Sean Moriarty and his management
team. I encourage all investors to analyze the forthcoming
earnings release and judge the performance of Leaf Group on the
basis of actual financial results.”
THE COMPANY IS POISED TO REPORT ITS BEST
QUARTER IN YEARS
It is odd that the Investor Group is criticizing the Company’s
actions at this point in time. Under Mr. Moriarty’s leadership,
Leaf Group is delivering stellar financial performance, with the
Company expecting to post strong results for the second quarter of
2020 across key reporting metrics, including revenue, adjusted
EBITDA and free cash flow.
On July 2, Leaf Group issued a preliminary financial update
indicating that the Company’s strategy is gaining significant
momentum and traction, even despite uncertain macroeconomic trends.
The Company’s preliminary second quarter 2020 revenue growth of 35%
year-over-year would be its highest since the first quarter of
2011. The Company’s revenue for the quarter is also expected to be
its highest since fiscal year 2013. Additionally, Society6 Group
and Saatchi Art are both on track to post record second quarter
revenue and new customers figures. The full preliminary financial
update can be found here.
The timing of the Investor Group effort is thus
truly perplexing for anyone interested in creating shareholder
value. Despite Leaf Group performing better than it has in years,
the Investor Group is calling for the removal of the CEO
responsible for that performance and demanding that the Company be
stripped down and sold for parts. Their actions beg the question –
what does the Investor Group really want, if not for the Company to
perform well?
THE INVESTOR GROUP IS PURSUING ITS OWN
SELF-INTEREST AT THE EXPENSE OF ITS FELLOW
SHAREHOLDERS
To consider why the Investor Group has chosen to
continue agitating despite Leaf Group’s strong recent performance,
shareholders must understand that the Investor Group’s interests
may not be aligned with their own. We believe most of our
shareholders are seeking sustainable, long-term value
generation.
From November 2019 to May 2020 Oak Management Group
sold 769,388 shares of Leaf Group Common Stock at prices per share
as low as $1.10 per share, suggesting that Oak is focusing on
near-term liquidity for its investment.
Similarly, Investor Group member John Lewis’s
Osmium fund, according to its Form 13F filings, has seen the fair
market value of the public securities it holds decline for four
straight quarters from $118,327,000 as of March 31, 2019 to
$31,008,000 as of March 31, 2020.
We encourage shareholders to ask: what do these
actions and positions suggest about the motivations of the Investor
Group relative to the interests of other Leaf Group
shareholders?
NOW IS NOT THE TIME FOR MORE
DISTRACTION
It was just two months ago that Leaf Group concluded a thorough
13-month strategic review process. These reviews are always costly
and distracting, and the results from our review made clear that
the best path to deliver shareholder value is to continue to
execute our strategy and deliver sound business results. Just three
weeks ago, the Company reported preliminary results for what is
shaping up to be its strongest quarterly growth in nearly a
decade.
Our Board of Directors is always open to reviewing
offers for the Company that can potentially deliver shareholder
value. However, the Board firmly believes that now is not the time
to undertake another time-consuming, costly and distracting
strategic review process – just months after we completed a
thorough, 13-month strategic review – and potentially disrupt the
Company’s strong performance.
We respectfully ask Leaf Group stockholders to thoroughly weigh
the motivations of the Investor Group and consider their
communications in light of the Company’s current outstanding
business performance.
About
Leaf Group Leaf Group Ltd. (NYSE: LEAF) is a
diversified consumer internet company that builds enduring,
digital-first brands that reach passionate audiences in large and
growing lifestyle categories, including fitness and wellness
(Well+Good, Livestrong.com and MyPlate App), and
home, art and design (Saatchi
Art, Society6 and Hunker). For more
information about Leaf Group, visit www.leafgroup.com.
Cautionary Information Regarding Forward-Looking
Statements
This communication contains “forward-looking statements” within
the meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. The forward-looking
statements set forth in this communication include, among other
things, statements regarding potential synergies achieved from
acquisitions, the impact of strategic operational changes and the
Company’s future financial performance. In addition, statements
containing words such as “guidance,” “may,” “believe,”
“anticipate,” “expect,” “intend,” “plan,” “project,” “projections,”
“business outlook,” and “estimate” or similar expressions
constitute forward-looking statements. Actual results may differ
materially from the results predicted, and reported results should
not be considered an indication of future performance. These
forward-looking statements involve risks and uncertainties
regarding the Company’s future financial performance; could cause
actual results or developments to differ materially from those
indicated due to a number of factors affecting Leaf Group’s
operations, markets, products and services; and are based on
current expectations, estimates and projections about the Company’s
industry, financial condition, operating performance and results of
operations, including certain assumptions related thereto.
Potential risks and uncertainties that could affect the Company’s
operating and financial results are described in Leaf Group’s
annual report on Form 10-K for the fiscal year ending December 31,
2019 filed with the Securities and Exchange Commission
(http://www.sec.gov) on March 16, 2020, as such risks and
uncertainties may be updated from time to time in Leaf Group’s
quarterly reports on Form 10-Q filed with the Securities and
Exchange Commission, including, without limitation, information
under the captions “Risk Factors” and “Management's Discussion and
Analysis of Financial Condition and Results of Operations.” These
risks and uncertainties include, among others: risks associated
with political and economic instability domestically and
internationally including those resulting from the COVID-19
pandemic, which have and could lead to fluctuations in the
availability of credit, decreased business and consumer confidence
and increased unemployment; the Company’s ability to execute its
business plan to return to compliance with the continued listing
criteria of the New York Stock Exchange (“NYSE”); the Company’s
ability to continue to comply with applicable listing standards
within the available cure period; changes by the Small Business
Administration or other governmental authorities regarding the
Coronavirus Aid, Relief and Economic Security Act of 2020 (the
“CARES Act”), the Paycheck Protection Program (“PPP”) or related
administrative matters; the Company’s ability to comply with the
terms of the PPP loan and the CARES Act, including to use the
proceeds of the PPP loan; the Company’s ability to successfully
drive and increase traffic to its marketplaces and media
properties; changes in the methodologies of internet search
engines, including ongoing algorithmic changes made by Google, Bing
and Yahoo!; the Company’s ability to attract new and repeat
customers and artists to its marketplaces and successfully grow its
marketplace businesses; the potential impact on advertising-based
revenue from lower ad unit rates, a reduction in online advertising
spending, a loss of advertisers, lower advertising yields,
increased availability of ad blocking software, particularly on
mobile devices and/or ongoing changes in ad unit formats; the
Company’s dependence on various agreements with a specific business
partner for a significant portion of its advertising revenue; the
effects of shifting consumption of media content and online
shopping from desktop to mobile devices and/or social media
platforms; the Company’s history of incurring net operating losses;
the Company’s ability to obtain capital when desired on favorable
terms; potential write downs, reserves against or impairment of
assets including receivables, goodwill, intangibles (including
media content) or other assets; the Company’s ability to
effectively integrate, manage, operate and grow acquired
businesses; the Company’s ability to retain key personnel; the
Company’s ability to prevent any actual or perceived security
breaches; the Company’s ability to expand its business
internationally; the review of strategic alternatives; the
Company’s ability to generate long-term value for its stockholders;
and any future actions that may be taken by activist stockholders.
From time to time, the Company may consider acquisitions or
divestitures that, if consummated, could be material. Any
forward-looking statements regarding financial metrics are based
upon the assumption that no such acquisition or divestiture is
consummated during the relevant periods. If an acquisition or
divestiture were consummated, actual results could differ
materially from any forward-looking statements. Any forward-looking
statement made by the Company in this press release is based only
on information currently available to the Company and speaks only
as of the date on which it is made. The Company undertakes no
obligation to revise or update any forward-looking information,
whether written or oral, that may be made from time to time,
whether as a result of new information, future developments or
otherwise, except as required by law, and may not provide this type
of information in the future. Investor Contacts
Shawn Milne Investor Relations 415-264-3419
shawn.milne@leafgroup.com
Media Contacts John Christiansen/Matt Reid Sard
Verbinnen & Co 415-618-8750/310-201-2040
LeafGroup-SVC@sardverb.com
Sharna Daduk VP, Communications Sharna.daduk@leafgroup.com
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